The Small Business Administration plans to bring two proposals to Congress next year that would give bankers what they have begged for since Hurricane Katrina struck the Gulf Coast two years ago — a more prominent lending role in their own communities when disaster strikes.
One of the proposals would let banks act as agents of the SBA and process disaster loans for a fee, according to sources familiar with the plan. A second would attach an SBA government guarantee to certain credit card purchases made by disaster victims.
The proposals are still in the preliminary stages and have not yet even been presented to SBA Administrator Steven Preston. But bankers and trade group officials who have taken early looks at the plan say that the SBA appears to be on the right track.
"It makes a whole lot of sense to let private industry do what it does best," said Guy Williams, the president and chief executive of the $750 million-asset Gulf Coast Bank and Trust Co. in New Orleans and one of the bankers the SBA has consulted on its proposals. "Using bankers on the ground who know their customers, there's no downside. It's cheaper for the taxpayer and better for the recipients."
Though primarily a guaranteed lender, the SBA makes loans directly to home and business owners who have been hard hit by disasters and need cash to rebuild.
But three Gulf Coast hurricanes in 2005, starting with Katrina in late August, overwhelmed the agency and prompted it to examine alternatives for deploying its disaster loans more quickly and efficiently.
After a disaster, the SBA typically hires temporary workers to help underwrite and process loans, but Katrina exposed that model's shortcomings. Months after the storm the SBA had processed only a few thousand of the more than 200,000 loan applications, and bankers, lawmakers, and business owners began pleading with the agency to let banks help.
In Washington, both the House and the Senate have passed legislation this year that would give banks a role in disaster lending, but the bills are vastly different.
The Senate bill would give banks the authority to make emergency loans that would carry an 85% guarantee, similar to that of an SBA 7(a) loan. The bill, passed in August, was tucked as an amendment into the Senate version of a Farm Bill that was passed this month. (The House has passed its own Farm Bill, but the bills have yet to go to a conference committee.)
The House passed its own SBA bill in April. Unlike the Senate version, it would not give banks direct lending authority. Instead, it would let them process, approve, close, and service disaster loans for a fee of 2% of the loan amount.
The SBA proposal to let banks act as its agents would be most like the House's model, though details still need to be worked out.
Patrick Rey, who is heading the SBA's accelerated disaster response initiative, said that before the plan is presented to Congress, the agency wants to be sure that it has the support of all interested parties.
"The best way to do that is to ask the people who might have to process it, like banks, and the primary users of the product, like businesses and homeowners," Mr. Rey said. "We believe the new product needs to meet bank specifications for processing, requiring it to look something like the very well-known SBA 7(a) product."
The banking industry also supports the proposal to guarantee disaster-related purchases made with credit cards. Under that plan, a percentage of purchases would be covered by the SBA if the cardholder defaults. The cardholder's interest rate also would be lowered, but the spending limit would not change.
"The idea has merit," said James Ballentine, director of grassroots and community outreach at the American Bankers Association. "Clearly there are mechanics that need to be worked out … but it accomplishes two things. It gets people back on their feet immediately, plus it gets money back in the economy immediately."
Mr. Rey said that is exactly the point.
"These complementary products are to assist in stabilizing the area from an economic point of view, so people don't have to leave, and businesses don't have to close down" he said.
Gulf Coast's Mr. Williams said that if what the SBA is proposing now had been in place two years ago, more money would have been available to rebuild New Orleans, and more of its business owners and residents might have stayed.
And even hough Gulf Coast made loans to nearly everyone who asked after Katrina struck, Mr. Williams said, it could have done even more if it could have processed loans on the SBA's behalf.
"We could have reached out to people that we knew that had lost everything," he said.
14-Day Free Trial
Corrected December 31, 2007 at 7:09PM: This story misspelled the name of the head of the Small Business Administration's disaster response initiative. He is Patrick Rea.