Will success spoil Low-Doc's future if SBA cuts loan guarantees to 75%?

CNY Business Journal (1994-95), Jul 24, 1995 by Fitting, Beth

Another reason the bank doesn't want to see loans go into default, says Markley, is because it is required by the SBA to liquidate real-estate collateral first, before it can invoke the guarantee. "We don't want to be in the real-estate business. We want performing loans."

Because some banks are trying to avoid having to liquidate real estate by requiring other types of collateral, it is being proposed that non-real-estate collateral be included in the requirement to liquidate collateral before the SBA guarantee kicks in.

Howard Sharp, executive vice president at OnBank & Trust Co. in Syracuse, says that any abuses of the Low-Doc program "are a poor reflection on the banks' participation in the program. The intent of the Low-Doc program is to simplify documentation. This was done in response to criticism from banks and borrowers alike that the process is too paper-intensive. If lenders lower standards, they are not practicing due diligence," Sharp declares.

At OnBank, he explains, the same standards are applied to Low-Doc applicants as to all others. "Low-Doc is just a tool to make getting loans more convenient, to increase the volume of small-business loans." Sharp says that, as the number of smaller loans increases, there may be an increase in the number of defaults, but it will not be proportionately more.

One solution to the possibility of high default rates, according to SBA's Walsh, may be for the SBA to set its loan guarantee at 75 percent, rather than maintaining the current 90-percent guarantee for Low-Doc loans. "Banks will be more careful in approving loans if they are exposed to greater risks."

Another reason for setting the guarantee lower, says Walsh, is a proactive one. "With the thrust to balance the federal budget, the government wants to cut the cost of some of its programs. It will probably want the lending institutions to take more of the risk on these loans."

Yet another reason is purely practical. Walsh explains that at this point SBA loans are guaranteed by the government anywhere from 70 percent to 90 percent. Reducing the confusion of percentages may reduce paperwork, too.

On June 6 the SBA met in Washington with representatives of the NAGGL to discuss solutions to possible problems. NAGGL's Wilkinson says that it has been proposed--and will soon be adopted, he thinks--that two bank signatures be required on all Low-Doc applications.

Wilkinson says that the SBA realizes that this program must be better supervised. As for lowering the guarantee, he believes it will most certainly be lowered, probably to 80 percent.

According to Wilkinson, the SBA is considering centralizing its loan processing, for the Low-Doc program. Wilkinson believes this to be an excellent idea. SBA's Preferred Lender Program, which has a central processing unit in Sacramento, Calif., "works beautifully," claims Wilkinson. "They have the high-tech equipment to deal with the processing, and they all know their business. I think the SBA should set up three Low-Doc processing centers across the U.S., and have all Low-Doc loans processed through one of these centers. It would provide more consistent results, and be more economical."