Comment: Don't Let Flood of Paper Wash Out Your Advantage

A friend of mine develops apartment houses. He was telling me about the paperwork involved in getting a bank loan these days.

It reminded me of a story about the U.S.S. John F. Kennedy. They say the blueprints and other papers used in her construction weighed more than the carrier.

"Banking," my friend was telling me, "is just not the same as it used to be. It is unbelievable how many forms you have to fill out to get a routine loan from most major banks. I'm talking 70 pages or more.

"In our last loan request the bank even demanded that we hire an insurance consultant to make sure that the coverage was adequate for the property we were building."

Banks have set up so many standards, my friend complained, that borrowers need the same documentation for a small loan as for $100 million.

My friend's projects are usually too big for one bank to handle. But anyway, borrowing from four that are reasonable about documentation is cheaper and faster than using one document-crazy bank, he said.

Big banks using paper as a security blanket is a growing trend - especially where the Community Reinvestment Act in involved.

"Look," bankers tell me, "we are doing our job. We serve the community - we go out of our way to make loans to the disadvantaged and on projects that can help restore and maintain our market area.

"But the examiners don't care. They just want to see the files, the documentation. They are just protecting themselves; they figure that if they can show their bosses that the bank has a solid file of CRA data, they will not be in trouble."

There is a danger that community banks too may be swept up in this trend of using paperwork as the be-all and end-all of lending operations.

Community banks are known for having lending officers who look loan applicants in the eye and make the loan on the basis of character. Their track records are generally better than those of banks with heavy spreadsheet feasibility studies and documentation of collateral.

My favorite analogy was provided by the head of admissions at an Ivy League college who was talking about what letters of recommendation from high school principals and guidance people should say.

"We know our people," he said. "The statement from one school's adviser that a student is wonderful means far less to us than a modest evaluation from a school with a more honest and less enthusiastic referral.

"We took a boy from a rural New Hampshire high school when his headmaster sent in a two-word recommendation: 'Take Him.' "

So here is another community bank advantage: simple procedures that stress reality, instead of "comfort letters" and statements to have in the file when the process is over.

I hope local banks don't drown loan applications in a sea of paperwork, as many larger rivals do.

Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.