SBA lending to boom in 4Q, thanks to reinstated breaks
Orlando Business Journal – by Kent Hoover Washington Bureau Chief
Original article can be viewed here.
Expect a boom in Small Business Administration lending in the fourth quarter, thanks to passage of legislation that increased the government guarantee on SBA loans and waived fees for borrowers.
The Small Business Jobs Act (HR 5297) increases the government guarantee on the SBA’s flagship 7(a) loans to 90 percent through Dec. 31. The bill also temporarily waives fees on both 7(a) loans and 504 loans, which primarily finance real estate. Combined, these breaks will make SBA loans less risky for lenders and more affordable for borrowers.
These breaks originally were funded by the economic stimulus bill, but they expired at the end of May. Since then, SBA lending has fallen sharply.
However, the chance that Congress would revive these breaks led many lenders and borrowers to hold off taking out SBA loans. This pent-up demand will explode now that Congress has reinstated these breaks, said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders.
About $500 million in 7(a) and 504 loan applications are on a waiting list set up by the SBA for borrowers who wanted to wait to see if the higher loan guarantee and fee waivers were reinstated. Wilkinson said lenders also have been holding onto another $1.5 billion in SBA loan applications, in anticipation that the breaks would be renewed.
These loans now will go forward, thanks to passage of the Small Business Jobs Act. The bill was signed into law on Sept. 27 by President Barack Obama, who made the bill a top legislative priority.
Many SBA lenders also will take advantage of another piece of the legislation. The bill creates a $30 billion lending fund community banks can tap to make loans to small businesses. Many community banks will use this money to increase their SBA lending, Wilkinson predicted.
The legislation is “going to be a shot in the arm for the fourth quarter,” said David Bartram, who heads the SBA division for San Diego-based Seacoast Commerce Bank.
Bartram’s bank plans to tap as much capital as it can get from the new $30 billion lending fund. If the bank gets $1.8 million in capital from this Treasury Department-run fund, it can leverage that into $18 million in small business loans, he said.
With a 90 percent SBA guarantee, the bank can leverage that $18 million into $180 million in new SBA loans, because the bank sells the guaranteed portion of its SBA loans on the secondary market.
Hundreds of other small and medium-size banks also see opportunities to make more small business loans, but “are pulling in their horns now to preserve their capital,” said Paul Merski, senior vice president and chief economist at the Independent Community Bankers of America.
These banks can’t raise capital on their own because private capital markets are still largely frozen, he said. The new Small Business Lending Fund will provide these banks with the capital they need, he said.
Under the program, the Treasury Department will charge a 5 percent dividend rate for the capital. This dividend rate would decrease if a bank increases its small business lending and rise if a bank doesn’t use the capital to boost loans to small businesses.
Critics fear this incentive to lend will lead banks to make bad loans.
“This could lead to banks making risky loans to avoid paying higher interest rates,” said Sen. Olympia Snowe, R-Maine, who supported much of the legislation but voted against it because of the Small Business Lending Fund.
However, Merski said bank underwriting standards won’t change as a result of the program. Only banks that already see demand from creditworthy small businesses are going to tap this fund, he said.
The program could become available to community banks as early as the fourth quarter of this year, Merski predicted.
Small Business Jobs Act
• Waives fees on 7(a) and 504 loans through Dec. 31.
• Permanently raises size limits of SBA loans, including an increase from $2 million to $5 million on 7(a) loans.
• Provides up to $30 billion in cheap capital to community banks to make small business loans.
• Funds $1.5 billion in grants to support state-run credit programs for small businesses.
• Provides $12 billion in targeted tax cuts for small businesses, including incentives for investment in new equipment.
Source: HR 5297