SAN DIMAS, Calif. -- Can the Small Business Administration's 504 loan program essentially "eliminate" the 12.25% member business lending cap?
The agency's 504 program provides businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. Certified development companies work with the SBA and private-sector lenders to help provide financing. Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50% of the project cost, a loan secured with a junior lien from the CDC (backed by a 100% SBA-guaranteed debenture) covering up to 40% of the cost, and a contribution of at least 10% equity from the small business being helped.
For credit unions, 504 loans can do a number of things, said Kent Moon, president/CEO of Member Business Lending, LLC during a Webcast hosted by the CUSO and WesCorp on July 25. For starters, the program can "literally eliminate" the MBL cap, which current limits credit unions to 12.25% of their assets. The Credit Union Regulatory Improvements Act is aiming to increase the threshold to 20%.
"The 504 program can literally eliminate the regulatory cap," Moon said. "The same program can generate higher fee income, higher liquidity and eliminate or substantially reduce loss potential" as well as "create a viable secondary market."
Because the loans require a lower down payment, Moon said this feature alone will "drive a lot of small businesses into credit unions." There is also a full amortizing fixed rate on the second mortgage and the blended rate provides a below market rate. Moon said the loan to value and risk is low as the government typically will step in and buy out the loan should a foreclosure occur. Even if the government doesn't intervene, the credit union only has to recover 50% of the project, Moon said.
As for how the SBA 504 loan program can help create a commercial real estate secondary market, the majority are large cash flow properties of which many of these types of loans are starting to originate from credit unions, said Bob Burrell, executive vice president/chief investment officer at WesCorp. Secondary markets are indeed addressing small balance commercial real estate markets--another area that might be of interest to credit unions, he added.
"Banks are large players and have been for years," Burrell said. "Many credit unions want to minimize exposure so selling loans is a good way to reduce credit risk. And for credit unions with cap issues, in some instances, it's better to sell the loans."
Burrell said the securitization process, where loans are purchased and then bundled together into mortgage-backed securities, may be one of the best deliveries for driving a loan and bringing in a number of buyers. In late 2006, NCUA voted to expand the authority federal credit unions now have to enter into investment repurchase transactions in which the instruments consist of first-lien mortgage notes. Investment repurchase transactions using mortgage loans are typically short-term transactions with a counterparty for purposes of facilitating the securitization of the loan before it is sold to the secondary market.