More Doors, More Dollars Expanding Capital Access for America’s Small Businesses U.S. Small Business Administration Office of Capital Access · Office of Credit Risk Management National Association of Government Guaranteed Lenders (NAGGL) Meeting May 2, 2012 Confidential
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More Doors, More DollarsExpanding Capital Access for America’s Small Businesses
U.S. Small Business AdministrationOffice of Capital Access · Office of Credit Risk Management
National Association of Government Guaranteed Lenders (NAGGL) MeetingMay 2, 2012
Confidential
OCA Wants to Close America’s $100 Billion Small Business Credit GapA National ProblemThe U.S. is experiencing a $100 billion small business credit gap.Since the recession, small business lending and small dollar lending have shrunk dramatically –14.7% and 17.9%, respectively.A Social ProblemThe scarcity of small dollar loans disproportionately impacts minority communities.Small dollar loans serve Main Street businesses critical to underserved communities and SBA’s mission.An Agency ProblemSBA lending is not expanding capital access to underserved communities. While 7(a) dollars may be up, the number of loans is down 16%. Microloan and SBIC programs show the same trend. SBA is lending more dollars, but helping fewer businesses.
Small business lending $710b $606b -$104b
-14.7%
Small dollar loans (<$250k) $295b $242b -$53b
-17.9%
June 2011 DecreaseJune 2008
SBA loans to African-Americans are down 86% from their FY 2007 peak.
Source: FDIC.
Source: Minority Business Development Agency, SBA Loan/Lender Monitoring System.
Source: SBA Loan/Lender Monitoring System.
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High transaction costs make small-dollar lending unprofitable.
Revenue $43.6
Total Non-IE $23.5
Gross Margin $20.1
% Gross Margin 46.1%
Provision Expenses (Reserves & Charge-offs) $14.9
Pre-Tax Income $5.2
SBA Lender Fee $4.8
% of Total Non-IE 20%
SBA loans offer banks very low profit margins.
Lenders Responded: Simplify Origination Procedures and Reduce SBA Loans’ Overhead
} Given standard 7(a) loans’ transaction costs, high dollar loans are much more profitable to SBA lenders.
} Originating a $50k Standard 7(a) loan costs many lenders as much as a $1m conventional loan.
SBA Loan Size $50 $1,000 $3,000
Guarantee Amt. @ 75% $38 $750 $2,250
Secondary Sales Premium 9% 9% 9%
Secondary Sale Amount $41 $818 $2,453
% Commission 25% 25% 25%
Total Commission $10 $204 $613
Net Secondary Sale $31 $613 $1,839
} In this example, the $4.8m SBA lender fee represents 20% of the lender’s total non-interest expense.
} The cost of maintaining specialized SBA staff further erodes profit margins.
} This bank’s pre-tax income is $5.2m, which is almost equal to its SBA fees.
Profit Worksheet for a Typical National SBA Lender
Profit Pro-Forma on SBA Loan Sizes ($000s)
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Expanding Express Platform Will Reduce Origination Costs and Repairs
7(a) Industry
Total requirements 17 5
Automated requirements 0 5
Time burden 5 days SecondsSource: SBA Lender Roundtables, SBA Standard Operating Procedures.
7(a) vs. Industry Standard Underwriting
} Standard 7(a) loans require manual calculation of 17 detailed credit criteria.
} SBA fees account for 20% of non-interest lender expenses.
} The Standard 7(a) repair rate is almost 5 times higher than Express’.
} Lenders would incur fewer repairs if Standard 7(a) matched Express’simplicity.
Proposed Origination Guidelines for Small Dollar 7(a) Loans (<$350K)Borrower Portion &Lender Portion
• Form 1919• Form 1920 (A,B,C)
Type Term only. (No revolving loans)
Origination • SBPS scored by SBA prior to approval• Processed via E-Tran.
Credit Criteria
• Verified income (4506)• Use credit scoring• Must consider management
experience• Debt service coverage ratio exceeds
1:1 on projected basis• With the exception of loans under
$50,000, the Small Business Applicant’s global cash flow coverage ratio exceeds 1:1 on a projected basis. Lender must document in the loan file the definition or formula used to calculate global cash flow.
Maturity &Guarantee
• WC: 10 yrs. F&F, M&E: Useful life. Real estate: 25 yrs.
• <$150K: 85%• >$150K: 75%
Interest Rate
• Prime/LIBOR base rate.• SBA optional peg rate + 2.25% for
• < $25K: None• > $25K: Lender policy except must take
business assets if available• Equity injections/Life Insurance: lender
policy• Environmental: same as SBA Express
Closing and Disbursing
In closing and disbursing SLA loans, lenders will follow the same closing and disbursement procedures and documentation as it uses for its similarly-sized non-SBA guaranteed commercial
loans.
14 Deliberative & Confidential
} SBA wants to stimulate small business and small dollar lending.} Current SBA policies subject all lenders to unnecessarily
complex underwriting processes.} These processes are so expensive that they make small dollar
lending untenable.} SBA will allow all lenders to originate small dollar loans on
their own authority.} SBA will replace its underwriting process with credit scoring.} These streamlined procedures will:} Reduce NAGGL members’ transaction costs for SBA lending.} Make SBA lending more profitable for NAGGL members.} Increase disadvantaged businesses’ access to capital.
ConclusionMore Doors, More Dollars: Expanding Capital Access for America’s Small Businesses