On November 1, the OCC issued Bulletin 2023-34 addressing the topic of “venture lending,” referred to as “commercial loans to early-, expansion-, and late-stage companies.” According to the Bulletin, venture lending is often used to fund new business growth and development but comes with its own set of risks and challenges, and financial institutions must take care to meet the agency’s expectations for risk management and risk-rating of venture loans. Key takeaways from the OCC’s Bulletin including the following:
- Risk Management: Lenders should have effective processes to identify, measure, monitor, and control the risks associated with these loans. This includes assessing the creditworthiness of the borrowers, evaluating the adequacy of their cash flow, and closely monitoring the progress of startup borrowers.
- Capital Adequacy: The OCC advises that lenders should assess their capital adequacy in light of the increased credit risk associated with lending to startups and emerging businesses.
- Adequate Loan Policies: The bulletin recommends that financial institutions should establish clear and comprehensive loan policies for venture lending. These policies should address underwriting standards, credit risk management, and ongoing monitoring of these loans.
- Concentration Risk: Financial institutions should be mindful of the potential impact of a high concentration of venture loans on their overall risk profile.
Putting It Into Practice: In the wake of recent bank collapses, including some banks that were focused in tech startups, banks are increasingly expected to assess a borrower’s ability to repay a loan in a timely manner. 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.” “Ability to repay” rules are common for consumer loans, and as consumer lending concepts further bleed into commercial transaction, prudential banking regulators will expect banks to remain cautious when transacting with venture borrowers, including fintechs, that are not yet mature companies. Banks may wish to consider enhancing their policies and procedures demonstrating safety and soundness to make an informed lending decision, assess risk, and assess the borrower’s ability to repay the indebtedness in a timely manner. Not to be lost is that this heightened scrutiny on banks will likely result in tighter lending conditions for early-stage companies, including fintechs.