Despite aggressive 90% guarantee limit, fee waiver, loans fall

[caption id="attachment_14202" align="alignright" width="215" caption="Michael Rice and Mark Quinn"][/caption]

NORTH BAY - Even with aggressive new rules for Small Business Administration loans intended to increase lending, the program hasn't delivered the punch it intended.

In March of this year, the SBA announced an extension of its program as part of the federal recovery act. The recovery act allotted $730 million to the SBA to go toward five programs.

There was $375 million set aside for temporary fee eliminations on SBA loans as well as an increase of guarantee limits from 75 percent to 90 percent. Also, there was an expansion of the microloan program and a program called the American Recovery Capital that enables banks to make 100 percent guaranteed loans for struggling business owners for up to $35,000.

This was all created to help stimulate lending and help small businesses survive the economic downturn.

Instead, SBA loans are down. In the greater San Francisco District, where there were 3,000 SBA loans made in 2007 and 2,000 in 2008, there are only 1,300 this fiscal year, which ends in September.

"We are still significantly below where we have been in prior years," said Mark Quinn, district director of the SBA in San Francisco.

He said the low point was in February, right before the recovery act was passed.

Since then, he said there has been a leveling off.

"We are flat," he said, and continued hopefully, "And in today's market, flat is the new up."

Bankers and officials attribute the lack of lending to both the depressed confidence of businesses that might otherwise borrow and regulatory pressure on banks to be very cautious with their lending.

Of the banks in the North Bay that make SBA loans, Redwood Credit Union, Sonoma Bank, First Community, Circle and Tamalpais Bank have led the pack. However, this fiscal year to date, there has been a significant drop off in total loans made.

This fiscal year, $43.3 million in SBA loans have been made in the North Bay. Sonoma County is responsible for $25.9 million, Napa for $6.6 million and Marin for $10.8 million. That is just a little more than half the $78.4 million lent last year. Redwood Credit Union and Circle Bank are the exceptions, but other than those two institutions, lending is down across the board.

Redwood Credit Union just started making SBA loans last year and is leading the North Bay in both number of loans and amount lent.

It has made 15 SBA loans this year for a total of $6.9 million. It attributes the new program's elimination of the borrower's fees to the success of the number of loans made.

"The elimination of fees seems to be more of an impetus than the increase in guarantee. The cost savings that companies get from the fee elimination can be significant, and has definitely been a big factor in the increase," said Jason Ehn, senior SBA loan officer of Redwood Credit Union.

Tamalpais Bank has stopped making SBA 7a loans but does intend continue to make SBA 504 loans. It is, however, according to its new business model, only making those loans in Marin County and the very close surrounding area.

Circle Bank has made seven loans, Sonoma Bank has made two and First Community has made two.

Last year, Tamalpais made eight, Sonoma Bank made five, First Community made eight and Redwood Credit Union and Circle, the only ones to increase lending this year, made four and six, respectively.

As for the American Recovery Capital program, many national banks and some community banks are not offering it at all due to the cost of training for what they see as a one-time short-term program.

According to Mr. Quinn, what the ARC program can do for a business is keep a loan out of default, which benefits the banks as well.

If a business has a $100,000 loan and is seeing a drop in revenue, the bank can make the $35,000 loan to the business. This is backed 100 percent, and the business can put it to the loan, bringing the principal loan to $65,000. The borrower doesn't have to pay for a year and a half.

It helps keep the loan current so the bank can keep a clean balance sheet, but it is still expensive, Mr. Quinn said.

"One hundred percent is great, but they have to service it right," he said.

This is one area that makes SBA loans difficult and expensive. He likened it to an insurance policy. The loan is only guaranteed if it has been serviced correctly, much like insurance is paid only if the guidelines are followed.

"SBA tends to have a higher risk factor and a greater degree of administration," said Circle Bank Senior Vice President and Business Lending Manager Michael Rice.

But he thinks that things are changing in a positive way.

"SBA lending is down the first two quarters 30 percent," he said. "But it is up since they passed the legislation."