WASHINGTON — A Small Business Administration program that had been expected to generate large demand is off to an unexpectedly slow start amid lender confusion about requirements and potential legal pitfalls.
The agency anticipated so much demand for the America's Recovery Capital program, which offers $35,000 interest-free loans to struggling small businesses, that it imposed a weekly limit on the number of loans banks could offer.
But Arne Monson, whose Memphis-based firm Holtmeyer & Monson performs SBA-related services to around 400 community banks, said he has only completed one Arc loan so far.
"We've probably had calls from 50 of our client banks inquiring about Arc," Monson said. "But after we mail out the packages of information we put together for it, they normally come back and say, 'Well, gee, this doesn't make sense.'"
Tom Burke, senior vice president of Wells Fargo's SBA Lending division, said the program has generated a lot of interest, but so far no loans have been completed under it.
Lenders are citing a host of reasons for not rushing into the program, which formally started June 15, including fears about the costs of underwriting the loans, concerns that banking regulators may view them as excessively risky and worries they could jeopardize their SBA lender status.
Monson said lenders are not allowed to pass on steep underwriting costs to borrowers and may face extra scrutiny from the SBA if the Arc loans default. The program is designed for struggling businesses, but is limited to ones that banks estimate are still "viable."
The SBA has said that Arc loans should be made to businesses that have been operating for at least two years and that have been profitable or had a positive cash flow in at least one of the past two years.
To make an Arc loan, a lender must look at three years' worth of an applicant's financial statements and analyze two years' worth of future cash flow projections.
But lenders worry SBA may second-guess its decision if a borrower defaults.
"With that definition of viable, bankers immediately say, 'We have a claim,' the SBA's going to come back and say, 'You have a nonviable borrower,' and they're going to deny the claim," said Monson.
The National Association of Government Guaranteed Lenders has also been fielding questions from hesitant lenders.
Tony Wilkinson, the president of the trade group, said he sent the SBA a six-page list of questions a week ago compiled from members, and has not yet received answers.
Among the questions were how bank examiners may view SBA loans made to a clearly struggling borrower, since the agency has said it expects more than half to default. The group also asked about the weekly 50-loan limit, saying it could unintentionally violate fair lending laws by allowing two borrowers with similar risk profiles to have different outcomes.
Lenders also are seeking to charge extraordinary servicing fees for disbursing a loan over a six-month period.
Of particular concern is whether lenders could lose SBA lender status if too many Arc loans default. Though the agency clearly expects a high default rate, it still said it would review the performance of such loans when reviewing a bank's SBA lender status.
The SBA is trying to put some of these fears to rest.
In an interview, Janet Tasker, the SBA's deputy associate administrator for capital access, said the agency will view the performance of Arc loans in context.
"We understand that the loans in this program are going to have a higher default rate, and we understand that that will have an impact on their portfolio performance, and we are going to compare the performance of their Arc loans to the SBA's Arc loan portfolio performance overall,' she said.
Tasker said the SBA also would not judge a lender negatively for declining to participate in Arc, another concern cited by NAGGL. But, she added, "The lenders that are going to be making Arc loans are really going to be supporting SBA's mission, and we're certainly going to view that favorably."
Tasker also said regulators were on board with the program.
"The Arc loan is kind of an interesting little twist on lending so we want to make sure [other regulators] were aware of it," Tasker said. "What they've advised us here initially is that they're not going to criticize a government guaranteed loan or subject them to adverse classification."
But regulators will be watching to make sure their banks follow the underwriting process for Arc loans carefully, Tasker said. She said a lender is unlikely to violate a fair lending law as a result of the 50 loan limit because the institution could resubmit a loan the following week.
Lenders are also worried how fast the money will run out. One NAGGL lender asked SBA to include a countdown clock on its Web site to keep track of how much money is left in the $350 million program so that a bank would know whether it was worth it to go through with the costly application process.
Tasker said the SBA has been considering ways to keep track of the use of funds from the stimulus package on its Web site. But right now the funds do not seem to be disappearing very quickly.
Coleman Publishing, which tracks SBA loan data and puts out a daily newspaper on the subject, said Wednesday that unless lending picked up, the funds allotted for the Arc program would only be half disbursed at the current lending rate by the time the program ends on Sept. 30, 2010.
According to the SBA, only 72 lenders have made a total of 139 Arc loans as of Monday — worth $4.6 million.
"I thought we would be through 20% of the money right now, and we're not even close," Wilkinson said. "It's just taking a while to ramp up."
Tasker said the SBA was preparing to release an updated set of frequently asked questions early next week to reassure lenders. The FAQ would address some issues agency officials had come to see needed more detail.
She added that the agency was also planning to reassess some of the details of the Arc loan rules in August, once the initial ramp-up period ended. The 50-loan-per-week limit could be abandoned if officials felt it was unnecessary, she said.
Jonathan Swain, the SBA's assistant administrator for communications, said it was far too early to declare the Arc loan program a failure. "It was rolled out differently from any program that's been rolled out in the past, and it's because of the urgency of the situation," he said.
He said that the SBA had to rush the plan out to make funds available to borrowers as quickly as possible to combat rising unemployment.
Swain added that in the week after the program was announced, 3,000 bankers representing 1,300 different banks had attended training sessions on the Arc program that the SBA held at its field offices across the country.
"We are continually on the phone daily with lenders answering specific questions about the program," he said.
Burke, of Wells Fargo, agreed the program could ramp up.
"We're sending out several hundred applications to people," he said.
"There's a lag time there, and that's pretty typical in SBA lending. The average SBA loan doesn't close any quicker than 30 days. We're probably within the same time frame. I expect it to pick up as people get more comfortable with what they need to send us."