June 26, 2018
By Bob Coleman
Editor, SBA Hot Topic Tuesday
SBA Hot Topic Tuesday — And the Answer is. . .What is the Credit Elsewhere Rule?
Here are the results of last week’s poll. Thank you for those who participated — both in supplying your comments, and then voting your opinion. The major concern to the SBA lending industry is the definition and adherence to the credit elsewhere test. (I’ll release the 504 poll results next week.)
Savvy and sometimes unscrupulous lenders take advantage of the SOPs “gray areas” with respect to equity injection, seller notes, all available collateral etc. I would like SBA to make the rules more clear and be quicker to react to and punish those that fail to follow them. The recent “credit available elsewhere” issue is a great example: Nobody has a clear definition, so nobody knows how to follow the rules. Is it any wonder why the program faces such scrutiny? (sorry Bob – I’m not sure that was “one thing”!)
Definitive rules as to what is considered credit elsewhere. Even with the most recent guidance, it is still too subjective and open to interpretation. Bring back the personal resource test.
Eliminate the revenue sharing of 50% of loan premiums on secondary market sales above 110. This was a conspiracy by the large banks, who almost never sell their loans, to hurt the small banks and credit unions, who have to sell their loans all the time to raise immediate revenue. Make up for the loss of revenue to SBA by making all guarantee fees 3.5% of the guaranteed amount, and/or raising the annual fee, and/or sharing in the interest collected (probably have to increase the spread limit). This penalty on the small banks just isn’t fair.
Waiving the guarantee fee for loans under $150,000 as it is not necessary as an incentive for borrowers. Just let the lenders keep guarantee fee to give them an incentive to fund small loans.
The average loan size is getting pretty high and it is called the SMALL Business Administration after all. Require that PLP lenders do as many loans below $1 million as they do above $1 million (or half a million, or $2 million, or whatever is appropriate). Too many lenders only use the program for Real Estate. Some lenders are turning down small loan requests because they don’t have enough staff to process all the loans and they are prioritizing the larger, more profitable loan requests. The enforcement penalty should be that failure to do so for two years in a row will suspend the lender’s PLP status. Donations or referrals to SBA micro-loan programs or non-profit business loan programs could be allowed to satisfy this requirement. Some lenders just can’t do small loans so they should be allowed, if this type of rule is put in place, to outsource it.
Reorganize all Federal government loan programs (SBA, USDA, Energy, EXIM, etc.) under one government department, probably the Department of Commerce.
Simplify the guarantee fee structure and stop using tiers. Option 1: charge 2% of the guaranteed amount regardless of loan size. To make up for the loss of revenue to SBA collect a higher annual fee from the lender or share in the interest collected, perhaps 1%. Consequently, raise the allowable interest spread from 2.75% to 4.00% over WSJ Prime Rate. This would also encourage more non-real estate lending. Option 2: charge 3% of the guaranteed amount regardless of loan size. Leave everything else the same.
Eliminate Lender Service Provider Agreements entirely.
Elimination of the all available collateral requirement in the SBA SOP 5010 5(J) associated with the SBA 7(a) loans over $350,000.
Annual PARRiS reviews! We portfolio all our SBA loans, so we do not have premium income to offset the ridiculous and unnecessary annual expenditures associated with the reviews. We consistently outperform the SBA’s quarterly performance estimates yet we have been reviewed in each of the last three years.
Self Contracting rules are a mess There is a built in prejudice in SBA against borrowers doing some of the work or all of it themselves It is not realistic for the borrower to get three bids on everything, when they do an appraisal that already gives values for the project. It is a waste of time for a project to get three bids when the other two will not be used because the borrower is going to do it themselves. Also SBA has now said that the borrower cannot go buy furniture or equipment or purchase any hardware for a project, such as door locks, in a hotel without three bids. This is ridiculous. They are, in effect, saying that all project costs must go through the general contractor who will mark the up by at least 8% resulting in additional cost to the project and borrower.