SBA makes more, smaller loans

Special to The Times

As a credit crunch squeezed borrowers during the last three months of 2007, Los Angeles bucked the national downward slide in loans backed by the Small Business Administration. Driven by a higher number of smaller deals, loan volume here increased 3.5% to 1,319 from 1,275 in the year-earlier period, according to agency figures.

But the amount lent fell $15.3 million, or 5.5%, to $265.2 million. That drop reflected a decline in the number of SBA commercial real estate loans, which are typically larger than the average SBA loan, according to the head of the L.A. district office.

“We believe more [SBA] loans are being made for things like debt consolidation and working capital,” said Alberto Alvarado, administrator for the Glendale-based office, which serves Los Angeles, Santa Barbara and Ventura counties.

The mixed performance punctuated record numbers for the district’s 2007 fiscal year, which ended Sept. 30. The number of loans jumped 21% from the previous year to 6,194. The amount of money lent climbed 13% to $1.3 billion.


The slowdown in commercial real estate lending is due in part to a cooling economy and the sub-prime mortgage crisis, which has depressed the value of SBA loans on the secondary market.

“All of a sudden this is not as exciting as it used to be” for some lenders, said Steven Stultz, a 35-year veteran in SBA lending and principal of Stultz Financial Inc., an SBA consulting company based in Irvine.

At the same time, some SBA lenders around the country are complaining about a new oversight fee the agency started charging last fall. In addition, profit from their SBA lending has declined.

“When the sub-prime problem is hitting and bankers are looking to rein in expenses, the SBA is hitting us with a new lender oversight cost,” said Tony Wilkinson, executive director of the National Assn. of Government Guaranteed Lenders, based in Stillwater, Okla. “It’s the wrong time. Our volume is down.”


The number of loans nationwide shrank by 2,849, or 11%, to 23,111 in the last three months of 2007, the first quarter of the government’s 2008 fiscal year.

The decline came despite an increase in the popularity of its commercial real estate loan. Those loans increased by 3.8% to 2,393 while the amount lent climbed 9.3% to $1.446 billion, according to the SBA.

The national performance was surprising to some observers because SBA lending is often considered to be countercyclical. That means when the economy is doing poorly, and conventional business loans are harder to get, more small-business owners typically turn to SBA lenders.

The bump in loan volume for the Los Angeles district came in part from a single lender: Innovative Bank, a unit of Innovative Bancorp of Oakland.


The small lender, which had assets of $279 million as of Sept. 30, more than tripled the number of loans it made in the Los Angeles district to 305 in the final three months of 2007, compared with 95 in the year-earlier period.

That put it at the top of the lender rankings for the Los Angeles district for the quarter, replacing Bank of America, which made the most loans -- 196 -- the year before.

The amount Innovative Bank lent in the Los Angeles area also soared, to $6.9 million from $1.9 million.

“We are taking a little bit more of an aggressive approach to brand ourselves as an SBA lender,” said Richard Choo, executive vice president of marketing at the bank, which was bought in 2005 by a Korean American investment group. “Our SBA is our core.”


The bank has beefed up the number of SBA lending officers in its Los Angeles branch to seven from two a year ago, he said. Increased marketing efforts, particularly in Koreatown and among the Armenian community, have helped push the expansion, he said.

The bank has focused on making some of the smallest SBA loans. That is a critically underserved market, the SBA’s Alvarado said.

The popularity of the bank’s Small Office, Home Office loan has helped push it to the top of SBA lender rankings in other key markets, such as New York.

Innovative Bank has changed the compensation for its top SBA lending officers, Choo said, in response to a cease-and-desist order issued by the Federal Deposit Insurance Corp. in April.


The order was based on an October 2006 examination of the fast-growing bank that found the need for it to boost its management strength, improve loan procedures and strengthen compliance with the Bank Secrecy Act, which requires institutions to report cash transactions of more than $10,000 as a tool against money laundering.

The bank has put in policies and procedures to do so, hired executives, appointed new directors, instituted more frequent board meetings and submitted a three-year operating plan to the FDIC as required.

“We are probably 99% there on clearing up most of the order issues that the FDIC had cited,” Choo said.

Wells Fargo is also moving ahead despite industry concerns about the effect of the oversight fee, although some of its growth is coming from larger real estate loans.


“It isn’t in any way inhibiting us from doing business,” said Thomas Burke, head of small-business lending at the bank.

The number of SBA loans the bank did in the last quarter of fiscal 2007 dropped by 10%, or 36 loans, he said. But the amount lent grew 13% or $5.5 million. That means more high-dollar loans were made to fewer borrowers.

“The larger borrowers are doing just fine, but the smaller borrowers -- under $75,000, $50,000 -- they are struggling,” Burke said.

SBA lenders are approved by the federal agency to make loans, which it backs with guarantees ranging from 50% to 85%. There were 98 banks and finance companies lending in the Los Angeles market.


Many specialize in one of the agency’s two major loan-guarantee programs, such as the 504 real estate loan, which is a long-term loan

The other is the agency’s workhorse, the 7(a) program. The programs get their catchy names from the numbered sections in the federal regulations that authorize their existence.