Industry Comments Overwhelmingly Slam SBA Oversight Bill

June 2, 2016

By BoB Coleman
Editor, Coleman Report

Industry Comments Overwhelmingly Slam SBA Oversight Bill

Final Survey Results (162 participants)

Do you support the bill as presented?

Yes — 13%
No — 87%

Assume SBA’s 7(a) oversight fee increase is a fait accompli to the industry. How should it be paid for?

Premium Split over 108 — 25%
Portfolio Fee — 75%

Should banks with less than $1 billion in assets be exempt from the fee?

Yes — 51%
No — 49%

Should lenders with a small 7(a) portfolio, say less than $10 million or $20 million, be exempt from the fee?

Yes — 58%
No — 42%

Should CDCs be exempt from the fee?

Yes — 31%
No — 69%

Should lenders who have a market share of greater than 1% ($235 million annually) be solely responsible for the fee?

Yes — 38%
No — 62%

Following are all comments received:

The Single Pro Comment

The greed of the 7(a) industry and the amount of money 7(a) lenders are making is out of the bag on the hill. The taxpayers deserve a return as much as all of us. NAGGL did a hell of a job negotiating the 108. Many wanted a much lower split. This train has been coming for a long time.

Con (37 Comments)

Stop taxing smaller lenders in favor of banks already too big to fail. The fees in the program should be shared on a pro-rata basis for ALL SBA loans, regardless of the size of the bank. As proposed, this legislation will have a disparate impact on women owned and minority owned businesses who have smaller capital needs and are more likely to work with a smaller institution who depends on the secondary market.

Why would Congress interfere with a successful program and Hinder small banks from participating in program. As the # 1 SBA lender in our county, we will give serious consideration to exiting program.small businesses will be the ones hurt by this, but our bank has to think about its own financial situation

SBA has done a great job recently of listening to the lenders and making great strides in improving the technology and reducing the cost for lenders to participate in the program, while reducing the cost to operate the program. It seems at first glance that the bill represents a good idea…to increase the ability to monitor and enforce program guidelines, which is something in theory I can support. However, the way the bill proposes to execute the monitoring and enforcing is misguided. I can not connect the dots between the split being dropped to 108 and the enforcement of the program. The increased PARRiS activities/monitoring seems to be accomplishing the same result without the bill. I think the involvement by the government in a free market is a mistake, and will have a negative effect on the program participants. We heard in St. Louis on numerous occasions, how the program is trying to get the lenders who do less volume to increase their participation, or for lenders who currently do not participate, to start. By reducing the split, effectively you eliminate part of the reason small community banks are able to take on the additional risks typically associated with SBA lending.

How can NAGGL publicly support additional regulations without consulting its membership? Who do they answer to?

I would rather see the SBA require that banks that sell the loan retain more than 10% instead of charging a “new” portfolio fee.

Who’s gonna originate SBA 7(a) if the legislation passes?. Due to high closing costs and too much paperwork requirement, SBA 7(a) program is losing its merit. If the fee is increased, there is no reason for the bank to pursuit 7(a) deals. The bank will simply reject the small business loan request unless it is doable under conventional program. Eventually, small business owners have no way to go like before.

Punishing lenders for making long term access to capital available will only drive more lenders from the program, reduce competition and, ultimately, hurt the small businesses the program was designed to assist. So, who thought this was a good idea?

It is not the fee that concerns us, but additional restrictions, such as new concentration rule. It really contradicts the desire for “credit elsewhere ” rule enforcement, as the gas stations, hotels and restaurants are biggest SBA loan volume drivers because of credit otherwise not available for these special use properties.

Hard to believe our association would lobby and support additional regulation, such as this—-

If so many bankers and SBA lenders do not support this bill, why has ABA and NAGGL come out in support of it?

A change to the premium split should NOT be the answer…period! This is because most of the top volume 7a lenders choose not to and/or don’t need to sell their loans; therefore the “tax” is a burden only to smaller banks that rely on the secondary market for income growth and capital preservation. I feel this “tax” should be shared by every participant in the program by making it a portfolio fee or additional ongoing servicing fee.

Instead of simply reigning in the bad actors and making reasonable changes to eliminate that type of behavior (e.g., disallowing 100% financing for real estate, concentration limits for the riskiest lenders, etc.), the proposed bill has a disparately negative impact on the lenders most likely to fulfill SBA’s true mission. Furthermore, additional taxation on secondary market sales demonstrates willful ignorance. Less than 50% of all loans generated are sold, and the majority of those – mostly due to competitive pressures – don’t generate anywhere near the upper-end price investors are willing to pay. There is no need to smack the lenders both coming (higher ongoing fees, more restrictive program) AND going (less secondary market income). Changing the SOP to close the loopholes would have been more than enough. Despite Vitters’ saber-rattling, SBA enjoys strong, bipartisan support. That should be leveraged so that the actual problems are addressed and corrected, not the red herrings.

The fee makes it difficult to continue SBA lending for the smaller SBA lender. We are already paying fees for the Risk Based PAR. Fees should be paid by the lenders who utilize the program the most. I would like to see the split fee on the secondary market even larger as those lenders are typically the ones pushing loans through with questionable underwriting practices.

Charge the fee only, it’s the one fair mechanism to all.

Another tax on small banks that need to sell their loans in order to continue to participate in the program. The large banks don’t sell their loans.

This will hurt the Small Banks.

Why is it necessary for portfolio lenders, regardless of size, to pay extra fees? Leave the portfolio lenders alone especially since many of them are offering fixed rates that help borrowers by lowering interest rate risk. If SBA needs more funding to run the program or for oversight, it should either request an additional appropriation from Congress, raise the SBA guarantee fee on all borrowers, or charge all lenders the same servicing/audit fees across the board.

To the extent possible, have some pricing variable tied to the Portfolio Risk Rating and most recent Review. For high volume lenders with circumspect past SBA portfolio rating and performance reviews, a higher variable should be assigned to their loans.

Not only do the big banks not have to pay this “tax”, the tax benefits the big banks because the money goes into the subsidy calculation and could result in lowering the ongoing SBA fee which would result in a huge benefit for the large lenders that can hold their loans. This provision definitely has disparate impact.

They should still tax large lenders. The credit available elsewhere is a subjective opinion unless we go back to getting decline letters — or it meets the narrow criteria. If you are doing high volume SLA how do you prove all the loans aren’t available elsewhere (more paper=more cost)

An incredible power and money grab. Basically the big portfolio lenders are sticking it to the smaller secondary market lenders. And a fine of up to $250K for the credit available elsewhere test failure (on each occurrence)? This is obviously a push to get the smaller lenders out of the market and has little to do with oversight. And NAAGGL supports this!?

If they want more money for oversight relax the nit picking scrutiny of loans under $150K and expense requests, simplify SBA 172 processing, and stop requiring massive reports on small loans except the post purchase if they see deficiencies.

Lender oversight it working; there was no problem that needed fixing. This legislation is a waste of time. Lenders already pay an annual fee and pay the cost of their on site reviews. This proposed bill should never have been supported by our trade association.

This bill as proposed appears to have a disproportionate effect on smaller banks that must sell, over the very large book and hold SBA shops. Therefore, an increased portfolio fee would seem more appropriate or at least a hybrid of premium split and increased portfolio fee.

Fees to be applied to all participants of the program regardless of whether or not the bank sells their loans. This proposal is essentially penalizing the smaller banks and rewarding the national banks that do not sell their loans. Could that be discrimination? Hmmm

The split premium of 108 is a tax on small businesses and small banks. The market should be allowed to set the rate that loans are sold. This new proposal will only put a crimp in small bank liquidity.

This hurts the smaller banks and those who sell in the secondary market. Seems like this is for the big lenders out there so they can start doing more conventional.

No more fees. There is enough oversight already. This is one of those its not broken, so don’t fix it. Purely political since their is an election in November. Plus one way or another the small business concern will pay for it. They don’t need any more expense.

This Bill hurts small community Banks! This Bill will force the small Banks to either stop making 7a loans or find alternative financing.

This is a further attempt by SBA to paralyze small banks and let the large money center banks with low cost of funds offered as they keep their guaranteed portions of loans to evade the secondary market 50% tax

SBA does not need more fees and definitely does not need to split more of the secondary market premiums

Clearly the “deck is stacked” in this model against lenders who sell a good deal or most of their loans. Places an excessive burden on small lenders.

The bill will discourage lenders to actively promote the SBA platform and eventually reduce production.

Interesting that a bill supposedly done to guard portfolio quality has no tangible quality measurements. Seems to just be attacking a SBA business model.

This is a tax on the smaller banks which have to sell for liquidity. Also the securitization issue will kill liquidity for non-bank lenders!

Increase the ongoing servicing fee and eliminate the cap fee altogether. All SBA lenders would then be paying their fair share of the burden.

The legislation completely favors the large banks. Congress is fed up with the lack of leadership at the SBA. The losers in this if the legislation is past are the small businesses that will lose access to capital because the small banks may not use the 7a program because the cost of the program is already high. I do believe there should be a cost to be a part of the program. It helps keep everyone honest and use the program appropriately and be good stewards to the mission of the program. The large banks are able to pick and choose who they lend to and are using the program to fund the small businesses that are lower risk, leaving the higher risk small business lending opportunities for the small banks to fund.

The Snarky Seven Comments

NAGGL now stands for the National Association of Gigantic Guaranteed Lenders.

Where is the current problem?

Disbelief. While additional oversight is not inappropriate, the means to paying for it disproportionately favor the largest banks. I am also still somewhat in shock that NAGGL felt this was the best deal that could be had…their outright support for this feels like a betrayal.

There’s not enough room here or time now.

Typical of government to try to diminish a program which is working well.

More government oversight has never been good to any industry and usually only ends up costing more than intended and accomplishes nothing.

It looks like the bill as presented favors large regional and national banks. Who wrote this legislation? I smell a rat…

And All the Rest

I would like to know what politicians are proposing this fee and why they feel it is needed. I would be willing to wager that it is just another money grab by some liberal groups looking to fund.their own personal agenda and pork spending. This is just another example of an attempt to over regulate by a government that lacks responsible leadership, is out of touch and out of control. The overall impact will be negative on small business and the lenders who provide capital to the small business community.The program should remove bad lenders & keep bad lenders out rather than penalizing the good & honest lenders.

NAGGL seemed to act on this without input from membership.

The reason CDCs don’t pay a fee is that the income for a 504 loan is 1.5 bp and 0.5 servicing. 7a lenders make 10 tens times this and can therefore afford the fee

Need to make OCRM Director Independent of Capital Access. Need to differentiate between Supervised SBA Lenders (Non Banks) and Bank Lenders

Could you also conduct a survey regarding the portfolio concentration policy, as it impacts the community banks

All lenders participating in the SBA program should contribute to funding the program regardless of institutional size or if you participate in the secondary market.

The rules need to be applied consistently to all sizes / types of lenders using the 7a program. My only suggestion would be to consider having a different fee structure for those loans approved under PLP status versus those processed directly by SBA.

Any bank participating in the programs should help in paying the fees.

Very disappointed in NAAGL’s representation of the industry on this matter – obviously controlled by a particular segment of the 7(a) lenders.

Credit elsewhere rules are too open to interpretation and subject to SBA attempts to decline payments

The deal has to work for all parties: banks, customer and SBA. Politicians don’t have a clue.

I think the bill should not allow 100% financing at all. The borrower needs to have something at risk. Even 504 loans require a nominal 10% down.

This will have major impacts on the recovery of America’s small business economy. On the precipice of an economic recession cycle, this will certainly put us over the edge.

We need more succinct verbiage regarding the credit elsewhere statement. It is too nebulous right now. Those banks not actively selling guaranteed portions should not bear the expense of those that sell nearly everything.

A better solution might be to lower the maximum loan amount OR lower the split premium amount below 108 on loans over $1,000,000

I agree with the industry concentration limits and restrictions on 100% financing however believe equity in hard business assets taken as collateral should continue to be allowed as equity contribution

Surprised NAGGL is supporting with so many members part of small Community Banks.

Read more comments at the Coleman Small Business Lending LinkedIn Group.