New SBA 504 First-Mortgage Pools Can Aid CUs and Member Businesses
While banks are the first approved lenders for a new SBA secondary market loan pool, credit unions are eligible to participate in the program that provides another liquidity source.
Bank of America and United Midwest Savings Bank were the first financial institutions to assemble SBA 504 first-mortgage pools to be sold in the secondary market, the SBA said last week. Bank of America pooled $32.07 million in loans it purchased from other lenders, with $25.65 million guaranteed by the SBA, according to the agency. United Midwest assembled a pool of $7.96 million, with $6.4 million guaranteed by the SBA.
The announcement follows the launch of the 504 First Mortgage Loan Pooling program on July 1. Authorized as part of the American Recovery and Reinvestment Act of 2009, the SBA said the measure is aimed at jump-starting the secondary market for the first-mortgage loans made in conjunction with Section 504 Certified Development Company loans. The ability to sell loans into this secondary market will provide liquidity to those lenders that want to partner with a CDC to provide real estate and fixed-asset financing to small businesses, the SBA said.
Under the program, the SBA provides a government guarantee on pools of portions of eligible 504 first-mortgage loans assembled by approved pool originators that sell them to third-party investors. Lenders retain at least 15% of each individual loan, pool originators assume 5% of the risk, and the SBA guarantees the remaining 80%.
Typically, a 504 project includes three elements: a loan or first mortgage secured with a senior lien from a private-sector lender covering up to 50% of the project cost, a second mortgage secured with a junior lien from a 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 borrower. Brokers, or pool originators, purchase portions of the first mortgages, package and sell them on the secondary market. So far, 12 banks have been approved to participate in the pool.
According to James Hammersley, program manager for the 504 First Mortgage Loan Pooling program, the NCUA is an acceptable regulator to the agency for pool originators and credit unions are eligible if they meet all of the appropriate criteria. Among the requirements for banks and credit unions are the financial capability to originate acceptable pools consisting of eligible first-lien position 504 loans in sufficient quantity to support the issuance of pool certificates and satisfactory SBA performance as determined by the agency.
CDC Small Business Finance, considered to be one of the nation's largest SBA 504 lenders with a loan portfolio of more than $2 billion, collaborated with Bank of America to assemble the nation's first pool of SBA 504 first-mortgage loans through the agency's new program.
Selling off 85% of each loan may allow a credit union to stay under the 12.25% member business lending cap, said Jordan Blanchard, executive vice president at CDC Direct Capital, a subsidiary of CDC Small Business Finance. Credit unions can also maintain the relationships and servicing, he added.
"It also allows credit unions to be more competitive. I'm sure some credit unions are running into the same thing as community banks, which is the difficulty to compete on rate," Blanchard said. "This program allows credit unions to price [in the low range]."