Small Business Administration loans provide opportunities for credit unions to build relationships with small business owners in their communities.

However, for many cooperatives, the loan program is marked by uncertainty. According to credit union executives who said they are familiar with the program, the SBA needs to ramp up its education efforts to increase credit union participation.

According to the SBA, roughly 200 credit unions across the country participated in the 7(a) loan program last year. Through the 7(a) loan program, the agency guarantees 85% of a small business loan, given the credit union fulfilled the agency's lending requirements. Credit unions may also participate in the SBA's 504 loan program as commercial mortgage lenders, in which the credit union funds 50% of the loan amount, the agency lends 40% and the borrower puts up 10%. However that program has been less popular among credit unions.

The number of credit unions participating in the 7(a) loan program has gradually increased since fiscal year 2009, when 171 credit unions originated 2,129 loans totaling roughly $191.3 million, according to the SBA. So far in 2015, 207 credit unions participated in the 7(a) loan program, originating 1,620 loans worth $357.7 million.

In comparison, about 100 credit unions participated in the 504 program each year, making between 175 and 200 loans annually, the SBA said.

SBA Administrator Maria Contreras-Sweet strongly advocated for credit unions to participate in the program when she appeared at NAFCU's Congressional Caucus Sept. 15. There, she told assembled industry executives that since being confirmed by Congress, she has made a significant effort to streamline the agency's processes for making loans.

While making these changes, Contreras-Sweet explained, she also realized the agency had to reach out to more credit unions.

“I was in the middle of working to create a program that would help borrowers of less than $50,000 and I realized we had a network of financial institutions that were already well situated to reach these borrowers,” Contreras-Sweet said, referring to credit unions.

SBA loans totaling less than $50,000, such as those made through the 7(a) lending program, should be attractive to credit unions because the agency guarantees 85% of their principle, Contreras-Sweet said. In addition, SBA-guaranteed loans totaling less than $50,000 do not count toward the business lending cap, she noted.

“If I were still in banking and I had loans that were 85% guaranteed, could be largely underwritten electronically, carried no fees and were free from a regulatory or a compliance point of view, of course I would be interested,” she said.

Gerald Goldenbroit, president/CEO of the $338,000, 89-member Queens Cluster Federal Credit Union in Hicksville, N.Y., one of the smallest financial institutions authorized to originate SBA 7(a) loans, shared Contreras-Sweet's enthusiasm for the program.

He declared the loans a great deal for both the credit unions that originate them and those that buy their guaranteed portions.

“[This is] particularly [true] for credit unions that are too small to originate their own business loans,” Goldenbroit said. “They're buying the 85% guaranteed part and finding a yield that's hard to match these days.”

But Goldenbroit also emphasized that credit unions, particularly small ones, are still holding back from originating the loans.

“You want to know why more credit unions don't do SBA loans?” Goldenbroit asked. “It boils down to two things in my opinion. First, they don't know how, and second, they don't trust the guarantee.”

Even though the SBA has worked to streamline its lending process, Goldenbroit said the 7(a) loan program still came with a pretty hefty list of standard operating procedures that the cooperative had to follow to remain eligible for the guarantee. The procedures can be complicated, he said, and to ensure they are followed correctly, credit unions must employ staff members who are thoroughly familiar with the SOPs.

Goldenbroit and other credit union executives also noted that although the agency does not like to talk about it this way, credit unions should consider an SBA guarantee as more of an insurance policy than a guarantee.

For example, if a credit union originated a $100,000 SBA 7(a) loan, the agency's guaranteed part of that would be $85,000. However, if the loan defaulted and the credit union asked the SBA to buy that portion of the loan, the agency wouldn't do it – at least not in full – if the cooperative made any SOP mistakes.

“It really feels a bit like insurance,” Shamus McConomy, vice president of member business services for the $1.7 billion, Tampa, Fla.-based GTE Financial said. “Much as when you need to find a claim, the insurance adjustors will look at the situation and see if you're covered, the agency looks at a defaulted 7(a) loan and sees if they have to buy all or part of the guaranteed portion.”

McConomy said GTE Financial has been authorized to originate SBA 7(a) loans for some time but began working with the agency diligently in 2012, when it refocused its business lending program on local communities and small business lending.

Source: NCUA 5300 call report

Leading up to the Great Recession, GTE Financial began taking a more aggressive stance toward making larger business loans, primarily in the hospitality industry, which has remained strong in Florida.

“We took what we call an 'elephant hunting' approach,” McConomy said. “We went out to see if we could bag big business loans attached to the hospitality industry, usually for hotels that might be clear across the state.”

The cooperative's hotel loans have not performed well unless the property was situated in a well-known travel destination, McConomy reported.

One $2 million hotel loan in particular has been problematic, and although GTE Financial has been carrying the loan's potential loss on its books for some time, the property helped hike the cooperative's ratio of delinquent loans to total loans to 1.65% – more than twice the 0.66% posted by its peers.

In addition, the credit union's return on assets ratio stood at less than half than that of its peers (0.39% versus 0.83%) and its provision for loan losses was double that of its peers (0.57% compared to 0.25%).

Despite its lagging loans, GTE Financial ended June of 2015 with positive income of $3.3 million, and McConomy reported the credit union carried 444 business loans on its books (only 15 were SBA loans).

McConomy said the agency's program guidelines were to blame for the low number.

“In our market, the community banks run all their business loans through the SBA,” McConomy said. “And I mean all. Even loans that shouldn't need the SBA are made as SBA loans. They do that because that helps them boost their fee income. There are fees on all those guaranteed loans.”

However, he added, the agency's SOPs clearly state that it wants credit unions to use the SBA loan program for loans they would not make otherwise.

“The SOPs ask in several places why you could not make this loan on your own,” McConomy said. “Sure, you could lie, but it's clear they really want these loans targeted to where they are needed.”

McConomy explained that the credit union used the SBA loans for circumstances when it could not make the loan through its own underwriting alone, for example, or when the cooperative thought a business had the experience but lacked credit history.

“In that circumstance, we believe in the idea and the people doing it, but the numbers just aren't there for us to do the loan,” he said. “In that circumstance, the SBA guarantee makes it possible.”

Instant Insights /

Credit Unions Lack SBA Lending Knowledge

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