Despite Lending Risks, Industry Still Sees SBA as a Viable Buffer
Even though Black Hills Federal Credit Union is the largest SBA lender in South Dakota, its portfolio is relatively small, making just 29 loans totaling $1.6 million in 2008, the most current data on record.
"For those of you who are doing the math, as you can see, we make very small loans," Roger Heacock, president/CEO of the $837 million cooperative in Rapid City, S.D. Heacock made the statement to the more than 100 attendees who tuned into a March 25 audio conference hosted by CUNA on credit unions working with the SBA and the NCUA on business lending. CUNA President/CEO Dan Mica moderated the session.
Still, Heacock said without the SBA's loan programs, the CU would have had to turn away some of its current borrowers. Last year, Black Hills was recognized by the agency for writing more SBA loans than any other financial institution in South Dakota. As of fourth quarter 2009, it was still the top SBA lender in the state. What has helped the CU maintain that top ranking is being able to steer members to the SBA's small business development centers, which assists with putting business plans together, said Kevin Tiede, business lending manager at Black Hills.
The CU's success story was one of the highlights of the CUNA audio conference. Also on the call was SBA Administrator Karen Mills, who tracked CUs' participation progress in the agency's loan programs. In 2004, the industry had $125 million in loans and is now at the $500 million mark. Over the past year, 1,000 new lenders who had not been active with the SBA since 2007 had since renewed activity, Mills said. Roughly 100 of those were CUs.
"I travel around quite a bit, and I've met a lot of you," Mills said. "My impression is you all know your communities very, very well. We have a great desire to be more connected to credit unions and to bring in more credit unions to SBA guaranteed lending."
While CUs are intimately familiar with the SBA's 7(a) and 504 loan programs, the agency's micro-loan division has seen renewed interest as of late, said John Wade, financial analyst at the SBA's Office of Financial Assistance. He also coordinates the approval process for nontraditional lender applicants, including credit unions, in the 7(a) program. The agency provides up to $35,000 in micro loans and a technical assistance component-"something many credit unions have built into their mission."
"There are a lot of home-based businesses or store-front businesses that are just getting started and some may be at a point where they need financing to take them to the next level," Wade said. "What's appealing to credit unions is the SBA provides loans to micro-loan intermediaries," which includes credit unions. Self-Help Federal Credit Union and Alternatives Federal Credit Union serve in these roles, he pointed out.
Regardless of the accessibility to the SBA loan programs, monitoring and risk rating has taken on a more urgent tone in light of a troubled economy, most agreed. Wade said the agency "is not in the business of seeing small businesses fail," but that being said, there are situations where some things cannot be controlled. In those cases, deferments and other forms of relief are available.
NCUA Staff Attorney Frank Kressman acknowledged that "the reality is loans are risky business." The function of the regulator is to provide a framework to mitigate those risks, he said. The changes made in 2004 to sync NCUA's regulations so that credit unions could work more with the SBA have been "generous." Even the two-year experience requirement for making certain types of MBLs has some flexibility, Kressman said. A credit union can have an in-house person, work with a third party, a CUSO or non-CUSO or have a conjunction of theses to meet that guideline.
Over regulation is not the goal as a January 2010 letter to credit unions on business loan risk management reiterated, said Melinda Love, director of the NCUA Office of Examination and Insurance.
"As we have come through a boom time, we have a lot of credit unions that are feeling the pain" of seeing collateral values collapsed, Love said. "Loan workouts are one of the most important parts of an MBL portfolio. Credit unions are helping members through difficult times and when you're making an MBL, you're dealing with a person's livelihood."
That reminder, combined with who a credit union may partner with to bring business lending to its members, deserves fine-tooth attention. Wade said the SBA recognizes that CUSOs and other lender service providers are an alternative for those that don't have in-house expertise.
"I should also say that there is no reason why after you've engaged a service provider, you can reach a point where you say 'I think I can do this on my own'" Wade said. "This is the germination of SBA, and really, MBL lending taking off."
NCUA Chairman Debbie Matz said MBLs grew by $1 billion and SBA loans increased 15% in 2009. Growth, "which makes me, as a regulator, very happy." It makes sense to do SBA lending, Matz offered. Even more important, she stressed, is that the guaranteed portion of the loans don't count against the MBL 12.25% of assets cap.
"Some might think it's unusual that a regulator is encouraging credit unions to increase the use of their MBL programs," Matz told the audio conference attendees. "If done properly, and by that I mean with due diligence, they can be an excellent book of business."
During the question and answer period at the end of the call, one person asked if piggy-back loans would make a comeback. A few years ago, the SBA offered the financing, which allowed one or more lenders to provide more than one loan to a single borrower at the same time where the SBA guarantees the loan secured with a junior-lien position on the assets being financed. Wade said because of "the risk posed by these loans, [the SBA] can't accept a subordinate position under this scenario." The SBA stopped the loans in 2004.
A representative from a CUSO touted the fact that none of the community banks in her area were offering the SBA's America Recovery Capital loans, which have a 100% guarantee, provide funding up to $35,000, are interest-free and allow deferred payments.
"We're one of the few lenders doing them" the CUSO rep said. "The last call I got was from someone saying community banks are not doing them. I think we need more recognition that credit unions are doing [the ARC loans]."
Another attendee asked about the turnaround time from loan submission to approval. Wade said, "It's always a function of how complete the application is" but estimated four to six days. Tiede said Black Hills' turnarounds have been one to two days.