A Small Business Administration program that encourages lending to women, minorities, and veterans has become too popular for its own good.
In the first eight months of this fiscal year, which started Oct. 1, total Community Express loans rose 55% from just two years earlier and accounted for 12% of all 7(a) loans originated.
That would seem like good news at a time when overall demand for 7(a) loans is down, but there is a problem: Community Express is a test program, and the volume of such SBA programs is supposed to be capped at 10% of the 7(a) total.
As a result, heavy users of the program, including U.S. Bancorp, have been forced to scale back their lending. The $238 billion-asset Minneapolis company added five bankers to its SBA team this year with the intention of increasing its Community Express volume to 50 or 75 loans a month, but recent caps imposed by the SBA have limited the volume to 15 a month.
Erik Daniels, national sales manager for U.S. Bancorp's SBA division, said he understands why the agency needed to cap the program, "but it's been difficult to swallow."
Since the SBA has been encouraging lenders to make more 7(a) loans to help stimulate the economy, it should consider increasing the limit temporarily, Mr. Daniels said. "We have stepped up, so why should we be prevented from doing business when we are being told to do more business?"
Community Express loans have become more popular of late because they let qualified lenders use their own documentation, reducing paperwork and speeding up the turnaround. The loans carry an 85% government guarantee of up to $250,000, though the average loan size is $35,000.
The SBA said it had no choice but to impose the caps, because several large lenders had dramatically increased their volume in recent months. Also, because 7(a) volume is down 22% so far this fiscal year, Community Express loans now make up a larger slice of the 7(a) pie.
Eric Zarnikow, the associate administrator for Capital Access, said the agency has no intention of increasing the limit on Community Express loans. Banks that are approaching the cap should consider other SBA programs, such as Patriot Express, which is aimed at veterans looking to go into business, or traditional 7(a) lending, he said.
Community Express loans make up only about 2% of the dollar amount of SBA guarantees, but they have the highest percentage of default among all the loans it backs, Mr. Zarnikow said.
As a result, the SBA has asked the Office of Inspector General to conduct an audit of the Community Express program to help it "make sure it's not a wasteful program."
He also said that the focus of the program would be changed within the next few months from individuals to areas that are in need of redevelopment.
When asked if that planned shift indicates Community Express would become permanent, Mr. Zarnikow said the SBA would want to see the results of the changes before making a decision.
Tony Wilkinson, the president and chief executive officer of the National Association of Government Guaranteed Lenders in Stillwater, Okla., said that the Community Express program is dominated by a handful of lenders.
He said that the SBA is legally obligated to enforce the cap but he wishes it would have given the banks that make Community Express loans more of an advance warning.
"They could have cut the pain" by doing so, he said.
U.S. Bancorp's Mr. Daniels said that he learned about the SBA's enforcement of the cap in early March, just a few weeks after hiring the new lending team.
The SBA said it believes it gave lenders ample warning. In a "Myth vs. Fact" notice it put out in a press release last month in response to lender complaints, the agency said, "Large Community Express lenders have been aware of the cap issue for many months."
James Ballentine, senior vice president of government relations for the American Bankers Association, called Community Express "a doubly good program," because it provides underrepresented entrepreneurs with working capital and technical assistance.
But he questioned why Community Express had to be established as an offshoot of the 7(a) program in the first place. "I don't think the SBA would be overly excited about increasing the limit," Mr. Ballentine said. "But they need to learn that not everything can be a hybrid of the 7(a) program. It starts creating these problems, and they run into these caps."
