Agency restricts popular loans
The Small Business Administration has tightened the rules on a popular loan program, which will make it tougher for some start-ups and small ventures to get the loans they need.
New lending caps and other restrictions come at a particularly dicey time for small businesses because the recession and uncertain financial markets continue to pinch off access to vital capital.
The restrictions in the Community Express Pilot Loan program mean two major small-business lenders active in the Los Angeles area each must stop at 100 such loans a month nationwide. This year, before the restrictions, lenders were making as many as 500 a month.
The Small Business Administration said it imposed the caps because the pilot loan program it oversees threatened to bump up against a limit authorized by Congress.
At Innovative Bank of Oakland, demand for Community Express loans has as much as doubled to 20 applications a day from small firms looking for cash to help them survive the recession.
“We cannot accommodate most of them,” said Young Ho Won, senior executive vice president at the bank.
Many of the applicants may not have considered the typically smaller Community Express loans in the past, he said.
The loan, which is a small but growing pilot program in the SBA’s portfolio of loan-guarantee programs, has been popular with borrowers because it is often available in small amounts, as low as $5,000, that many lenders don’t want to handle. In addition, the loans don’t always require collateral.
Community Express loans accounted for 9% of all loans in the SBA’s major 7(a) loan-guarantee program and 1% of the 7(a) dollars lent in fiscal 2008. But in Southern California, such loans play a larger role.
In the Los Angeles area, Innovative Bank and Superior Financial Group of Walnut Creek, Calif., together accounted for about 23% of all SBA-guaranteed loans, both in numbers of loans and dollars lent in the federal fiscal year ended Sept. 30, SBA data show. Community Express has accounted for most of those banks’ SBA loans.
That share has declined to 13% of loans and 3% of the total dollars lent from Oct. 1 through Dec. 8 as the new caps, the rocky financial markets and the recession have stymied lending.
In the South Bay, the popularity of the loan has grown in recent months among clients at El Camino College’s small-business development center, said Sharon Peterson, the senior business counselor who handles the nonprofit’s loan packaging. At the same time, Community Express lenders are tightening credit rules, in part to help them stay under their caps, she said.
“You have more people competing for less money being available,” Peterson said, adding that most of her clients are minorities.
The new caps are part of other changes the SBA made to the program effective Oct. 1.
From now on, potential borrowers have to submit a business plan with their application. Fulfillment of the required financial and business counseling, which is free to borrowers and available as an online course, will be more closely monitored. The maximum interest rate through the program has been lowered.
Eligibility requirements have been broadened. Any qualified borrower can apply for a loan under $25,000. Eligibility for loans above that amount is based on a borrower’s location. The old rules focused on borrowers in specific demographic groups, such as women or minorities in underserved areas, the SBA said. It said constitutional concerns about the former eligibility rules promoted the change.
Partially in response to the new economic landscape, Superior Financial will focus on loans of $5,000 to $25,000, it said. Innovative Bank, which now requires site visits for some loans, is expected to focus on slightly larger Community Express loans.
Both lenders said they were increasingly using other SBA products to try to meet borrowers’ needs.
The SBA said it made the changes to address concerns about the program’s default rate, which it says is 7%, or twice the rate of all 7(a) loans. In addition, officials didn’t like that only a few institutions were doing most of the lending and doubted whether all borrowers were getting the required financial counseling.
The agency also said it had anecdotal reports of predatory and exploitative lending practices but didn’t name the lenders. In May, the agency said that it had asked its independent inspector-general’s office to audit the loan program, a step that one SBA official said was unusual.
“I would readily say our evaluation of it was long overdue, but it’s something we are really focused on,” said Eric Zarnikow, the SBA’s associate administrator in the Office of Capital Access.
SBA officials play down objections to the altered Community Express program and say they want to wait to see how the changes affect the program. Results of the audit are expected next year.
The pilot program was authorized by Congress, which said the program loans couldn’t exceed 10% of all loans made in the SBA’s 7(a) loan program.
The number of 7(a) loans has dropped for months as banks have slowed lending and some small-business owners put off borrowing until better economic times. The SBA began to set varying caps for the first time this year when the growing program began to bump up against its limit.
The new caps apply to all of the 365 institutions that participate in the program, although Innovative and Superior account for 80% of Community Express lending nationwide, the agency said. Small lenders have caps of 10 loans a month. The SBA has said it may review individual caps.
The SBA has objected to contentions that the cap on the program will mean fewer minority or women-owned businesses will get loans.
Excluding Community Express, 28% of all SBA loan dollars went to minority-owned businesses in 2008, the SBA said last week. With Community Express, the share would be 32%, it said. Women-owned businesses received 18% of all SBA loans, it said. With Community Express included, that share would be 23%, it said.
Lenders are pushing hard to end the Community Express program’s pilot status, which could eliminate the caps. Sen. Olympia J. Snowe (R-Maine), ranking member of the Senate Small Business and Entrepreneurship Committee, recently introduced legislation that would make the program permanent and broaden the eligibility criteria.
Here are the five lenders that made the most loans guaranteed by the Small Business Administration in Los Angeles, Ventura and Santa Barbara counties since Oct. 1, the start of the government’s fiscal year, to Dec. 8.
CDC Small Business Finance Corp.
Superior Financial Group
Source: Small Business Administration