STAR Financial Bank in Fort Wayne, Ind., had done well for itself making loans through the Small Business Administration, but things really took off after it signed up with the popular SBA Express.
STAR got approval in April 2004 to make loans through the program, and before long SBA Express loans accounted for 75% of its SBA volume in loans made. Last year the $1.4 billion-asset bank generated 47 SBA loans totaling $3.7 million, against 33 worth $2.7 million in 2004 and 15 worth $1.4 million in 2003.
“Our growth of SBA loans is attributed to the Express program,” said Tony Hueston, STAR’s business banking risk manager. “It has really opened the door for enhanced lending. You have to abide by SBA rules, but the benefits you get from it are worth it.”
The majority of the more than 1,000 financial institutions that made Express loans last year were community banks. Proponents of the program say it is more streamlined than the SBA’s conventional 7(a) loans. Express loans, with limits of $350,000, offer a guarantee rate of 50%, versus 75% for conventional 7(a) loans.
But they require less paperwork, and the approvals are faster. Standard 7(a) loans take up to two weeks, Express loans 36 hours. Lenders make the credit decision and can use their own collateral policy for loans of less than $150,000.
Silver State Bancorp in Henderson, Nev., started offering Express loans last August and has been making them at a steady pace since then. It did five Express loans in the last five months of 2005 and has completed 24 this year, with 10 more in the pipeline.
“We can generate more loans and expedite the process,” said Jake Larsen, credit scoring loan officer at the $872 million-asset Silver State. “It’s a great product for our customers. They want their money, and we are able to provide it fast.”
The program has grown rapidly since its introduction in fiscal 1997. The agency guaranteed about Express 59,000 loans worth $3.1 billion for the fiscal year that ended Sept. 30, 2005, compared with 17,500 worth $828 million three years earlier. SBA Express loans were 62% of all 7(a) loans last year, compared with 34% three years before.
But the SBA in general and the Express program in particular have come under fire.
SBA Administrator Hector Barreto, who took heat for the agency’s slow response to last year’s Gulf Coast hurricanes, announced his resignation in April. The Bush administration has nominated Steven C. Preston, the executive vice president at ServiceMaster Co. in Downers Grove, Ill., to succeed Mr. Barreto, who is to stay on until Mr. Preston’s confirmation by the Senate, which is expected in July.
One complaint is that SBA Express’ growth has come at the expense of other 7(a) lending, such as conventional 7(a) loans and the popular LowDoc program the SBA canceled in October 2005. Those loans came with an 85% guarantee.
“That program worked well for banks that didn’t do large volumes of SBA lending,” said Paul Merski, the chief economist at the Independent Community Bankers of America. “For a bank doing 12 loans, LowDoc was a nice format.”
Another complaint, from banks, lawmakers, and others, is that SBA Express caters to national and regional banks, which handle the bulk of the volume. The top 10 providers accounted for 56% of loans by dollar volume in fiscal 2005 and nearly 75% of loans generated, with 41,000; against 53% and 69% in fiscal 2004. These critics say small communities get left behind because they don’t have the volume to justify dropping down to guarantee rates of 50%.
Large SBA Express lenders tend to work in more heavily populated areas, but the program has started to draw in more participants that make a small number of loans. In fiscal 2005, 1,011 providers made SBA Express loans, versus 794 in fiscal 2004, according to the SBA.
“Rural lenders are facing challenges in providing capital” to entrepreneurs, said Nydia Velazquez, D-N.Y., in a prepared statement. “By putting program changes ahead of what small businesses need, the Bush administration has essentially cut lending to rural small businesses.”
Some community banks have dropped out of SBA lending because of the agency’s policy changes over the years. For the fiscal year that started Oct. 1, 2004, the SBA moved to a so-called zero-subsidy budget, meaning that instead of relying on appropriations to fund the program, it uses proceeds from loan and bank fees. That entailed budget cuts, including the elimination of LowDoc for fiscal 2006.
The $40 million-asset CountryBank USA in Cando, N.D., which had been making as many as four loans a year through the LowDoc program, found the lower guarantee rate of 50% of SBA Express unpalatable in Cando, a town of 1,300. Lending to borderline cases was too risky, said Terry Jorde, CountryBank’s president and chief executive officer.
Only conventional 7(a) loans would be worth the risk, but they are much more cumbersome. “When you are doing a $50,000 loan, it is a lot of paperwork to go through for a 7(a) loan,” Ms. Jorde said. “My concern is that the small businesses that really need these loans aren’t getting them.”
Michael Hager, the SBA’s associate deputy administrator for capital access, said community bankers should give the Express program a hard look. In particular, he encourages bankers to file using the agency’s 2-year-old E-Tran service.
About 60% of participating banks use E-Tran, which essentially requires a computer, software, and an Internet connection. “SBA Express enables them to use their own forms and process the application via electronics,” Mr. Hager said. “It allows for almost live real-time approval.”
Mr. Hager points to other efficiency moves such as centralized processing centers that have cut down loan-approval times. Express loans, for instance, are all processed in Sacramento.
Over the past 12 months the agency has also slashed approval times for banks applying for preferred lender status to less than 30 days from as much as nine months. Preferred lenders are granted authority for loan approval, closing, and most servicing and liquidations. The agency is working on a survey to be conducted this fall with the aim of doing more fine-tuning.
“We have 2,000 bankers in the country that participate in the Express program,” Mr. Hager said. “The rural community banker really does have an array of other SBA products they tap into.”
He said that at zero subsidy, the agency could not afford to continue LowDoc. Keeping it would mean relying on congressional appropriations, which in recent years has led the agency to stop making loans so it could meet its budget. “We eliminated LowDoc because it destroyed our zero-subsidy calculation,” Mr. Hager said.
Community bankers using SBA Express acknowledge it takes time getting up to speed, but they say they can live with that.
“It’s a learning curve that takes a while to get around,” said Edward C. Ashby, president and CEO of the $175 million-asset Surrey Bank and Trust in Mount Airy, N.C. “That is why a lot of folks don’t do it. There’s a lot to comply with, so you have to know the program very well. It’s hard for all your own loan officers to know all that.”
Surrey, which made 38 Express loans worth $4.2 million in fiscal 2005, makes sure to keep lenders up to date with SBA rules; it uses one point person in the back office for more technical issues. “We give our loan officers quite a bit of training,” Mr. Ashby said. “But a lot of specialized training goes to the back-office.”
SBA lenders need to obtain transcripts of borrowers’ tax returns from the Internal Revenue Service and to issue monthly reports on an SBA portfolio’s performance. And the loans typically require more documentation than a bank’s own underwriting process.
Community banks can ease the underwriting burden by using more sophisticated credit scoring products, said James Hammersley, the SBA’s director of loan programs.
“The credit scoring systems available now can help not only the large-volume lender, but also a community bank,” Mr. Hammersley said. “They can help them get their heads around credit in a quick and efficient matter. A few years ago you were pulling financial documents and interviewing the applicant. Now there are suitable substitutes for that type of analysis on small credits.”
Community banks can also make fees less painful for borrowers by folding them into the loans themselves. “There are ways to get around fees,” STAR Financial’s Mr. Hueston said. “They can be financed. SBA is OK with that. That is big, because the fee can be sizable. That is a definite benefit.”
Over all, bankers using the program say it is more fluid than traditional 7(a) lending. “Express helps us expedite the process for smaller deals,” said Silver State’s Mr. Larsen. “That way our loan officers can focus on bigger deals that take more time.”
Mr. Hueston said “it’s another tool in the belt — it’s another product we can offer to help borrowers we might not normally be able to help. We can offer better terms than we normally we would want to do.”
