A number of lenders are considering selling the non-guaranteed portion of their 7(a) loans as a way to further expand the secondary market for the Small Business Administration program.
Other lenders have tried such sales in the past, but several obstacles, including increased risk and the time required to underwrite the deals, have deterred potential buyers and sellers.
Changing pressures within the industry could make renewed efforts more successful. Aspiring buyers are eager to build their loan portfolios, while sellers are attempting to free up capital. Those objectives could outweigh potential impediments to deals.
"This strategy makes a lot of sense," said Tim Romig, regional chief lending officer for Pennsylvania and New Jersey for Customers Bank, a unit of Customers Bancorp in Wyomissing, Pa. "If you're a small bank and you have legal lending limits, this then becomes a fee generator. But it will be challenging."
SBA lending has been strong with roughly $17 billion in 7(a) loans originated this fiscal year, a 10% increase from a year earlier, according to the SBA. The increase is partially attributable to a thriving secondary market for banks selling the government-backed portion of their SBA loans.
SBA 7(a) loans are capped at $5 million, with a guarantee covering 75% to 85% of each loan. Banks can generate fees by selling these portions for a strong premium to buyers that are drawn to the relatively low-risk involved. Generally the originating bank continues to service the loan.
That leaves the lender on the hook for 15% to 25% of the loan. Banks generally retain 10% of the loan, with an opportunity to resell the remaining non-guaranteed portion.
Interest in buying and selling SBA loans is rising, industry observers said. More banks are originating SBA loans on a national scale. Such lenders are sometimes interested in selling loans since they are typically originating more and have a higher need to seek out participants, said Richard Walter, head of Bank Assetpoint, which has helped sell two pools of non-guaranteed SBA loans and is planning more.
Potential buyers include banks that are located closer to the SBA borrower. Those institutions are optimistic that they can provide additional products and services to the business.
Banks also view buying 7(a) loans as a way to diversify geographically or by loan type. Other potential buyers include banks that are struggling with organic growth.
Bank Assetpoint, a unit of Promontory Interfinancial Network, is looking to broker loans that have strong underwriting, were made to solid businesses and have matured a bit to show buyers a track record of repayment.
"Everyone is looking at the market place for growth," said Walter, who is also a senior managing director at Promontory. "Most people want growth and everyone is challenged. Community banks are competing with a lot of nonbank originators so the timing for this is good."
Sellers could be motivated by the chance to free up capital for use elsewhere as loan demand slowly comes back, said Rohit Arora, chief executive of Biz2Credit. Banks, which once faced the possibility of selling the non-guaranteed portion at a discount, can demand at least par now, he said.
"The economy is improving and rates are low, so SBA loans are still a good deal for business owners," Arora said. "The Main Street market is still recovering, but it is getting better every day."
A few banks recently approached the $5.6 billion-asset Customers about buying their non-guaranteed portion of SBA loans, Romig said. Customers is looking to double the roughly $20 million in lending it does in SBA programs by hiring more lenders.
The company is considering buying SBA assets, though Romig expressed concerns with what he also called an "interesting concept." Customers would have to underwrite each deal, requiring considerable work for a small portion of an overall loan. By buying a non-guaranteed portion, rather than originating the loan, Customers would also miss out on the fee income that comes with selling the guaranteed part.
The non-guaranteed portion is also riskier since it isn't backed by the government, which has deterred some interested buyers, said Arne Monson, president of Holtmeyer & Monson. Overall, SBA loans are seen as riskier since the borrowers didn't qualify for a traditional commercial loan.
"There's a very thin market," Monson said. "The borrower may have a collateral issue or it may be a lower-rated credit and that keeps a lot of people out of the market."
Bank Assetpoint, however, believes the time is right to overcome these challenges. Some banks are struggling with organic loan growth and the non-guaranteed portion of SBA loans, which often have a floating rate, could prove tempting enough for banks to overcome these concerns.
The floating rate would also prove attractive to banks concerned about an eventual rise in interest rates.
"The more successful this becomes the more people will look at their SBA origination terms differently," Walter said. "Right now they view it as unsellable and that they have to hold on to it. This opens it up."