American Banker recently reported that more community banks are offering Small Business Administration (SBA) loans far beyond their local markets, hoping that the income boost outweighs the long-term risk of lending in unfamiliar regions. Strong demand for SBA loans and a strong secondary market have encouraged more banks to expand their SBA operations, often nationally.
Banks are being enticed to expand their SBA 7(a) lending primarily as the premiums for selling SBA 7(a) guarantees in the secondary market remain highly profitable. This week Cantor Fitzgerald’s SBA desk was purchasing SBA 7(a) guarantees for a Prime plus 2.75%, 25-year loan at 117, a 13.5% premium to the bank after splitting the portion of the premium above 110 with the government. That means earnings of $270,000 on a $2-million guarantee, plus a 1% servicing fee for the life of the loan. These are huge numbers for smaller community banks.
One of the challenges of expanding SBA lending “out of territory” in regulatory parlance is the concern regulators have for banks making loans out of their geographic region. Lenders that have expanded outside their traditional areas report that, while national regulators have been taking a close look at their underwriting practices, they have not objected to geographical expansion.
“Our regulators are supportive, but they want good risk management in place,” commented one national SBA community bank lender.