SBA Exec Offers Loan Primer; Wants More CUs
The U.S. Small Business Administration reiterated its interest in expanding relationships with credit unions during remarks made here.
James Hammersley, director of the Office of Loan Programs for the SBA and who oversees loan policy development for the SBA's Section 7(a) guaranteed business loan and Section 504 certified development company loan programs, told NASCUS' annual meeting that as of July 1, approximately 150 CUs have been approved to participate in the SBA's 7(a) loan program. The SBA program is now open to all credit unions.
"One hundred fifty credit unions out of approximately 9,500 is not getting me a lot of points with my boss," Hammersley joked. The SBA has 40 applications from CUs in hand, and is working to get those approved before Oct. 1, he added.
There are several advantages to working with the SBA, Hammersley continued. CUs can expand their loan portfolio with both new and current members, provide longer terms of up to 25 years, and do larger loans due to limited exposure. There is an active secondary market for SBA loans, and CUs receive a guarantee of 85% on loans up to $150,000 and 75% on loans over $150,000.
"If a credit union has a bit of a concern with the credit-worthiness of an individual, or if the person's credit is non-standard, consider the SBA," he said. "Only the non-guaranteed portion of the loan counts against a credit union's member business lending cap."
The maximum loan amount is $2 million. Some exceptions exist, but the maximum applies to 99.9% of loans, he said. The maximum guaranteed amount is $1.5 million. Until April 5, the guarantee was $1 million. Congress passed legislation raising the maximum guarantee to $1.5 million, but that expires Oct. 1. Hammersley said the SBA is waiting to see if new legislation will be passed, or if the maximum will revert to $1 million.
The interest rates CUs may charge for SBA loans are in the regulations and have not changed in 23 years. For terms of less than seven years, the rate is the prime rate as published in The Wall Street Journal plus 2.25%. For seven years or longer it's prime plus 2.75%. The rate may be fixed or variable.
Guarantee fees apply to SBA loans, Hammersley advised. "Needless to say, all of this good help from the government is not free."
For terms of 12 months or less, the fee is one-quarter of 1%. For terms longer than 12 months, the fee varies from 1% of the guaranteed portion on loans up to $150,000, up to 3.75% on loans over $1 million. There is an ongoing fee charged to CUs of 36 basis points per year, collected monthly. The latter fee is subject to change Oct. 1 -it could stay at 36 basis points, or rise to 50.
Credit unions are allowed to charge borrowers "reasonable" packaging fees for time expended and services rendered, and they can pass through lenders legal fees and any borrower-requested services. However, SBA lenders are not allowed to charge for taking an application, processing or brokerage.
SBA loans come with a "character" requirement. Hammersley said potential borrowers must disclose all arrests and the disposition of the charges.
"If the person has a few simple misdemeanors, that's not a problem. But, if it is something more serious, such as embezzlement or assaulting a police officer, it can be an issue."
In addition, borrowers must demonstrate the ability to manage the business, and must have sufficient equity invested to operate on a sound basis. The SBA's "reasonable guidelines" are a debt-to-tangible worth ratio of 3 to 1 after the loan for existing businesses, and owner's equity of approximately 30% for new businesses.
The SBA will not decline a loan solely on the basis of inadequate collateral, he explained. But, the business owner must be willing to pledge all available business and personal collateral to adequately secure the loan.
Hammersley said the loan application process is "fairly straightforward," but added, "As a federal program, not everybody is eligible. Size and affiliation are issues. If there is something unusual, the credit union should call an SBA officer early in the process so the applicant doesn't waste a lot of time."
The SBA does not have contact with the applicant, the CU handles everything, he said. If the loan application package is complete, SBA approval takes three to five days.
A credit union is allowed to contract out all or part of the processing and servicing process, but "its name still is on the application, and if there's a problem, the SBA will come looking to the credit union."
Hammersley advised all CUs interested in SBA programs to visit the agency's Web site: www.sba.gov to find their local SBA office-which are in all 50 states. Forms and lender updates can be found at www.sba.gov/banking .
Advice To Regulators
For regulators examining SBA loans made by credit unions, Hammersley offered several important observations. He told regulators to check the loan for full documentation, ensure the proceeds were used as required in the loan authorization, and make sure any required equity injection was made, verified and documented in the loan file.
Another important item is the payment of the guarantee fee. If not paid in 30 days, the guarantee is terminated.
CUs must report the loan's status to the SBA on a monthly basis. If the loan goes into default, a request to honor the guarantee must be sent to the SBA within 120 days.