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Abstract
SBA programs are required to serve only borrowers unable to secure loans from another source. This report examines whether lenders comply with the credit elsewhere requirement, based on interviews with 23 commercial bank lenders that originate both SBA and conventional small business loans. Overall, lenders: are aware of the credit elsewhere requirement, say that SBA programs allow them to serve borrowers who do not meet standard conventional underwriting guidelines, indicate there is little overlap between SBA and conventional lending. SBA loans are offered with longer terms than conventional loans allowing borrowers, who commonly lack sufficient NOI, to meet DSCR requirements.
Introduction
SBA loan programs are required by law to serve only borrowers who otherwise would not be able to secure loans from another source: 15 U.S.C. §636(a) states, “No financial assistance shall be extended pursuant to this subsection if the applicant can obtain credit elsewhere. No immediate participation may be purchased unless it is shown that a deferred participation is not available; and no direct financing may be made unless it is shown that a participation is not available.”
Although central to SBA’s mission that lenders serve borrowers who are not able to receive loans, there has been relatively little analysis of the extent to which lenders actually comply with the credit elsewhere requirement. This report presents such information collected through interviews with representatives of 23 commercial bank lenders that originate both SBA and conventional small business loans (the sample lenders). Based on the results of these interviews, this report documents the types of factors that the sample lenders use to recommend a loan with an SBA guaranty (SBA loans) and how these factors are consistent with the requirement that SBA loan recipients could not obtain credit elsewhere.
As detailed below, all of the sample lenders were selected from a frame based on information provided in call reports, and so are depository institutions. As a result, the sample lenders do not include any non-depository lenders or small business lending companies (SBLCs), which hold approximately 20 percent of all outstanding SBA loans (SBA 2005). Therefore, the findings reported here may not be generalizable to non-depository lenders if they do not use the same factors to identify borrowers who are offered SBA loans as do depository lenders.
(End of excerpt. The entire paper is available in PDF format.)
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
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