John Cox is in a hard spot. As the associate administrator of the U.S. Small Business Administration, Mr. Cox's loan programs are wildly popular with lenders and small companies alike.
Perhaps too popular, as federal budget restrictions threaten to create a funding shortfall for loan guarantees totaling $1.2 billion in 1995. That, says Mr. Cox, who works closely with lenders, could force his agency to focus on niches ranging from export finance to loans for women-and minority-owned businesses.
To be sure, the tension between congressional funding for guarantees and the demand for the programs is not new.
But the problem is exacerbated by a wave of innovative programs -- like the LowDoc program to cut the paperwork and costs of handling small loans -- which have stirred new interest in SBA-backed loans.
Mr. Cox said that tight funding for increased staff will also drive the creation of more programs that will rely more on lenders for underwriting and processing applications.
In an interview from his Washington office this week, Mr. Cox, a 27-year veteran of the agency, reflected on the SBA's recent success and insisted it will continue despite the departure of innovative SBA Administrator Erskine Bowles for the White House staff.
Q.: After a record year, how big do you expect the guarantee program to be in 19957
COX: We did $8.176 billion in 1994 in the 7(a) program, which is the major program that we have. We're looking at a demand of around $9 billion for fiscal 1995 (which began Oct. 1).
Q.: Is there going to be a funding problem?
COX: Right now we're funded at a $7.8 billion level, so unless we make some changes in the program we could see a shortfall if our projections are correct. We want to get a feel on whether the projections keep up in the first quarter before we start making drastic changes. There have been some dips in the first quarter that may show us the $9 billion may be a little off.
We probably won't make any decisions on what we'll do until the middle or latter part of December. We're looking at all kinds of options but nothing we're ready to zoom in on at this point.
Q.: What is the status of some of your new loan programs?
COX: Putting out a program like Greenline that is new to us and new to some of the lenders we've worked with for many years has been a challenge.
We're going to be making some adjustments that allow for a Greenline type loan that is under $200,000 without the strict monitoring systems we would normally want on an asset-based loan program. But we're probably two to three weeks away from finalizing that.
Q.: What about the Women's Prequalification Pilot Loan Program?
COX: We're very excited about this pilot. Once and for all we're going to be able to determine whether we need a safety net to catch those applicants who do not feel for one reason or another they would get a fair hearing from traditional lenders or the traditional lenders are not open to.
We've turned that process around so that we're looking at the applications first and then giving them a commitment letter where they can search out a lender willing to work with an SBA program.
It's too new to tell how much SBA has to spend for the results that we'll get under the program. We'll be looking at the reasons these applicants are coming to the SBA instead of going through the traditional lenders.
Q.: Won't the success of all these new programs push demand further above the already low funding level?
COX: It may or it may put SBA in the direction of being a niche lender and using the resources that we have in specific areas that need them. For instance we believe there is a need that is not being filled in the very small loan area. I think LowDoc has shown that. I think there is a niche in export lending.
There is certainly a niche in minority lending and lending to women. So it may mean refocusing our resources to address those niches that are not being addressed in a traditional lending market.
Q.: What are lenders saying about the new programs?
COX: On LowDoc, we couldn't ask for a more successful and accepted program from the lenders. I think that's a big plus because it matches a niche that we feel needs to be addressed. That certainly helped a great deal in our loan programs to minorities in 1994. We couldn't reach the targets we did without their help. We can design programs but if we don't have lenders out there who accept them, it's not going to do anyone any good.
Q.: With the rapid expansion of new loan guarantees, is there the potential for large credit problems for the SBA in the future?
COX: We have faith that our underwriting standards are being held to. In any rapidly expanding portfolio, you have to take steps to ensure your standards are held to and that your collection process is in line. We're taking steps to centralize our servicing in two centers in Fresno and Little Rock. This is a method used by private sector lenders to save resources and we get better standards that way.
Although we want this increase in business, we want it through prodent lending, and we think we've got the safeguards in place.
Q.: Why have the preferred and certified lender programs expanded so quickly?
COX: We know that if we are going to continue to grow, we need to grow in a way that places the processing and approval function outside of SBA district offices. That's because we know we're not going to get massive increases in personnel, nor do we think that that would be prudent to do at this point. We think it's more prudent to go with innovative programs like the Small Loan Express. The more that we can put into the hands of the lenders we feel that, with prudent monitoring of those lenders and with prudent guidance, we can have a much larger program without increasing SBA's staff.
Q.: Are lenders concerned about Erskine Bowles leaving the SBA?
COX: We've probably got the best of both worlds right now. If we're going to lose someone, there's not a better way to lose them than to have them become deputy chief of staff at the White House. Certainly his interest in small business will still be with him. His interest in SBA will still be there. And we've got in Phil Lader a person who knows the White House, who was deputy director of Office.
Q.: Will the change slow new product creation?
COX: I don't believe so. Hopefully this creativity is going to be imbedded in SBA. We're going to have a unit within the Office of Financial Assistance that will create new and innovative things within the financing programs.
