58% of Industry Says SBA should Demand 10% Minimum Equity for SBA 7(a) CRE Loans

June 11, 2015

By Bob Coleman
Editor, Market Trends Thursday Special Edition

From the 250 who responded to our unscientific poll this morning — the largest response we have ever received in a six hour period.

Thank you for all who participated!

Due to the length of comments, I am dividing them over two reports. Today’s comments are from the No to SBA 7(a) CRE 100% financing crowd.

Tomorrow morning I will run the pro comments.

But first the poll results to date (You may still respond here)

1) Have you lost a loan to a competitor who offers 100% SBA 7(a) CRE financing?

Yes 56%
No 44%

2) Does your institution offer 100% SBA 7(a) CRE financing?

Yes 16%
No 84%

3) What is your attitude toward SBA 7(a) CRE financing?

I would never consider 100% SBA 7(a) financing prudent lending — 43%
I would consider it prudent lending if I took the borrower’s house as additional equity — 25%
I would consider it prudent lending if it was to a low-risk industry, e.g. a veterinarian, and it cash flows beautifully — 32%

4) SBA demands 10% equity for SBA CRE loans. The SOP is silent regarding a minimum equity injection for SBA 7(a) CRE loans.

That is fine with me. There is no need to change the SOP — 42%
SBA should demand 10% equity for SBA 7(a) CRE loans — 58%

The No to SBA 7(a) 100% CRE Financing Comments

We are climbing or of a serious recession. Let’s not be eager to leap back in with some crazy lending practices.
SBA lending in not “prudent” its making a loan that would not ordinarily be made without the Guarantee No skin in the game — No Game No loan It is foolish to rely on the Guarantee, without considering ” what does the borrower have in it ”

100% financing CRE 7(a) lenders deserve everything they will get in the next crash. It’s not a matter of ‘if’, but only a matter of ‘when’!

100% financing is crazy

Didn’t the economic meltdown teach us anything? No skin in the game to easy to walk away.

Not prudent lending.

Never say never but generally, 100% financing is not prudent. It’s a slippery slope.

Are we becoming desperate? Greedy? Or just stupid again? No…WE aren’t and I’m hoping the industry isn’t either.

The Agency NEEDS to address this ASAP. It’s imprudent lending and putting taxpayer dollars at unnecessary risk. Just greedy bankers living up to their stereotypes. Pathetic! Glad you’re shining a spotlight on this.

Let’s stay with the basics of lending and not try and get fancy just to be competitive.

For question #4, I would say the SBA needs to set a minimum % equity injection or state 100% is allowable as long as certain specified criteria are met. OOCRE down payment injection guidance just mentions “prudent” lending, but when is 100% financing ever prudent?? If they have cash, they should prudently inject some of it (skin in game)…if they don’t, is 100% financing really prudent? Big banks seem to be the tail wagging the dog on this one while smaller community banks often don’t have the capital/financial ability to risk this argument in a liquidation scenario for fear of repair or denial.

I work in special assets (eeks!) and most of the CRE loans that are transferred to my department are under secured using the 90% LTV guideline. 100% financing on commercial real estate – not for it…

Financing like that can only lead to abuse. I’m old school and would require something at stake. As for 7(a) there should be a reasonable amount at stake in the business. 504 has worked so leave it alone.

Greed is driving this market, high premiums, in-experienced SBA lenders throwing the kitchen sink trying to get a piece of the pie. When market does turn again, and it will, matter of time, those borrowers who have 100% financing will walk. I would venture to say if borrower is getting 100% financing, there would be little in other available collateral to take to ensure “prudent lending”

Fixed and floors are not the issue, the duration or the term of the fixed rates or ceilings. Some banks are offering 100% financing with 25 year fixed rates. Albeit for low risk industries (vet, dental), but it is hard to justify a risk adjusted rate of return for that loan structure, even for low risk industries.

Collateral does not repay loans. Cash flow and management much more important.
We are a lender in Texas, so taking the homestead as equity is not an option for us. SBA used to require 10% equity for the loan to be done as a preferred loan, and should at least revert to that standard.

Good way for SBA 7a to lose its zero subsidy.

I believe there always ought to be equity in the deal, honestly. And I’m a BDO.
The playing field between 504 and 7a needs to be leveled. Too many borrowers are being put into variable 7a structures rather the long term fixed rate 504 can offer.

We have short memories from previous economic downturns

Its just shady marketing. 99% of the time there’s additional collateral to cover the shortfall.

I guess we didn’t learn our lesson from the last market crash. Don’t fully agree with 100% financing. Even with the SBA 75% guaranty, Federal Credit Unions I believe would be excluded as I believe our LTV limits us up to 90% LTV with an SBA guaranty.

This is simply one more way to cut 504 out of the business. Without actually saying so, SBA has recently implemented many changes that put the 504 at a distinct disadvantage to 7a so that the 504 program will simply wither up and die. This way, SBA feels they won’t have blood on their hands like they would if they manned up and just pulled the plug on 504.

The industry must have a short memory. This same kind of lending resulted in the “great recession”. Lenders should be partners, not owners. All we make is the “rent” on the money. We typically have more investment than the borrower, but no ownership. Is this, 100% lending, the principles on which our country now operates? Judging from our national leaders’ spending habits of spend & tax, how can we expect anything different from the current population? I’m thankful that I am near the end of my career. The new generation is a reflection of the new American way, all take, but no give.

The disparity between the programs, guides, at least on the margin, CRE deals towards the 7a rather than the 504 based upon the fact in question. While the 7a is a wonderful product, it is not the better of the two SBA programs for CRE lending. Higher fees and tying up of all business assets with the 7a just as an example. Point: the guideline disparity pushes borrower towards less optimal financing for them, but more profitable vehicles for the lender.

Bankers have short memories. Just a few years ago as we were writing off over leveraged deals we all said we would never make that mistake again yet here we go.

Lets not start imprudent lending. It sad on many levels as to borrower risk and incentive to repay. Always get equity or take assets to make sure the borrower has something at risk.

We are a CDC, not a bank. I think SBA should be consistent with its rules.

SBA is in for a run on loan losses if 100% financing is allowed.

I think financial institutions are getting carried away with their high percentage loan to value. They have short memories.

There should be lessons learned with very high leverage financing from the high default rates of recent past. High leveraged combined with low rates tilt the risk-reward spectrum in favor of a losing proposition.

Is the client pledging other collateral with equity? How can 100% financing represent prudent shared risk or is this a race to the bottom?

100% SBA CRE financing is placing excessive risk on the taxpayers for the benefit of the bank’s profits. These bankers have very short term memories and some act oblivious to recent real estate lending history! Prudent Lending, LOL!!!

100% financing is not prudent lending for real estate acquisition, regardless of what the collateral is. The borrower has “no skin in the game”, and it is too easy to walk away. This overly aggressive financing practice is part of what got us in to trouble not that long ago. What short memories people have!

SBA 7(a) CRE loans specifically compete with the SBA 504 loan program, only with less restrictions. Lenders making 7(a) CRE loans do not want to use the 504 program because they do not generate as much fee income with the latter. I question whether or not they are doing the borrower justice by financing what is typically a significant, long-term investment with a Prime-based variable rate debt instrument. Because Prime hasn’t moved in so long, it is easy to gloss over the downside risk of a rising rate environment. I strongly suspect that will not be the case over the next 5-10 years.

100% 7(a) SBA financing will give Congress reason to kill the program. Borrowers must have skin in the game. The banks take a large profit on selling the guaranty and the taxpayer takes the hit if it doesn’t work…this will not sit well.

Question 4 should be clearer. I just want the SOP to be more definitive on advance rates. The SBA laboriously changed the process of assessing a “fully secured” loan and should do the same with SBA CRE loans. 85% advance rates on CRE but 90% sometimes…and others see it at 100%. I really just want better guidance and an even playing field.

Please remember the new Basel 3 rules for HVCRE. It should make it so most banks will not offer less than 15% down because of capital requirements

You can’t even buy a house with 100% financing, why should CRE be any different!?!

We are nearing the end of another cycle!