The U.S. Small Business Administration (SBA) has indicated it intends to streamline the approval process for credit unions wanting to participate in its guaranteed loan program, and CUs are showing greater interest in member business lending.
But is the approval process worth the trouble?
There answer is a resounding "yes," four credit unions told The Credit Union Journal. All four have been approved to offer SBA-backed loans, which insure up to 80% of outstanding loan amounts. According to the SBA, 77 CUs have been approved.
Even one CU that hasn't made a single SBA loan since receiving approval back in 1995 said the program offers value.
"The process itself wasn't that onerous back in 1995 when we went through it," said William Spearman, CEO of the $393-million Mid-Hudson Valley FCU. "At that time, we had someone who previously had been a commercial lender at a bank, so he had the necessary expertise."
But that person left, leaving the credit union with no one with SBA loan experience. That just goes to show how important it is for credit unions to seek out people with a high level of experience in business lending, Spearman noted.
"Just a few weeks ago we hired a commercial lending person, so now we have re-engaged with the SBA. We have sent our information to them, and they're very anxious to work with us."
Tremendous Marketplace
MHVFCU is just as eager to get back in the SBA game. "In our particular area there is a tremendous small business marketplace," Spearman explained. "We are a former IBM credit union, and when IBM closed many of our members looked to starting their own businesses. We have $4 million in commercial loans in the pipeline, and we haven't even told anyone that we do it, so that gives you an idea of the demand."
To meet that demand and make the most of the SBA loan program, MHVFCU is taking a conservative approach, even as it invests in establishing a department to handle member business loans in general and SBA loans in particular.
"We've hired someone with the expertise to make these loans, and we're in the process of bringing another three people into the department to do it, and I suspect we will eventually need to hire more staff, as well," he added. "We want to go at it conservatively and prudently as we work to develop a vision of this new marketplace for us."
Alternatives FCU in Ithaca, N.Y., has been SBA approved for eight years.
"Our experience is that this is not really a troubling process, but the underwriting is very, very disciplined," commented Bill Myers, CEO of the $42-million CU. "Compared to selling mortgages on the secondary market to Fannie Mae, frankly, this is easy."
But there are a number of hoops to jump through on the documentation side, he stressed. "Essentially, you turn the loan in to them, they look at it and say, 'We will guarantee this loan if you do this, this and this.' Most of the time, the stuff they're looking for is stuff we would do anyway, like doing a file search to make sure there are no undisclosed loans, getting a copy of a bill of sale on any equipment.
"What it isn't is cowboy lending. There's no 'This guy just feels right.' You have to get financial statements, you have to do the due diligence-but you ought to be doing that anyway," Myers continued. "There are some minor, annoying restrictions, but they're understandable, and it's a short list. For example, if I've made a loan for $50,000 to someone, and he comes in to me and says, 'I'm going under,' I can't then decide to refinance that loan as an SBA loan and cut my losses by getting that guarantee. Well, that's too bad for me, but can you blame them? Of course not."
While Alternatives' SBA loans don't perform as well as non-SBA MBLs, Myers said that's not a fair measurement of whether these are good loans. "Of course they don't perform as well. We choose the worst loans in our portfolio for the SBA-that's the whole point of getting that guarantee, so that you can take on a riskier deal without taking on that much more risk," he offered. "That 80% guarantee carries a lot of weight when the examiner comes in, so now we can go after bigger deals with the same amount of exposure as much smaller loans, for example."
Much like applying for a community charter, applying for SBA status has also gotten easier, according to Hal Coffman, CEO of $145-million Gulf Employees CU in Groves, Texas.
"We were just approved to offer SBA loans in June. It's kind of like applying for a community charter, sometimes it's easy, and sometimes it's not," suggested Coffman, whose credit union recently converted to a community charter. "The SBA process took a little longer, but there was a lot of hand-holding throughout the process. They were really supportive. They gave us a sample commercial lending policy from a bank they do business with, and we were able to use that as a template for our own. It probably took me a good month to tailor that for us, and I've offered ours to other credit unions interested in applying."
The whole process took about three months, Coffman said, adding "They've smoothed the process quite a bit from what I understand, because they really see credit unions as the future for the SBA loan program, because there are so few community banks interested in it. The Houston district was eager to get us on board."
Coffman said the process does involve a fair amount of paperwork. "The main thing is showing that you have the level of expertise to make these loans, and I guess that's where the difficulty is for most credit unions. You can't turn a consumer loan officer into a commercial lender."
Since receiving approval in June, GECU has gotten final approval on one SBA-backed loan and has three more in the pipeline.
A Positive Experience
But as hot as the MBL market is in some places, it's only lukewarm in others. Just ask Bill Spenny, VP-mortgage lending and business services at the $2.3-billion Citizens Equity FCU (CEFCU) in Peoria, Ill.
"We were approved five years ago when we had a loan officer with a great deal of experience with SBA loans. He had worked at a local bank and his work was well-known at the local SBA office, so we were able to use his expertise to get that established," Spenny explained. "But we really haven't utilized it a great deal in part because our area doesn't have that great a demand for it. We've had a few start-ups, and we did one to help in the buy-out of a long-time machine shop that was being bought out by four of its employees."
Even without the demand, however, it's been worth all the paperwork to be able to offer SBA loans, Spenny maintained. "Our experience with the SBA has been very positive. They are very borrower-friendly, and even though there's not a great demand for it we really like having that arrow in the quiver. A lot of credit unions can benefit from it, especially because there's an active secondary market to purchase these loans. As credit unions start to bump against the 12.25% cap on member business loans, there will be a need to move these off their books."
