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The Entrepreneurial Agenda by Robb Mandelbaum
January 8, 2009
SBA Loans (Still) Plunging
Posted at 1:04 PM
The news out of the Small Business Administration's corner of the market only gets worse -- and worse. As CNNMoney.com reported on Monday (hat tip: the Coleman Report), the SBA's 7(a) loan program has all but collapsed. Lending in the last quarter of calendar year 2008 plummeted 57 percent from a year earlier. Total dollars loaned fell by 40 percent, to almost $2 billion. Meanwhile, Temecula Valley Bank, a California institution that had lately developed one of the busiest SBA programs in the country -- as of last fall, SBA loans accounted for 28 percent of its portfolio -- announced a dramatic retrenchment Monday. Then on Tuesday, bank officials said it would leave the business altogether, at least for the time being.
What's happening here? The imperiled economy -- with its tighter credit and softer demand for capital -- can't account for this kind of cratering. In fact, the Federal Reserve's Survey of Business Lending, a quarterly snapshot of commercial loans, reports that production for loans under $1 million (the ones thought to go mostly to small borrowers) actually increased slightly in the same period. The SBA, for its part, blames the frozen secondary 7(a) market. (Many banks, especially community banks, pool their 7(a) loans and sell them to investors, reinvesting the proceeds in new loans.) SBA spokesman Mike Stamler says that recent initiatives to shore up the secondary market by both the SBA and the Treasury Department "will help free up the capital both brokers and investors need to purchase new SBA loans." As these changes work their way into the system, "we expect secondary market activity to begin to return to normal levels."
That's true as far as it goes. Independent SBA lending industry analyst Bob Coleman believes the Treasury's effort to support asset-backed securities, in particular, will help rejuvenate the secondary market. But only about 35 to 45 percent of 7(a) loans are resold -- not 60 percent. And while officially, at least, Temecula Valley officials cited the sluggish resale market as the reason for their hasty retreat, the bank is clearly trouble for reasons that have nothing to do with the secondary market. The bank's losses started in the spring. In mid-December, it announced that it was considering applying for a federal bailout, then a few days later sacked its top executives.
A closer look at the numbers reveals that the biggest drop in 7(a) lending occurred among -- wait for it -- SBAExpress loans, for which banks use their own forms and credit scoring models to decide independently -- and immediately -- whether to approve the loan. (In exchange for delegating that authority, the SBA offers only a 50 percent guaranty.) Express loans are down a whopping 64 percent. This should come as no surprise to faithful readers -- it's been apparent ever since the downturn in SBA lending began last spring. Express loans were an easy way for the SBA to bulk up loan numbers -- or reach more borrowers, to construe it more charitably -- at little cost to the agency. (The bank, after all, is doing all the work.) In 2006, these amounted to two-thirds of all 7(a) loans. But they are, evidently, the least resilient to a softening economy. As banks tighten credit scores, Express loans are the first to go. By comparison, regular 7(a) loans --with their reams of paperwork and SBA approvals -- fell just 32 percent.
Finally, "a real problem is that banks are firing their sales people left and right -- I estimate the SBA lending industry has lost 1,500 private sector jobs in the last three months," says Coleman. "Coupled with shrinking credit boxes, SBA lending has simply plummeted."
Ironically, the loan program that has most suffered is the one that's perhaps most needed. The Community Express loan combines the higher guarantees of the traditional 7(a) loan with the reduced paperwork of the SBAExpress, and it's targeted to people who live in disadvantaged areas. But because it's pilot program, it's restricted to ten percent of the total number of 7(a) loans. As a result, Community Express lending has fallen nearly 80 percent.
As the Obama Administration and Congress debate new ways to invigorate SBA lending, it should look hard at expanding Community Express.
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Robb, some of what you posted is correct, but don't drink the koolaid. There is more to the SBA story. The SBA Industry is coming off a period where loans were being made to anyone with a pulse. Lenders were concerned far more with quantity (loan volume) than quality. It was easy and the downside was minimal. They could make the loans and sell the suspect paper on the secondary market or if they held the loan, once it defaulted, the SBA would rubber stamp payment of the guarantee. Mercenary BDO's hopped from lender to lender churning the same marginal loans and collecting hefty commissions. Most employed the services of suspect SBA loan and franchise brokers to increase the volume and everyone made a killing. In addition, lenders could cover their collateral requirements with a 2nd, 3rd or 4th lien on the borrower's residence and the borrower could take out a home equity loan to cover any shortfall. Well the music has stopped, the party's over and someone has to clean up the mess. The SBA secondary market is frozen, the SBA has taken a tougher stance regarding whether it will honor its guaranty, the default rates are climbing b/c the loans were marginal anyway and everyone knows what's happened to the housing market. Do a little research on the Cuppy's Coffee saga, BLX, Wamu/Bank United, Sargent Hussain and search the SBA website for recent reports from the OIG (Office of Inspector General).
Bring forth the "experts", who talk about "moral hazard" could blame it on the people that took out the obviously "worthless" SBA loans from obviously "shady" loan brokers using their obviously "greedy" home loans for collateral. Then, we should make it so hard to get loans that there is never a default and the SBA only guarantees 5 loans a year (all to Indian tribes with gambling revenue) and the money the government usually allocated to loans could be used to hire more bureaucrats and pay bureaucratic salaries............
- and those that agree with the above are too stupid to understand sarcasm...
In reality, imagine having to make a unconditional guarantee on an SBA loan and then having the banks and Congress tank the credit market. Neither of whom have to guarantee anything.
hank
Robb
Do you know how much the federal government spent last year on SBA loan losses? Nothing. Zilch. Losses are covered by borrower and lender fees -- and that includes losses incurred by the very infrequent rogue lender.
At least five small businesses have closed in the past month in my town -- a gas station, a hair salon, a dress shop, a retail shipping store and a real estate brokerage firm. Jobs and local tax revenues are lost.
Small business needs access to capital. Today. The numbers are stark. SBA loans are down 57%.
It's not a coincidence the unemployment rate is rising as small business lending is falling.
The $700 billion Wall Street bail out must trickle down to Main Street. SBA, with all its warts, is the most cost effective way to the American taxpayer to get capital to Main Street.
Bob Coleman
http://www.colemanpublishing.com/
I think we haven't seen the worst yet. Ignoring Main St will be a BIG mistake.
So Bob, the$76 million in fraud taken by BLX was repaid using borrower or lender fees? The Wamu/Bank United fiasco was covered totally by borrower and lender fees? The losses on Cuppy's, Java Joe's, Quiznos and other franchises? Man, you folks who feed at the gov't trough continue to rationalize and promote the current version of the SBA from your own ends. The taxpayers pay for this boondoogle. Folks Bob makes his living selling SBA seminars and services to the BDOs and other industry players who siphon fees from the SBA program. You do the math. When the SBA has to honor its guaranty on a defaulted loan, it's covered by taxpayer money.
"...SBA, with all its warts, is the most cost effective way to the American taxpayer to get capital to main street."
How can that be when less than 5 - 10% of small businesses are funded using SBA loans? Take an anecdotal poll of small businesses in your neighborhood. See how many were financed through SBA lending. Trying to get capital to small businesses through the SBA as it's currently set up, is throwing good money after bad. When talking about supporting small businesses, the discussion needs to to separate small business lending from SBA lending. Most small businesses are not financed using SBA loans.
As currently situated, the SBA lending industry is set up to generate commissions and fees for brokers, BDOs, seminar producers, consultants and other service providers.
Now, if the SBA outlawed the use of loan brokers, increase its enforcement abilities, required lenders to keep and report accurate default numbers and required businesses who take SBA loans to write their own business plans and perform their own due diligence, the SBA loan program would be much more effective.
Read this article. Replace the word "mortgage" with "SBA loan" and that sums it up.
http://www.nytimes.com/2008/11/02/business/02gret.html
Read this article. Replace the word "mortgage" with the word "SBA loan" and it describes what's happened in the SBA industry.
http://www.nytimes.com/2008/11/02/business/02gret.html
The SBA 7a Loan program is very similar to the Canada Small Business Financing program. I wrote a paper in 2005 that explained what I defined as Predatory Franchise Lending: exploitative industry practices including loan pushing.
I think looking at Franchising Opportunism (google for pdf) explains how franchisors, sales agents and lenders work together to kite investment offerings that are designed to fail.
When the churned franchises tank, much more than the loan amounts are lost. Often the defaulting loans are not even redeemed: the bank's receiver covers the trail as the loser unit forms the basis for the next trap.
This is nothing at all like a victimless crime. Read more at FranchiseFool.
We don't need the SBA - we have capital equipment leasing companies writing illegal contracts and helping franchises lose their life savings and their homes and in many cases, their families.
http://bloodyfranchise.wordpress.com/2009/02/24/fly-on-the-wall-with-a-franchisor-franchise-broker-a-predatory-lenders-attorney/
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