The Evergreen Edge Newsletter

The American Recovery and Reinvestment Act created temporary fee reductions in the SBA 504 Loan Program. The initiative has contributed to a significant resurgence in lending to small businesses. However, based on the activity to date, SBA projects that they will only have funds to support this initiative through late-November 2009. 

November 23, 2009 will begin a transition period where applications for new 504 loans may be submitted either:

1. As Recovery Act loans, which will mean being placed in a queue to await the potential availability of Recovery Act fee reduction funds; or
2. As non-Recovery Act loans, which will be authorized as soon as approved, but which will not be eligible for fee the reduction.

Applications submitted as Recovery Act loans will be processed up to the point of approval and then will be placed into a queue awaiting the availability of funds. Once the appropriated Recovery Act funds are exhausted, some funds are projected to become available again as previously approved loans are cancelled. As funds become available, applications in the queue will be authorized in the order they were approved by SBA. With the exception, that "327" action requests for specific project increases on previously authorized loans will be approved before applications for new loans. At any time while waiting in the queue, an applicant may choose to withdraw and re-submit as a non-Recovery Act loan.

The 504 program will continue to offer unique and attractive benefits, regardless of the changing program fees. Businesses can enjoy a down payment as low as 10%, low fixed interest rate and a loan term. Lenders will continue to benefit from reduced credit risk and a low loan-to-value ratio.

The full and detailed SBA Notice on the transition period can be found below. Contact your local Evergreen loan officer [3]for more information.

The U.S. Small Business Administration's (SBA) 504 loan program is getting another boost from a new secondary market stimulus program announced earlier this week by the SBA. The SBA just created a secondary market guarantee program for SBA 504 first mortgages. This new program, funded through the American Recovery and Reinvestment Act, will encourage sales into the secondary market of the first mortgage portion of 504 loans made by commercial lenders.

The economic recession and the disruption in the credit markets has resulted in a significant decline in secondary market activity for 504 first mortgage loans and have made some lenders wary of adding any further commercial debt to their balance sheets. This new secondary market guarantee program will provide greater liquidity for lenders that will translate into expanded access to capital for small businesses. The National Association of Development Companies (NADCO), the trade association of the country's CDCs applauded the move as one that will go a long way toward making small business lending attractive again to banks across the country.

Under the new program, portions of eligible 504 first mortgages pooled by originators or broker dealers could be sold with an SBA guarantee to third-party investors in the secondary market. Lenders will retain at least 15 percent of each individual loan, pool originators will assume 5% of the risk, and the SBA will guarantee the remaining 80%. First mortgages eligible to be pooled must be associated with a 504 loan disbursed on or after February 17, 2009. The program expires on February 16, 2011, or when $3 billion in new pools are created, whichever occurs first.

NADCO Vice Chair, Joe Wolfe from Wisconsin Business Development Finance Corp [5]., noted that the commercial lenders in NADCO's Lender Advisory Council have been voicing concerns this past year over their inability to sell 504 first mortgages leaving them with less capital to re-lend to small businesses. "This is welcome news to those lenders who could not add any further commercial debt to their books. They will again have an outlet for selling their 504 first mortgages allowing them to come back to fund more. In fact, this new secondary market guarantee program comes at a critical time for our industry. SBA 504 loan applications are beginning to rise again and this will make 504 projects more attractive to our bank lending partners, and we need all the 504 banking partners we can get." 

The SBA 504 loan program has funded nearly $40 billion in loans to growing small businesses over the past 23 years.

Regulations published today by the U.S. Small Business Administration will create a secondary market guarantee program to provide greater liquidity for lenders and expand access to capital for small businesses.

Funded through the American Recovery and Reinvestment Act, the new program would encourage sales into the secondary market of the "first mortgage" portion of small business financing made possible through the SBA's 504 Certified Development Company (CDC) program. As a result of the economic recession and the disruption in the credit markets, there has been a significant decline in secondary market activity for 504 first mortgage loans.

"This new program will stimulate activity in the secondary market, ensuring lenders have a place to sell first mortgage loans on their books and in turn have liquidity to make more loans to small businesses," SBA Administrator Karen Mills said. "This is another tool in our Recovery toolbox that will expand access to the capital small businesses need to drive economic growth and create jobs."

Under the new program, portions of eligible 504 first mortgages pooled by originators or broker dealers could be sold with an SBA guarantee to third- party investors in the secondary market. Lenders will retain at least 15 percent of each individual loan, pool originators will assume 5 percent of the risk, and the SBA will guarantee the remaining 80 percent. To be eligible to be included in a pool, the first mortgage must be associated with a 504 loan disbursed on or after Feb. 17, 2009. The program will be in place until Feb. 16, 2011, or until $3 billion in new pools are created, whichever occurs first.

SBA will begin accepting applications to become a pool originator from banks and broker dealers immediately, and expects to be operational for the settlement of pools in about 60 days.

For more information, lenders or broker/dealers can contact James W. Hammersley, Deputy Assistant Administrator for Policy and Strategic Planning at james.hammersley@sba.gov [6].