Treasury Tells Arrowhead: CUs Participation in SBA 504 Loan Program Permissible
ARLINGTON, Va. - The Treasury has cleared the road for credit unions to make SBA 504 loans. The agency, after discussions with senior staff of the Office of Management and Budget and the Small Business Administration, concluded that CUs' involvement with SBA 504 loans does not violate OMB Circular A-129,...
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ARLINGTON, Va. – The Treasury has cleared the road for credit unions to make SBA 504 loans. The agency, after discussions with senior staff of the Office of Management and Budget and the Small Business Administration, concluded that CUs’ involvement with SBA 504 loans does not violate OMB Circular A-129, “Policies for Federal Credit Programs and Non-Tax Receivables.” The announcement from Treasury was good news for Arrowhead Central CU Executive VP Parker Cann who made the inquiry after senior SBA licensing staff, in meetings they had with Arrowhead officials in January, questioned whether CUs as not-for-profit financial institutions were eligible to participate in the 504 program. Cann explained that “some concerns had been raised regarding a non-profit entity holding a First Trust Deed position in front of the government debenture in the Second Trust Deed position.” In January, Arrowhead opened the doors to its CUSO, Member Business Services to facilitate and service business loans. In December the $683-million credit union was approved by SBA as a 7(a) lender. But Cann said the CUSO “wants to get involved in all aspects of business lending, not just member business lending, so we’re better able to reach and serve all members with more variety of products,” and that objective precipitated the CU’s talks with SBA According to MBS President Steve von Rajcs, Arrowhead has about 425 business loans on its books worth approximately $60 million. In reaching its decision, Treasury’s Office of Policy and Legislative Review examined the language of OMB Circular No. A-129, issued in November 2000, that states Federal agencies will: not guarantee federally tax-exempt obligations; provide that effective subordination of a direct or guaranteed loan to tax-exempt obligations make the guarantee void; prohibit the use of a Federal guarantee as collateral to secure a tax-exempt obligation; prohibit Federal guarantees of loans funded by tax-exempt obligation; and prohibit the linkage of Federal guarantees with tax-exempt obligations. Treasury’s research also showed that credit unions do not issue tax-exempt debt. Unlike SBA 7(a) loans, an SBA 504 loan is not guaranteed. Instead, explained von Rajcs, “they’re actually two loans in one.” It includes a loan that’s secured with a senior lien from a private-sector lender covering up to 50% of the project cost, and a loan secured with a junior lien from a Certified Development Company (CDC) licensed by the SBA to make 504 loans and backed by a 100% SBA-guaranteed debenture covering up to 40% of the cost. The remaining 10% is paid by the small business borrower as a downpayment on the loan. According to the SBA, proceeds from 504 loans must be used for fixed asset projects such as purchasing land and improvements including existing buildings, grading, street improvements, utilities, parking lots and landscaping, construction of new facilities, or modernizing, renovating or converting existing facilities; and long-term machinery and equipment. The loan program can’t be used for working capital or inventory, consolidating or repaying debt, or refinancing. The maximum SBA debenture is $1 million for meeting the job creation criteria or a community development goal. A business must create or retain one job for every $35,000 provided by the SBA. The maximum SBA debenture is $1.3 million for meeting a public policy goal. Interest rates on 504 loans are typically an increment above current market rates for five-year and 10-year U.S. Treasury issues. Fees total approximately 4% of the debenture and can be financed with the loan. von Rajcs stressed that just because the SBA announced earlier this year that all credit unions could participate in the agency’s 7(a) program and has been encouraging them to apply for certification, “SBA loans are only one tool in the tool kit, but they’re not the only tool out there. Credit unions need to have their own business lending programs first and not rely on SBA loans.” When a member applies to MBS for a business loan, von Rajcs said the first thing the CUSO does is sit down with the borrower, find out what they need and learn about their financial condition. Then the CUSO decides what structure of loan – conventional or SBA – works best for them. An SBA 504 loan, for example, is suitable for members who are only able to make a small downpayment on a loan. The upside for a credit union, he said, is that at a 50% loan-to-value ratio, there’s not a lot of risk to the credit union. “But you still have to do standard underwriting procedures,” said von Rajcs. He said Member Business Services has already gotten requests from members for commercial real estate loans and expects to make its first SBA 504 loan “within the next 30-45 days.” -
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