A broker of Small Business Administration loans says as many as half of the banks he works with are backing off in their pursuit of SBA loans. This could have a major impact on job generation in the region, as about 95 percent of enterprises are classified as small businesses.

“There’s been a real tightening of the credit box,” says Craig Francis of Francis Financial. “Lenders are reducing exposure or eliminating programs like the 7(a) operating expense loans from their portfolios. Of the 20 banks I typically work with, about half” are scaling back on SBA lending, Francis says. “For every aggressive 7(a) lender, I now find two have backed out.”

The broker says banks’ decisions to curtail SBA lending is influenced by the general state of the economy, warnings about credit quality from regulators and an increasing unwillingness of those in the secondary market to buy SBA loans.

Kurt Chilcott, CEO of the CDC Small Business Finance Corp., says volume through April 21 in both programs nationally is down, with the 7(a) program off 8 percent in dollar volume and 18 percent in number of deals. The 504 program is off 3 percent in dollars and 5 percent by deals.

Chilcott says CDC’s deal volume is down 5 percent, with dollars even. In the region of Arizona, California, Nevada and Hawaii, deals are off 12 percent.

“Banks are tightening some,” he says. Lenders are taking a closer look at home equity because the home is the collateral for some SBA deals.

Even though the federal government typically guarantees SBA loans up to 75 percent, banks in this environment are worried about credit quality and do sweat the remaining 25 percent risk.

“There’s real risk,” Francis says. “If you get a troubled loan, it’s an enormous amount of manpower and the cost of working out the loan — it’s ugly.”

Francis says some big banks and “money center” type banks are increasing their SBA activity. “Those banks are expanding their credit box, becoming more liberal, and they’re doing loans that used to be the province of the smaller banks, encroaching on their territory.”

Francis says the federal SBA “might have been too liberal, and the trend now is a reversion to what was once considered normal in terms of qualifications and underwriting standards.”

Banks get whipsawed in the process. “Banks go from very hot to very cold,” Francis says. “They are very reactive to the perceived risk, the conditions of their portfolios and that the Fed is looking over their shoulders. If the Fed criticizes your loan portfolio, there’s hell to pay.”

Peter Q. Davis, whose Bank of Commerce was an SBA powerhouse, says in an already leveraged market place, SBA loans can become problematic, especially if the bank doesn’t really specialize in SBA lending. “To succeed you have to be really aggressive,” he says. “Borrowers want a quick response.

“When we got into SBA, all of our customers had already applied at BofA, and we funded them before they heard back from BofA,” Davis says. “You’ve got to be a specialist for it to work.”

— Rich Acello