“Beginning July 1, lenders will no longer have to perform an analysis of cash flow or debt-service coverage on loans of $350,000 or less, provided business owners meet the agency’s credit standards. Eliminating the two requirements is expected to cut the time needed to originate a small-dollar loan by as much as 50%, SBA officials say…
…The changes “will simplify and streamline the lending process, which will incentivize banks to do more small-dollar loans in order to get more loans into the hands of traditionally underserved entrepreneurs,” SBA administrator Maria Contreras-Sweet said.”, Ruth Simon, Wall Street Journal, June 2014
“It seems today, that only wise Federal government bureaucrats are capable of deciding what is a prudently underwritten loan and what is not!!! Read the short article below. For those who know and understand today’s largely nationalized mortgage market and rules, the hypocrisy in comparison is stunning. The new Consumer Financial Protection Bureau clearly would have a field day with the disparate impact of SBA’s existing program (blacks accounting for only 2.3% of SBA loans today, down from 11% in 2008). And yet they likely would also have a huge problem with SBA’s solution: a “no income”, “no ability-to-repay” SBA loan program…but only to $350,000!!! Isn’t the federal government/SBA doing exactly what critics complained that mortgage lenders (pre-crisis) shouldn’t have done? Lowering lending standards to allow more minorities an opportunity to take the risk of succeeding or failing (in a business or in home ownership). In several years, when more minorities default on SBA loans (because of the lower standards), will the SBA be accused of deceiving them into taking out these loans?”, Mike Perry, former Chairman and CEO, IndyMac Bank
Federal Government to Streamline Key SBA Loan Requirements
Move Intended to Help More Blacks, Other Minorities Borrow Funds for Business Ventures
By Ruth Simon
The federal government is streamlining some requirements banks use to grant small loans backed by the Small Business Administration, in a move intended to help more blacks and other minorities borrow funds for business ventures.
Loans backed by the SBA are a crucial source of financing for many entrepreneurs, who can generally borrow as much as $5 million to start, buy or expand a business through the agency’s two biggest programs. Banks and other financial institutions make the loans, with the government promising to cover as much as 85% of any loan losses.
But black business owners have largely missed out on the rebound in federal small business lending since the end of the financial crisis because of financial distress, tighter lending standards and changes in lending practices. In January, The Wall Street Journal reported that black business owners received just 2.3% of the roughly 54,000 loans made by the SBA in fiscal 2013, down from 11% in 2008.
Changes to be announced Tuesday are intended to reverse a falloff in originations of small SBA loans.
Beginning July 1, lenders will no longer have to perform an analysis of cash flow or debt-service coverage on loans of $350,000 or less, provided business owners meet the agency’s credit standards. Eliminating the two requirements is expected to cut the time needed to originate a small-dollar loan by as much as 50%, SBA officials say.
The changes “will simplify and streamline the lending process, which will incentivize banks to do more small-dollar loans in order to get more loans into the hands of traditionally underserved entrepreneurs,” SBA administrator Maria Contreras-Sweet said.
Historically, 90% of SBA loans to black business owners are for $350,000 or less, the agency said. In the current fiscal year, the average SBA loan size was $358,506, nearly double the average of $192,919 in 2005.
The change in underwriting requirements is the latest effort to boost the use of an SBA program for loans of $350,000 or less known as Small Loan Advantage, introduced in 2011. Two years ago, the SBA introduced a credit scoring model for the program that looks at the credit record of both the business owner and the business.
Traditional credit scoring models that focus only on a business owner’s credit record can penalize entrepreneurs who have a solid business, but fell behind on personal bills during the recession. SBA officials say that the new approach to credit scoring has helped boost the portion of SBA loans to African-American borrowers to 2.8% in the current 2014 fiscal year, based on the number of loans granted.
In another effort to simplify SBA lending and increase the number of lenders participating in the program, the agency will early next year introduce a new electronic platform for originating and closing government-backed loans that will include a Web-based tool laying out SBA rules, a process for submitting electronic signatures and online document storage.
Under the current system, SBA lenders must turn to a 321-page manual for program guidelines. Some lenders use outside software to streamline the SBA process, while others still mail in loan paperwork.