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Bankers see commercial loan opportunity on reservations

WASHINGTON – There is “a growing appetite for business and commercial lending on tribal trust lands,” according to the federal Office of the Comptroller of the Currency, and some banks “have aggressively pursued these opportunities by implementing a variety of business strategies to meet the needs of this expanding market.”

While acknowledging challenges and barriers to nongaming commercial lending on reservations, OCC, which administers national banks, cited “prospects of an increased commercial lending presence in Indian Country.”

In the article “Commercial Lending in Indian Country: Potential Opportunities in an Emerging Market,” published in a spring issue of OCC’s “Community Development Insights,” the agency surveyed banks involved in reservation lending, tribal entities and economic development groups to conclude that “bankers are evolving their lending beyond gaming-related enterprises to include both tribal and private sector non-gaming enterprises.”

Those already in the sector “indicated that this line of business has been profitable, satisfied multiple business objectives, and has experienced delinquency, default and loss ratios among the lowest in their portfolios.”

Also, reservation commercial lending has shown “increasingly positive market conditions, indications of potentially strong demand for capital and credit, and the potential for favorable consideration under the Community Reinvestment Act.”

The article cited a couple of studies that have shown improved socioeconomic conditions on reservations and the growth of Indian-owned businesses. “Median household income for non-gaming tribes grew 21 percent, or nearly twice the national average rate of growth during this decade [between 1990 and 2000],” according to the OCC, citing research by the Harvard Project on American Indian Economic Development.

Despite this, large credit gaps remain. OCC cited a Department of Health and Human Services study that concluded “a lack of investment capital, both debt and equity financing, was identified by study participants as a critical development issue, making it difficult to start new businesses or expand existing ones.”

OCC pointed to a number of tribes that have successful commercial ventures, including the Mississippi Band of Choctaw Indians, which has an annual payroll of more than $125 million; the Gila River Community in Arizona, which has developed a commerce and business park; the White Mountain Apache tribe, also in Arizona; the Navajo Nation; the Three Affiliated Tribes; and Alaska Native Corporations.

The article identified “large regional banks, community banks, tribal entities, government and non-profit agencies, and financial intermediaries, such as Native CDFIs [community development financial institutions] and community development corporations.” (There were 16 Native CDFI business loan funds as of May 2005, according to the OCC.)

The regional banks are those with “footprints,” or service areas, in or near Indian country. “Although these banks have financed a number of gaming-related ventures, they have increasingly diversified their lending and investments into non-gaming economic development projects as a major element of their business lines,” according to the article.

Smaller community banks in or near Indian country also are interested, especially with the help of several federal loan guarantee programs.

OCC identified these as the BIA Loan Guarantee Program, the BIA Loan Insurance Program, the BIA Interest Subsidy Program, the U.S. Department of Agriculture’s Business and Industrial Loan Guarantee Program and the Small Business Administration’s Section 7(a) program.

The BIA’s Loan Guarantee Program guarantees up to 90 percent of a lender’s outlay to an Indian business, “provided that the activity will contribute to reservation-based economic development.” Loan limits are $500,000 to individual tribal members or $12 million to tribes or tribal enterprises.

The BIA Loan Insurance Program provides credit up to $250,000, while the subsidy program helps reimburse interest on the other loans.

The USDA’s “B and I” program is available to tribes and tribal groups in amounts up to $25 million. USDA will guarantee 90 percent of a loan of less than $2 million, decreasing to 60 percent of a loan for more than $10 million.

The SBA program “provides commercial loan guarantees for general business purposes,” but tribes may be required to guarantee loans to tribally owned businesses.

Barriers that remain to commercial lending in Indian country include sovereign immunity, complications with collateral, lack of standard commercial practices and commercial codes, and the jurisdiction of tribal courts.