Credit Unions Optimistic on SBA's Digital Vows
The SBA has promised credit unions and other lenders that they can say goodbye to fax machines and mountains of paperwork.
During a recent speech at the Center for American Progress in Washington, SBA Administrator Maria Contreras-Sweet spoke on entrepreneurial equality and new tools to make the agency more inclusive.
“The time has come to reach out to all of our lending partners on small loans and bring new lenders into the SBA fold,” Contreras-Sweet said. “To augment loan volume and multiply points of sale, I’m pleased to announce that we’re transforming into a smart system guarantee process to serve businesses better.”
For years, the SBA has had a reputation for long wait times for processing and approval decisions as well as a litany of paper documents required for loan submissions. So much so that industry trade groups such as CUNA have called on the agency to streamline the back and forth.
“CUNA strongly supports efforts of federal agencies to eliminate unnecessary, outdated regulatory restrictions on credit unions,” Luke Martone, CUNA's senior assistant general counsel for regulatory advocacy, wrote in April 2013 when the SBA said it would eliminate a personal resources test from the regulations for the agency's 7(a) and 504 loan programs and allow SBA applicants more flexibility to use their loans to finance expenses.
A year later, in March, the SBA eliminated or revised several requirements for its 7(a) and 504 loan programs including changing the latter's requirements to allow third-party lenders to take collateral in addition to project collateral under certain conditions. The agency also eliminated a test so that borrowers could be more flexible in the management of their allocation of personal resources to their small businesses.
Before Kent Moon became president/CEO of Member Business Lending LLC, a West Jordan, Utah-based CUSO, he served as district director of the SBA's Utah District and as a financial analyst and senior technical adviser for SBA headquarters in Washington. He said the SBA's latest initiatives are a move in the right direction but that there is more work to do.
For instance, the SBA's small loan advantage scoring model that has been in effect for over a year now has given an extra metric in evaluating loan risk, he noted. However, the eligibility and underwriting criteria on SBA-guaranteed loans have not been reduced, hence the complexity of the SBA regulations has pretty much stayed the same, Moon said.
“Larger lenders will initially benefit the most from the proposed technological advances being proposed by the SBA. Of course, the top 3% of the SBA lenders nationwide deliver over 75% of all SBA guaranteed loans,” Moon said. “Smaller lenders have a harder time affording the staff and computerization to incorporate such technological advances.”
Contreras-Sweet said the agency has launched SBA One, what she described as an interactive, user-friendly SBA lending platform that will save lenders hours of processing time and thousands of dollars on each 7(a) loan through automated document uploads, forms generation and electronic signatures.
Starting this month, credit unions and other lenders will be able to use a new SBA credit score that will combine an entrepreneur's personal and business credit scores for loans of $350,000 or less. One of the goals is to eliminate cumbersome, impeding analyses of a company's cash flow, a step that can delay loan decisions, Contreras-Sweet said. The SBA's credit score also ensures that risk characteristics, rather than socio-economic factors, are used to determine if a potential borrower is creditworthy.
For the $1.8 billion Technology Credit Union, the SBA implemented a few changes in 2014 that have helped to streamline the process, said Joe Anzalone, EVP and chief banking officer at the San Jose, Calif.-based credit union.
Among them, in January, the agency required all applications to be submitted through the E-Tran online platform, and reduced paperwork in some areas to improve processing times, such as condensing the application documents required of an applicant to a single form.
“We at Tech CU had already made it part of our process to handle applications electronically, and so were already using E-Tran. However, some financial institutions were still submitting via fax. By making everyone use the online platform, it likely speeds up processing on the SBA's end,” Anzalone said.
Tech CU is also a Preferred SBA Lender, which means it can unilaterally authorize to approve SBA loans, he said. That gives the lending team more flexibility and speed in supporting loan requests, particularly those that are non-traditional, Anzalone said. The agency also implemented new procedures for reviewing franchise agreements for lenders in the Preferred Lenders Program, which has reduced processing time and lessoned the burden on PLP lenders.
Anzalone suggested the agency now tweak communications about what its loan specialists are looking for on loan applications, and perhaps that it standardizes more. “Minor inconsistencies have been noted on how different loan specialists may underwrite an application,” the Tech CU executive said.
In June 2013, the $496 million Members Choice Credit Union in Houston was ranked ninth among the top 10 lenders in the SBA's Houston district, which consists of 32 counties in southeast Texas. The cooperative has also been an SBA Preferred Lender since June 2011.
“Since the late 1990s, SBA has been diligent in seeking new innovative ways to streamline the lending process both for lenders and small business borrowers,” said Bruce Hurta, business lending manager at Members Choice. “This is a continuation of that very process,” he added about the agency's latest moves.
While the credit union commended SBA for their efforts to streamline the process, there will always be the element of prudent lending procedures and due diligence that must be followed in the small business lending arena, Hurta emphasized.
“The technology aspect of the SBA lending process must continue to be enhanced which will assist in their efforts to make funds more accessible to the small business community,” he suggested.
Meanwhile, loan approval rates at credit unions improved to 43.6% in May, after having dropped to one of the lowest levels ever (43.5%) in the three-year history for Biz2Credit, according to the New York firm that connects small businesses with lenders. It discovered that increase in its monthly analysis of 1,000 loan applications processed for that month.
“Small business owners are confident and are investing in the expansion of their businesses, said Rohit Arora, CEO of Biz2Credit. “They are seeking SBA loans, as well as non-SBA loans, which take a shorter period of time to approve, have less restrictions and more flexibility, and sometimes offer better interest rates.”
Meanwhile, Contreras-Sweet has vowed to make some hard decisions if the SBA isn't delivering on its goals. “We will measure our success by tracking the revenue gains and job gains that result from these initiatives. Programs that do not deliver on these metrics will be reformed or eliminated,” she said.
“We know small businesses must do more with less. The SBA should lead by example. An adaptive SBA must be modern, inclusive, and market-sensitive, all the while delivering a strong return on investment to the taxpayer,” the SBA administrator said.