REPORT FROM THE U.S.—SBA financing could receive a welcomed shot in the arm should pending legislation make its way through Congress. The United States Senate plans to move to consideration of the Small Business Lending Fund Act of 2010 (HR 5297), which would create a US$30-million fund to spur lending through community banks.
The bill passed the House of Representatives Thursday. The Senate version, which Democrats are busy putting together for review this week, could include long-talked about provisions to increase the sizes of 7(a) SBA loans to US$5 million and 504 SBA loans to US$5.5 million, according to National Association of Government Guaranteed Lenders, a trade association for 7(a) financing.
Those provisions are crucial to hotel financing, said Scott Gilman, senior VP of Quadrant Financial, a subsidiary of First Chatham bank.
“That’s the one major piece of legislation that will open up the lending platforms,” he said, adding that an increase in those loans can mean the difference between financing for a limited-service budget hotel or a midscale property.
Borrowers are limited to US$2 million at a time under the current SBA framework. The loans can be used for acquisition, renovation and new construction.
Bumps in the road
The news isn’t all good, however. First, passage of HR 5297 could be delayed by a few weeks if it is not considered on the Senate floor before the 4 July holiday recess. When passed, the Senate version would have to be reconciled with the House version via a conference, so the final passage could be several weeks away, according to NAGGL.
Second, a separate bill that would extend SBA stimulus provisions from the American Recovery and Reinvestment Act of 2009 is stuck in Congressional gridlock. Commonly known as the Tax Extenders Act of 2009 (HR 4213), the bill only received 58 votes in the Senate, two short of the necessary 60 votes to avoid a Republican filibuster.
One of the key provisions of HR 4213 is to raise the government-backed guarantee in 7(a) loans from 75 percent to 90 percent, a provision originally included in ARRA that expired 31 May.
Increasing that guarantee fueled a huge increase of 7(a) financing, said Miguel Alandete, regional manager of REsource Capital in Georgia. If the extensions for the guarantee and other fee abatements aren’t passed by the 4th of July break, Alandete doesn’t expect them to pass at all.
The bill could be brought back up at a later date, according to NAGGL.
Congress already passed legislation to guarantee a portion of the first lien in 504 financing.
Under SBA 504 financing, the borrower takes out a conventional loan of 50 percent, and a Certified Development Company—a private, non-profit organization set up to contribute to the economic development of its community—authorizes a second lien of approximately 30 percent to 35 percent. The borrower is responsible for the remaining 15 percent to 20 percent, Gilman said.
Lenders can take that first mortgage piece and create an investment-grade type of product, Alandete said. They then can sell this product in a secondary market to keep it off their balance sheet.
Though that legislation is being rolled out and the government is guaranteeing part of that first loan, it’s slow to take hold. The secondary market has dried up, and big banks, which are the only lenders making loans, are more inclined to hold those first liens instead of selling them, Alandete said.
“Until a few of these have been done, and until some of the big lenders really step in and start doing them, (smaller banks likely won’t finance),” Gilman said. “We don’t have that type of capital. Until (big lenders) get in there and start financing, there’s a lot of risk for some of the smaller parties like ourselves.”
SBA Recovery Efforts Impact as of 18 June 2010:
- SBA has supported more than US$29 billion in recovery loans to small businesses: SBA has supported more than US$29 billion in small business lending with the approval of US$21.8 billion in recovery loans since 17 February 2009. From 17 February 2009 to June 18, 2010, weekly SBA loan dollar volumes rose more than 90 percent in the 7(a) and 504 programs, compared to the weekly average before passage.
- More lenders making loans: From 17 February 2009 to 18 June 2010, more than 1,359 lenders who had not made a loan since at least 2007 made a 7(a) loan. .
- Secondary markets uptick with 7(a) loans: After months of reduced activity and lower premiums, the SBA 7(a) secondary market is picking up and premiums are beginning to recover. From June to May, the average monthly loan volume settled from lenders to broker-dealers in the 7(a) secondary market has been US$330 million, providing lenders with additional liquidity to increase lending.
Source: U.S. Small Business Administration