With New Regs, Credit Unions Can Meet the Needs of Larger Loan Demands From Members

In coming from a bank environment two years ago to start up an SBA department at a credit union, I was immediately shocked by the regulator limitations placed upon SBA lending. Both of SBA’s flagship programs for lenders, the 7a and the 504 loan programs, were restricted by NCUA regulations, which either eliminated the use of the program (504), or substantially limited the ability to process moderate dollar loan requests (7a). The same regulations were not in place in the bank environment, and substantially limited the amount of financial assistance the credit union could provide to its membership. Due to Loan to Value requirements, set at 80%, processing loans through the 504 loan program appeared to be impossible. This was primarily due to standard 504 loan guidelines allowing 90% Loan to Value financing, but the NCUA regulation limited the total transaction to 80%. Additionally, with the lender 1st Trust Deed providing only 50% of the total financing package (typically, the Certified Development Company provides 40%, with the member providing the remaining 10%), it is typical for the lender to also provide a short-term “bridge” loan on the remaining 40% being financed by the Certified Development Company. This allows the borrower to close the transaction in a timely manner, avoiding the need to wait approximate 90-120 days for the SBA Guaranteed Debenture to close. The NCUA regulation changes effective October 1, 2003 clarified this issue, and provided for up to a 95% Loan to Value as long as the entire request was, in addition to other factors, subject to advance commitment by an agency of the federal government. The SBA Authorization for Debenture provides the approval for the Certified Development Company to fund a debenture, and payoff the lender’s short-term bridge loan. I believe this clarification provided all credit unions the ability to process SBA 504 loans and allowed them to provide an equal service that their member may have been obtaining through non-credit union funding sources previously. The 7a restrictions were similar, as they were Loan to Value related. The majority of the SBA loans that I assisted with underwriting and processing (over 250) prior to coming to a credit union were approved and funded with Loan to Value ratios greater than 150%. The majority of borrowers requesting SBA funds would not have access to collateral levels that would allow them to comply with the 80% Loan to Value requirements. Based upon this, and the Member Business Loan rules, which state that the SBA Guaranteed portion of a loan are not required to calculate a loan as a Member Business Loan, credit unions are limited to processing loans of no greater than $200,000 (unless sufficient collateral was available, and as stated above, this is rare). The NCUA regulation changes effective October 1, 2003 provided for loans to be collateralized at 95%, instead of the previous 80% threshold. This regulation was again clarified in a NCUA news release dated May 20, 2004. Neither the actual regulation, nor the May news release provided much relief for processing SBA 7a loans, as the majority of the members requesting SBA assistance do not have this level of collateral available to support their loan request. Non-credit union financial institutions could process these requests without limitations. The proposed amendments dated June 24, 2004 (which are currently in the comment period) provide much needed relief from the current NCUA regulations. I have interpreted them to allow full access to the SBA 7a lending program, without collateral restrictions. If approved, this would allow credit unions the opportunity to better serve its business membership, and provide working capital loans that were previously causing members to be sought through non-credit union sources. With the Loan to Value requirements for SBA 7a loans being relaxed to meet standard SBA Guidelines of “all available assets to be offered/obtained”, credit unions now have the opportunity to provide SBA 7a loans greater than the previous $200,000 threshold, with a 75% guaranty on loan requests up to $1,333,333 (actual loan amounts can be processed up to $2,000,000, but the maximum guaranty is $1,000,000, providing as little as a 50% guaranty on amounts greater than $1,333,333). With most credit unions relatively new to SBA and Members Business Loan products, the increased loan threshold should provide all credit unions a greater level of comfort in knowing that they can assist members with larger loan requests, without concern to specific collateral requirements.