ERA ® G OLD S TAR P ROPERTY Open More Doors. Close More Deals.
More Doors, More Dollars - scoreworks.org Training 2012529.pdf · More Doors, More Dollars ... •...
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More Doors, More Dollars Expanding Capital Access for America’s Small Businesses U.S. Small Business Administration Office of Capital Access · Office of Credit Risk Management National Association of Government Guaranteed Lenders (NAGGL) Meeting May 2, 2012 Confidential
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Transcript of More Doors, More Dollars - scoreworks.org Training 2012529.pdf · More Doors, More Dollars ... •...
More Doors, More DollarsExpanding Capital Access for America’s Small Businesses
U.S. Small Business AdministrationOffice of Capital Access · Office of Credit Risk Management
National Association of Government Guaranteed Lenders (NAGGL) MeetingMay 2, 2012
Confidential
OCA Wants to Close America’s $100 Billion Small Business Credit GapA National ProblemThe U.S. is experiencing a $100 billion small business credit gap.Since the recession, small business lending and small dollar lending have shrunk dramatically –14.7% and 17.9%, respectively.A Social ProblemThe scarcity of small dollar loans disproportionately impacts minority communities.Small dollar loans serve Main Street businesses critical to underserved communities and SBA’s mission.An Agency ProblemSBA lending is not expanding capital access to underserved communities. While 7(a) dollars may be up, the number of loans is down 16%. Microloan and SBIC programs show the same trend. SBA is lending more dollars, but helping fewer businesses.
Small business lending $710b $606b -$104b
-14.7%
Small dollar loans (<$250k) $295b $242b -$53b
-17.9%
June 2011 DecreaseJune 2008
SBA loans to African-Americans are down 86% from their FY 2007 peak.
Source: FDIC.
Source: Minority Business Development Agency, SBA Loan/Lender Monitoring System.
Source: SBA Loan/Lender Monitoring System.
2
High transaction costs make small-dollar lending unprofitable.
Revenue $43.6
Total Non-IE $23.5
Gross Margin $20.1
% Gross Margin 46.1%
Provision Expenses (Reserves & Charge-offs) $14.9
Pre-Tax Income $5.2
SBA Lender Fee $4.8
% of Total Non-IE 20%
SBA loans offer banks very low profit margins.
Lenders Responded: Simplify Origination Procedures and Reduce SBA Loans’ Overhead
} Given standard 7(a) loans’ transaction costs, high dollar loans are much more profitable to SBA lenders.
} Originating a $50k Standard 7(a) loan costs many lenders as much as a $1m conventional loan.
SBA Loan Size $50 $1,000 $3,000
Guarantee Amt. @ 75% $38 $750 $2,250
Secondary Sales Premium 9% 9% 9%
Secondary Sale Amount $41 $818 $2,453
% Commission 25% 25% 25%
Total Commission $10 $204 $613
Net Secondary Sale $31 $613 $1,839
} In this example, the $4.8m SBA lender fee represents 20% of the lender’s total non-interest expense.
} The cost of maintaining specialized SBA staff further erodes profit margins.
} This bank’s pre-tax income is $5.2m, which is almost equal to its SBA fees.
Profit Worksheet for a Typical National SBA Lender
Profit Pro-Forma on SBA Loan Sizes ($000s)
3
Expanding Express Platform Will Reduce Origination Costs and Repairs
7(a) Industry
Total requirements 17 5
Automated requirements 0 5
Time burden 5 days SecondsSource: SBA Lender Roundtables, SBA Standard Operating Procedures.
7(a) vs. Industry Standard Underwriting
} Standard 7(a) loans require manual calculation of 17 detailed credit criteria.
} SBA fees account for 20% of non-interest lender expenses.
} The Standard 7(a) repair rate is almost 5 times higher than Express’.
} Lenders would incur fewer repairs if Standard 7(a) matched Express’simplicity.
Product Repairs / Denials
Closed Loans
% Repairs / Denial
Standard 7(a) 814 13,166 6.2%
Express 518 38,544 1.3%Source: SBA Loan/Lender Monitoring System.
Express Platform Will Reduce SBA Lending Transaction Costs
Simpler Regulations Will Reduce Repairs
Repair Rates: Standard 7(a) vs. SBA Express
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SBA Will Streamline Origination for Loans Under $350K
Process to Streamline Small SBA Loan Origination
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} FICO/D&B’s LiquidCredit scores use commercial and consumer data to predict purchase risk.
} FICO/D&B developed the suite using loan, lease, and card data from lenders nationwide.
} Small business credit scores are compensatory.} Criteria do not have hard-cutoffs, and scores do not
always use all criteria or data sources.
Credit Scores Will Predict Risk More Accurately and Simply Than Complex Underwriting
Source: SBA Loan/Lender Monitoring System.
Below 140: 21% Above 140: 3.7%
Small Business Credit Scores Accurately Predict Purchase
This Score Suite is an Industry-Standard Decisioning Tool Large National Banks Smaller Regional Banks
KeyBank AgriLand Farm Credit Services (TX)
Huntington National Bank Five Star (NY)
PNC Glenview State (IL)
RBC Rockland Trust (ME)
USBank Associated Bank (WI)
Zions Bank First Volunteer (KY/TN)
HSBC Bank of Idaho
Sovereign Bank Union Bank of California
} Banks across the country use the suite for evaluating borrower risk.
} Under the new Small Loan Advantage, SBA will only approve loans scored above 140.
Sample Users of Small Business Credit Scores
Source: Dun & Bradstreet, Fair Isaac Corp.
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Lenders Can Easily Determine Which Credit Profiles Will Fall Above SBA’s Score Cut-Off
Example Disqualified Profile
SBSS Score 119589
10
120
Utilization: >75%. Delinquencies: 6.
Example Qualified Profile
SBSS Score 178782
0
120
Utilization: 0. Delinquencies: 0.
FICO score
# of inquiries
Average months in file
Etc.: Credit utilization
55%
Less than 2 years
2
Poor paydex. 1 line; avg. 60 days delinquent.
100%
More than 2 years
0
Good paydex. 4 lines; 0 past terms.
% sat. trade lines
Time as current owner
Total # suits
Etc.: Paydex, trade lines
Less than $75k
Less than 2 years
Less than $100k
Sales: <$500k. Employees: 0. Mining industry.
More than $75k
More than 2 years
More than $100k
Sales: >$500k. Employees: >2.
DDA total balance
Time as current owner
Principals’ combined net worth
Etc.: Sales, employees, industry
Low
55%
Low
High
100%
High
Cash-to-assets ratio
Current ratio
EBIT-to-interest ratio
Cre
dit
bure
auB
usin
ess
bure
auA
pplic
atio
nFi
nanc
ials
Source: Dun & Bradstreet, Fair Isaac Corp.
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Proposed Score Guidelines Will Minimally Impact Banks’ Loan Decision Processes
} Only 2.74% of loans made by top 48 National SBA lenders would have been ineligible.
} Forty percent of the loans these members originated under the score cut-off were purchased.
Top 48 National SBA Lenders Make Very Few Ineligible Loans
Loans Under the Score Cut-Off Performed Poorly
Source: SBA Loan/Lender Monitoring System.
Source: SBA Loan/Lender Monitoring System.
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SBPS <140 Cut-off has Small Impact on Start-Up Approvals and Large Impact on Purchases
2010 2011 2012
Disbursements w/ SBPS <140 $99 $112 $16
Total Disbursements $2,776 $3,489 $1,439
Denial Rate 3.58% 3.20% 1.10%
FY10 – FY12Avg. Denial Rate 2.94%
Source: SBA Lender Roundtables, SBA Standard Operating Procedures.
FY10 – FY12 Denial Rate – Start-Ups
Source: SBA Loan/Lender Monitoring System.
Confidential9
FY10 – FY12 Denial Rate – Existing Businesses2010 2011 2012
Disbursements w/ SBPS <140 $275 $308 $44
Total Disbursements $7,683 $11,658 $3,840
Denial Rate 3.58% 2.64% 1.15%
FY10 – FY12Avg. Denial Rate 2.70%
FY06 – FY08 Cumulative Purchases –Start-Ups
FY06 – FY08 Cumulative Purchases –Existing Businesses
Automated SBPS Credit Score
10
Automated SBPS Credit Score
11
Automated SBPS Credit Score
12
Automated SBPS Credit Score
13
Your Score is184
Proposed Origination Guidelines for Small Dollar 7(a) Loans (<$350K)Borrower Portion &Lender Portion
• Form 1919• Form 1920 (A,B,C)
Type Term only. (No revolving loans)
Origination • SBPS scored by SBA prior to approval• Processed via E-Tran.
Credit Criteria
• Verified income (4506)• Use credit scoring• Must consider management
experience• Debt service coverage ratio exceeds
1:1 on projected basis• With the exception of loans under
$50,000, the Small Business Applicant’s global cash flow coverage ratio exceeds 1:1 on a projected basis. Lender must document in the loan file the definition or formula used to calculate global cash flow.
Maturity &Guarantee
• WC: 10 yrs. F&F, M&E: Useful life. Real estate: 25 yrs.
• <$150K: 85%• >$150K: 75%
Interest Rate
• Prime/LIBOR base rate.• SBA optional peg rate + 2.25% for
maturities < 7 yrs. • Optional peg rate + 2.75% for
maturities > 7 yrs.
Collateral
• < $25K: None• > $25K: Lender policy except must take
business assets if available• Equity injections/Life Insurance: lender
policy• Environmental: same as SBA Express
Closing and Disbursing
In closing and disbursing SLA loans, lenders will follow the same closing and disbursement procedures and documentation as it uses for its similarly-sized non-SBA guaranteed commercial
loans.
14 Deliberative & Confidential
} SBA wants to stimulate small business and small dollar lending.} Current SBA policies subject all lenders to unnecessarily
complex underwriting processes.} These processes are so expensive that they make small dollar
lending untenable.} SBA will allow all lenders to originate small dollar loans on
their own authority.} SBA will replace its underwriting process with credit scoring.} These streamlined procedures will:} Reduce NAGGL members’ transaction costs for SBA lending.} Make SBA lending more profitable for NAGGL members.} Increase disadvantaged businesses’ access to capital.
ConclusionMore Doors, More Dollars: Expanding Capital Access for America’s Small Businesses
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