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Fixes Abound for SBA Loan Programs

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In the past couple months, the U.S. Small Business Administration has come under fierce criticism from some members of Congress. These efforts have ranged from drastic budget-cut suggestions to outright abolition of the agency.

One lending program, known as the "504" program, is being specifically targeted even though it has quietly been a successful job creator for the SBA for decades. The 504, which helps business owners buy commercial property, has historically been a zero-subsidy program, meaning that no tax dollars were required to keep it running. These loans have helped create hundreds of thousands of U.S. jobs, and if viewed over its lifetime, it has been one of the most cost-effective economic development programs ever created by the U.S. government.

Like many small businesses in recent years, an uncharacteristically large number of companies with 504 loans experienced problems during the economic downturn. As a result, the SBA has had to step in and subsidize the normally self-sufficient 504 program. Attacks from Congress soon followed.

I recently testified before the Senate Committee on Small Business and Entrepreneurship and shared some solutions to not only reduce the subsidy and solidify the SBA 504 loan program, but also enhance the 504 program's ability to more effectively assist small businesses all over the country.

My suggested solutions include empowerment and extension.

Empowerment
Through incentives, the SBA should empower Certified Development Companies to actively pursue recoveries on their SBA 504 loans. Billions in unnecessary losses on the SBA 504 program drive up the program's subsidy rate. Recent charged-off amounts reported by the SBA reveal that during fiscal year 2011, the SBA walked away from billions of dollars in delinquent loans including more than $784 million in 504 loans.

Currently, the SBA uses a calculation to determine if it should support a CDC pursuing recovery on a defaulted loan. This calculation is overly stringent and most of today's defaulted loans don't meet its criteria. Thus, the SBA determines it's best to "walk away" and expect no recovery.

Giving localized CDCs the opportunity to cover costs and share in recovery dollars creates a "win-win-win" scenario. The SBA benefits from increased recovery dollars. CDCs benefit from minimized losses, which in turn reduces the future subsidy requirement. And lastly, borrowers continue to benefit from one of the finest small business capital access programs available.

Extension
The SBA needs to extend its 504 loan refinance program and First Mortgage Lien Pool (FMLP) program by at least one year. Part of the Small Business Jobs and Credit Act of September 2010, both programs were subject to severe bureaucratic delays -- 14 months for the 504 refinance and 19 months for the FMLP -- which hampered their use and impact.

Extending these programs will also reduce the subsidy rate because both charge slightly higher supplemental fees to offset future losses. These fees should produce excess funds to help bring down subsidies in coming years. To let these programs expire shortly in September 2012 as they gain momentum and meet small business credit marketplace needs, would be unwise and irresponsible.

Nationwide, FMLP and 504 refinance loan volume confirms a healthy demand for these loans. According to SBA data, refinances amount to 14.7 percent of 504 loans made in the first quarter of 2012 and 20.6 percent of total SBA 504 dollars. FMLP loans are nearly 15% of all 504 loans made today (whether as refinances or as traditional acquisitions). With today's more stringent banking regulations, many performing loans (borrowers making their payments) are declined for refinancing because of commercial real estate loan "concentrations" that regulators deem more risky. The 504 loan refinance program is often the only option available to performing businesses in these situations.

Credit-worthy, special purpose property for small business owners is generally not being financed in the conventional marketplace, and therefore FMLP is needed to meet that demand. For example, an Ohio restaurateur recently took advantage of the 504 program and FMLP to refinance three restaurants. He reduced his yearly debt service from more than $800,000 to approximately $250,000. It is evident these programs represent significant small business stimulus.

Restricting SBA lending by not extending FMLP and 504 refinancing could exert considerable downward pressure on a modestly recovering owner-occupied commercial property market.

Though not perfect, SBA lending programs like the 504 are far too important to our economy to be shelved, particularly when solutions to fix them are responsible, reasonable and readily attainable.

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