Becoming an SBA Lender Not as 'Laborious' as Some Credit Unions Might Perceive, SBA Expert Assures in NCUA SBA 101 Webinar
ALEXANDRIA, Va. -- One question NCUA Board Member Gigi Hyland said she often gets asked by credit unions during her many travels is on the process of becoming a lender with the Small Business Administration.
That was the impetus for NCUA holding its Sept. 14 SBA 101 Webinar, which featured Hyland and John Wade, SBA policy analyst. More than 235 registered for the session which touched on a number of topics about becoming an SBA lender including an overview of the agency's 7(a), 504, and SBA Express loan programs; NCUA's member business loan rule and how it relates to SBA programs; and due diligence issues related to member business lending and NCUA examination criteria regarding such activity.
"This Webinar was a great way to highlight the programs offered by SBA and how they can partner with the government to help their members achieve the dream of starting their own business," Hyland said.
Wade said in the five years credit unions have been offering SBA loans, growth has been significant. In 2001, there were 71 credit union lenders and now there are more than 300. He addressed commonly-asked questions including stressing that loan participations in SBA are only permissible among other SBA lenders and the agency participates in the actual money portion if a loan goes into default.
"One thing we've noticed about credit unions is there seems to be a buzz about [them] moving towards becoming financial service intermediaries," Wade said. "The credo we're used to hearing is credit unions are not for profit but for service."
For its part, SBA is in the early stages of slowly moving towards centralizing the processing and servicing of 7(a) loans into a centralized location, which could come sometime in 2007, Wade said. The agency is in the midst of centralizing all of its loan programs and the 7(a) is the "last step," he added. Right now, liquidation takes place in Virginia while servicing takes place in Arkansas and California. The goal is to have processing, servicing and liquidation in one central location.
Meanwhile, the first step to becoming an SBA lender is to contact one of the agency's 70 district offices for an application, Wade said. Depending on how complete the application is or if any additional information is needed, the next step is SBA's headquarters in Washington. Delays can happen, for instance, when the agency is looking further into policies or rate sheets. Above all, SBA is trying to determine a potential lender's capabilities, Wade said. "We have to ensure that each lender has a continuing ability to make, service and liquidate small business loans," Wade offered. Once a credit union or other financial institution is approved, training takes place. When a credit union is ready to offer loans, SBA strives to make the distinction between program eligibility and credit worthiness, differences lenders will too have to address with small business applicants. "If they're not eligible for the loan, it will make no difference on credit worthiness," Wade pointed out. "Does our 'no' really mean 'no?' No, SBA can accommodate loans [where the structure or pricing may not work]. Instead of a five-year or seven-year loan, maybe the loan can be eight years and several months." The agency does want to make every sourcing channel available for applicants and disputes that is the "lender of last resort," Wade said. Meanwhile, if credit unions look closely, they can find areas where the SBA loan product can be introduced.
One area Wade has found credit unions have many questions about is the use of third-party providers. He said that SBA's loan structure and process is "designed to ward off finance companies [for example] and the risk they would assume on their own."
"We're looking at the lender's capability--can you operate all facets of a commercial lending operation," Wade said. "Some people say 'it's the same as a consumer loan' but [an SBA loan] is really not built that way. We want to be sure you can use the program with your existing program." Some other commonly asked questions from credit unions deal with reporting requirements, which the agency uses to track loan success, Wade said. The loan accounting data can reflect what's going on with repayments, he added. Probably the million dollar question is whether the loan guarantee is good. "One thing I've learned in my 12 years of experience is the more you can document, the better off we are in knowing when we go through a process of making payment whether a lender was following the rules," Wade said. By doing so, "we stand ready to honor that guarantee."
NCUA staff members Frank Kressman, staff attorney in the Office of General Counsel and Corey Phariss, program officer in the Office of Examination and Insurance, also participated in the SBA 101 Webinar to discuss NCUA's member business loan rule, due diligence requirements, and what agency examiners look for when reviewing member business loans and SBA loan activity. Phariss offered suggestions on how credit unions can succeed in business lending by avoiding certain mistakes, one being focusing too much on loan growth.
"Consider liquidity, have a plan to test the water," Phariss said. "Look at the balance sheet and income statement in a holistic manner." Other familiar mistakes are credit unions not having experienced staffers in business lending, Phariss said. That also includes hiring a senior officer from a local bank who may not have done credit analysis or servicing for 15 years, he pointed out. More importantly is bringing in someone who "fits the credit union description" and ensuring that the person has the type of experience for the type of lending a credit union wants to do. Credit unions should also remember to look at cash flow versus the financial position of an applicant because the former is used as the primary source of repayment, Phariss said. He also said credit unions need to show more evidence of ongoing monitoring and have stronger contingency plans.
"Credit unions need to ask what does MBL offerings help us achieve, which members will be served and what costs will be associated with maintaining regulatory requirements," Phariss said.
While NCUA's MBL rule was amended in 2004 to better align with SBA's requirements making it more efficient for credit unions to become lenders, Kressman said the agency tends to get a lot of questions about further changes, which are often not permissible. "We always need to stress that a good portion of what is structured [in the MBL rule] comes from the Federal Credit Union Act," Kressman said, adding ultimately, the amendment made sense because SBA's programs were "ideally suited" to the mission that many credit unions have in serving members with business loan needs. Hyland said the suggestions she receives from credit unions on knowing the SBA lender process are timely and significant. "As a regulator, I believe that public comment and input is vital, and this Webinar was a great way to utilize the latest in Internet Webcasting technology to provide a productive forum for discussion for credit union officials across America," Hyland said. NCUA was scheduled to archive the SBA 101 Webinar by Sept. 21 on the agency's Web site, www.ncua.gov. --firstname.lastname@example.org