The Small Business Administration's flagship 7(a) lending program enjoyed a record fiscal year, in which it guaranteed more loans for more money than ever before.
One reason: Credit unions, which were largely barred from making 7(a) loans until 2003, are starting to emerge as significant players.
With demand for SBA loans at an all-time high, 103 credit unions made 1,237 loans under the 7(a) program worth $135 million in fiscal 2005, which ended Sept. 30, according to SBA data released this week. In the previous fiscal year 77 credit unions made 824 loans worth $91 million.
And as Congress considers authorizing even more money for the program this fiscal year, the number of credit unions making the loans is almost certain to rise.
"The pie is getting bigger, and more credit unions want to get involved," said Kent Moon, who oversees SBA lending for the $1.6 billion-asset Mountain America Federal Credit Union in Jordan, Utah.
The SBA would like more credit unions to get involved, as well. In 2003 it relaxed restrictions on credit unions' participation in the 7(a) program as part of an overall initiative to offer more government-guaranteed loans to more small businesses.
But community bankers say they are troubled by the trend. Though there may be plenty of business to go around now, they fear that growing credit union participation will eventually outstrip the growth in funding and lead to more competition for fewer loans.
Banks still dominate SBA lending. More than a dozen banking companies made more loans on their own than all credit unions combined in fiscal 2005. Bank of America Corp., for example, made nearly 12,000, worth $413 million.
Over all, the number of 7(a) loans the SBA guaranteed rose 18.8% from fiscal 2004, to 88,912. The value of the loans rose 12%, to $14 billion.
Alan Bender, the chief financial officer at the $610 million-asset Unity Bancorp Inc. in Clinton, N.J., said it originated $86 million of 7(a) loans in fiscal 2005, up about 30% from the previous year. But he said he foresees tougher times ahead, as the program adds more credit unions. About 200 are now certified as 7(a) lenders.
SBA lending "is pretty profitable, but with more … [lenders] coming in, it's going to be more difficult," Mr. Bender said.
The SBA asked Congress for $16.5 billion of funding authority for this fiscal year, but whether it can ask for even more in the future could depend largely on how much it is willing to raise fees. (The fees paid by lenders and borrowers pay for the program's credit costs.)
Bankers say fees are already too high, so the program's ability to grow is limited. They also say they do not believe credit unions, which already are tax exempt, should be allowed to participate in a government-subsidized program.
"The key issue from the bankers' standpoint is that you have an entity that already receives preferential treatment getting a federal subsidy," said Keith Leggett, an economist with the American Bankers Association. "You're piling subsidy on top of subsidy."
SBA officials do not share that position on credit unions. "They're lenders, they're making SBA loans, so they're welcome," said Michael Stamler, a spokesman for the agency.
Federal law prevents credit unions' business loan portfolios from exceeding 12.25% of their assets, but government-guaranteed loans, such as 7(a) credits, do not count against that cap.
Mr. Leggett said credit unions' increasing involvement in the program "is another indication of how credit unions are working to get around that business-lending cap."
But Sherry Sterling, the manager of member business lending at the $1.6 billion-asset Visions Credit Union in Endicott, N.Y., said credit unions are moving into 7(a) lending to fill a need, not to exploit a loophole.
A number of community banks in Visions' upstate New York market have been acquired, while others have switched their focus to middle-market companies, so a void has been left in the small-business sector, she said.
Visions originated three 7(a) loans for $235,000 in fiscal 2005.
As in past years, the biggest 7(a) lender among community banks was the $133 million-asset Innovative Bank in Oakland, which made 4,214 of the loans for $35.1 million, up from 3,657 loans for $31.7 million in fiscal 2004. Wilshire Bancorp Inc. in Los Angeles was the second-biggest, with 343 loans for $172 million.
According to Mr. Stamler, about 60,000, or 67% of the 7(a) loans guaranteed in fiscal 2005 were SBA Express loans, up from 56% in fiscal 2004. SBA Express began as a pilot program in 1999 but has grown rapidly since then as the agency has worked to reduce its average loan size.
Express loans are limited to $350,000 and come with a 50% guarantee. Regular 7(a) loans, by contrast, can be as large as $2 million, with 75% guaranteed by the government.
