OCC urges banks to adopt cautious approach to venture lending

Banks engaging in venture lending must do so in a safe and sound manner, in compliance with applicable laws and regulations, and with support from sound risk management systems, the Office of the Comptroller of the Currency said in new policy guidance issued today. In the guidance, the OCC said it has observed that some banks have added, or are considering adding, new commercial lending activities targeting high-risk borrowers. Venture lending supports business formation, but new business ventures have a high probability of failure, the agency said.

Venture lending “often involves banks accepting high-risk characteristics that banks normally avoid when originating conventional commercial loans to borrowers with reliable cash flows and positive earnings,” the OCC said. “Therefore, venture borrowers warrant strong underwriting analysis and monitoring commensurate with the level of risk in such loans. Venture lending facilities should include appropriate credit enhancements to mitigate the elevated risk of borrower failure.”

A bank should maintain documentation to support the decision to grant the credit and allow for follow-up monitoring, as it would for any loan, the OCC said. “OCC examiners will scrutinize loan commitments that are underwritten without an adequate assessment of the borrower’s capacity to repay and will determine whether such loans should be subject to supervisory criticism,” it added. “Examiners will ask banks to determine the impact that any weak venture loan underwriting standards may have on the assumptions used in calculating loan loss reserves.”