SBA rescue effort stimulated peak 7 (a). Will it backfire?
A debt relief effort offered by the Small Business Administration as part of the initial stimulus package has contributed to a recent surge in lending under the agency’s traditional programs.
The initiative – where the agency covers six months of principal, interest, and fees on any 7 (a) or 504 loans that were on the books or disbursed in the six months ending September 27 – could also mask credit quality problems with lenders. The SBA’s portfolios, according to industry watchers.
The six-month coverage, along with the August 8 shutdown of the Paycheck Protection Program portal, has prompted lenders to revert to 7 (a) loans in recent weeks. Total volume 7 (a) for fiscal 2020 jumped 31% between August 8 and September 25, according to the most recent data from the SBA.
“There was a huge incentive for businesses to get their loans fully disbursed” before the deadline, said Jim Fliss, national director of the SBA at KeyCorp, with $ 171 billion in assets in Cleveland. Key, among the country’s top 7 (a) lenders, had “one of its best months ever” in September.
“We saw the exact same peak,” said Michele Vervlied, head of government guaranteed loan operations at Customers Bancorp, with $ 18 billion in assets, in Wyomissing, Pa. “Since the start of the third quarter, customers have come back to us ready to act, seeking additional funding.
The eleventh hour activity surge helped Volume 7 (a) for FY2020 close the gap from the previous year. Although annual data is not available – the fiscal year ended September 30 – the total volume as of September 25 was $ 22.3 billion, down 3.8% from the year former.
The recent increase reflects the SBA lending pop that took place when Congress intervened during the 2008 financial crisis. The total volume of 7 (a) jumped 58% in fiscal 2010 compared to l The year before, to reach $ 19.6 billion, after Congress temporarily suspended program fees charged to borrowers and increased Prime Grant 7 (a) from 75% to 90%.
The expiration of the paycheck protection program not only made the six-month coverage for 7 (a) more attractive, but allowed bankers to refocus on traditional programs after a period of dealing with a flood of cash. PPP requests.
“It’s fair to say there was a laser focus on PPP,” Fliss said. “You couldn’t do more than a quarter of a century of typical SBA volume across the [PPP] in a few weeks and still expect business to continue as usual.
The status of existing 7 (a) loans, in terms of credit quality, is unclear.
A stalemate in Washington over further stimulus measures, as well as the precarious state of the economy, has led some analysts to express concern that SBA borrowers could be in trouble at the end of the six-month period. coverage of their loans.
The coverage period has just ended for loans 7 (a) and 504 which were on the books on March 27 when the first stimulus package was enacted. However, loans issued towards the end of the last fiscal year will be covered in March 2020.
“These government programs delay, at least in some cases, credit problems, without necessarily solving them,” said Stephen Scouten, analyst at Piper Sandler. “So it’s hard to really understand where the credit environment is right now. We’re all looking for the next signs.
Investors should keep an eye out for deferrals and delinquency data for traditional SBA loans, said Brian Martin, analyst at Janney Montgomery Scott. Martin said it is likely that some will be criticized, adding that the ultimate level could shed light on the credit outlook for small businesses in various industries.
Certainly, lenders are protected against massive credit problems, as the SBA guarantees up to 75% of the face value of loans made by the 7 (a) and 504 programs.
“We’re not talking about a devastating blow here, but it could be a signal of where things are going,” Martin said. “It will be something that we think is definitely worth watching.”
But an increase in credit losses could create headaches for banks looking to sell the secured portions of SBA loans, said Bert Ely, director of consulting firm Ely & Co.
“I think we’re going to see a lot of small businesses going out of business” after the six-month coverage period ends, Ely said.
“This pandemic has really taken its toll on the little guys – not just restaurants but in retail,” Ely added. “I think the SBA is going to have to pay on a lot of collateral, and the banks will have to absorb some losses on their part.”
Lenders, for the most part, are more optimistic about the integrity of their portfolios.
“Overall, we remain fairly optimistic and general demand for [the fourth quarter] remains relatively strong, ”Fliss said.
“Of course, we are watching things like payment subsidies that are going to disappear,” he added. “This will potentially expose some warts. … We’ll have a lot more data and a lot more certainty once we start seeing the year-end financials.
“We anticipate growth next year in larger loans and loans below $ 350,000,” Vervlied said. “We see the 7 (a) program as an important vehicle to help stimulate recovery.”
But that doesn’t stop lenders from crafting a wishlist of changes they want Congress to make to strengthen 7 (a) as the economy begins to recover. To begin with, they want the traditional subsidy to be reduced to 90%, as well as the elimination of guarantee fees.
Lawmakers “should consider the proven temporary changes to 7 (a) loans to further support economic recovery and recovery,” said Greg Clarkson, SBA division manager of the $ 102.3 billion BBVA USA asset at Birmingham, Alabama.
“When you step into these recessionary environments, having extra comfort allows us to do more to help customers,” Fliss said. “That’s the intention of the program. To help us put ourselves at ease and give our clients access to capital on more favorable terms.