The news out of the Small Business Administration's corner of the market only gets worse -- and worse. As CNNMoney.com reported on Monday (hat tip: the Coleman Report), the SBA's 7(a) loan program has all but collapsed. Lending in the last quarter of calendar year 2008 plummeted 57 percent from a year earlier. Total dollars loaned fell by 40 percent, to almost $2 billion. Meanwhile, Temecula Valley Bank, a California institution that had lately developed one of the busiest SBA programs in the country -- as of last fall, SBA loans accounted for 28 percent of its portfolio -- announced a dramatic retrenchment Monday. Then on Tuesday, bank officials said it would leave the business altogether, at least for the time being.
What's happening here? The imperiled economy -- with its tighter credit and softer demand for capital -- can't account for this kind of cratering. In fact, the Federal Reserve's Survey of Business Lending, a quarterly snapshot of commercial loans, reports that production for loans under $1 million (the ones thought to go mostly to small borrowers) actually increased slightly in the same period. The SBA, for its part, blames the frozen secondary 7(a) market. (Many banks, especially community banks, pool their 7(a) loans and sell them to investors, reinvesting the proceeds in new loans.) SBA spokesman Mike Stamler says that recent initiatives to shore up the secondary market by both the SBA and the Treasury Department "will help free up the capital both brokers and investors need to purchase new SBA loans." As these changes work their way into the system, "we expect secondary market activity to begin to return to normal levels."
That's true as far as it goes. Independent SBA lending industry analyst Bob Coleman believes the Treasury's effort to support asset-backed securities, in particular, will help rejuvenate the secondary market. But only about 35 to 45 percent of 7(a) loans are resold -- not 60 percent. And while officially, at least, Temecula Valley officials cited the sluggish resale market as the reason for their hasty retreat, the bank is clearly trouble for reasons that have nothing to do with the secondary market. The bank's losses started in the spring. In mid-December, it announced that it was considering applying for a federal bailout, then a few days later sacked its top executives.
A closer look at the numbers reveals that the biggest drop in 7(a) lending occurred among -- wait for it -- SBAExpress loans, for which banks use their own forms and credit scoring models to decide independently -- and immediately -- whether to approve the loan. (In exchange for delegating that authority, the SBA offers only a 50 percent guaranty.) Express loans are down a whopping 64 percent. This should come as no surprise to faithful readers -- it's been apparent ever since the downturn in SBA lending began last spring. Express loans were an easy way for the SBA to bulk up loan numbers -- or reach more borrowers, to construe it more charitably -- at little cost to the agency. (The bank, after all, is doing all the work.) In 2006, these amounted to two-thirds of all 7(a) loans. But they are, evidently, the least resilient to a softening economy. As banks tighten credit scores, Express loans are the first to go. By comparison, regular 7(a) loans --with their reams of paperwork and SBA approvals -- fell just 32 percent.
Finally, "a real problem is that banks are firing their sales people left and right -- I estimate the SBA lending industry has lost 1,500 private sector jobs in the last three months," says Coleman. "Coupled with shrinking credit boxes, SBA lending has simply plummeted."
Ironically, the loan program that has most suffered is the one that's perhaps most needed. The Community Express loan combines the higher guarantees of the traditional 7(a) loan with the reduced paperwork of the SBAExpress, and it's targeted to people who live in disadvantaged areas. But because it's pilot program, it's restricted to ten percent of the total number of 7(a) loans. As a result, Community Express lending has fallen nearly 80 percent.
As the Obama Administration and Congress debate new ways to invigorate SBA lending, it should look hard at expanding Community Express.