Is the SBA Headed in the Right Direction? I Think So
The SBA has been debating it for a long time, but pulled the trigger on Oct. 1. In an effort to drive smaller loan amounts (a move I believe will ultimately help Main Street borrowers), they are eliminating some of the fees associated with their most popular loan program, the 7(a) program.
On loan amounts of $150,000 or less, the two percent fee required upfront along with subsequent monthly fees have been eliminated to make it more attractive for smaller businesses to access the capital they need through the SBA guarantee program. The SBA announced the change the end of September as part of an annual review of fees they charge their lenders and borrowers to determine if adjustments need to be made to better serve the market.
“The purpose of this Notice is to announce a reduction in the F Y2014 yearly fee (also known as the ‘on-going guaranty fee’ or the ‘annual service fee’) for all 7(a) loans and a reduction in the upfront guaranty fee for all 7(a) loans in the amount of $150,000 or less. Additionally, this Notice announces that there are no changes to fees for 504 loans approved during FY214.”
This is a major step in the right direction. I’ve been of the opinion for a long time that making it less expensive for community banks and even credit unions to engage is the smaller loan amounts that many Main Street borrowers are looking for would make the lower-interest rate loans available through the 7(a) program more accessible to Main Street. In 2012 the average 7(a) loan was $337,000—so far this year it’s $370,000.
As would be expected, these fees charged to lenders were passed down to borrowers, and according to the SBA, “As the fees charged to lenders will be zero, lenders may not charge a guaranty fee to the borrower in connection with these loans.”
This carries potential benefit to both borrowers and lenders. Senior Regulatory Affairs Council for the National Association of Credit Unions, Tessema Teferri said, “NAFCU welcomes the 2014 fee reduction, which will make 7(a) program participation less expensive for credit unions looking for more ways to facilitate loans for their small-business members.”
Citing Brian Picarazzi, senior area manager for the SBA’s regional office in Grand Rapids, MI, Mark Sanchez writes, “They’re saying, ‘That’s where we still have an issue for credit … the $50,000 to $70,000 loans. This is meant to make those loans more palatable for the business owners, and they can put that money (from the lending fees) back into their business.”
Of course I’d like to see them expand their micro-loan program to increase the eligibility, but this is a great step in the right direction. I’m very pleased to see the new Acting Administrator, Jeanne Hulit take this action. Earlier this year, then an associate SBA administrator, Hulit said, “As the banks have re-entered the market in lending, they’re really looking at the business metrics and the business’s ability to repay the debt,” she said. “And if you’re going to do that kind of analysis, it’s just as costly to analyze a $1 million loan as a $100,000 loan. So clearly the banks were using their resources to lend to more established businesses, with a more predictive ability to pay.”
By encouraging lenders in their 7(a) program to make smaller loan amounts more available to Main Street, I think we’re taking some important steps to actually do something about building local economies, strengthening local communities, and spurring job growth—70 percent of new jobs are created on Main Street after all—and this makes more capital available to Main Street.