September 12, 2013
Now for the first time many lenders are assessing how their CDC partners should be evaluated and selected. And for good reason. SBA’s closure last year of one of the nation’s largest CDCs cast a spotlight on the SBA-504 program and put a few unfortunate lenders and small businesses in untenable situations, with loan funding and servicing actions delayed and interim loans extended. How can lenders make sure this doesn’t happen in their SBA transactions?
Here are some questions lenders can ask and explore as they evaluate potential CDC partners on their SBA-504 projects:
Who serves on the CDC’s Board of Directors?
The majority of CDCs are non-profit membership organizations governed by a board of directors. Lenders should be familiar with a CDC’s board of directors. Do they have the experience and expertise to oversee the CDCs strategy and operations? Are they well known in the SBA lending and economic development field? SBA will be requiring CDC directors to take on more oversight responsibilities as part of new regulations. Bankers should have confidence a CDC’s directors.
What level of expertise does the CDC have?
Lenders enter into long-term relationships with a CDC that go far beyond when the 504 loan is funded. Lenders should ensure that a CDC has experienced, competent staff – not just in sales but in loan processing, underwriting, servicing and liquidation. The greater their expertise, the greater value offered by the CDC. SBA designations can provide greater assurance of competence and in some cases faster processing. These include: Premier Certified Lender Program (PCLP), Accredited Lenders Program (ALP), Abridged Submission Method (ASM), Authorized CDC Liquidator (ACL).
How does the CDC rank in performance?
SBA and CDCs generally have access to a range of information about their performance metrics. These include lender rankings, portfolio size, screenout rates and overall portfolio performance statistics. Lenders should ensure they are at least aware of CDC performance as part of their evaluation process in selecting CDC partners. CDCs can be asked to share this information confidentially to reveal how they rate.
How is the CDC’s relationship with the SBA?
A good relationship and reputation with SBA District Offices, the Sacramento Loan Processing Center, SBA Servicing Centers – even Washington DC’s Office of Capital Access – can often assist in streamlining requests and addressing challenges with the SBA. Lenders shouldn’t be afraid to pick up the phone and contact SBA regarding a CDC’s reputation and performance.
Does the CDC reinvest in the economic development of the communities it serves?
SBA requires CDCs to reinvest revenue available after expenses and reserves back into economic development. CDCs that have chosen to reinvest often have other programs and services at their disposal that can assist lenders and borrowers alike. Lender should ask about what reinvestment activities the CDC is involved in as there may be the opportunity to expand a partnership beyond the SBA 504 program, yielding banks more services for their customers.
Does the CDC demonstrate leadership in the SBA lending industry?
Like other industries, there are several key professional organizations that advocate for positive change for lenders and small businesses, including the National Association of Development Companies (NADCO) and the National Association of Government Guaranteed Lenders (NAGGL). Is the CDC active in influencing policy in Washington with the SBA and Congress through these associations? Does the CDC have up-to-date information and knowledge about program changes and policy direction? CDC leadership should keep lenders informed and prepared as key partners in the SBA 504 program.
Knowing the answers to these simple questions supplements lender internal controls and insures they are working with reliable partners. The SBA is issuing new regulations that provide better guidance regarding CDC governance in light of last year’s events and is launching a new oversight system this year. Lenders participating in the SBA 504 program will put themselves in a more secure position by taking heed of these changes and insuring they are partnering with reliable, reputable and secure CDCs.