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WASHINGTON – Credit unions seem to be the perfect match for Small Business Administration loans, but the SBA is learning that credit unions are not ones to jump on new things. When SBA opened its lending programs to all credit unions Feb. 14, 2003, credit unions did not swarm upon the new opportunity, but instead they are carefully deliberating the move to member business lending and then to SBA. “To prove our validity, we’re always looking at ways to reach out to small business,” Associate Deputy Administrator for Capital Markets Ron Bew said. Credit unions fit the bill to a T : SBA is working to reduce its average loan size, which currently stands at $154,000. Overall, credit unions business loans average around $120,000, according to NCUA. SBA Financial Analyst John Wade said credit unions’ average SBA loan has dropped from $110,000 three years ago to $83,000 now. This also contributes to SBA’s goal of increasing the number of loans it backs. Bew added, “Credit unions are another avenue for us to make new loans and focus on emerging markets.” This meets another of SBA’s goals to reach out to the Hispanic marketplace where he feels credit unions are making headway. “For what we’re doing, it’s a lot of education right now,” Bew’s Senior Advisory Kevin McCall said. He pointed out that more than 1,500 credit unions are involved in business lending right now, but they are not signing on with SBA “as fast as we would have thought.” According to SBA data, 158 credit unions are approved SBA lenders as of March 31, about double the number from a year ago. McCall said SBA has no specific goals for credit unions but want “a good portion” of the credit unions currently involved. NCUA Board Member Debbie Matz, the board’s liaison to SBA, said that the increase in credit union participation in business lending in general has been significant. The number of credit unions in business lending is up 2% over last year to 1,631 (17.41% of all federally insured credit unions). “The dollar volume went up quite a bit,” Matz explained. “It went up 33%. The number of member business loans outstanding also went up significantly; they went up 14% from 2002 to 2003. So it seems that credit unions that are doing business lending are making more loans.” She also indicated that delinquencies have continued to decline. Regarding SBA loans, specifically, Matz added, “We worked very hard to get SBA to change their regs to permit credit unions to participate with them and the reason why I worked so hard to do it was because I felt it would minimize the risk if they’re working with SBA. It would minimize the risk, but it would also free up more money to make more business loans because the guaranteed part of the SBA loan is not counted against the cap.” She added that she understands SBA would like more credit unions to jump into government-backed business lending. “They really took a lot of flak from the bankers for changing this reg and so they really want to make sure they did the right thing and that credit unions understand the significance of it and since they serve the same market, they see that the credit unions are really a good way to get the SBA guarantees into the community where they want it. So SBA is concerned and really wants to open the doors for credit unions and is hoping that more and more credit unions see the advantages of working with SBA.” Bew, a former banker, said that SBA is trying to stay out of the overall war between the banks and credit unions. However, Matz said, SBA may have set their expectations a bit high. “I think they thought that as soon as they changed the reg, it would be like opening the flood gates and credit unions would make a stampede to their SBA office to get on board,” she said. “I tried to explain to them that it’s a slower process. That first the credit union has to make that big leap to decide that they want to do business lending, and for credit unions that is a very big leap if they’re not currently doing it.” Then credit unions have to go through the process to become an SBA lender. “There are big benefits to doing it but it’s a fairly complicated procedure,” Matz said. “I think, once more and more credit unions understand and know that some of their colleagues are doing it and they see the advantages of it, I feel confident that more credit unions will start working with SBA, but it takes time.” Bew admitted that credit union involvement in SBA lending has seen an uptick. SBA loans through credit unions have increased from129 loans in 2002 to 298 last year. “We think we will find over the future it will be worth it,” Bew said. SBA is making efforts to attract more credit unions to SBA lending. Officials from SBA have appeared at two separate NCUA Partnering and Leadership Successes conferences in the last six months. SBA has and continues to meet and work with CUNA and NAFCU and is exploring CUSO development of lending expertise as well as having completed a marketing study. Matz also suggested SBA’s regional offices should be more proactive, advice which the government lender is heeding. She and Bew have also discussed possibly holding training sessions for credit unions next year that focus on SBA lending. Additionally, SBA is just now rolling out-they haven’t even issued a news release yet-a program called E-Tran, which allows for electronic transfers of loan application data. Any SBA lender can use E-Tran to send in an application online and get an approval number back immediately, according to Bew. In an attempt to make lemonade out of lemons, SBA is also trying to push all its 7(a) participants to the SBA Express application process, where lenders can use their own paperwork for loans. This would require less training for credit unions, but it would also cut the potential 85% guarantee back to 50%. Earlier this year, SBA’s 7(a) loan program closed up shop temporarily because they had to wait on congressional appropriations. “We were shut down eight days this year, which is unacceptable to us,” Bew said. So, to take the 7(a) program out of the appropriations process, SBA submitted a legislative proposal to cut back the guarantee via the Express program and raise the cap on the maximum guarantee to squeeze an additional $3 billion out of the program and move it closer to a zero subsidy. The House passed the legislation March 31 by unanimous consent. Realizing the higher guarantee is especially attractive to credit unions because of the 12.25% cap on business lending, McCall said, “We’re trying to find a middle ground for everyone.” More than half (54% or 67,000) of 7(a) loan applications came through SBA Express last year, Bew pointed out. Since credit unions are already member-driven institutions, business lending and SBA lending should be a natural fit, SBA’s Wade said. “From the credit union side, it’s very, very attractive to keep that member in the fold,” he explained. To become an SBA 7(a) participant, credit unions only need to contact their local district office, Wade said. The process is particularly easy for federally insured credit unions because safety and soundness is presumed from the NCUA oversight. The lender then needs seven items, including some corporate governance paperwork and their share insurance certificate. Beyond that, SBA then tries to establish the institution’s desire and ability to do member business lending. The final package then goes to the Washington, D.C. office for further legal review of business lending decisions, internal controls, and experience or how the credit unions will partner to gain someone with experience. -

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