Chase's community development lending chief talks about "expanding the pie." One unusual tool: the Small Business Administration loan.

Mark Alan Willis sounds more like a political activist than a banker.

But as president of Chase Community Development Corp., a unit of Chase Manhattan Bank, Mr. Willis is responsible for originating some $150 million annually in mortgage and real estate loans to low- and moderate-income customers.

"We want to focus on expanding the pie, not just dividing it up," says Mr. Willis. "instead of competing on [loan] volume with other banks., we're focusing on making a difference."

Surprisingly, one of the tools Mr. Willis is now using to help change New York's inner city landscape is the once-staid, government-funded Small Business Administration.

Little History with SBA

Chase Manhattan Corp., like many other New York City banks, historically has done little lending through the SBA, which was established in 1953 to help build small businesses after World War II. The SBA is now the largest guaranteed lending program in the country.

The agency, which has ear--marked some $7.5 billion for lending in 1994, guarantees between 70% and 90% of each loan it backs. But bankers have often shied away anyway. They complain that the SBA plays favorites and is too bureaucratic, requiring inch-thick piles of forms.

Even programs aimed at boosting or maintaining banks' Community Reinvestment Act ratings have found the SBA less than useful.

Over the years, the SBA has followed a conservative lending policy, tending to favor traditional small businesses over minority-owned or inner city firms.

A recent study of SBA lending policies found that in 1993, only 3% of loans went to black-owned businesses; 5% to businesses owned by Hispanics; and 14% to businesses owned by women.

A Move to Refocus

As a result, the biggest SBA lenders in New York City are institutions like Banco Popular, which uses the SBA to lend money to owners of taxi medallions, and organizations like the Money Store, which uses it to lend to borrowers of second mortgages. The Money Store sells the guaranteed portion of the mortgages to the secondary market.

But all this could be changing. A new administration at the SBA, headed by Erskine Bowles, wants to refocus the agency on minority-owned businesses, inner city businesses, and other firms that ordinarily wouldn't be eligible for bank loans, such as cash-based businesses, like restaurants or retail stores.

That's made the SBA more interesting to bankers like Mr. Willis.

"SBA ought to be in the role of expanding business opportunities; of bringing access to funds to minorities," said Mr. Willis. "The new administration appears committed to this goal."

"Chase is rejuvenating its pro, gram with us," said Michael Walsh, assistant district director in the SBA's Syracuse, N.Y., office.

At Chase, SBA lending constitutes a tiny percentage of all small-business lending, and an even smaller percentage of lending to low-income areas. Since October, Chase has lent about $6 million using SBA-backed funds.

For Chase, the SBA is just one in an array of programs funded by states or private enterprise and earmarked for low-income communities. Chase is one seven bank members of an alliance with the Brooklyn EConomic Development Corp.

Chase has made an initial contribution of $700,000 to the Small Business Investment Corp., an alliance of the office of Gov. Mario Cuomo, the New York State Bankers Association, and seven banks.

Chase also is experimenting internally with a program that allows branch managers to sign off on relatively small loans to low-income areas, so-called micro-loans, worth tens of thousands of dollars.

The program reverses Chase's policy of centralizing lending decisions for most commercial loans.

Problem Areas

But the SBA's role may grow substantially.

Historically, banks have two problems with small-business lending, Mr. Willis says.

"Ninety percent of small businesses don't last beyond five years, so you need to be able to identify those that are likely to survive," Mr. Willis said. In addition, banks don't like to lend to cash-based businesses where there is typically no collateral.

That's where the SBA comes in. "When you feel comfortable with the borrower but his business doesn't fit the normal underwriting categories, the SBA guarantee gives you more freedom to make the loan," Mr. Willis says. "You can go into a situation that historically is riskier."

Other bankers share Mr. Willis' view. "It's becoming-easier to work with the SBA, because the message is coming through from the top to use it to make loans to businesses that traditionally haven't had access to bank funds," said Ruth Salzman, executive vice president for Chemical Community Development Inc., a unit of Chemical Banking Corp.

She said she expects Chemical to increase its SBA lending by about 30% this year, albeit from a very small base of less than 1% of all small business lending.

'More Realistic'

Ms. Salzman said the SBA was receptive when Chemical asked for help last year to set up a program to lend to building contractors owned by minorities and women. The SBA changed its collateral requirements to be "more realistic and more flexible," Ms. Salzman said.

Chase hasn't set up any special programs with the SBA. But Patrick T. McGrath, a Chase vice president and small business lending executive, said several agencywide programs will boost the use of the program.

Mr. McGrath heads a new team at Chase dedicated to lending to small businesses in low to moderate income areas using government guaranteed programs. He reports to Mr. Willis and to Richard Schrumpf, senior vice president in charge of small business lending.

Late last month the SBA introduced a program called LowDoc, which allows loan applicants to submit a simple, one-page application for loans of under $100,000. The program is currently being tested in New York.

The SBA also is developing a "green line" program that will allow banks to extend lines of credit that would even out cash flows for cash-dependent businesses.

Redefining Eligibility

The SBA says it is also changing the way it defines eligible businesses. A stricture against guaranteeing loans to "opinion molders" - virtually any company in the publishing business - had led the SBA to reject an application from Chase to lend to a minority-owned birthday card company.

And the Consumer Bankers Association has had discussions with the SBA to make it easier for commercial banks to qualify as preferred lenders. Currently banks must apply for preferred status with every SBA district where the bank has branches.

That would mean banks could underwrite loans themselves, using their own forms. The SBA would audit the paperwork once the loans were made.

With the SBA's new emphasis, who are the recipients of SBA-guaranteed loans?

At Chase, they run the gamut from a Hispanic man with a bodega in the South Bronx who previously had been forced to borrow from loan sharks, to the Italian-American owner of an inner-city drugstore, to the proprietor of an airplane taxi business in posh Purchase, N.Y.

Millie Becker, who owns Westchester Air, shopped around for a loan to buy a $700,000 Beechcraft King Air turbo prop, an eight-passenger plane that her corporate customers had been requesting for their outings.

Westchester Air "was growing nicely, but it had grown to the point that we were using other people's airplanes," said Mrs. Becket, who was born in New York City and is of Puerto Rican descent. "I was exposing my clients to my competitors."

Mrs. Becker said the banks she approached didn't understand the aviation business, or her need for the new airplane.

In August 1993, Mrs. Becker attended a breakfast in Tarrytown, N.Y., for Hispanic businesswomen, hosted by Chase, called "Si se puede" ("Yes you Can").

Chase "said they were interested in doing community loans for minority-owned business," Ms. Becket said. "They were giving a positive push to women."

Ms. Becker bought the eightseat airplane with a loan from Chase, and is now dreaming of buying a $1.5 million Lear jet.

Chase also went through the SBA to lend money to Beirne's Pharmacy Inc., a 75-year-old drugstore in the heart of New Haven's inner city.

The pharmacy's bank, Shawmut National Corp., cut off its line of credit when the drugstore bounced a check to a supplier. The pharmacy, which relies heavily on large checks from organizations like nursing homes, drug and alcohol rehabilitation centers, and state-financed clinics. needed its line of credit to ensure smooth cash flows.

"I looked for a new bank, but most were not interested in a business my size." said Philip J. Votto Jr., president of Beirne's. He said the pharmacy generates about $3 million in revenue annually.

Chase gave him a $275,000 loan through the SBA to repay the supplier and Shawmut. Chase also extended a $75,000 line of credit.

Mr. Votto says that with the loan and the line of credit, he's been able to expand his business in ways he never could before.

He's now able to get better discounts from his wholesalers, and this year added another delivery van for dropping off medication to AIDS and tuberculosis patients.


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