The Agenda
How small-business issues are shaping politics and policy.
The Small Business Administration’s guaranteed business loan program is back. Nudged by stimulus provisions that reduced fees and increased guarantees, American banks made a record amount of S.B.A.-backed loans in 2010 (measured in dollars), reversing a demoralizing four-year slide. But there’s something noteworthy about who was doing that lending: while banks as a whole loaned more government-backed money than ever, the biggest banks loaned less.
The 25 American banks with the most deposits in 2010 underwrote $3.6 billion in S.B.A. general business, or 7(a), loans. That is just more than 20 percent of all 7(a) loans approved that year, down nearly a third from the share these same banks loaned in 2006. The decline cannot be tied to a decline in deposits. In that same period, these banks grew to control $5.8 trillion in deposits, 61 percent of all bank deposits in 2010.
In other words, in 2010 the 25 biggest banks held 32 percent more in deposits than those banks did in 2006 — but approved 30 percent less in S.B.A. loans.* The decline appears to be related to losses the banks suffered when borrowers defaulted on one type of 7(a) loan during the crisis, and perhaps as well to the difficulty large banks have in making profits on smaller loans in general.
Steve Smits, the S.B.A. associate administrator who supervises lending programs, said that one reason big banks lost 7(a) market share was that during the recession, many community banks joined — or rejoined after a long absence — the S.B.A. program as a way to keep lending despite their weakened balance sheets. This was possible because S.B.A. loans permit a bank to keep less cash in reserve and can be sold on a secondary market to generate still more cash for the bank. “We definitely saw north of a thousand lending partners use our programs for the first time in years during the depths of the recession, and many of those institutions were the small community banks,” Mr. Smits said.
But the big banks didn’t just lose share of total S.B.A. lending; their dollar volume fell absolutely as well — 15 percent from 2006. Bank of America, the largest bank and one of the top 7(a) lenders in 2006, saw its loan volume plummet 89 percent by 2010. Loans at PNC Bank and RBS Citizens (which operates as Citizens Bank in the Northeast and Charter One in the Midwest) fell by 82 and 83 percent, respectively. At Capital One, which had moved aggressively into the S.B.A. market only a few years earlier, 7(a) lending has almost completely collapsed: the bank, which approved $228 million worth of 7(a) loans in 2006, green-lighted only $551,000 in 2010.
The figures here (and in the chart below) represent loan amounts approved by either the bank or the S.B.A. — a higher amount than the money actually distributed to borrowers, since some loans are canceled before they are issued. They were compiled by the loan brokerage firm MultiFunding, using deposit data from the Federal Deposit Insurance Corporation and loan information from the S.B.A. (which was provided by Coleman Publishing). The loan figures are for calendar years, though the S.B.A. itself tracks its lending by the government’s fiscal year, which begins Oct. 1 and ends Sept. 30.
“I did expect to find that the big banks currently are making a lot less loans to small businesses than smaller banks are,” said Ami Kassar, who is chief executive of MultiFunding. “I didn’t expect to find that the big banks commitment had decreased.”
The big banks simply are not well suited to make S.B.A loans in particular, or small-business loans in general, said Barry Sloane, chairman and chief executive of Newtek Business Services, a large 7(a) lender that is not a bank. “The larger institutions have a much higher cost structure, and they have a harder time making a million-dollar loan profitable,” Mr. Sloane said. “Larger banks, when they lend, want to lend more money, to a larger borrower, and they want to secure a depository arrangement. S.B.A. loans don’t necessarily go along with a significant amount of deposits. And they are much more labor-intensive than a conventional loan.”
To induce large banks to make S.B.A. loans, the agency developed a 7(a) program especially for them, S.B.A. Express. This program lets lenders use their own application forms and credit-scoring models to make smaller loans, which they can approve themselves, and banks don’t have to take any more collateral than their regular loans require. It allows those banks to incorporate government-guaranteed loans seamlessly into their lending operations — borrowers who don’t qualify for a bank’s conventional loan can automatically be considered for an S.B.A.-backed loan without having to start the paperwork all over again. Because they take on more responsibility for underwriting the loan, the banks must also shoulder more of the risk, in the form of a lower guarantee.
By 2007, S.B.A. Express had grown into an important component of the 7(a) program, constituting almost a quarter of the loan volume and more than two-thirds of the total loan numbers. But big banks put the brakes on S.B.A. Express lending in late 2007, a year before the full-on credit crisis that saw most lending come to a halt. At the time, Mr. Smits’s predecessor at the S.B.A. explained that banks were seeing higher defaults than they originally anticipated, so they were raising their credit standards. Since then, many appear to have in fact pulled out of the program. Bank of America, RBS Citizens, and Capital One — the three banks showing the sharpest drop in S.B.A. lending — had all specialized in S.B.A. Express loans. Mr. Sloane and Tony Wilkinson, president of the National Association of Government Guaranteed Lenders, both attribute the decline in big-bank 7(a) lending to big losses in Express lending.
The S.B.A.’s Mr. Smits said he was not able to explain the decline in S.B.A. lending among big banks. “I think you have to look at each lender on its own and see whether they’ve actually had a drop in activities to small business lending in general, or whether it was just S.B.A. in specific,” he said. “You have to look at what their model is, and what their average loan sizes are.”
The banks contacted by The Agenda were for the most part reluctant to say much about their S.B.A. lending. All insisted that S.B.A. loans are just one of many ways they provide credit to small businesses and that they are broadly making more credit available to those companies.
Robb Hilson, an executive in Bank of America’s Global Commercial Banking division, was the most explicit. “Admittedly, we made mistakes, and we ended up losing a lot of money, even on the S.B.A.-guaranteed portfolio, because we were too aggressive at a time where it was not appropriate,” he said. “We were looking at borrowers who at the end of the day unfortunately in too many cases did not have the ability to repay the loan.”
Several years ago Bank of America suspended its traditional 7(a) program, with the higher guarantees and additional paperwork, because “we thought it wasn’t customer-friendly,” said Mr Hilson. Last year the bank reintroduced it, and Mr. Hilson vowed that the bank would rebuild — carefully — its Express program. And he added that Bank of America remained a leading lender in another popular S.B.A. program, which guarantees loans made by nonprofit community development companies that partner with banks.
In an e-mail, a PNC spokesman, Fred Solomon, attributed some of that institution’s lending decline in 2009 and 2010 to its efforts to combine with National City Bank, which PNC bought in 2008. But, he added, “other factors do play a role, including our determination not to rely on the S.B.A.’s guarantee when qualifying potential borrowers.” A spokesman for Capital One, Steve Schooff, said in an e-mail message, “We are reevaluating our strategy and opportunities in the current environment relative to S.B.A. loans to determine the best approach.”
Mr. Kassar, for his part, acknowledged the limitations of his analysis of which banks are supporting small businesses. “I don’t think the S.B.A. is the only indicator, or a perfect indicator,” he said. Still, he added, “it does seem like a reasonable indicator of Main Street lending.”
Not all of the big banks have struggled with S.B.A. lending. Despite the overall downward trend, several actually made more 7(a) loans over this time period. SunTrust posted the biggest growth: through 2008, its 7(a) lending hovered around $34 million. In 2009, it grew to $44 million — and then soared to $155 million in 2010. SunTrust has gone from being purely an Express lender to an S.B.A. “generalist,” said Jeff Nager, a SunTrust senior vice president and its S.B.A. Division Executive. “We have made it a focus of the bank.”
Mr. Nager acknowledged that SunTrust’s S.B.A. lending effort was buoyed by the generous government incentives established by the 2009 Recovery Act. “It didn’t change our desire to play or not play, but it stimulated a lot of knowledge in the S.B.A.,” he said. “The borrowers and the clients learned a lot more about the S.B.A. in a short amount of time because of the stimulus. It became a more prevalent part of the discussion in the market place.”
The stimulus provisions have since expired, but Mr. Nager predicted further growth for S.B.A. lending at his institution.
*Eight of the top 25 deposit-holding banks did not participate in the 7(a) program at all between 2006 and 2010; these banks are chiefly credit card lenders or investment managers.
Article source: http://feeds.nytimes.com/click.phdo?i=0e6e9bd89b576c551852643c94f137dc