July 23, 2015
The Industry Reacts to our coverage of the SBA 7(a) Lending Holiday
By Bob Coleman
Editor, Coleman Report
Many of you on the 504 side sent me emails telling me the chickens are coming home to roost for 7(a) lenders.
Chris Hurn of Fountain Head Capital notes, What, no mention of record-setting SBA 7(a) secondary market premiums, especially for floating-rate real estate deals and some lenders doing 100% financing as contributing factors to this authority level being hit early? Might want to mention these factors too.
Watch. Suddenly in the month of August, some lenders will now do 504 loans in an attempt to keep lending. This will further muddy the slow gears of SLPC (and further convince these lenders never to do 504’s again). Then, some of these same authorizations will later be canceled as they convince their borrowers to go back to 7(a), once things get “fixed” over there.
Borrowers lose; lenders win. Sad.
One CDC Executive Director writes, As a CDC, we find a number of businesses who were put in a 7(a) loan instead of a 504 for fixed asset loans.
Often the lender has told them there are too many fees and the 504 takes too long.
In reality, the 504 would have been a much better structure for the business, and for growing companies with fixed asset needs would preserve critical eligibility. The 7(a) was simply easier for the lender and when selling on the secondary market much more profitable for the bank and for the loan offer.
Had lenders more often considered what was best for BOTH the bank AND the borrower, running out of their 7(a) appropriation would not be quite so imminent.
Coleman Report commenter extraordinaire Tim Yentsch of Rhode Island-based Independence Bank is more circumspect offering his observation about 504 lending levels:
A big reason for the under-utilization of the 504 loans is exposure. Pre-debenture funding , the lender is on the hook for 90% of the loan versus its lending limit and reserve requirement. Problems DO occur in construction and issuance of the C of O. I saw one take years. Use of a third party interim lender adds costs and process that makes the small bank’s proposal non-competitive. With no secondary market, 50% of the loan will always be on the books. Small lenders get locked out of 504.
It’s also a slow process with two closings and multiple institutions underwriting the same data.
“Why not offer a 504 GP alternative funded like 7-A? This actually existed back in the 1960’s and 70’s but lost out to 503 loans (remember those prepayment penalties??). Maybe it should come back on a limited basis for smaller institutions. The 504’s broadened eligibility and funds availability standards (which still exist in another form ) make it attractive for a new “502 GP.”
Back to the issue at hand.
Coleman feedback regular, Howard Levine of Americlean, writes, Let me make sure I understand. The solution to the impending SBA loan crisis (“Holiday” doesn’t quite get it) offered by these two wise and experienced gentlemen is that Congress (the best politicians money can buy) should raise the SBA’s loan limit and do so quickly. This raises the notion of belaboring the obvious to a new zenith.
Finally, a shout out to St. Petersburg Area Chamber of Commerce, Advocacy Manager Travis Norton, for contacting Congressman David Jolly (R-FL), as well as reaching out to the US Chamber of Commerce about “this very important issue.”