April 6, 2016
By Walter McLaughlin
Contributor, C-Suite Wednesday
C-Suite Wednesday — SBA and Fee Income: There’s More than Meets the Eye
Lenders involved with the SBA 7(a) program are normally aware that the secondary market is a substantial source of income. Although the markets ebb and flow over time, today’s premiums approach 17% for a 25-year loan priced at Prime+2.75%. That means a $1 million real estate loan—even after splitting the amount received over ten points with the SBA as required—can earn the bank a premium in the neighborhood of $100,000, along with ongoing servicing income on the sold portion and interest income on the retained piece. If you try to figure out the Internal rate of return on your old HP 12c calculator, smoke may just come out of the battery case.
But there’s more profit potential on SBA loans than just premium income. Not including standard reimbursable expenses such as appraisals, title insurance, credit reports and the like, the following is a list of discretionary fees allowed by SBA:
- Packaging Fee: Not everyone knows that packaging fees aren’t necessarily limited to $2,500. According to the 50 10 5 (H), “If the total compensation exceeds $2,500, the compensation must be itemized.” Lenders sometimes use time sheets showing the hours spent in various categories to demonstrate the validity of fees greater than $2,500.
- Late Fee: Most lenders charge late fees after 10 days.
- Other Services: This fee category is not particularly well known, but has the potential to be substantial. “Other services” includes consulting as to what financing is needed and what type, with the footnote that the lender is not allowed to charge the borrower a broker or referral fee. Packaging and “other services” can be based on a percentage of the loan amount (via formula), topping out a maximum of $30,000.
- Construction Fee: If a portion of the loan is designated for construction, SBA allows a loan fee of up to 2% of the dollar amount of construction. The fee must not exceed the cost of the additional service.
- Extraordinary Servicing Fee: This fee is designed to cover expenses for extraordinary servicing requirements connected with the loan. It may not exceed 2% of the loan balance except under the Export Working Capital Program and for Working Capital CAPLines. For those programs, the fees must be reasonable and prudent, based on the amount of extraordinary effort required. For non-delegated lenders, SBA must approve this fee in advance.
- SBA Express/Export Express Loan Fee: Lenders can charge a loan fee consistent with its policies for similarly-sized, non-SBA loans provided the fees are related to the services provided and are reasonable and customary
While looking at fee income possibilities, let’s not forget about the 504 program. Although the allowable fees listed on pages 316 and 317 of the SOP go to the CDC or the SBA, the lender can still earn significant fee income in two ways:
- Premium Income: Third Party loans can be generated by, or sold to, certain larger lenders, who pay premiums depending upon the pricing and structure of the loan. Prepayment penalties are usually key to a strong bid.
- Points on Interim Loans: The lender is allowed to charge a loan fee on the interim loan. The fee must be reasonable and prudent.
Notice the word “reasonable” is emphasized throughout. SBA doesn’t want lenders ladling on unjustified fees to the detriment of the borrower, and as reputable lenders that’s not in our best interest, either. It’s important that we take a balanced and fair approach. Make sure your rationale is well documented.
Lenders are allowed a myriad of ways to compensate themselves for the extra time and energy spent on putting together an SBA together. As Jack Canfield once wrote, “Overcome your barriers, intend the best and be patient. You will enjoy more balance, more growth, more income and more fun!”