WASHINGTON — Provisions in the stimulus package President Obama signed Tuesday are designed to spur Small Business Administration lending, but recent guidance from the agency may undercut those efforts.
The stimulus package tries to make SBA lending more attractive for banks by providing relief from guarantee fees, more protection against losses on the loans, and a new facility to improve the secondary market for the loans. But bankers argue that the SBA is jeopardizing those gains with new standard operating procedure guidelines that, for the first time, will cap the amount of financing lenders may offer on certain loans.
Though the agency has pledged to revisit the guidelines in light of complaints, it has an extensive to-do list, including making changes required by the stimulus package, and many lenders are worried.
"This cap will eliminate a lot of opportunities to buy businesses, and it will reduce jobs," said Scott Harvey, the executive vice president and SBA manager of the $69.4 million-asset Fortune Bank in Seattle.
Under the guidelines, released Feb. 12 and scheduled to take effect March 1, the SBA set a $250,000 cap on the goodwill value for loans to purchase an existing business.
Goodwill — the portion of a business with intangible value — makes up a large part of the value of certain types of businesses, such as medical and veterinary practices, and other types of businesses that do not have expensive equipment but generate significant cash flow.
Bankers argue that the cap was too low and instituted without any basis.
"The anger comes from the out-of-right-field, seemingly arbitrary cap," said Lynn Ozer, an executive vice president at Susquehanna Bank, a unit of the $7.48 billion-asset Susquehanna Bancshares Inc. in Lititz, Pa. "It just came out of the blue, and there are many lenders who do business acquisitions exclusively, and there are many industries where the financing of goodwill is what people sell."
The goodwill cap could discourage lenders from making SBA loans, according to Ms. Ozer, a former SBA loan officer. Susquehanna will not give up the line entirely, but "it's going to severely hamper the kinds of loans we do."
Jim Hammersley, the director of the SBA's loan division, said in an interview that the agency was revisiting the cap in light of lenders' complaints and was aiming to issue new guidance before March 1.
"The message on the goodwill issue is that we're taking a look at the comments that we've received that our $250,000 ceiling is too low," Mr. Hammersley said. "We are certainly sensitive to the times and that business acquisition is growing — many folks that are being laid off … may be looking to purchase a business. We expect to come up with a plan that we think deals prudently with this particular issue."
The SBA will have to solve that problem and complete the formidable task of writing implementation guidelines for the stimulus provisions.
The stimulus package provides $69 million for the SBA to expand its staff and marketing, including $20 million that must be spent on improving lender oversight and streamlining lender processes.
Additional appropriations will help lenders reduce the fees the SBA charges for each loan it guarantees. The SBA must first eliminate the fees for borrowers; then it can begin to use leftover funds to subsidize the guarantee fees for lenders with assets under $1 billion. Loans made by bigger lenders have their guarantee fees waived last.
"This is probably the best we could have hoped for in this atmosphere," said James Ballentine, the director of housing, community, and economic development at the American Bankers Association. "Clearly, both the Congress and the administration recognized that the SBA can play a vital role in this situation."
Still, some SBA lenders saw a problem with the structure of fee eliminations.
"They got it backwards," because fees for lenders should have been eliminated first, Mr. Harvey said. "If there isn't any money to reduce the fees paid by the lenders, then there isn't any incentive for the lenders to make these loans, and if you have a borrower who doesn't have to pay a fee but can't get a loan, what good is it?"
Tony Wilkinson, the president of the National Association of Government Guaranteed Lenders, said the stimulus language is vague but encouraging — one section seems to say the SBA should eliminate guarantee fees for all lenders and borrowers until the money runs out.
Another provision increased the guarantee on SBA loans to 90%. (Loans of different sizes currently have guarantees of 75% or 85%.) Many lenders are pleased with the increase, but others say it could foster irresponsible lending.
"I was making SBA loans back in 1981, back when there used to be a 90% guarantee, and there were lenders that pushed the envelope, and the SBA default rates were much higher," Mr. Harvey said. "And to tell you the truth, there are people out there who are greedier now than they were back in 1980."
Still, he said, the provisions will have a positive effect on SBA lending. "These changes, I think, will help lenders either get into the program or expand their programs."
One of the hardest parts of the stimulus language to address may be the various new facilities the law describes.
Lenders making loans through the 504 program, which deals only with loans for fixed assets such as land or machinery, will now be able to sell the non-guaranteed portions of their loans through a secondary market facility to be established by the SBA.
Another provision would allow lenders making the most common type of SBA loans, 7(a) loans, to offer deferred-payment loans to borrowers who are behind on payments on other loans.
The mechanics of the programs have yet to be defined by the SBA.
Participants in the secondary market for SBA loans are set to get help, too.
The law calls for the establishment of a lending authority at the SBA that will make loans to broker-dealers who buy the loans, pool them, and sell them to investors. Broker-dealers have struggled recently to find buyers for their loans, and observers said the program could help them get their inventories moving again.
"I view it as a very good development," said Scott Taylor, a vice president in Memphis for Shay Financial Services Inc.
But questions remain about how the SBA will implement its secondary market lending facility and how it will obtain the funds to lend to broker-dealers. If the agency cannot borrow cheaply enough, the prices of its loans to broker-dealers may be too high to attract much interest.