The latest version of the Senate stimulus package is missing a major element promised by Barack Obama last fall before he was elected president. Furthermore, what the plan provides for Small Business Administration (SBA) lending programs is another case of
The most important component of President Obama’s small business platform last fall was a temporary SBA direct lending program that would bypass banks that are currently not making SBA loans, and allow the SBA to lend directly to small businesses.
In my view, this was the most eloquent way for the SBA to act as a conduit for federal funds necessary to give small businesses the necessary cash to grow, create jobs and do what small businesses have historically done during recessions, which is to be the job creation engine that has led the country out of many prior bad economic times. President Obama’s proposal was supported by many congressional leaders on both sides of the isle. But President Obama failed to keep his promise and the SBA direct lending proposals never made it into the President’s original proposed legislation.
What the current Senate and House of Representatives have provided in their respective bills is a temporary decrease on fees charged by the SBA to borrowers and some increased loan guarantees to banks making SBA loans. Having spent the past 15 years in banking, I can say unequivocally that SBA fees are too high, but I can also say with close to absolute certainty that reducing those fees will not increase the number of SBA loans made by banks. According to Senator Mary Landrieu, Democratic chairperson of the Senate Small Business and Entrepreneurship Committee in a press release February 3, 2009, merely reducing borrower origination fees will create 600,000 new jobs with the origination of $20 billion in new SBA loans.
I respect Senator Landrieu and believe she will be a strong advocate of small business interests; however, she is simply wrong.
I would encourage her to have a discussion with a dozen former SBA loan officers from across the country. These are the lenders who have worked with customers directly and pushed their loans across the finish line in their former banks. It certainly won’t be hard to find the best of the breed of former SBA loan officers out of work because thousands of them have been let go during the last year as their banks have completely stopped making SBA loans or scaled back their loan production to a trickle.
Another SBA change that was made before the current administration took over was to make it easier for banks to sell off SBA loans in the secondary market, thus freeing up liquidity so the lenders could make more loans. For many years, certain banks have gained the reputation as SBA loan mills. These banks would originate an SBA loan, charge the borrower the highest allowable origination fees and interest rate, and then when the loan was a few months seasoned, the bank would sell off the loan at a premium. The bank retained the non-guaranteed portion of the loan, and would be paid a premium by a third party for the guaranteed portion.
This scheme allowed banks to maximize their profit yields on the loans at the expense of huge fees paid by borrowers. Nearly importantly, loan servicing became a huge nightmare for the borrower. When the banking crisis hit hard in the fall of 2008, the secondary market dried up, causing SBA loan mills to stop making loans. In late October, the SBA changed a few rules that were supposed to stimulate the secondary market for SBA loans. At the time it was heralded as a panacea that would cause banks to make more SBA loans. To date, there is no evidence these rule changes have made any difference. While reducing loan fees to SBA borrowers will be welcome, it will not stimulate significant additional loans, nor will it create anything near the 60,000 jobs Senator Landrieu promises.
Simply put, direct lending by the SBA will be the only method that will allow Congress and the SBA to control how much money is loaned to small businesses.
If you are so inclined, e-mail or write your Congressional leaders and urge them to put into the final stimulus package a provision for direct SBA lending. Without it, small businesses don’t have a fighting chance to obtain loans in today’s frozen credit market.