SBA Documentation, Fees Prohibitive CU Witness Tells Federal Lawmakers
WASHINGTON -- Debate continues between the Republican Administration and the Democratic Congress, guarantor and lenders over SBA's zero-subsidy program that passes fees along to borrowers.
Congresswoman Melissa Bean (D-Ill.) and Small Business Committee Ranking Member Steve Chabot (R-Ohio) introduced legislation earlier this month that would provide "fee contributions" for the SBA 7(a) program, make permanent to Low-Doc and Community Express programs, as well as providing incentives for medical professionals to place their practices in underserved areas. Additionally, the Small Business Lending Improvements Act (H.R. 1332) would provide for a program to aid smaller lenders in delivering 7(a) loans.
For his part, Actors Federal Credit Union CEO Jeff Rodman told members of the House Small Business Committee during a March 8 hearing that fees passed through to borrowers under SBA's 7(a) zero-subsidy program are prohibitive, as well as the documentation procedures.
SBA Associate Administrator for Capital Access Michael Hager stated during his testimony, "The zero-subsidy program has provided stability in the program, which is of the utmost importance to lenders." In the past, the program has had to be temporarily shut down due to congressional budget impasses. According to Hager, the administration is opposed to the taxpayer subsidy.
While stability is appreciated, the fees that are passed on to the borrowers can make them think twice, Rodman said. Small to mid-sized 7(a) loans can bring fees ranging from $1,500 to $3,000. "That is significant to the borrower," Rodman told Credit Union Times. "How much inventory is that?" The fees have been a "deterrent" for Actors to enter the program, he said, especially when $2 million of the credit union's business lending portfolio are small loans for musical instruments.
Additionally, a credit union's expense to hire someone with the necessary expertise may not be worth the loans to be made, given the credit unions' member business lending cap of 12.25% of assets. While Actors does offer business loans, it does not participate in SBA because, he explained to committee members, hiring someone at approximately $70,000--equal to 10% of his human resources budget--for the few SBA loans a credit union will be able to do is impractical. "Unfortunately," Rodman told committee members, "we have found the process for qualifying as an SBA lender, and the requirements for underwriting and servicing individual loans to be too cumbersome and time consuming to recoup the expense for the small size or number of loans we might make." Actors is not alone. Rodman provided statistics showing that less than 2% of credit unions offer 7(a) loans to members and, while they are more prevalent among larger credit unions, only about 18% of credit unions over $500 million in assets offer 7(a) loans. What would help though, would be to "restore and expand" the Low-Doc program and permanently authorize the Community Express Loan Program, as included in the legislation. Congress should also consider a "prequalification" program for small lenders. According to Rodman, he has heard from colleagues that if the SBA documentation is not 100% in order, which is not reviewed by SBA in advance, and a loan goes bad, the guarantee could be voided. Rodman also recommended permitting credit unions to serve as nonprofit, community based intermediaries under the Microloan program. Simplifying the process will go a long way in encouraging credit unions to participate in SBA lending he said in response to a question from Small Business Committee Chair Nydia Vel?zquez (D-N.Y.). "Streamlining this will make a huge difference," Rodman stated.
In her opening statement, Vel?zquez supported H.R. 1332. "This country's 26 million small businesses must have the ability to secure affordable capital in order to continue spurring economic development and job creation," she said. "It is not only important that they are able to start their businesses, but if affected by a disaster such as Katrina, entrepreneurs must be able to receive reliable and efficient aid."
Ranking Member Chabot agreed that improvements are necessary. "I strongly believe we need to evaluate ways to expand the 7(a) and 504 loan programs to provide opportunities to small business owners in rural and urban areas," he stated. "However, I believe this should be accomplished without reverting back to the days when the viability of these important lending programs was dependent on receiving appropriations."
A markup of the legislation was slated for March 15. CUs Pick Up the Pieces
"Today, hundreds of credit unions offer much needed capital to their members so that the dream of owning a small business can be realized, filling a void that has been created as some lenders have left the program," NAFCU Senior Vice President of Government Affairs Dan Berger wrote in a letter to the committee leadership just prior to the hearing. "Credit union members all too often are unable to secure 7(a) loans through other lenders and turn to their credit unions to offer them a hand in their small business dream." He said this was particularly true in the Gulf Coast region.
However, NAFCU is worried that credit union members are the hardest hit under the fee-based funding structure for the 7(a) program. "Their loans are often smaller than the average small business loan," the letter read. "The SBA's access to capital programs will undoubtedly suffer, programs vital to credit unions will become more expensive and the result will be less accessibility and capital for small businesses and lenders." NAFCU asked the committee for help by "adequately funding the SBA 7(a) program." --firstname.lastname@example.org