Credit unions can leverage the technology and experience they acquired during the Paycheck Protection Program era by pivoting to other SBA loan programs.
In a recent survey of more than 250 bankers representing banks and credit unions, 61% of respondents said their financial institution plans to maintain or increase Small Business Administration loan origination this year and beyond.
With the Paycheck Protection Program lending window closed, are there benefits for credit unions that increase participation in ongoing SBA loan programs? Here are five reasons, according to industry experts.
1. SBA loan origination can leverage PPP tech, experience to expand relationships. Many financial institutions implemented or upgraded technology to help them offer PPP loans during the pandemic. These lenders could be looking to leverage those SBA technology investments and the SBA experience they gained to develop or solidify member business relationships. Remember: PPP lenders that were not already authorized to make loans under the 7(a) and other programs before the PPP will need to execute new loan agreements with the SBA.
2. Offering SBA lending is a good way to “get in the door” with good credits. Even if community businesses don’t end up utilizing the federally guaranteed loans, many small businesses have heard of SBA loans and want to explore them. By marketing that your credit union offers SBA loan origination, you provide additional products that expand opportunities to members who own businesses. A requirement of many SBA loans is that the business is otherwise unable to access credit on reasonable terms and conditions. Businesses with healthy credit might initially inquire about an SBA loan but end up taking out a regular member business loan from your credit union.
3. Stimulus enhancements make SBA 7(a) lending more attractive. In addition to boosting 7(a) loan guarantees to 90% (up from 75% for loans of more than $150,000 and from 85% for loans of up to $150,000), Congress approved fee waivers and funding to cover up to six months of principal and interest payments (up to $9,000 a month) on 7(a) and 504 loans approved between Feb. 1 and Sept. 30.
4. Offering SBA loans might mitigate portfolio risk by boosting business success. SBA loans can (and should, according to some experts) be considered by lenders to refinance existing debt in a credit union’s portfolio to mitigate risk. SBA borrowers cannot use 7(a) loan proceeds to refinance existing debt where the lender is likely to sustain a loss and the SBA would take over that loss through refinancing. However, lenders might consider SBA options for their members to help shore up the businesses to survive. During Abrigo’s recent ThinkBIG Conference, credit underwriting and loan portfolio risk management trainer and consultant Michael Wear, CRC, of 39 Acres Corp. said now is the time for lenders to “triage” their portfolios. “We know 2020 stunk,” he said. “As soon as we get those fiscal year-end financials, we might need some mitigation. I’d say do it right now.”
Wear noted that in the 2008 financial crisis, when the SBA similarly increased guarantees of 7(a) loans to 90%, it ran out of funding before the end of the fiscal year. “I would hop on SBA and USDA guarantees right now,” he said. “But to determine if you need to do that, you’ve got to get the quarterly financial information, and you’ve got to triage your portfolio to identify the ‘weakest in the room.’”
Through June, the SBA had approved 7(a) loans totaling $18.2 billion so far this federal fiscal year, out of a $30 billion authorization limit, according to SBA data.
5. SBA loans are a source of much-needed non-interest income. The guaranteed portions of SBA loans can be sold in the secondary market, typically at a price above par, and the credit union can retain the servicing rights and related fees for the unguaranteed portion. This provides non-interest income at a time many credit unions continue to struggle with shrinking net interest margins given low interest rates.
“In the secondary market, guaranteed loans are liquid and command a premium. Investors buy these loans because the interest rates are generally high compared to the risk, as the only risk the investor incurs is prepayment risk,” the FDIC said in a Supervisory Insights article. The lender retains all servicing rights for sold loans and must follow the servicing requirements in SBA's rules but receives a monthly minimum servicing fee of 1% on an annualized basis on the unpaid principal amount of the guaranteed portion of the loan that is sold at a premium, according to the FDIC.
SBA loan origination can be especially lucrative for community financial institutions now.
“Recently, premium levels for SBA and USDA guarantees have reached historically high levels,” SBA loan servicer and consulting firm Holtmeyer & Monson said in a recent newsletter to clients. “For example, a new 25-year SBA loan with a rate of prime + 2.75%, and a calendar quarterly adjustment will generate a premium of more than 20 points. This income, coupled with a guarantee equal to 90% of the loan, adds up to a great revenue opportunity for SBA lenders.” The firm offers an SBA loan yield calculator to estimate how SBA lending might work for an institution.
Moving Forward With SBA 7(a) Lending
Despite the benefits, only a small portion of financial institutions actively participate in SBA 7(a) lending. More than 5,000 financial institutions participated in the PPP, but fewer than 1,700 lenders provided 7(a) loans in fiscal year 2020.
The SBA loans available for lenders to offer to member businesses aren’t just limited to standard loans under the SBA’s flagship 7(a) loan guaranty program, named for Section 7(a) of the Small Business Act of 1953 (P.L. 83-163, as amended). The SBA also has other 7(a) programs offering streamlined or expedited loans for specialized borrowers. These programs include SBAExpress and Export Express loans.
However, as lenders learned during the PPP, all SBA loans come with detailed technical requirements for underwriting, servicing, and liquidation, so lenders need to understand the particulars.
Credit unions looking to leverage the technology they purchased for PPP, or to leverage the experience they gained offering these SBA-administered loans, might consider pivoting to other SBA loan programs now that the PPP is ending. With several enhancements made to the program through relief legislation enacted by Congress, both members and lenders may find SBA loans more attractive. Lenders may be interested in the non-interest income that can be generated from originating SBA loans and from selling the guaranteed portion of SBA loans on the secondary market. In some cases, lenders might also be able to utilize SBA loans to shore up the finances of existing members, which can mitigate portfolio risk while helping the member and cementing that relationship.
Mary Ellen Biery is a senior writer and content specialist at Abrigo, a software company that offers technology that banks and credit unions use to manage risk and drive growth, headquartered in Austin, Texas.