SBA Hot Topic Tuesday — 47% Say SBA 504 Loan Program Unmanageable

May 8, 2018

By Bob Coleman
Editor, SBA Hot Topic Tuesday

SBA Hot Topic Tuesday — 47% Say SBA 504 Loan Program Unmanageable

From Our National 504 Day Survey Results

47% Say SBA Regulations are making it unmanageable, up from 41% in January.

52% Say Credit Elsewhere remains a severe detriment, down from 60% in January.

Thank you to the 100+ survey takers.

Five Survey Takeaways to Increase SBA 504 Loan Volume

1) Give CDCs More Authority

Specifically, PLP-type loan approval authority and unilateral-matrix loan authorization changes.

2) Go Back to the Historic SBA 504 Jobs Created Standard

Quite a few questioned how SBA 504 morphed from an economic development/job creation program to a personal resource test/credit elsewhere standard. The credit box has shrunk as the loan “can’t be too good, and can’t be too bad either.”

3) Better Communication with Sacramento

A good number criticized the inability to pick up the phone and talk with the underwriter, or to communicate by email.

4) Establish Specific Credit Elsewhere and/or Personal Resource Test Standards

First choice is to abolish, but it not provide specific guidance about credit elsewhere to the industry.

5) Finally, Clip SBA 7(a)’s Wings

Many voiced displeasure that “fast and loose” lenders are approving SBA 7(a) loans PLP that would never be approved as SBA 504 loans by Sacramento.

Editor Note: While I understand many of you are frustrated, I want to be clear I disagree with your stance on SBA 7(a). SBA lending is not a zero sum game. Restricting SBA 7(a) is not the answer. The answer lies in making it easier for Main Street to obtain the fixed rate 504 loan.

Some of Your Selected Answers

CDC’s need to have delegated authority to approve loans. The SLPC has proved unable to manage the deal flow and has become severely overbearing in regulation interpretation. SBA is killing the program. No one could successfully start a new CDC in today’s environment and SBA seems to prefer less CDCs because it makes their job easier. The program is in the midst of a slow SBA created death spiral. It’s like a python has wrapped around us and is slowly squeezing the life out of the program.

Credit elsewhere and personal resource tests should be eliminated as the small business lending markets have expanded over the years with significant choice for borrowers. Capital preservation serves all business well by assisting with the funding of additional hires and business growth/expansion. However, if SBA/regs continue to demand the program is restricted from more well-off applicants, then I suggest that mission and/or public policy goals be allowed to be used to mitigate the restriction.

Processing center should be reasonable and talk with CDC’s. There is too much animosity and not enough working together.

Stop micromanaging CDCs with all the compliance requirements. Go after the renegade CDCs instead of penalizing the entire industry! Let us get back to lending as opposed to scrutinizing our Board minutes and compensation!

Unilateral 327 decision matrix to cut down on SBA review of non-material changes to the authorization.
Extension of interim statement date from 120 to 180 days. Remove increased equity requirement on additional special-use property projects. The definition of an extension of an existing business should not require identical ownership. It should rely on continuity of management and retention of majority owners.

Give us concrete Credit Elsewhere Standards or revert to Personal Resource Test.

Firm guidance on when a feasibility study is necessary. Certain industries? Total project cost? Total loan? All of the above?

It’s very simple for small banks. Bring back the “Pooling Program” that expired several years ago to sell 504 loans. Banks are limited the amount of Commercial Real Estate they can have on their books. The Pooling Program was a great program to sell 504 loans, why it was not renewed is a big mystery. Bring back the pooling program 504 numbers will increase.

I think a big detriment to SBA 504 production to date, has been many SBA 7a PLP operating “fast and loose”. Many of “fast and loose” lenders are closing loans that wouldn’t pass SBA underwriting standards if submitted directly to the SBA.

1. SLPC – are quick to decline or screen out a request. Why not call the CDC to discuss a credit. 7a folks call or email if they have questions or need clarification. 2. SLPC – the CDC are your partners and want to work with you 3. TPL find the 7a process quicker and less burdensome 4. There is a SLPC number on the screenouts/declines. But when called, you only leave a message and the call is usually not returned. Why provide the number?

Modify credit elsewhere for 504, this is the economic development program, not 7A,

Do away with extra equity for startups and special purpose properties — just make it 90% loan-to-cost across the board.

The 25 year debenture should help make the 504 an attractive option versus the 7(a) program, IF the lenders and loan officers do what is best for the borrower versus what is best for their wallets.

Capping 7a at $2.0 million would be a great start since it’s starting to look like Fannie Mae. A big help would be for Congress to let us refinance 7a loans that should have gone 504 in the first place.

They need a PLP-style approval process.

The documentation requirements for both borrowers and CDCs are astronomical. It’s getting to be a very tough sell to our customers for all the hoops they are required to go through. I think SBA needs to actually walk through the process with an applicant to see first hand how difficult it is. In addition SBA’s requirements on CDCs are hindering our ability to do our jobs – naming providing financing to small businesses.

Every credit application is a battle at SBA. Credit can’t be too good (credit elsewhere), but can’t be too bad either. Box for regular 504 loan users as defined by SBA is tiny, and the refi box is microscopic.

SBA seems to have lost touch of its original mission. Rather than trying to find ways to help small businesses get access to capital, they’re acting just like the major banks with their rigid, automated system that ignores factors that impact the true risk level of that particular business and the risk of that loan failing to SBA. This is a strange change of course, considering SBA exists because of the difficulty small businesses have accessing capital from big banks using these same methods. As such SBA seemly serves no purpose any longer. They either need to change their acceptable risk profile using the model, or return to the same type of thinking like community banks and actually be willing to manually work through a deal instead of relying on a standardized, semi-automated process.

Common sense underwriting. Sacramento needs a lot of help.

Read our earlier reporting here: