The Small Business Administration's latest lending statistics confirm what was widely suspected: its two lending programs are headed in opposite directions and some changes may be needed.
The agency's flagship 7(a) lending program, in which a number of credit unions participate, is firing on all cylinders and then some. SBA had approved loans totaling $19.2 billion through July 25 of the federal fiscal year that began Oct. 1. To put that number in perspective, it nearly equals all the 7(a) lending done in the previous fiscal year.
Though credit unions have been eligible to participate in the 7(a) program for years, there's been greater interest of late, as the portion of a loan that is guaranteed by the SBA doesn't count against the 12.25% cap on member business loans. This greater interest isn't one-sided. SBA recently entered into a partnership with NAFCU to help bolster CUs' awareness of the program, and the SBA also teamed up with NCUA to co-host a business lending seminar.
The situation with the 504 program, SBA's other major lending vehicle, is less rosy. Through the same period, SBA has approved just $3.4 billion of 504 loans — well below the $7.5 billion it is authorized for in the current fiscal year.
"Without a doubt, we're currently underutilized," Barbara A. Vohryzek, president and chief executive of the National Association of Development Companies, said in an interview Thursday. "We're not going to blow through any records this year."
If the 504 program seems like a poor stepsister to the more popular 7(a), part of the reason may lie in its limited scope. Unlike 7(a) loans, which can be used to purchase equipment, buy real estate or for general working capital, 504 credit can only be used to buy big-ticket equipment or to purchase or improve commercial real estate.
Now, in an effort to make 504 loans more attractive, the development companies association is backing a bill that would broaden the program by adding commercial real estate refinancing to the list of permissible activities. Introduced in May, the Commercial Real Estate and Economic Development Act would provide a much-needed new dimension and offer borrowers a fixed-rate alternative to the floating-rate loan products that dominate the commercial real estate refinance market now, Vohryzek said.
"If you take a long view, a fixed rate gives a small business predictability in its loan payments," Vohryzek said.
Congress allowed 504 to accept refinancing deals under a short-lived pilot program in 2011 and 2012. During that window, more than 2,700 businesses used 504 to refinance about $7 billion in debt, according to Rep. Judy Chu, D-Calif., the chief sponsor of the CREED Act in the House. When the program shut down, there were more than 400 loan applications in the pipeline, according to the development companies association. Even so, the pilot was allowed to sunset in September 2012. An effort was made to revive it in the last Congress, but that bill, also known as the CREED Act, died in committee.
Sen. Jeanne Shaheen, D-N.H., is serving as chief sponsor in the Senate.
The CREED Act would not affect the structure of 504 loans. They would still require a down payment of at least 10% by the borrower and a junior participation by a certified development company and a senior participation by a conventional lender. Banks have traditionally played a major role in 504 lending, and credit unions are showing a growing interest as well, Vohryzek said.
Both the Consumer Bankers Association and the Independent Community Bankers of America supported the CREED Act in the last Congress, but neither group has taken a position on the current bill, although a CBA spokesperson said her group would most likely back it.
As things stand now, the CREED Act has 21 co-sponsors in the House and 7 in the Senate.
The sleepy situation surrounding the 504 program stands in sharp contrast to the drama that rocked 7(a) recently. Surging demand for 7(a) loans exhausted the program's $18.5 billion lending authority and forced a brief shutdown last month before Congress stepped in and passed emergency legislation raising the lending limit to $23.5 billion.