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The SBA's Bad News Cycle

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Three bits of related news from the SBA, none of it, in my mind, good:

1) The flagship 7(a) loan program continues its freefall. I reported back in May that for the first half of the fiscal year, general business loan guarantees were down 18 percent, and dollar volume was down 9.3 percent -- principally on a decline in SBAExpress loans. (SBAExpress offers banks a smaller guaranty, in exchange for using their own application forms and credit scoring models to approve small-dollar loans immediately.) Now, eight months into the year, total loans are down 22 percent to 51, 489 loans, while the dollar volume has recovered only a little bit of lost ground -- it's down 8.8 percent, to $8.5 billion.

At the time, the SBA told me that declines at five major SBA Express lenders accounted for most of the shortfall, but wouldn't name the banks. Now they have. According to the Myrtle Beach Sun News, Bank of America, Capital One, RBS Citizens, Washington Mutual Bank, and Wells Fargo Bank "amounted to 75 percent of the nation's decline in SBA lending." The paper quoted SBA spokesman Mike Stamler, who said, "This isn't to suggest in any way that these banks have done something wrong. It's simply an illustration of how changes in strategy by a handful of national lenders can affect SBA's loan program."

Maybe. But it also shows what happens when the SBA concentrates its effort in one particular program, as the agency did until a couple years ago. A lot of the bankers and industry analysts I've spoken with see SBAExpress as an easy way for the agency to bump up its numbers without really reaching entrepreneurs who can't get credit elsewhere, which is, after all, the SBA's stated mission. The fact that SBAExpress has not proven to be counter-cyclical -- growing as commercial lending falls off -- reinforces that view. The silver lining here is that back in May, most banks doing traditional 7(a) loans appeared to be building that book of business, and that still seems to be the case.

2) The SBA is reconfiguring -- and diluting -- its Community Express loan program. Community Express is a great concept, the purest expression of "credit elsewhere" in the loan guaranty program. It targets women and minorities and businesses in low-income neighborhoods, with smaller loans paired to technical assistance. (Interest is capped at a much lower rate than in the regular Express program.) But my sources have told me that the program's portfolio doesn't perform as well as the SBA or Congress would like, which is why it remains a pilot program and not a full-fledged offering.

Last week, the agency extended Community Express through the end of next year.* It's also expanding the program's reach: now any loan under $35,000 is eligible for Community Express. In principle, that's fine -- I think more borrowers should have access to these loans, and many will no doubt migrate from the Express program and its higher rates. But because Community Express remains a pilot program, it's limited, as I reported in that May story, to just ten percent of the total number of 7(a) loans. And because the number of 7(a) loans is falling, the SBA is forcing Community Express lenders to curtail the program. In practice, the disadvantaged borrowers will have to compete in a much larger pool of borrowers for a smaller number of loans.

I asked the SBA's Stamler about all this. "As we review the program's pilot status and make decisions about its future, we want to ensure that the program minimizes fraud, waste and abuse, and truly delivers good loan products at reasonable prices to underserved borrowers," he wrote in an email. "The Community Express Pilot Program was created to complement SBA's main loan programs. Several other proven SBA products also reach many of the same markets as Community Express. Underserved borrowers will continue to have ample ways in which to access capital through SBA loan programs."

One other note: the SBA is weakening the program's technical assistance program, allowing banks to substitute the agency's online training material for live, one-on-one counseling -- which only further works against those disadvantaged borrowers.

3) Another program designed to reach disadvantaged businesses turns out to be rife with fraud and is ineffective, according to a pair of recent government investigations. The HUBZone program tries to steer three percent of federal contracts to designated disadvantaged areas, but Congress's Government Accountability Office, in a report (pdf) released today, concludes, in typically measured words, that "The policies and procedures upon which SBA relies to certify and monitor firms provide limited assurance that only eligible firms participate in the HUBZone program." Moreover, few agencies meet their three percent goal, the GAO found that in 2006, contracts awarded to HUBZone businesses accounted for just 2.11 percent of the total federal contract dollars. (But at least that was better than 2003, when the total was just 1.23 percent.) In May, the SBA's own Office of Advocacy found (pdf) that while the program has grown substantially in the last few years, "it has not generated enough HUBZone contract dollars to have an impact on a national scale."^

Acting Administrator Jovita Carranza, testifying before Congress today, acknowledged all this up front. "The administration of our HUBZone program leaves considerable room for improvement," she said when she began. One thing that might help is more money: since 2004 (at least), the budget for administrating HUBZones has been essentially frozen, at around $2 million. In her testimony, though, Carrazna made no such request, and the administration's 2009 budget seeks what amounts to a cost-of-living increase. If you can call that living.

*The changes were published in the Federal Register, and unearthed by the Coleman Report.
^Hat tip to the Washingtonpost.com's Sharon McLoone for serving up links to those reports.

Last updated: Jul 17, 2008




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