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(ALTAMONTE SPRINGS, FL) -- Longtime Central Florida banker Geof Longstaff thinks he may have the answer to rehabilitating America's banks without spending billions of additional tax dollars in bailouts.

Geof Longstaff

Longstaff, chairman at Mercantile Commercial Capital LLC in Altamonte Springs, FL, says a small regulatory change could eliminate many of the problems banks currently face with their loan portfolios.

"We need a new category to classify loans that are currently viewed as substandard but whose borrowers are still making payments," he says.

"The problem now, put simply, is this: Among other criteria, banking regulators gauge a loan's merit against the value of the collateral pledged to secure the loan.

"If the collateral---an office building or retail center---declines in value, the loan can be considered 'substandard' and subject to reserves.

"Regulators see banks that loaned $1 million against $1.5 million in collateral as sound," Longstaff points out.

"But if the asset value drops to $900,000, regulators call that a non-performing asset, NPA, substandard loan, and tell banks they can either post reserves to cover the collateral deficiency or demand additional money from the borrower.

"We do this at a time when borrowers need to preserve liquidity to handle volatility in their business. Making these cash demands can cause businesses to fail and thus promotes job losses."

Assets have been dropping in value all over the country, Longstaff says, and NPAs are "a major challenge to the nation's economic recovery.

"If the bank takes the additional reserve, that increases the need for capital and subjects the bank to further capital impairment. But many borrowers have continued to make payments on loans even though their assets have been devalued."

They do this because "they are confident the real estate market will come back and they know their asset value will improve," Longstaff says. "They are employing the sort of long-term investment strategy our economy has been built on."

The solution, Longstaff says, is to create "a new category for NPAs that are actually performing---whose borrowers are making their payments on time.

"We need a new category called a 'performing under-margined loan' to describe a loan that is performing, but whose collateral assets have suffered a short-term devaluation as a result of the national economy," Longstaff explains.

Longstaff says he is confident such a classification would reduce demands on the bank's reserves without adding to the cost of recovery.

"Bank regulators shouldn't require increased reserves against these loans when the borrower shows the ability to make the payments," he says. 

Longstaff has been a banker for 37 years.  According to industry data, Mercantile Commercial Capital ranks among the nation's leading providers of U.S. Small Business Administration (SBA) 504 loans for small business owners who want to develop or acquire their own facilities.  

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