You’re the Boss Blog: The S.B.A. Wants to Encourage More Small Loans

The Agenda

How small-business issues are shaping politics and policy.

For the last several years, the Small Business Administration has attempted to expand its loan-guarantee programs by making them available to bigger businesses. But with the 2014 budget that the White House sent to Congress last week, the Obama administration is trying to solve a problem at the other end of the spectrum: how to induce banks to make smaller loans, to smaller businesses.

S.B.A.-guaranteed general business, or 7(a), loans for $150,000 or less have fallen from $3.5 billion in 2007, and about 24 percent of all such loans guaranteed by the agency, to $1.4 billion in 2009. Of course, 2009 was the pit of the recession, and S.B.A.-backed lending — if not all lending — had dropped to its lowest level in recent memory. But while the agency’s loan programs have since fully recovered, the total lent in these small loans has remained flat, and constituted just 9 percent of the 7(a) program, the S.B.A.’s biggest, in 2012.

The new budget for the S.B.A. would waive the agency’s fees for guaranteeing loans of less than $150,000, and this follows recent efforts to streamline one program to encourage more small loans. But some observers in the S.B.A.-lending industry doubt these moves will be sufficient.

S.B.A. officials trace the decline in smaller guaranteed loans to the collapse of a loan program known as S.B.A. Express, a 7(a) variant that allows lenders to use personal credit scores rather than business fundamentals as the basis for approving loans. The big banks that participated in S.B.A. Express started racking up huge losses in the program even before the recession hit, and many gave up on the smaller loans. Then, in 2010, the S.B.A. shuttered a separate loan program, Community Express, that focused on providing small loans to borrowers in struggling communities. A replacement initiative known as Small Loan Advantage has been considered too cumbersome, at least until recently, to win over lenders.

That has largely meant that borrowers have had to turn to the traditional 7(a) program, with its extensive, and expensive, underwriting requirements for banks. Those obligations are the same regardless of the size of the loan, making bigger loans more profitable for lenders than smaller loans. Moreover, banks that sell those loans on the secondary market make more money on bigger loans. “Premiums on the secondary market are at an all-time high, and that may have given bankers a reason to make larger loans rather than smaller loans,” said Arne Monson, whose firm, Holtmeyer Monson, helps small banks make S.B.A. loans. Finally, most small loans go to new businesses, Mr. Monson said, and banks are still shying away from these riskier borrowers.

Last week, Jeanne Hulit, an associate S.B.A. administrator, acknowledged these problems. “As the banks have re-entered the market in lending, they’re really looking at the business metrics and the business’s ability to repay the debt,” she said. “And if you’re going to do that kind of analysis, it’s just as costly to analyze a $1 million loan as a $100,000 loan. So clearly the banks were using their resources to lend to more established businesses, with a more predictive ability to pay.”

The S.B.A.’s solution to the small-loan drought is to waive the fees it charges banks for guaranteeing these small loans — both the one-time fee it charges at the time of the loan (percentages vary with the size of the loan) and the annual fee of .55 percent of the guaranteed portion of the loan (it would be waived for at least one year). For a loan of $150,000 with a term of more than one year, the initial fee is 2 percent of the amount the agency is guaranteeing, which amounts to $2,550. (On larger loans, the inital fee can approach 3.75 percent.) The Obama administration says that the agency can afford to do this and still get by on a smaller overall budget for 2014 because S.B.A. lending has gotten less risky with an improving economy and requires a smaller taxpayer subsidy. The proposal would require Congress’s approval.

In addition, Ms. Hulit said, “we’re doing a lot of things to streamline the transaction costs for small-dollar loans.” In particular, she said, the S.B.A. has adapted its own business credit-scoring model for making preliminary decisions about borrowers in the Small Loan Advantage program. For loans that get an early green light, banks can skip 100 pages of paperwork that normally accompany a loan application. “Lenders can cut the time required to process loans of this size by up to 60 percent, and in some cases, save as much as four full business days in processing times,” said an S.B.A. press secretary, Emily Cain.

Still, it is unclear whether eliminating the guarantee fees will spark much new lending, since banks are able to pass those onto the borrowers, and tend to roll them into the loan itself. Back in 2008, bankers contacted by The Agenda (in an earlier incarnation) expressed skepticism that a fee holiday, proposed at the time by Senator John Kerry, would do much to jump-start lending. Rohit Arora, chief executive of Biz2Credit, a business-loan broker, said he doubted the current proposal would do more than perhaps make the loans more palatable to borrowers. “From our experience,” he said, ” we have seen that streamlining the paperwork and the decision-making is more important.”

But here, too, it is hard to know whether banks are responding to the procedural changes. Mr. Arora said that the S.B.A.’s claims about reducing paperwork are overstated, in part because banks, out of habit, continue to insist on gathering all of the tax returns and financial statements required of a standard 7(a) loan. And with good reason, said Mr. Monson — if a loan goes bad, a bank better have a fully documented loan file or it may not be able to collect its guarantee. “When we perform the service for our client banks,” Mr. Monson said, “it is not streamlined.”

Many more banks now participate in the Small Loan Advantage program, but that could be simply because the agency has opened the program up to many more banks. And though lending through the program has spiked, that may reflect another change the agency made: It raised the program’s loan limit from $250,000 to $350,000. In fact, total lending at $150,000 or less across all the 7(a) programs has actually fallen slightly from the first six months in 2012.

To bring smaller loans back into the fold, the S.B.A. seems to have its work cut out for itself.

Article source: http://boss.blogs.nytimes.com/2013/04/18/the-s-b-a-wants-to-encourage-more-small-loans/?partner=rss&emc=rss