One reason some community banks shy away from using the Small Business Administration's loan programs is that it often takes months to collect on the government guarantee if a borrower defaults.
It is a complaint SBA Administrator Steve Preston has heard consistently since taking the helm of the agency in mid-2006, and now he is doing something about it.
Mr. Preston will announce today at a small-business lender conference in Las Vegas that the SBA is streamlining the process for collecting on the guarantee, with a goal of repaying lenders within six weeks after a loan goes bad.
The SBA offers a guarantee of between 50% and 85% on the value of every 7(a) loan it approves, depending on the level of documentation. In the fiscal year that ended Sept. 30, it approved more than 99,000 such loans worth just under $14.3 billion.
When a loan defaults — roughly 6.9% of SBA-approved loans go bad each year — the lender must ask the agency to repurchase the guaranteed portion.
The problem, Mr. Preston said in an interview this week, is that the request documents themselves can be dense and confusing. They are often incomplete and can go back and forth between the lender and the SBA several times before the agency has enough information to grant or deny the request, he said.
"This can go on for months," Mr. Preston said. "It can be frustrating" for lenders.
He will tell lenders gathered at the conference of the National Association of Government Guaranteed Lenders that the SBA has streamlined the documents in the hope that more lenders will get the requests right on the first or second try.
"We want to simplify the process for getting the guarantee honored," Mr. Preston said. The goal is to honor a repayment request within 45 days, but "if the package is complete, and we have all the information we need, … [lenders] could have their money in two to three weeks."
Paul Merski, the chief economist at the Independent Community Bankers of America and its point man on SBA issues, said in an interview this week that community bankers are likely to welcome any changes that simplify the process for collecting on the guarantee.
Many bankers have "found out the hard way that it can be hard to collect on the guarantee," Mr. Merski said, so they have either scaled back their SBA lending or stopped making such loans entirely.
Even though small banks generate less loan volume than large ones, they suffer more from the delays, because they cannot absorb the shortfall as easily, he said. "It only takes one" delay "for a community banker to say, 'I'm out of the program.' "
Mr. Merski said that he has been "impressed" with Mr. Preston's efforts to encourage more small banks to use the SBA's loan programs.
Last month, for example, Mr. Preston started a test program in rural markets in six states that streamlines the application process for loans of less than $350,000 and promises a turnaround time of three to five business days on approval for routine loans. The SBA created the Rural Lender Advantage program after an advisory team it had established found that many small banks were not using its programs because they do not have the resources, staff, or technical capabilities to comply with the agency's criteria.
Mr. Preston seems determined to make the SBA programs more accessible to community banks. At the conference, he also will announce that his agency is working on simplifying the entire lending process and should have a new standard operating procedure in place by next spring.
In addition, the agency has trained hundreds of employees to be more responsive to lenders who might find the SBA's processes overwhelming, he said.
"I like to joke with people that we are introducing a new concept called the human being," Mr. Preston said.
