As the partial government shutdown enters a second month, pressure mounts on the Small Business Administration to find a way to deal with a growing backlog of applications.
Democrats on the Senate Small Business Committee released a letter late Tuesday calling on SBA Administrator Linda McMahon to come up with a plan to quickly process loans from borrowers after the shutdown ends.
The letter’s release came a day after Richard Hunt, president and CEO of the Consumer Bankers Association, called on Congress and the Trump administration to “explore all options” to reopen the SBA.
“We ask that you provide us with the steps you are taking to ensure the SBA can quickly and fairly process the growing backlog of claims,” wrote the lawmakers, led by Sen. Ben Cardin, D-Md. “Please let us know if you need additional resources or authorities to meet the needs of these small businesses that are being adversely affected.”
Lawmakers and the ABC have added their voices to a growing list of parties who fear the first few months after the shutdown ends will be difficult for the ASB. While it’s difficult to determine the size of the backlog, the SBA supported about $2 billion in 7(a) loans over a period comparable to the prior year’s close.
“It’s going to take time to process the backlog,” said Chris Hurn, CEO of Fountainhead Commercial Capital. “Meanwhile, it will take much longer for the deals to be approved.”
The SBA’s reputation will likely come under fire from borrowers who have grown accustomed to increasingly rapid turnaround times before the shutdown, Hurn added.
Still, Hurn says the SBA will likely bounce back, “since its terms are much better than” conventional financing.
Some bankers have agreed, although they note the importance of breaking the deadlock quickly.
The impact of the shutdown will be “something unique,” said Guy Williams, president and CEO of Gulf Coast Bank & Trust in New Orleans. “Once it’s done, it’s done. It’s always been like that with shutdowns. I don’t see any long term effect.
Others are not so confident.
An SBA drift “is ultimately what’s going to happen if the shutdown drags on,” said William Phelan, president and co-founder of PayNet, a Skokie, Ill.-based company that assesses credit for small businesses. “Loan terms aren’t the whole equation. Speed and confidence are key drivers.
Small businesses, which PayNet defines as businesses with less than $1 million in debt, are less risky and more creditworthy now than they were before the financial crisis, meaning more could be eligible for non-SBA financing, Phelan said. About three in four businesses that apply for an SBA loan could qualify for conventional credit, he said.
While small businesses were barred from accessing the roughly $117 million in capital the SBA was approving daily before the shutdown, several major SBA lenders were able to take action that lessened its impact on them.
Gulf Coast Bank, as a preferred lender, is authorized to underwrite and approve loans itself. It leveraged that status to store loan numbers, or PLPs, that preferred lenders need to approve credits. That has allowed the $1.7 billion asset bank to continue making loans, though its supply will likely run out within the next two weeks, Williams said.
Most banks pursuing SBA lending as a line of business appear to have followed the same strategy.
United Community Banks, with assets of $12.6 billion, reported Wednesday that its SBA loan sales in the fourth quarter increased nearly 5% from a year earlier to 35, $1 million.
A continued decline in premiums resulted in a lower gain for the Blairsville, Georgia-based company on the sale of these loans, prompting it to follow the lead of several other lenders in holding more of its originating volume. United expects to hold about half of the SBA loans it has issued on its balance sheet, President and CEO Lynn Harton said Wednesday on a conference call to discuss quarterly results.
Seacoast Commerce Banc Holdings, a billion-dollar asset, which launched a nationwide expansion of its SBA business in February, announced on January 17 that its production of SBAs increased 7% to 73.7 million. dollars.
Richard Sanborn, president and CEO of the San Diego company, declined to comment.
BBVA Compass in Birmingham, Alabama, reviews interim financing requests from its small business clients on a case-by-case basis, said Greg Clarkson, a spokesman for the company with $90 billion in assets.
Banks, credit unions and other lenders that don’t have preferred status will likely face a backlog and long wait times, industry watchers said. But some workarounds exist.
Fountainhead Commercial, which focuses on 504 loans, didn’t have the luxury of building up a surplus of PLP numbers, which are used in the more popular 7(a) loan program. To maintain the pace of business, Hurn agreed to provide temporary bridging loans for a number of transactions, some of which were initiated by 504 other lenders.
The bridge loans that Fountainhead provides replace the second-tier financing that certified development companies typically provide. While the CDC has been sidelined by the shutdown — they can’t lend without SBA approval — major 504 lenders have an opportunity to step in.
“A lot of banks and credit unions are going to say, ‘We don’t know how long this is going to last or how bad the backlog is going to be,'” Hurn said. “I’m not regulated in that regard, so I can be a hero for some of these companies.”
Fountainhead has secured two bridge loans and is close to finalizing a third issued by a major bank, Hurn said.
“I’ve done 504 loans in my entire career, so I’m very comfortable doing those loans,” he said. “It’s a bit of an exaggeration. We are in a gray area.
As some lenders improvise, more industry trade groups are pushing for a resolution.
The American Bankers Association also called for a resolution, and the National Association of Government Guaranteed Lenders signed a strong letter from the US Chamber of Commerce calling on Washington to “take immediate action to restore the full functioning of the federal government.”
Anxiety among lenders and borrowers appears to have prompted another government agency to temporarily reopen.
The Department of Agriculture brought back around 2,500 staff from the Agricultural Services Agency for three days last week to provide limited services to farmers and ranchers. Staff helped agricultural producers obtain existing agricultural loans.
FSA employees worked to provide borrowers with 1099 forms ahead of Internal Revenue Service deadlines. Staff also processed payments made by December 31, continued to expire funding statements, and opened mail to identify priority items.