During the past three years, bankers have complained over and over that one of the big deterrents to doing more small-business lending is the harsh criticism they expect from banking regulators. Regulators, they argue, want to see sophisticated cash-flow projections and financial reports -- even for tiny loans -- both of which can add to the transaction costs and make them prohibitive.

Not wanting to pass up a low-cost way to stimulate the economy, the Clinton administration released a series of administrative proposals late last March aimed at giving lenders more leeway to make small-business loans that rely (at least in part) on the borrower's character. Under the proposed rules, a portion of a bank's loan portfolio (representing up to 20% of its total capital) could be made without the standard documentation examiners have been demanding.

Will the changes make a difference? Will regulator-fearing bankers feel comfortable making so-called character loans? The dust may take some time to settle, but we asked an assortment of credit experts to give us their predictions:

Joe Williams, president, Marine National Bank, Jacksonville, Fla.: "It's a step in the right direction, but frankly, I don't see things changing much until Congress redefines what the regulators are supposed to do. The regulators take their cues from Congress, and right now a 'good' loan is a heavily documented one. There are lots of good lending opportunities that don't have the cash-flow statements. But my fear is that the regulators would ask to examine those loans and would view them as second-class loans."

Jim Menzies, executive vice-president, KeyCorp., Albany, N.Y.: "Bankers are a bit skeptical because there's a big gap between the policy that regulators are supposed to follow and their practice in the field. Before the changes have a meaningful impact, banks will have to go through an examination and experience a difference."

Bill Lee, president, Lee Financial Services, Guilford, Conn.: "It will help the really small banks that truly know their customers. The bigger banks that lend by the numbers and don't really know their customers will have a hard time changing the way they do things. Particularly if they are not feeling comfortable about their capital, they won't want to step over the line. I have a feeling they'll continue to require lots of documentation."

John Dean, president, Glenwood State Bank, Glenwood, Iowa.: "Bankers spend huge amounts of time on things that have nothing to do with the safety of the loan. Everyone's terrified that they'll do something wrong, and that they'll be criticized by regulators. I know what Clinton wants to have happen, but I'm not really sure how you get regulators to become less focused on little details."

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