What will it take to boost SBA lending?
Seven weeks into a new fiscal year, the Small Business Administration’s flagship 7(a) program is off to a sluggish start.
Volume through Nov. 13 was down 22% from a year earlier, at $1.9 billion, according to SBA data. The new fiscal year began Oct. 1. Industry observers are pointing to the pandemic, along with an ongoing standoff in Washington over more federal stimulus, to explain the decline. A turnaround largely hinges on the course of the pandemic or more aggressive governmental assistance, they said.
Some are calling on Congress and the agency to slash 7(a) fees, increase loan guarantees and allow larger loans to qualify for SBA assistance. If the formula seems familiar, it’s because it was tried before, in the aftermath of the 2008 financial crisis, when it produced a spike in 7(a) volume.
A similar response should spark another snapback in 2021, SBA participants said.
The National Association of Government Guaranteed Lenders has been “advocating for Recovery Act-like provisions,” said Tony Wilkinson, the group’s president and CEO, referencing the 2009 law that provided SBA with $730 million to temporarily reduce fees and boost the standard 7(a) guarantee from 75% to 90%. The guarantee reverted to 75% in 2011.
“Many borrowers will find it difficult to access capital as we come out of the pandemic,” Wilkinson said. “Many small businesses will experience negative trends and find their business landscape has changed.”
“If you want to spur SBA activity, go back to the 90% guarantee and waive” fees, said Arne Monson, president of Holtmeyer & Monson in Memphis, Tenn.
“I’m even more [supportive] of that now that it appears we’re not going to have a stimulus,” Monson said. “There’s a big need. We’re getting calls every day from banks we haven’t heard from before. … Relief, if it can be offered through the 7(a) program, is the absolute way to go.”
Total 7(a) approved jumped by 35% in fiscal 2010 from a year earlier, to $12.3 billion, largely because of governmental intervention.
Reforms that followed the last financial crisis were critical in driving SBA volume, said Diane Gallion, who oversees 7(a) lending at the $33.3 billion-asset Western Alliance Bancorp in Phoenix.
"It made the difference in 2010, when that came around," Gallion said. "I hope they'll find the right balance [now] to do the right thing in the go-forward strategy."
Revamping the 7(a) program will likely become a significant topic of discussion for the incoming Biden administration, especially if stimulus talks remain deadlocked, said James Ballentine, executive vice president of congressional relations at the American Bankers Association.
"If PPP is not reinstituted, I think you'll see more conversation around 7(a) and how you make it more usable for borrowers in challenging times," Ballentine said, adding that the ABA would support lower fees and an increased guarantee.
The Independent Community Bankers of America would like to see lawmakers fund the SBA so it can slash fees in half, allow for bigger loans and approve longer loan terms, said Paul Merski, the ICBA’s group executive vice president for, congressional relations and strategy.
"The 7(a) program is that safety net that keeps credit flowing to small businesses," Merski said.
The 7(a) program also saw a spike late in fiscal 2020 when the SBA agreed to cover six months of principal, interest and fees. That backing only applied to loans approved by Sept. 27. No such coverage has been lined up for loans made since then.
With roots going back to the SBA’s founding in 1953, 7(a) is the SBA’s largest traditional lending program. In fiscal 2019, 7(a) accounted for three-fourths of the agency's overall lending activity. The program typically has an 85% guarantee for loans of $150,000 or less and a 75% guarantee for loans between $150,000 and $5 million.
Throughout most of 2020, 7(a) was overshadowed by the emergency Paycheck Protection Program, which provided $525 billion of forgivable loans to small businesses between April and early August. The focus on PPP was so intense that many 7(a) lenders reported significant declines in 7(a) volume.
The PPP expired on Aug. 10 and all discussions about reviving the program have been stalled as lawmakers disagree over a comprehensive relief package.
Partial shutdowns and social distancing requirements have also taken a toll on 7(a) volume.
“To me, a lot of it revolves around lockdowns or no lockdowns,” said Eric Hovde, chairman and CEO at the $2 billion-asset Sunwest Bank in Irvine, Calif. “As long as businesses are able to open and operate, they're bouncing back pretty well.”
Some SBA lenders aren’t waiting on action from Washington to boost their 7(a) volume.
The $17.2 billion-asset United Community Banks in Blairsville, Ga., recently hired eight SBA lenders, including bankers from Spirit of Texas Bank, CIBC and Newtek Business Services. They specialize in a number of industries, including health care and franchise lending.
“Our decision to hire so many at this time was a mix of filling open roles and wanting to add more resources to the team,” said Rich Bradshaw, United’s chief banking officer. The move “probably should be a signal” that United has a “bullish” long-term view of SBA lending.
United’s 7(a) volume has increased in fiscal 2020 from a year earlier, though Bradshaw declined to provide the numbers. Sunwest has also seen its SBA lending bounce back, Hovde said.
Western Alliance is also placing a greater emphasis on SBA lending. In August, the company hired Gallion to lead a new enterprise lending group focused on 7(a) lending.
Gallion is looking to build a multi-regional team of bankers to offer 7(a) loans.
Live Oak Bancshares in Wilmington, N.C., the busiest 7(a) lender in fiscal 2020, has continued to increase its production, largely by emphasizing industries that are somewhat shielded from the pandemic.
About a fifth of Live Oak’s $430 million in originations between July and September involved “least impacted verticals” such as self-storage facilities, solar energy, investment advisers and bioenergy, Huntley Garriott, president of the $8.1 billion-asset Live Oak Bank, said during a recent call to discuss quarterly earnings.
Live Oak is also pursuing bigger borrowers.
“We have a chance to move up market,” Chairman and CEO Chip Mahan said on the earnings call. “It is true in some verticals that the Darwinian theory prevails, that the strong will survive, which will provide opportunities to the larger folks in our verticals.”
Bradshaw and Hovde said their banks would benefit from lower 7(a) fees and a higher guarantee, but they added they expected demand to perk up in 2021 even without a boost.
“My guess is demand is going to be pretty strong,” Hovde said. “I think a lot of bankers, instead of doing a loan conventionally, will try to underwrite it through 7(a).”