WASHINGTON — The Office of the Comptroller of the Currency, responding to industry criticism, has gone back to the drawing board on a pilot program designed to ease lending limits on national banks.

The three-year pilot test, proposed last fall but not yet begun, would raise national banks’ lending limits for some loans in the 36 states with more lenient standards.

Officials confirmed this week that they are tweaking the plan because of complaints by small bankers that it should apply to more loans and that a narrower, permanent program would be more attractive than a broader test program. Details are expected to be released this spring.

The OCC’s effort is part of a continuing competition between federal and state regulators to offer equal powers so that banks will not switch charters.

Agency officials “want to be sure their banks are on par with state-chartered banks,” said Julian Hester, chief executive officer of the Community Bankers Association of Georgia. “The national banks probably have said, ‘We are at a little disadvantage because our lending limits are lower than the state banks’, and we are losing customers.’ ”

Federal rules prohibit national banks from lending more than 15% of capital to a single borrower. The test would bump the cap up to 25% for one-to-four family residential real estate and small-business loans. A single loan still could not exceed $10 million, and small-business loans would be limited to $1 million.

To be eligible for the test, a bank must be well capitalized, have a Camels rating of 1 or 2, and score at least a 2 on the management component of the Camels grade.

The OCC picked small-business loans and mortgages for the test because national banks have a good safety and soundness track record with these loans and can handle the additional lending authority, according to agency officials.

“We are trying to craft a fairly conservative pilot program,” said Karen Solomon, the OCC’s director of legislative and regulatory activities.

Though community banks applauded the attempt, they argued that the agency must do even more to make national banks more competitive with their state-chartered rivals.

Thomas J. Sheehan, president of the Independent Community Bankers of America, urged the OCC to take a bolder, permanent step: Immediately increase lending limits by 5%. The agency could reevaluate its decision in three years and then consider a second 5% hike, he wrote in a comment letter.

He warned that bankers might resist participating in the program if they think the agency might pull the plug after three years.

“The expenses involved during the initial three-year period may not be recouped by the marginal profits on any loan amounts made at the higher limits. This might discourage some national banks from taking advantage of the pilot” unless they can expect it to become permanent, Mr. Sheehan wrote.

At a minimum, he said, the agency should widen the types of loans permitted in the test to include agricultural loans. “This is an area where increased lending limits would be especially beneficial for community banks, many of which are located in rural markets and are dependent on agricultural lending,” Mr. Sheehan wrote. “Without an increased lending limit for agricultural loans, those banks may not benefit from the OCC’s proposal at all.”

Paul A. Smith, American Bankers Association senior counsel, agreed. “Agricultural community national banks have just as much, if not more, experience and expertise in making farm loans as they do in making small-business loans,” he wrote in a comment letter.

Mr. Sheehan also recommended that the proposal’s $1 million limit on small-business loans be eliminated to benefit larger community banks.

Marathon National Bank vice president RandalB. Baker said in an interview that looser lending limits would help his $90 million-asset Los Angeles bank retain its best clients.

Raising the lending limits of national banks would increase competition as well as give borrowers more options, according to Terry H. Downard, regional president of 1st National Bank of Nevada. The Reno bank has $135 million of assets.

“The ‘megabanks’ seem to have a substantial advantage in bidding on credit packages on loans under $10 million,” Mr. Downard wrote. “By increasing the legal lending limit on nationally chartered community banks, you will be increasing the choices of the business borrower, the ultimate beneficiary of this regulatory change.”

Critics, however, contended that the existing limits promote diversification.

The test would be available only to top-rated national banks, but the agency may be jeopardizing banks’ safety and soundness by increasing the lending limits, said George G. Kaufman, a banking professor at Loyola University in Chicago.

“What we should do is tighten up on the state side rather than loosening up on the national bank side,” said Mr. Kaufman, who is also co-chairman of the Shadow Financial Regulatory Committee, which issued a statement in December criticizing the pilot program.

It is unclear whether the program would continue if President Bush replaces Comptroller of the Currency John D. Hawke, but Ms. Solomon said the agency is going ahead with it.

Mr. Hester, the Georgia trade group officer, predicted the program would remain intact because it is the responsibility of any comptroller to promote the strength of the national charter. He said agency officials have told him to expect the program to in operation by May.


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