March 14, 2017
By Bob Coleman
Editor, SBA Hot Topic Tuesday
SBA Hot Topic Tuesday — House Small Biz Committee Probes Lender Compliance with SBA Credit Elsewhere Test
The first question by Subcommittee Chairman Trent Kelly of Mississippi, “From the lender’s perspective can you describe the Credit Elsewhere Test and the steps you take to verify whether a small business can obtain capital from another source?”
Grapevine, Texas’ Bank of the West Vice Chairman, Cynthia Blankenship answered in last week’s hearing, “We look at the Credit Elsewhere Test and go through the parameters that SBA has lined out and that’s how we qualify that small business as an alternative source of funding through the SBA. Many times those small businesses aren’t a good candidate for conventional financing because they don’t have the collateral value or they’re depending on future cash flows, projected cash flows. We do a lot of startups as well as acquisitions for small businesses as well as some franchise. A lot of times there’s not a historical record there.
“I was able to give my hairstylist, Kim, a loan to acquire a salon when the owner died. She was a young lady, she had good credit, but didn’t have a lot of collateral. We were able to have her acquire that salon. She hired eight additional stylists, paid her SBA loan off early and that’s just one story where the Credit Elsewhere Test is a good tool and we do use it, so we can slot that customer and the right type of either conventional or SBA loans.
Chairman Kelly followed up, “You’re not competing with other sources. If they can get credit in another place then they have to do that. They can’t use this program. They have to only use this if it’s the only resource that they can use to get there, is that correct?”
Cynthia Blankenship: “That is correct.”
Later in the hearing when the question was posed again she added, ““It works for us right now. If you look back at our historical volumes they didn’t increase or decrease because of this test. Remember, when you’re a small community bank you have a fiduciary responsibility to your customer. We go to church and schools, our kids go to school together. We can’t take advantage of our customer, so it’s our job to put that customer in the right finance tool to get them their credit availability. Our reputation and integrity is riding on this as well.”
Surrey Bank & Trust President and CEO Edward Ashby agreed.
“When you look at our percentage of loans that we have with the SBA guaranty that are business related purposes it’s 19 percent, so when you just look at the broad category of business opportunities in our area that is not as vibrant as others that’s a very believable percentage.”
Randolph Brooks Federal Credit Union’s Chief Lending Officer Sonya McDonald concurred, “Everybody has said it really well. We have fiduciary duty to do the right thing and everybody here agrees with that. We have to be able to note in the loan file or document the reasons that we went with the SBA. If we’re ever audited we can confidently give the information.”
Another hot topic was evaluating the effectiveness of SBA’s lender oversight activities.
Ashby said, “SBA has had explosive growth over the last few years. I think they’re doing a good job. (The PARRiS score) is sent out quarterly to the banks that are participating in the programs. It covers a lot of important things, your performance, the asset management, regulatory compliance, risk management and any special items and risk factors that the SBA sees out there — it’s well done.
Blankenship added. “As a preferred lender we have to have integrity in our portfolio and meet certain standards and not go over loss ratios. Oversight is working for us now with the growth in the program. They may need to enhance the resources at SBA, but for players like us we’re not feeling lack of oversight.
Ranking House member Nydia Velázquez asked NAGGL’s President and CEO if he believed there are instances where some lenders are not adhering to this test.
Tony Wilkinson answered, “Could there be some lenders who are originating loans that could be done conventionally? I couldn’t say unequivocally the answer is no. There’s most likely somebody who has made a loan today where a borrower can get a conventional product, but that’s where the role of lender oversight at SBA comes into play. As Ms. Blankenship described every loan file has to explain why they cannot make that loan on a conventional basis. They have to cover the things that cause that reason be it lack of collateral or lack of a cash flow that meets their conventional standards. Perhaps it is because the borrower needs the 25-year maturity rather than the much shorter maturity that banks like to deal on conventional financing. That documentation needs to be in the file. If it’s not there then that lender goes to ask for the guaranty to be honored. Chances are the answer’s going to be no to the guaranty request.”