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Stimulus bill aims to boost SBA lending

Jan 28, 2009
Article #27
Author: Kent Hoover Business Journal

Stimulus bill aims to boost SBA lending

Kent Hoover Washington Bureau Chief

The initial House version of the economic stimulus bill would give the Small Business Administration $430 million to revive its ailing loan programs.

The bill would increase the government guarantee on the SBA's 7(a) loans, and empower the agency to make loans directly to small businesses, a function that now is performed by private-sector lenders.

Many of those lenders, however, are no longer making SBA loans. Through Jan. 9, the number of 7(a) loans is down 56 percent this fiscal year, which began Oct. 1, compared with the same period a year earlier. Total dollar volume was down 40 percent, to $2 billion.

Use of the SBA's 504 loans, which finance real estate and other fixed assets, also dropped sharply. The number of 504 loans was down 40 percent, and the dollar volume was down 43 percent.

The legislation would encourage lenders to start making 7(a) loans by temporarily increasing the amount guaranteed by the government from the current maximum of 85 percent to 95 percent. This would make the loans less risky for lenders and free up capital for additional loans, according to the House Small Business Committee.

The bill also would allow a small business to apply directly to the SBA for a loan. The agency would first forward the application to lenders within with 100 miles of the applicant's location. If none of these lenders decide to make the loan, the SBA would send the application to participants in the agency's Preferred Lenders program. If these lenders pass, the SBA itself could then originate, underwrite, close and service the loan.

SBA loans also could be used to refinance existing loans of up to $10 million, under the legislation. The lender, however, would have to accept less than 100 percent of the loan's balance and principal.

The legislation also aims to restore the secondary market for SBA loans, which has been dormant in recent months. The inability of lenders to sell their existing SBA loans on the secondary market has prevented many from making new SBA loans. The stimulus bill would enable the SBA to make loans to broker-dealers who operate the secondary market. The SBA could also guarantee pools of first-lien 504 loans sold to third-party investors.

President Barack Obama has called for the SBA to make direct loans and increase its loan guarantees. He also advocates lowering fees on SBA loans.

High fees and other program costs have driven many lenders away from the program, said Paul Merski, chief economist for the Independent Community Bankers of America. The number of lenders that made at least one 7(a) loan has dropped from 5,288 in 2001 to fewer than 2,700 today, he said. A few large banks dominated SBA lending in recent years.

"This gross imbalance in SBA lending was a recipe for disaster," Merski said. "Many of the largest financial players have tripped up on toxic investments and subprime lending, and have been forced to pull in their lending across the board -- including small business and SBA lending."

SBA officials cite several reasons for the decline in SBA loans, including reduced demand due to the weak economy. Borrowers have tightened lending standards, and many small businesses are less creditworthy than they were when the economy was healthier.

In order to make SBA lending more profitable, the SBA now allows lenders to charge higher interest rates on the loans. It also gave assemblers of SBA loan pools more flexibility on interest rates. Meanwhile, the Federal Reserve Board announced plans for a lending facility designed to provide more liquidity to issuers of SBA-backed securities. These recent steps eventually will boost SBA lending, according to agency officials.

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