NORTH BAY – In February, the Small Business Administration and Congress rolled out a program to make SBA loans more attractive to both lenders and borrowers by increasing the guarantee percentage and waiving fees.

It worked: $730 million was allotted and the guarantee went from 75 percent to 90 percent.

But the money that was set aside ran out more than a month before it was expected.

“It caught us a little by surprise,” said Michael Rice, senior vice president of small business lending at Circle Bank. “It was tracking to run out at the end of December, so a lot of lenders scrambled to get in as many as we could.”

SBA loans are up compared with last year. Nationwide, the number of loans is up 66 percent, and the dollar amount is up 90 percent. There is legislation trying to keep these incentives around for people interested in SBA loans and some on the table for new programs as well.

HR 3854, the Small Business Financing and Investment Act of 2009, passed in the House and is now waiting for approval in the Senate. It would put additional funds toward last year’s program, allowing it to continue through Feb. 17, 2010, making the entire program run for a year.

“Lenders and borrowers would love for the administration and Congress to find more funds because it did spur activity,” said Sherrill Stockton, senior vice president and SBA manager at Exchange Bank.

“From a credit risk perspective the increase of the guarantee can be the difference between an approval on a loan and a denial,” she added.

Mark Quinn, the district director of the SBA, said, “Our understanding is there is a general consensus it will pass. But there is a traffic jam of other issues Congress is dealing with.”

“Now,” he said, “borrowers are having to decide whether to wait or to pursue financing with the regular guarantee and fees.”

Ms. Stockton said for a recent client obtaining a $200,000 loan, the fee was $4,500, which would have been waived just a week earlier.

The SBA has also created a secondary market guarantee program for 504 first mortgage loan pools.

This program is designed to encourage sales into the secondary market of the “first mortgage” portion of small business financing made through the SBA’s 504 Certified Development Company program.

“Community banks like to have a secondary market,” said Mr. Rice.

He said this will have an impact on the local market.

When the program was announced, Karen Mills, SBA administrator, said, “This new program will stimulate activity in the secondary market, ensuring lenders have a place to sell first mortgage loans on their books and in turn have liquidity to make more loans to small businesses.”

Mr. Rice said this program has increased the projected volume of 504 loans he plans to make in the upcoming year.

However, in the language of the regulation, the pool originators, who are the ones who collect the loans and sell them, will have to assume 5 percent of the risk while the lender assumes 15 percent and the SBA takes on the remaining 80 percent.

This is different from the 7a loans where the pool originators don’t have to assume any of the risk.

Ms. Stockton said this essentially turns the originator into an underwriter. And while there is no regulation saying they would have to do a credit review, it would make sense that they would want to.

Redwood Credit Union, the top SBA lender in terms of number of loans made and dollar amount in the North Bay, also is not sure it will sell on the secondary market.

Michael Downey, vice president of business services, said while the credit union makes a significant number of 504 loans, it plans to continue to keep them in its portfolio.

With 504 loans, the SBA often takes the second deed of trust on the primary residence of the applicant. But now, said Mr. Rice, with homes not appraising out and with less equity, the SBA is requiring key person life insurance to back the loans.

But nothing seems to be stopping the community banks in the business of SBA loans from making more of them.

“Even if they don’t pass legislation,” said Mr. Rice, “there is enough to make the programs our number one priority in 2010.”