Will PPP demand spur credit unions to do more SBA lending?
The pressure is on for the Small Business Administration to win over skeptical credit unions.
Unlike the for-profit banking industry, credit unions have never fully embraced making loans through the SBA, including the agency’s flagship 7(a) program. That’s at least due in part to the movement’s greater focus on serving consumers, rather than commercial clients.
Now a number of credit unions have jumped into making loans through the Paycheck Protection Program, which was set up to help small businesses weather the economic fallout from the coronavirus pandemic. Though the program got off to a rough start, PPP could spur some credit unions to continue with or expand their SBA lending once the crisis passes.
However, that will depend on how the agency administers the program over the life of the loans.
“I do think this creates opportunities for credit unions to be more engaged with 7(a) and other types of SBA lending they haven’t done before,” said Carrie Hunt, executive vice president of government affairs and general counsel at the National Association of Federally-Insured Credit Unions, which has long had a partnership with the agency to help spur credit union use of the 7(a) program. “The caveat is it remains to be seen how these loans are going to be managed.”
Congress initially approved $349 billion in funds for PPP in March, and the program was launched on April 3. But the initiative was plagued with issues, such as problems logging into SBA’s processing system, which crashed. There was also criticism that some larger companies, such as the Potbelly restaurant chain, were able to secure millions of dollars in loans while smaller businesses missed out.
Still, the program proved to be hugely popular and ran out of money less than two weeks after its launch. Congress approved another $320 billion in funding on Thursday.
Roughly 5,000 lenders made more than 1.6 million PPP loans to small businesses, according to data from the SBA as of noon on April 16. Almost three-quarters of the loans were $150,000 or less, while the average loan size was $206,000, according to the data.
PPP is a way for credit unions to assist small businesses that the megabanks and other lenders might traditionally ignore, said Diana Dykstra, CEO of the California and Nevada Credit Union Leagues. For instance, Wells Fargo, Bank of America, U.S. Bancorp and JPMorgan Chase were sued by small businesses for allegedly processing PPP applications for larger loans first since these generate bigger fees.
Dykstra hopes credit unions will remain interested in SBA lending once the immediate crisis passes.
“I think some credit unions will recognize this is a business line,” she said. “I do think they will find there is a need in the marketplace they didn’t know about.”
The SBA did not return a request for comment.
Sean Hunter, chief information officer of OakNorth, a fintech focused on lending to small and mid-sized businesses, believes institutions that went through the trouble of becoming approved SBA lenders for PPP will continue to make regular 7(a) loans after the pandemic has ended because they have already invested the time and resources into the process. Additionally, others, who didn’t participate in PPP, could decide to become SBA lenders after the economy recovers so they won’t miss out on emergency lending opportunities when the next crisis hits.
“I think it will widen the pool of SBA lenders,” Hunter said. “That includes institutions that never looked at SBA lending before and signed up for the PPP.”
Greater Nevada Credit Union in Carson City is one institution that jumped into making loans through PPP, partly because it owns a commercial lending credit union service organization — Greater Commercial Lending — so it already had the expertise and infrastructure to complete these loans, said President and CEO Wally Murray. It was already an SBA lender before the coronavirus crisis took hold.
The $1.1 billion-asset institution worked with SBA officials and lawmakers to ensure it could start offering these loans on the first day they were available, Murray added. It was able to get authorizations to fund over 1,000 loans for $195 million during the first round and has accepted another 745 applications for almost $88 million. Management plans to submit those application as soon as more money is available.
“We didn’t anticipate a new program would be 100% smooth sailing so we weren’t surprised that it wasn’t that simple,” Murray said of glitches experienced with PPP loans.
However, other credit unions were less forgiving of PPP’s shortcomings. For instance, VyStar Credit Union in Jacksonville, Fla., is ready to participate in PPP when a second round of funding is approved, according to its website.
But VyStar initially didn’t offer these loans because of “significant delays that all lenders are experiencing” caused by “technical issues, unclear standards and manual underwriting by the SBA,” the credit union’s website previously said. Instead, the $9.1 billion-asset credit union developed a partnership with the city of Jacksonville to make small business loans.
VyStar did not return a request for an interview about its program with the City of Jacksonville.
It's likely some institutions have decided it isn’t worth the investment to offer SBA loans, including participating in PPP, said Hal Scoggins, a shareholder at the law firm Farleigh Wada Witt in Portland, Ore.
“My guess is credit unions see other greater opportunities that don’t require the same investment of sweat equity" that SBA lending requires, Scoggins said. “There is an element of you really have to be an accomplished dance partner in order to successfully dance with the SBA.”
The real test of whether lenders stick with the SBA once the crisis passes will happen in the coming weeks, experts said. For one, these loans are being 100% guaranteed by the SBA. How the agency works with lenders when that guarantee is enforced is one point of contention.
Credit unions also will have to collect documentation from borrowers to prove that the money was spent on qualifying expenses, such as payroll and rent and mortgage payments, so the loans can be forgiven. If the SBA is challenging to work with through that process, that could unravel any goodwill the agency has developed with credit unions.
The agency has a reputation for being difficult when it comes to covering a lender’s loss, some sources said.
“If [SBA] sees a credit union didn’t dot an i or cross a t on some aspect of servicing or collecting the loan, they will try to take advantage of that,” Scoggins said. “That’s the perception I’ve heard from more than one source. … Personally my view is there will be a lot of pressure, including from Congress, for the SBA not to do that.”
Hiway Federal Credit Union in St. Paul, Minn., made a number of PPP loans before the funding ran out after initially delaying participation. Now the $1.2 billion-asset institution is ready to start processing loans as soon as more money is available, CEO Dave Boden said.
Still management has lingering concerns, such as gathering documentation from borrowers and the timing of when they will receive funds for the loans they made.
“[T]here are a variety of open questions since the process end-to-end has just started and it is all new,” Boden added. “It is very difficult to get detailed information direct from SBA right now.”