SBA Opportunities for Credit Unions 2/15/2017


Kathryn Baxter: Good afternoon, everyone. Welcome to our February webcast. It’s a continuation of our partnership with the SBA,
and I think we’re going to love this particular webinar because we have guest speakers from the SBA and one of our own. And also I’m joined by my host, Vanessa Lowe. Before I turn everything over to Vanessa, I want to take everyone to our administrative announcements. So
that you can hear this webinar clearly, please adjust the volume on your computer. If you’d like to resize the slides, drag the right bottom corner. From this website, you will need to allow popups. And any time during this webinar you’d like to ask us a question, there is an Ask a Question feature on
your console to the left and what we’d ask you to do is to ask questions throughout the webinar ñ don’t wait until the end ñ and, if you know the name of the speaker, address your question directly to that speaker so that we know to give it to them. Also, at the end of the webinar we’re going to push out a short survey and we’d
really like you to fill it out because we do need to know what you think about this webinar and any suggestions you have for the future. And as always, in approximately three weeks or before we will close caption this webinar for on demand viewing. As I mentioned, we have a great webinar and our host Vanessa Lowe
is going to tell you about it, SBA Opportunities for Credit Unions. We are offering a certificate of completion for this particular webinar, and Vanessa is going to give you that information, too. So without further ado, I’m going to turn this over to Vanessa Lowe. Vanessa? Vanessa Lowe: Thank you so much,
Kathryn; excited to be here. Let me start with our usual disclaimer. This webinar, like all of them, is being offered for informational and educational purposes only. NCUA does not endorse any particular credit union or vendor or their employees, products or services. So what are we going
to hear today? As Kathryn said, this is a follow up to the March 2016 webinar we had. You’ll recall back last year NCUA and the Small Business Administration, SBA, signed I believe it was a Memorandum of Understanding to really start collaborating and helping to promote
credit unions who are doing business lending to really start exploring the SBA opportunities, the programs and services that SBA has, in order to really help with their business lending. And so today we’re going to hear a little bit ñ there might be a little bit of overlap in what we heard last year,
but I think it’s still very helpful and you’re going to get a slightly different perspective on things. First we’re going to hear about SBAOne. Within that discussion we’re going to hear about SBA’s flagship program, which is the 7(a) guarantee program, but we’re going to get a slight update on SBAOne, which is their
lender platform, and we’ll have a couple of screenshots in there for that. Then something that wasn’t talked about very much at all last year is their Microloan Program, a very unique program where this is one of two areas where they provide direct money for lending as opposed to just a guarantee, and I’m real excited about that
program as somebody who has worked a lot with organizations that do micro enterprise lending, lending to very small businesses. And finally we’ll have our own NCUA speaker give another sort of overview of the changes that went into effect January 1st. The new MBL rule has been around for a while now but
it went into effect – the full rule went into effect just this year, and so we’ll get an update on that. As Kathryn said, we’ll have a Q&A at the end; always that last half hour of the webinar is for Q&A. But remember, send in your questions at any time; we love to get your questions. Okay, let’s move on and
let’s match some faces to the voices. The voice you’re hearing right now is that face on the screen, Vanessa Lowe. I have been with NCUA’s Office of Small Credit Union Initiatives for 10 years come March, so quite a while. Before that, I was with U.S. Treasury’s Community Development Financial Institutions
Fund. And I’m really excited about the webinar today and the guest speakers that we have, including Scott. Let’s hear from you. Scott Bossom: Yes. Good morning and good afternoon, everybody, depending on where you’re calling in from. Scott Bossom here. I am located out in the Portland, Oregon
District Office for the SBA. I’ve got about a 20-year history in finance and lending, mainly credit-oriented positions. I was actually officially with the SBA for six years as of yesterday, Valentine’s Day, which is very fitting as I have a strong passion and love for SBA lending for small businesses and I’m excited to share that with you
here today. Vanessa Lowe: Great, thanks. We’re glad to have you Scott. Next let’s hear from Chris. J. Christopher Webb: And welcome, everybody, and thank you. My name’s Chris Webb. I work in the Office of Economic Opportunity here at the SBA, and we specialize in microlending as well as community advantage. I’ve been with
the SBA for over 7 years and transitioned into government service from the civilian field of financing, where I owned a finance company for about 18 years. And I’m very happy to be here today. Thank you. Vanessa Lowe: Great. Happy to have you, Chris. And next let’s hear from Rippy. Rippy Madan:
Good afternoon, everybody. And like everybody else, it’s a real privilege to be with you today. Vanessa Lowe: Rippy? We’re going to ask you to stop a moment. Rippy, we’re going to ask you to stop a moment because we’re getting an echo. Rippy Madan: Okay. Vanessa Lowe: So whatever you did before to get rid of that echo, do that again. I
think there was another phone maybe open or something. Rippy Madan: Oh. How’s this? Vanessa Lowe: I don’t think we’re getting an echo now. Great, keep going. Rippy Madan: Okay. All right, let me begin again. Good afternoon, everybody. And, like everybody else, I am super excited to be with you all this
afternoon. My name is Rippy Madan and I serve as an NCUA Regional Specialist in Region II. I’ve been with the NCUA for 18 years, and have pretty much focused my reviews on lending activities. Over the last 18
years I’ve actually witnessed a lot of changes in the credit union industry, as I’m sure most of you have witnessed as well, most recently of which is the growth in business lending at credit unions. So again, I
appreciate you sharing your time with us this afternoon and I am very, very happy to be with you today. Thank you. Vanessa Lowe: Thanks, Rippy, and keep that other phone off, okay? All right, let’s move into our first poll. We like to get a sense of the diversity of credit unions who participate
in our webinars, so this first polls asks what is your credit union’s asset size? And it goes from less than $10 million, greater than or equal to $10 million but less than $50 million, etcetera, down to greater than or equal to $250 million. There’s also a not applicable option. Remember ñ well, I’ll talk about this in a minute, about the certificate ñ you want to
answer all of the poll questions, okay, because if you want to get that certificate there’s a couple of criteria you need to meet. All right, let’s see what kind of diversity we have here. We’ll give it a minute to update. Wow, okay, this is not unusual. Now usually our sweet spot is between $50 million and $100 million; but because we probably a lot of those big
credit unions that are doing really wonderful commercial lending, right now 27 percent of our participants are with credit unions that are greater than or equal to $250 million. Welcome, everyone. I hope you get something out of this webinar. I think it’s going to be great. Moving on, okay, so the certificate of completion, what do you need to do in order to get that?
And these are, we’ve been offering these now I think for the last about 2.5 years for these webinars and essentially it’s a great way to sort of document how you’re building up your knowledge set. It’s great for board members; it’s great for staff members. So you need to stay on the webinar for at least 45 minutes, okay? You need to answer at least three out of the
four poll questions, but please answer all of them. And then there is a quiz. There are two magenta icons at the bottom of your screen; on the right side is the actual quiz ñ you can open that up and glance at it now, but don’t get distracted by it ñ and on the left side is a little kind of tally that tells you how close you are to meeting the criteria for
the quiz. All right? So those are the things you need to do for the certificate and I think it shows up at the end of the webinar for you. All right, moving on, I’m going to go ahead and turn it right over to Scott and let’s hear about SBA’s 7(a) program. Scott Bossom: All right, appreciate it. Thank you, Vanessa. So, yes, we’re going to
go to just kind of a high level overview of 7(a) here. For some of you on the call, this might be a refresher of sorts but for others that don’t have experience with 7(a) SBA lending, give you a sense of kind of what goes into these deals, what SBA does relative to 7(a), and then we’re going to touch on, as
we mentioned at the agenda upfront, the SBA One system, which is a new platform we have for loan submissions and eventually servicing and purchasing. So kind of the role of the SBA overview, we kind of have what we call our three Cs ñ some of you may be familiar with that reference ñ the first C being capital.
And what we’re primarily doing there is guaranteeing portions of loans for lenders, helping you take on more risk, do something you couldn’t do without that guarantee. And we have the counseling resources; that’s also referred to as technical assistance. So we partner with organizations across the country to provide
free business advising and counseling to help businesses be more successful. The last C would be the contracting; we’re assisting businesses get certified, get set up properly to do business with the federal government. A lot of opportunity there to grow a business, especially for businesses that might be
women-owned, might be veteran-owned, service-disabled veteran-owned; some great opportunities for business growth that are available through the SBA contracting programs. On the lending side, the capital side, as I mentioned, we’re primarily guaranteeing portions. We really have a limited role as a direct lender. These
are primarily not, you know, federal dollars that are being lent. We do have direct lending within a couple of programs, first, the disaster relief program, which is home loans, business loans when there’s some sort of natural disaster, and then the Microloan Program, which Chris is going to be talking
more about here in a bit. We touch on the grant side as well; I get that question a lot. Through the SBA we don’t have any grant programs really for for profit businesses; we do have grant dollars that are available to some of those technical assistance business advising resource
providers. It’s money to help them facilitate and help make that counseling available and beneficial to the small businesses. To kind of get into 7(a), really you can think of 7(a) as an umbrella of several subprograms. We’ve got the Express program, which is a delegated
program for our more active lenders; they get to approve those deals on their own, without our review. CAPLines, which is for lines of credit, you’ve got small 7(a), large 7(a), the cutoff there being $350,000, so still a fairly big loan is still considered a small loan and, for a new lender, what
you have access to here under 7(a) if you are a newer lender would generally be small 7(a) and large 7(a). And then eventually if someone becomes more active, you can get preferred lender authority, delegated authority, under the Express program. So some highlights of what ñ excuse me; I skipped over my slide
there ñ so some highlights on 7(a) in general. These can be really large loans; these go up to $5 million. But I see 7(a) loans as small as $5,000, so it’s a wide range of loan sizes. In our district, the average 7(a) is about $300,000 to $400,000. The guarantee that the lender gets
there, it’s going to be 85 percent on loans $150,000 or less, 75 percent on those over or up to that $5 million limit. And then we do have, though, some availability for even higher guarantees of 90 percent when you’re dealing with an exporter in the international
side of SBA 7(a). Fees on these loans are tiered and I’m very upfront with lenders, with businesses; these are far more expensive than a conventional loan. But of course these are loans that are available for businesses that can’t reasonably get conventional financing. So it is a little bit higher fee. It’s
normally financed; this isn’t paid out of pocket. And then, for instance, we have some fee waivers at times. Right now we have a fee waiver going for all of the loans up to $150,000, so there’s no upfront guarantee fee there. In addition to this SBA fee that gets paid, you as the lender can charge what’s called
a packaging fee and that’s usually 1 percent. So I tell businesses on a 7(a) loan the fees are anywhere from 3 percent to 4 percent, depending on the size of the deal and whatnot. And then any out of pocket costs certainly as well can be passed on to the borrower ñ closing costs, escrow,
appraisal fees, those kinds of things. We allow for extended terms under 7(a), so you can pretty much go 10 years on anything non real estate and then 25 years on real estate. Some of the equipment, if it has a longer useful life, you can justify going longer there as well. The key here, though, with term loans is these are fully
amortized; we do not allow balloon payments. That usually doesn’t come into play on your 5 to 10 year deals but you go out on real estate and you’re going out 25 years, just know that you have to fully amortize that deal; you cannot balloon that loan and cause the borrower to have to go refinance that balloon payment.
Now rate-wise within that, it can be adjustable and it typically will be on those longer-term deals, so this is how the rate works within the 7(a) side generally. I have prime on the screen here because that’s what most lenders do use; technically, you could use LIBOR as well but most
go with prime. It’s based on the term of the loan, 7 years or longer, prime plus 2.75, and then less than 7 years the spread is 2.25, so prime being 3.75 right now, essentially the maximum 7(a) rate would be 6 to 6.5 percent. Now within that cap you can do whatever you want; it could be fully
floating, it could be fixed for the whole term, it could be adjustable every year, every three years, every five years. If you stay within the cap, again, you can structure that rate however you see fit, however you see prudent for that particular deal. I always like to touch
on underwriting of 7(a) loans when I’m talking to newer lender; there’s a belief by some that as they get into doing 7(a) lending they’re going to have to learn a bunch of different stuff ñ what does the SBA like to see, what do we not like to see ñ and the reality is that’s actually not the case. It’s
really no different than what you currently do; in fact, we tell lenders you do not analyze a credit in a different way. You’re going to analyze this credit the same way you would a non-SBA deal. What we’re doing is giving you this guarantee which is allowing you to mitigate aspects of that deal that fall in the
fringes of your credit policy. We don’t want you going way outside of what you’re used to doing. What we’re primarily helping you do is mitigate collateral shortfalls. Every other aspect of the deal is solid; the cash flow’s there, the management. It might just be the type of business, a service-oriented
business with limited assets, a business acquisition deal with a lot of goodwill. Those are tough for you to do on your own; that’s where we come in and can help you make those happen. To kind of further illustrate this, the 7(a) portion of our SOP, our standard operating procedure, is about 250 pages; the credit
section in there is 3 to 4, and the reason that is it’s just a framework for what we expect you to do when you’re underwriting a 7(a) loan. But for the most part, it’s what you’re already doing as a prudent lender; it’s the same things you’re doing on a non SBA deal. You don’t
have to learn a bunch of new special underwriting rules necessarily. So I want to touch obviously as well on the SBA One lender platform. It’s amazing, I can’t believe it, but it’s actually been in use now for about a year. This will ultimately be a cradle to grave
processing system. That was the main idea, getting everything that lenders use for the SBA within on system as opposed to going one place for processing, one place for servicing, a completely separate area for purchasing; that’s all being brought into one system. Currently only processing is
available; we’ll be having servicing and purchasing come online here down the road, so currently only the processing is available. And we’ve been working through a lot of kinks; it’s a new system so, as you can imagine, we’ve run into issues that we’ve worked through and had different updates to the system. We’ve had a
couple, you know, mandates come down as far as having to use SBA One, so currently non delegated lenders ñ so again, those are going to be the newer lenders, maybe not as active, kind of learning SBA, getting to a delegated status ñ they are mandated to use SBA One. Technically, our delegated lenders, which will also
be referred to as our Express lenders or PLP or preferred lenders, they can still submit through Etran. Etran is still there; it’s never going away. With SBA One, it’s kind of just in the background a little more now. SBA One is a prettier front door into the Etran system, which helps
lenders become more efficient in processing, and that’s really what the goal is: being a more efficient system, being more user friendly, more intuitive. There’s a lot of teaching along the way. There’s an on demand training portal that’s housed within the SBA One system that you can use self-paced to go
through and learn. But technically, you could be a new user and jump into SBA One, you’re going to fumble your way around a little bit, but you’re going to be taught along the way different policy things, different definitions. And so it’s really great from that standpoint and helps me as I work with new lenders to bring
them online and up to speed. I’ll kind of give you a couple of screenshots here. There’s a whole lot more to it than these; I just wanted to kind of visually give you a sense of what you’re looking at. This is the main workspace page you’ll see when you log in. You’ve got a nice pipeline tool. Obviously, those numbers you see
there are national numbers; it would be just your deals when you logged into SBA One. So it kind of gives you a nice snapshot there, and then you’ve got your main menu bar at the top. You’ll see the training link in the top right there as well. It’s the nice visual in the front screen. And then this next screenshot
is in the middle of a loan application that’s being put together. You’ve got a nice progress bar on the left there. You’ll see the little checkmarks; when a lender gets a green checkmark it tells them that section is done. If you look at the questions on the right, for instance, that first question, you’ll see a little
question mark bubble at the end. Those are the ones that I mentioned you can click on; it gives you a definition, it’ll give you a policy reference, a CFR reference, Code of Federal Regulation reference, just really helping, again, teach that new user as they’re getting up to speed. Then lastly, my last couple of
slides here before I turn back to Vanessa, I touch always on the financial side of SBA 7(a) lending because obviously the main thing that we’re doing here is giving you access to a guarantee which is going to help you offset risk and mitigate concern you have with a deal, that collateral shortfall, and be
able to say yes. But there’s a whole other side to SBA lending, the first piece being there’s no loan loss reserve requirement for the guaranteed portion so, if you do an SBA loan with an 85 percent guarantee, you’re only reserving for 15 percent. So because of that, because you’re eating into capital
when you reserve in the loan loss, you’re not reserving as much, you’re able to leverage that capital further. And then secondly, there is a very active secondary market for these SBA guarantees. It’s a government-back security; it’s a very safe investment, so there’s a lot of people out there ñ all of us
on this call could buy into pools of these loans if we wanted to. Because they’re a safe investment, it generates a premium. The purchases of these guarantees are about 105 to 118 percent of par, so that premium being 5 to 18 percent there. And when these guarantees are sold, the borrower’s unaware.
You’re not selling the whole loan; you still retain that 15 to 25 percent share of the deal and, because you still retain that, you’re going to be servicing the loan and you’re actually going to create another revenue stream by being able to retain a share of that rate as your servicing fee. I want to mention that anybody
under a regulatory enforcement action through NCUA would be ineligible right away to sell guarantees; we can get approval for that in some cases, though. But I just want to mention that piece. And then just to kind of further illustrate this visually for everybody, this slide here kind of shows you how a lender could
set aside a chunk of money, they could lend that out, they could sell those guarantees, earn a premium ñ they’re not going to get all the money back in, of course, because again they’re retaining a portion of that loan ñ but they’re going to have a nice chunk of cash that’s coming back into the lender to lend back
out, sell the guarantees again. So literally, you could have a chunk of money and just recycle that same money over and over, leverage what you might think is only enough for 10 loans into 50 loans by being an active secondary market seller. So it’s just a ñ at the end of the day, it’s a very powerful cash management tool
that lenders can use. So that is my portion; now I’ll turn it back over to Vanessa. I appreciate everybody’s time. Vanessa Lowe: Fantastic, Scott. Thank you so much; really, really good information. And I know that was a lot of information, so now is the time to send your questions in. Remember, use
the little tool. He talked a lot about essentially some of the fees, he talked about selling the guarantee, which I don’t think we talked a whole lot about on last year’s webinar, but that tool for liquidity is really fantastic. Scott Bossom: It’s a ñ Vanessa Lowe: Go ahead. Scott Bossom: No, I was saying it’s a piece a lot of lenders,
yes, just don’t really realize. You know, they’re more focused on oh, I’m going to get a guarantee and I can do this deal, but it’s a powerful, powerful cash management tool on the back end. Vanessa Lowe: Absolutely. Absolutely. So here’s a question for those on the call on this webinar: Does your credit union offer business loans? Options are no, yes and we
have had SBA guarantees, yes but we haven’t had SBA guarantees, I’m unsure ñ maybe you’re not completely connected with that department ñ or not applicable and that could be for any reason, maybe you’re not with a credit union. So let’s see what kind of answers we have there. And Scott, while we’re waiting for those answers, why don’t you just give us a couple of points about
so, for anybody who’s on the call, they’ve got an active commercial loan program at their credit union, and they’re starting to think about partnering with the SBA, what should they do to get this started? Scott Bossom: Yes. Well, if you’re in Oregon, call me or southwest Washington, I should say. No actually,for that matter, anybody on this call could call me initially and I can connect you
to a local district office, because that would be the best next step, to engage with somebody who’s my counterpart, a lender relations specialist, in one of the other district offices closer to where the lender is. And just engage and start creating that relationship with the district office because that’s really the first point of contact,
even as you become a new lender, for questions, for support. That’s one of the favorite parts of my job, is working with lenders, because I used to be on your side doing these SBA loans and so I empathize with you, with lenders that are doing SBA lending and a little leery at getting into it. It’s
a lot easier than it used to be and there’s a lot of support to help you be successful at it. Vanessa Lowe: Okay, great. Okay, so the results are surprisingly even among those top three answers ñ no, about 30 percent are saying no, they don’t do business lending yet, so maybe they’re considering it if they’re on this call; yes, and we’ve had
SBA guarantees is 24 percent, so that’s great; yes, but we haven’t, so there’s 30 percent who like it sounds like you’ve got a portfolio and maybe this could be really helpful, to partner with the SBA. So for all of our speakers, there’s a widget at the bottom, that autumn widget is called Resources, and what you’ll find there that may be
helpful to print out even now includes the slides from this webinar but also one that’s called bio and links, and so you’ll get biographies of our speakers on that, and I believe I included their phone numbers and emails, too, so you can contact everybody. Excuse me. Thanks for the response to that poll.
I’m going to go ahead and move on. And remember, keep sending in your questions. Let’s now hear from Chris. J. Christopher Webb: Well, thank you very much. And hello everybody, once again, and thank you. We are in the Office of Economic Opportunity and we’re kind of the first step on the ladder, as
we like to refer to ourselves, to Scott’s big brother 7(a) program, which, like he mentioned, is our flagship program here at the SBA. But not everybody’s ready on Day 1 to jump into a 7(a) loan and sometimes they need a little bit more help with their business operations, and that’s
where we come into play. So let’s see here. I’m going to talk about our Office of Economic Opportunity, specifically our Microloan Program and how it works and talk about its highlights, the application process, because I know some of you are thinking about expanding or adding that
first tier to your existing SBA portfolio and, if you haven’t, we’re a great first step to ease your way into community lending, business lending, and entrepreneurial training because, unlike Scott’s program that he mentioned, where he is strictly in loans, we are the people that handle a lot
of the grants that help provide for technical assistance. So we wear two hats in our office; not only do we do loans, but we also handle grants. So talking about some of the products within OEO, the first one is Community Advantage; that should look familiar.
Scott pointed that out in his earlier slide. It is a hybrid of 7(a) and they are loans that go up to $250,000. They are done through nonprofit lenders, and these nonprofit lenders also provide technical assistance, sometimes as
little as three or four hours and other times it could be tens of many hours to get people ready for that level of lending. We also have what we call the Intermediary Lending Pilot Program, which was replaced by Community Advantage but they were 20 year loans and we have a few of these
lenders still out there, working their way through that portfolio. And then the highlight that I’m going to be talking about today is our Microloan Program. It is a unique program because, again, we work with nonprofit lenders. It’s a direct lending program. And not only do we lend but we also provide
technical assistance grants, and technical assistance is all about educating an entrepreneur, a future entrepreneur or existing entrepreneur, with where they are in their business and keeping them going through that ladder of success and/or economic opportunity through our ladder of capital.
So we’re climbing our way up here. And again, to help our Community Advantage lenders, we have PRIME Grant, which is another hat we wear here, which are grants up to $250,000, again, that support, technical assistance, capacity building of technical assistance, and in some cases
we’ve had great inroads in research and development into business education for small businesses. So the Microloan Program was really designed to assist with underserved markets and they were identified as women, low-income, minority, veteran entrepreneurs that
wanted to transition from either careers or different lives into taking what would most likely be a very small, commonly referred to as garage business and turning it into a fulltime occupation. And not only was it giving them capital, but the technical assistance they needed at that
point of their business life Now again, these microloans have to be made to for-profit businesses; I don’t want to create any confusion. Nonprofit lenders are the ones that lend the money but they are leant to for profit businesses. We have one minor exception, which are child-care
businesses. But again, nonprofit lenders lending to normal for profit small business. So just to highlight kind of how it works, we have the SBA and we have a big pool of money that’s allotted here in OEO to go out to our intermediary lenders. Again, they are nonprofit lenders such as
yourself, credit unions that have not only a lending capability but a robust technical assistance program to go with it. They meet with prospective borrowers and assess their needs, counsel them, train them, educate them, and then make a loan to them. Then that microbusiness utilizes those funds
and pays back the intermediary, who in turn pays back the SBA. Then, depending upon that track record and the management of that loan portfolio, the SBA then awards technical assistance grants to the intermediaries to reimburse them for all that training they did with those
prospective and now active borrowers. So to talk about what we do here, SBA going and lending directly to the intermediary, we can give them a loan as much as $2.5 million to lend out on the street. The very first loan we do with you
would generally be no more than $750,000 so that we can ease you into our process. And at any time we can never lend you more than $5 million as it relates to microlending. The term of our note to the intermediary is 10 years. It’s based on the
five-year T-bill and, depending upon the average microloan size of your portfolio, we buy down the interest rate off the five-year T bill; it could be 2 percent or 1.25 percent. So for intermediaries that specialize in loans under $10,000, commercial business loans under $10,000, the
cost to them is zero interest; you just pay back principal. That’s our current cost right now. So a pretty darn good deal for you to start reaching into the community. The collateral is based upon, number one, the microloan notes themselves, a loan loss reserve fund, and then of course the
revolving fund, where you collect your monthly payment from the microlenders ñ or micro borrowers ñ and in turn pay us out of that micro revolving fund. The matching requirement that goes into the loan loss reserve is 15 percent. So in our example above there, if I gave you a loan of
$100,000, you would need to put $15,000 in the loan loss reserve as your collateral contribution to begin your microlending program. And again, the use of those funds are short-term loans to businesses that are only fixed rate ñ very important
ñ and are $50,000 and less. So once you have our money, the intermediary, again, can make loans as small as $500 all the way up to $50,000. The loan can never be more than 6 years; we want to see that you’re able to reuse those monies
during the 10-year period that we give you to pay us back. The interest rate that you give to the borrowers is controlled by the size of the loan. There’s a margin of 8.5 percent if it’s under $10,000 and 7.75 percent if it’s greater than $10,000. And the borrower
can use those proceeds for supplies, furniture, fixtures, materials, equipment, and working capital. They can even refinance business debt ñ very, very carefully, you’ve got to prove that it’s business debt, but you can refinance business debt with a microloan. The one thing that’s not
there is you cannot buy real estate or real property. So that’s very important; we don’t do that. But that’s something, again, that Scott on his 7(a) side would fill that gap. Collateral for this is really up to the lending institution’s underwriting standards. At the time you become a lender with us we review how
you do your underwriting. Like Scott may have mentioned, we don’t want you to change how you do your underwriting; we don’t want to get involved on the underwriting. We want you to use prudent banking decisions but very often, with a lot of our microlending, because, again, you can do a loan as small as $500, the character
lending, the old school character analysis and character lending, comes into play. So very often there is no collateral to start with or sometimes it’s just merely the assets that were leant for. So it’s an old form of high-touch lending. And so again the servicing,
underwriting and collateral decision is all left up to the lender. And after they do all that, the technical assistance comes into play. As I mentioned before, depending upon how many microloans you’ve made and how much debt you’ve taken from the SBA
to make those microloans. That all goes into your calculation of your technical assistance grant and that grant size could be based upon 15 to 25 percent of your outstanding debt to the SBA. So again, in my same example of $100,000 lent to an intermediary to make
microloans and they did a bang up job, they could get as much as $25,000 in technical assistance grants. And currently our regulation has it that we’d like to see 75 percent of those grant monies to be used to support businesses while they have that microloan
and then 25 percent could be done for what we call pre technical assistance or before the loan goes into effect so that people are prepared to get the loan and then get the support they need as their business grows through the use of that capital. And our grants do have a matching
requirement of 25 percent. So a little bit of highlight about our Microloan Program. If you’re thinking about coming onboard, you wouldn’t be alone; we have over 150 now microlenders all over the United States. And since inception we’ve done over $500 million
in loans to intermediaries. In turn, they’ve taken that and leant out almost $800 million in microloan business. So again, we can see the use of that churn rate; we’re giving you 10 years on a loan and you’re lending it 6 years and less, so we’re seeing a lot of use of
that money going on the street and helping stimulate entrepreneurship within your community. We’ve done over 64,000 loans and our average loan size is only $12,290 as of the end of 2016. We’ve created over 94,000 jobs and retained 138,000 plus, and that number’s
growing very quickly as we head into 2017 as well. In my current slide you can see that our average over the past five years versus 2016 just shows how strong 2016 was. We had a banner year, actually putting out $61 million out onto the street.
And the important thing here is seeing how we have gotten into the underserved markets and really addressed this shortfall in lending. Right off the bat you see that we’re at just over 40 percent in startups, which is, again, just a huge lending market that if you don’t have that in
your portfolio and want to address it, you can do that with us. And again, with the technical assistance, we have a great success rate. As many people hear, you know, businesses fail within the first 18 months and it’s 40 or 50 or 60 percent. Our portfolios for most of our microlenders run
just around 10 percent on a default rate. So considering we’re in the startup business and you also have the grant to support you, you have a very good chance of success. We’ve just over 45 percent in women-owned and we have reached into the Hispanic and African-American
community very strongly to promote entrepreneurship and growth within all parts of the community, both urban and rural. In 2016, we did have our average loan size jump up to about just over $13,000. But you could see there, imagine a very low collateral startup loan
at ñ our average interest rate was only 7.51 percent to the consumer, so that’s some pretty strong lending and really reaching out to the community to empower people through entrepreneurship. So you’re thinking well, that’s probably some exciting inroads in
lending and something you’d want to add. Some people go well, it’s really hard to do business with the government or the SBA, but I want to go over the application process here real quickly and talk about some of the eligibility and qualification requirements and try to dispel that misnomer. The first thing
is to work with us, as I mentioned before, you need to be nonprofit. Well, I think we’ve taken care of that with everybody on the phone call here for the most part. I saw mostly credit unions in our poll, so that’s excellent. The next thing is you need to have at least one year of direct lending and loan servicing. Again, I think we can check
that off on this call here today but, drilling down on that just a little bit more specifically, we’re really looking to see if you’ve done smaller loans under $50,000. And again, for most credit unions, that’s probably an easy check. Now here’s the one to point out. You really need to
have at least one year of a robust technical assistance program. And what I’m talking about is an established and a multi-faceted technical assistance, not just teaching people about credit ñ which is very important ñ and credit management, but also some accounting
principles, maybe social media, marketing, all of these things that an entrepreneur might need to help them be successful within your community. So if you have all three of those components, you are more than eligible to apply and by all means we want you to. And then we get into your qualifications,
where we start taking a look at your personnel. And we’re hoping to see, again, somebody having that experience in microlending specifically or at least, again, portfolio management of loans $50,000 and less, that lending experience, that loan servicing experience, the technical
assistance experience, and then of course the financial strength and stability. We are looking for you to dedicate at least three full-time individuals to your microloan program, one person to handle servicing and another one to handle outreach and another one for technical
assistance. So we do need to see just over 6,000 hours of what we call FTE or fulltime equivalents dedicated to microlending so that we can see that that’s going to be a successful program. So that’s our minimum; that would be a good hurdle for you to take a look at and,
if you’ve got at least three people dedicated in those three areas then, again, you’re not only eligible but qualified to apply for us. So we kind of make those hurdles somewhat easy. And then we just have some components to the application; we send them out in a zip file,
and we just come in with an Excel spreadsheet checklist to make it easy. We’ll look for some governmental forms, like the legendary SBA 1081 that just checks off the background of the people that are involved in the microloan program or that will be, your history of lending, your lending loss
calculator rate, which we put into an Excel spreadsheet; you just plug in your numbers and it does all the calculations for you, a variety of supporting items, such as financials that you would need and your notification of nonprofit, and a variety of disclosures that we include, including the fact
that nobody’s doing lobbying, nobody’s been debarred, and that your Board of Directors knows that you’re looking to engage in microlending with the SBA. And then we have a sample of a security agreement as well as our microloan SOP ñ great exciting reading, I can tell
you; I recommend it. I enjoy it every weekend. So again, once you ask for the application you have the opportunity to read our SOP. It’s not very hard; we’ve made it very simple. It’s only about 60 pages but we have really drilled down on it and we’re very proud of it, and I
think you’ll find that it answers quite a few questions and alleviates concerns about what you may be getting yourself into, as they say, but you’ll be well educated ahead of time and be on the road of success to working with us. As I mentioned before, you can contact ñ and Scott’s correct, your very
first reach into microlending with the SBA should be with your local field office; they can get that zip file for you there but it’s also available on that hyperlink ñ but the loan officers and support staff in our field office are knowledgeable of the program and can help you and even get you into
a mentoring relationship with another microlender that is in your area. And that’s really the great thing about our 150 lenders; they always believe there can be more, and they’re always willing to help. Also, you can always reach out and contact myself or anybody in my office. So again, just a few
simple things. I would definitely, if you’re interested in getting this and you’ve made the phone calls, you’ve reached out, read that SOP and then really just follow the directions very carefully on the sheet and deliver a complete application and use the templates we gave you because we’re really
going to get all your calculations and everything done for you and it makes it very simple for you to onboard with us at the Microloan Program at the SBA. Again, more detail about our program and some of the good points of contact you can get as well as look up other
microlenders in areas so you can talk to them, that’s all available at these hyperlinks right here. And if you really want to go to the top, you can talk to our Chief of Operations at Microloan, Daniel Upham. He always stands ready to take your phone call. We
are definitely an office that will pick up the phone and answer your questions. And again, my name is Chris Webb. If you’re going to email me, I make it tricky. I go by james. [email protected] gov. My phone number’s right there, and I encourage you all to give me a call and/or
again reach out to your local field office and we’ll address all your concerns. We want to welcome you to come into the Microloan Program and become part of that because, based upon the poll there, there’s quite a few of you doing commercial lending within your community and you need the first step,
which could be microlending within your community and be able to participate in our multiple variety of technical assistance grants to help supplement that education. So thank you very much for your time today and I look forward to hearing from you. Thank you. Vanessa Lowe: Great information, Chris. Thank you so much. All right, let’s move on to our
next poll. The question is how does your credit union support micro enterprises? And here’s a check all that apply. Do you offer entrepreneurship training? Do you refer members to a training partner? He mentioned that there are 150 approved SBA microlending programs; hopefully you’ve got connection with them or will get connection with them
now that you’ve learned about them. Maybe you make loans via the SBA Microloan Program already or you make loans maybe through another partner; I know some cities offer a similar type of program, where they provide the funding. Or is it none of the above? So go ahead and answer that. In the meantime,
remember we’re going to have a last half hour of Q&A so send your questions in. To our speakers, leave that Q&A tab alone. We don’t want you to type in the answers to those; we’re going to give you the questions at the end. But for everybody else, send in your questions please. All right, we’ve only left a little less than 10 minutes for
Rippy so we may go a little bit into the Q&A part, but let’s move forward. Let’s see what kind of responses: 77 percent not supporting micro enterprises at all. Okay, something to think about there. 14.8 are referring at least to another training partner. I mean, I think that’s something each credit union can do is at least find who’s doing micro enterprise lending
or training in your community and at least have that referral available when your member comes in and says hey, I’m thinking about starting a business; where should I get started. So I encourage you to at least be prepared for those types of questions. 3.3 percent are making loans through the Microloan Program; that’s great. And then 3.3 percent are offering
the entrepreneurship training. All right, let’s keep it moving and Rippy, I’m going to turn it over to you, recognizing that you’ve got a little less time than we planned for so hit the highlights for us. Rippy Madan: All right. Thank you very much, Vanessa, and thank you, Scott and Chris. As a
lending specialist, I certainly appreciate all the information that you’ve shared with us. In making my rounds at credit unions, I notice credit unions getting more and more interested and getting into SBA loan programs or are
already in it. As the main topic slide that you’re looking at suggests, the focus of my presentation is the revised or I should say significantly revised member business
loan rule Part 723 that went into effect on January 1 of this year, 2017, except for one element, which would be the personal guarantee revision that became
effective on May 13th of 2016. So given the time constraints, what I would like to do is just hit on some of the highlights and some of the important points which I’m sure might be on
your minds. Just a little background. This rule revision was a part of the NCUA Board’s commitment to modernizing regulations for credit unions, so it’s the regulatory modernization initiative. And
also from a background standpoint, the NCUA Board promulgated its first MBL regulation back in 1987 and there haven’t been any significant revisions to the rule since 2003, so it’s been about 13 years, and over
the last 13 years, which keep in mind includes the great recession of 2008, 2009, credit unions have gained valuable experience in business lending activities and the portfolios have increased significantly as well. In fact,
just to throw some numbers out there, in 2003 the aggregate MBLs or business loans that were made by credit unions stood at an aggregate $13.4 billion. This is from the call report data. As of 2015 aggregate MBL balances
significantly increased to $56 billion, which translates to about a 14 percent annualized growth. So it was time to revamp the regulation, to modernize it, given the experience of credit unions and business lending
activity. The slide that you’re looking at right now highlights some of the goals of modernizing Part 723 or the MBL rule, and the first point is the most important. The objective was to replace
what the NCUA Board and NCUA senior management considered overly prescriptive requirements and replace it with a more principles-based set of standards or a more risk-focused set of
standards. A good example would be, from a prescriptive standpoint, as many of you might be aware, there were certain limits placed on loan-to-value ratios, the 80 percent rule, and then we had rules for limits
on construction development lending and so forth. The second objective was to clarify and expand risk management requirements to safely conduct commercial lending activities, and examples include experience, risk rating
systems, and so on. Number three was to improve the expertise and policy provisions of the regulation, and I will be touching on that in a future slide. Goal number four was ñ it’s
actually a corollary to point number one or goal number one on the previous slide ñ which was to change the supervisory focus to sound commercial risk management practices rather than focus on
prescriptive regulatory requirements such as, let’s say, a strict 80 percent loan-to-value ratio and go further and have discussions with management about how they plan to manage risk. Number five, which I’m
sure many of you would really appreciate, is to eliminate NCUA’s involvement and also, from the standpoint of credit unions, to eliminate the need for waivers, which really was a necessity as a result of these
prescriptive limits that were in place. So if you exceeded the 80 percent loan-to-value ratio by even 100 basis points or 1 percent, then a waiver was required. So it made it onerous for credit unions as well as the NCUA
to process these waivers. The sixth point, which can be a bit of a source of confusion, is the new rule distinguishes between a commercial loan and what you all know as a member
business loan. And what I try to do is think about it, and the simplest way to put it is that a member business loan is simply a loan that meets the statutory definition of a
member business loan and is reported on the call report as such and they count towards the regulatory aggregate limit that’s permissible for credit unions for business loans. Commercial
loans, on the other hand, the new rule describes a commercial loan as one that is more complex and requires a higher level of expertise and sometimes specialized expertise to not only underwrite the loan but
also to manage the loan effectively from a risk standpoint. So you could have a commercial loan technically that is not a member business loan per regulatory definition ñ an example would be a loan that’s fully guaranteed by a government agency; hypothetically
speaking, let’s say a loan was fully guaranteed by the SBA ñ that loan would not count towards your aggregate limit; however, it would still be regarded as a commercial loan simply because there are a certain set of requirements that must be met and also the loan
might be complex; it might be a restaurant, a loan to a restaurant requires a high level of expertise and also strict adherence to a set of procedures in order for the guarantee to be honored. So that would be the simplest way to
define the difference between what a member business loan is and a commercial loan is. Number seven would be to incorporate the statutory limit for aggregate MBLs pursuant to Section 107A of the FCU Act, and the
main point here is the act does not refer to an asset-based percentage limit such as what was included in the old rule, which was the lesser of 1.75 times total net worth or 12.25
percent of total assets. So the new rule essentially standardizes and adopts language which establishes a limit simply based on net worth, and that would be 1.75 times the
actual net worth. This next slide really just gives you kind of an idea about distance between a prescriptive and principles-based approach. A prescriptive rule would be, you know, don’t drive faster than 75 miles
or don’t have a LTV over, you know, 80 percent. A principles-based rule would be, you know, use your judgment; use risk-prudent judgment to decide what’s best given the situation, given the credit. Vanessa Lowe: So Rippy, while you’re changing slides, just remember again we
just need to highlight the main points that you haven’t covered yet. I think you’ve covered quite a bit in some of the upcoming slides, but we want to get to the Q&A. So I’ll turn it back over to you, now. Rippy Madan: Okay. All right. Thank you, Vanessa. I was hoping for
a little more time, but I think I can get to some of these slides a little faster because I’ve already touched on some of the rationale. So the slide that you’re looking at, highlights the changes, the differences between the old rule and
the new rule that went into effect the beginning of the year. The old rule did not have any specification and did not isolate smaller credit unions with limited commercial loan exposures, and by limited in the
new rule the definition of limited would be the credit union is not only less than $250 million in assets but does not originate loans that are greater than 15 percent of total
net worth. So there’s a relaxed expectation for smaller credit unions. This point deals with the Board of Directors’ responsibility and this, again is a
brand new section in the new rule. In the old rule there wasn’t a separate section on the Board of Directors; the Board of Directors’ role was included under the policy requirements. So the new
rule has a separate section on what the Board of Directors are responsible for and some examples would be not only approve policy but also review the policy annually, appropriate staffing,
risk awareness, periodic briefings, and so on. Loan policy requirements, the old rule did not have as much coverage as the final rule does. So if you look at the final rule and read the final rule, you’d find that
it’s much more expansive in terms of what your policy should address and should include. This next slide here is pretty self-explanatory; it talks about those prescriptive limits that under the old rule were in place, under the final rule it’s been changed.
The only thing to highlight here, what I’d like to highlight, is the final rule does suggest that loans to a single borrower or a group of associate borrowers, you can go up to 15 percent but you also have the added flexibility to go up to 25 percent.
However the amount above 15 percent must be secured by readily marketable collateral. And what that means is readily marketable collateral really is an asset that can be quickly converted into cash at a
predictable price and that’s the standard to use, and is fairly stable in price. Vanessa Lowe: Why don’t I ñ want me to ñ let me control the slides for you, Rippy, okay? Rippy Madan: Yes, I
think I’m on there. Sorry about that. Vanessa Lowe: It’s okay. All right, I think we were up to this one here. Yes, 723.8. All right, you want to start with that one? Go ahead. Rippy Madan: 723.6? Vanessa
Lowe: Yes. Rippy Madan: Okay. So this slide deals with construction and development loans and, again, you know, the old rule had a prescriptive requirement for the borrower to have at least a
25 percent equity interest and the loan amount by a credit union was to be limited to 75 percent, and the total amount of construction and development loans relative to net worth should not exceed 15 percent of net worth, so that
has been changed and, again, it’s up to management to establish risk-prudent limits for construction and development loans. And the loan to value calculation ñ this is very, very important for construction
loans ñ has been changed such that now the collateral valuation method would be the lesser of the projected cost to complete a project or the prospective market value. And
the language in the old rule was rather vague; when you look at it and compare the two, you’ll see the difference. 723.8, this is important, I think, for a lot of credit union
managers to participate in loans. In the old rule, the nonmember business loan participations did count towards the regulatory permissible
limit or cap; now it does not and there are no waivers required. This next slide deals with the seven states that have adopted NCUA’s old rule, which you see
in front of you. The final rule grandfathers these seven states simply because the rationale is that these seven states and the old rule is a lot more stringent than the new rule.
So if one of these states decides to change its rules, as long as it’s not less stringent than the new rule, the process would be to go through the regional office and have that approved; if
it is more liberal than the new rule, then it requires NCUA Board approval and a lot more scrutiny. Okay finally, from an examiner’s perspective ñ and I’m sure all of you are thinking, you know, it’s a new rule; whenever a
new rule comes out, okay, how are examiners going to, you know, kind of react and how are they going to assess our performance, our program ñ and I can tell you as a lending specialist one of the things that we are doing across the country is
all examiners are undergoing training on the new rule by regional lending specialists so the objective is to ensure a consistent examination approach. And the emphasis really would be on risk management, so
what I would like to emphasize is whatever you choose to do and adopt, you know, if it deviates from sound commercial lending practices, from ñ let’s say the old rule had a prescriptive limit of 80 percent loan-to value
and if you decide to go to 82 percent ñ I’d say documentation and having a good rationale would be what examiners would be talking to you about. So that would be the main point related to this slide. And finally, what
we do have for you is just a really good list of resources which I think you all will find extremely helpful, and it relates to member business lending and you can take a look and do your reading
and research at your own convenience. So with that, I think that’s my time. Thank you very much for your attention; I sincerely appreciate it. Back to you, Vanessa. Vanessa Lowe: Thank you, Rippy. Okay, let’s do this last poll so we have some time left for the
Q&A. Which MBL rule change has been most helpful? Moving from prescriptive requirements to principles-based standards? Clarifying and expanding guidance on commercial lending risk management practices? Eliminating the need for NCUA waivers? Or differentiating commercial loans from the MBL statutory definition? And of course we have the not
applicable option. All right, so while we’re waiting on that, again, continue submitting your questions; whatever we don’t have time during the live session to cover we will include in the Excel file that gets loaded with the archive. All right, here are our responses. They liked eliminating the need for waivers, 30 percent there, and moving from prescriptive
requirements to principles-based, 25 percent. Great. All right, let me remind you that you can get that certificate if you participated in the requirements that we talked about. And now, oh, there’s an advertisement. We have a relationship with the CDFI Fund, which is a program of the U.S. Treasury, and these are a couple of resources where
you can go back and look at essentially ways of getting certified and you can watch the video about CDFI certification. We’re still in partnership with them; we just released sort of a new memo about how those who are low-income designated can contact us directly and possibly use our streamlined application
for certification. All right, I think I’ll turn it over to Kathryn. Kathryn Baxter: All right. Thank you, Vanessa. And, as I explained to our audience, I’m pushing out our survey right now, so while we’re going through the Q&A,
please do the survey. Okay? I got it. All right. So let’s make sure all of our speakers are available and so, Chris, are you ready? I think we’ll start with you. J. Christopher Webb: Sure. Fantastic. Absolutely.
Let’s have some questions. Kathryn Baxter: Okay. So here’s what one credit union said. They said Mr. Webb, what does readily marketable collateral include? Does it include real estate? J. Christopher Webb: It can, absolutely. That would be great prudent banking sense that, if
they have real estate available and you can take a position, a second, third or so, that would be awesome. But it’s not necessary if they don’t have it at the same time. But that would be a great example of some great collateral for microlending. Kathryn Baxter: Awesome.
Okay. Stay there; let me get another one for you, Chris. Let’s see here. So weren’t you offering the ñ here’s what the credit union said, rather. Who is offering the technical assistance? Is it the lender? J. Christopher Webb: Absolutely, it’s the lender. So you get to wear two
hats, too. I mean, I’ve got two cool hats here. I get the lending hat and I get the technical assistant grant hat, and we give one to the lender as well, for lending and one for counseling. They do have the option to subcontract their technical assistance out, but it’s limited to only 20 percent of the grant amount.
So if you’ve got a $100,000 grant, only $20,000 could be contracted out to some contractor, say a CPA that would go around and maybe prepare balance sheets or something. But the lender, yes, you would need to have somebody on your staff that provides that education. Kathryn Baxter:
Okay. So on that same note, here’s what one credit union said, Chris. They said with the interest of small federal credit unions not having a staff of three people or 6,000 hours to invest in microlending through SBA, can a group of credit unions come together to spread the cost and
risk of meeting the 6,000 hours? J. Christopher Webb: You know, this is what I love about community lending; that is such a smart question. But, no. Yes, and I love the solution. The basic answer is no but yes, you could, but you would actually
have to create a whole new entity and that entity would need to have everything I talked about eligibility and qualification. So they would need to have the ñ that entity would have to have the lending and TA experience, that entity would have to have
financial stability, and the staff. So based I think from the position of the creativity of that question I don’t think it’ll work, but we have seen organizations pull together to create another community organization to do that, an umbrella, and if they want to explore that, that’s an awesome question and the type of creative
thinking that microlending needs. I think that’s fantastic and we could try to work something out. But based upon how I think that question’s being asked, the answer is probably no. Kathryn Baxter: Okay. All right, let me jump over to Scott. Scott, are you there on the call? Scott Bossom: I am here, yes. Kathryn
Baxter: Okay, so here’s your question. The credit union said for the SBA 7(a) Program, is the approval process for us as a credit union similar to the approval process for the Microloan Program? Scott Bossom: No, it’s actually quite a bit
easier. So the way that works under 7(a) is, well, assuming that you are federally regulated through NCUA and are in good standing with that primary federal regulator, then you are automatically authorized to be an SBA 7(a) lender. All
you have to do is request that in writing; you’ll sign a couple of agreements ñ our lender agreements are referred to as the 750 and the 750B; you can find those online pretty easily ñ and yes, it’s really just ask to be a lender and you’ll be granted authority to operate under the
7(a). In the beginning you won’t be delegated, of course; you’re going to send all of your loans to our loan center in Sacramento as a non-delegated lender. But yes, pretty easy; a much more straightforward process there because we’re not actually lending money to the organization, like what happens under Chris’s program
through the Microloan Program. Kathryn Baxter: Okay. So here’s another question for you, then. The credit union wants to know if we sell the guarantees then are we still on the hook for the 15 percent of the loan that is not guaranteed by SBA? Scott Bossom: Yes, absolutely. It could be 15; it could be 25 percent
if it was a larger deal with a 75 percent guarantee or, you know, international trade would be that 10 percent. But yes, you’re always as the lender retaining some portion of risk. I won’t go into great detail how that plays out should there be a default on a loan that has been sold, but
there’s essentially a fork in the road. A lender can buy the guarantee back or they can move forward and charge the loan off and we both go our separate ways. And there’s some reasoning to both of those routes, which I don’t need to get into here today, but that’s kind of generally how that would work.
Kathryn Baxter: Okay. So now one more question for you, Scott. This credit union wanted to know if you would review the last slide for further detail, sale of guarantee. Do you remember which slide number it was and we’ll go there? Scott Bossom: Yes, absolutely. It would be the very, very last one I had, which ñ I’m
scrolling here real quick ñ it’s a chart or kind of a flowchart of how that would look. Slide 21, I’ll put it up there now. Kathryn Baxter: Slide 21? Okay. Let’s see; let me get to 21. I’m going to push it out. Okay. Scott Bossom: Yes. Kathryn Baxter: Is this the one? Scott Bossom: Yes, that’s it, yes. Kathryn Baxter:
Okay, can you go over that? Scott Bossom: Yes, definitely. The whole idea here is again just kind of visually showing the flow of money. So as a lender you’re going to lend out that $1 million on one there; we’re hypothetically saying that’s 10 borrowers you did 10 $100,000 deals, let’s say. So the lender
gets an 85 percent guarantee, so every one of those loans was below $150,000. So in their hand they have guarantees, authorizations, for $850,000 worth of SBA-backed guarantee. So that what essentially gets sold, and so if a loan is sold there’s
a premium that’s created between whatever rate they issued to the borrower versus the rate that’s going to be dictated from the investor. Because these are very safe government-backed securities, the rate that gets paid is generally lower and so it’s that gap between
the rate paid to the investor and the stream of interest that’s being charged to the borrower that creates that premium. So in this case, I’m just using kind of a 10 percent average on that; again, those premiums are anywhere from 5 to 18 percent. What drives that is generally the rate
structure and the term of the loan as well. So they earn a 10 percent premium and that’s the benefit of this, is that’s, you know, it’s not free money essentially but, I mean, it’s a way to earn additional income by really doing nothing different than what you’re doing anyway; you’re just earning that premium because of the gap
in the rate between the investor and what the borrower’s paying. So in this example, you get a 10 percent premium, $85,000. Now you’re going to have fees that come of that, certainly, as these are sold through the broker-dealer but, you know, it’ll (inaudible) $935,000. That’s actual cash. So now in an account, you know, comes back into the credit union,
you’ve got $935,000 of that original million that’s there that you could lend back out and do the same thing again, lend it out to maybe nine borrower or to eight borrowers or whatever, sell those guarantees, maybe end up with $865,000 that time, and then it goes back out. So that’s kind of the idea of recycling it. Not all
lenders do that; every lender’s a little different with what they sell and what they don’t sell. It’s entirely up to you. It’s just, again, an extremely powerful cash management tool, especially for a smaller CDFI credit union. That capital’s even more precious than a larger multistate credit union. It’s a
great way to leverage that money further. Kathryn Baxter: That sounds like a good idea. Interesting. Scott Bossom: It is, absolutely. Kathryn Baxter: Yes. Scott Bossom: Absolutely. Kathryn Baxter: Yes. Scott Bossom: And it’s not for everybody; that’s the thing. That’s the thing to keep in mind. It is not for everybody. Some lenders, they just don’t
want to do this and that’s fine. But even those lenders, they know that on their balance sheet, should they need it, they have a fairly liquid way to access capital through the sale of the guarantees. Kathryn Baxter: That’s a very good program, though; it’s excellent. Scott Bossom: Yes. Kathryn Baxter: Okay. So now, Rippy, we’re going to give you a question. Are you ready? Rippy Madan: Yes, absolutely.
Kathryn Baxter: Okay, so here’s what the credit union asked. They said has the change been approved where all one to four NOO properties ñ and you’ll have to explain the NOO, okay? Rippy Madan: Yes, that’s non-owner occupied. Kathryn Baxter: Thank you. Okay, so has the change been approved where all one to four non owner occupied properties no longer count
against the cap? I thought that the law was passed, but I don’t see the change written in the recent regulation revisions. Can you elaborate? Rippy Madan: Yes, that’s a great question and it’s a bit nuanced. The statutory definition of a member
business loan explicitly states that a one to four family primary residence is excluded from the cap; however, if it’s a one to four non-owner occupied
property, such as an investment property that, you know, a person chooses to buy and the dollar amount exceeds $50,000, then it does count towards the cap because
it meets the statutory definition of a member business. Kathryn Baxter: Okay. All right, you’re done. Okay, let me give you another question. This one is pretty straightforward. It was already answered actually in the presentation, but here’s a
question. The credit union said are credit unions considered nonprofit lenders? Rippy Madan: Yes. Kathryn Baxter: And that was simple to answer to. Okay, great. So I think we’re going to give Scott our last question because we’re running out of time, so let’s see. Scott, we have a few here for you. Here’s a
good one. So here’s what the credit union said. Under your new One lender platform, do you see credit unions buying MBLs in the secondary market? That’s the first part of the question. Let me ask that first. Scott Bossom: Yes. I had kind of read through that one. So
honestly, I am not entirely sure on that. I don’t know of any credit unions that are active buyers in the secondary market. I’m not sure if there’s any restrictions on, you know, an actual credit union or a bank for that matter or any other kind of lender, you know, buying
into these pools of loans in the secondary market. I think that might be acceptable. I mean, it is an investment. I just don’t know for sure, so I need to research that piece a little more. It sounded like the rest of that question was really alluding to credit unions
not having the capability to necessarily do the business loans themselves directly but they could invest in pools of these 7(a) loans potentially through the secondary market because they have the funds to do that. So that one I need to research a little bit further to clarify that. Kathryn Baxter:
Okay. Well then, let’s give you this as our last question. Scott Bossom: Sure. Kathryn Baxter: Then we’re going to close out for the day. So here’s what the credit union asked. They said with the 1 percent packaging fee, how have other lenders structured their fee to reach the 1 percent or what would be an example
of how to structure that fee for, say, a $500,000 loan? Scott Bossom: Yes. So to clarify, the 1 percent, that is the fee. So it’s not a coming up with a dollar amount to fit into the 1 percent; what lenders do in general is just use a 1 percent packaging fee.
How that work, the allowance is a lender with the packaging fee, can actually charge up to 2 percent on the first million, and then.25 percent for anything over that. What we normally just see in most cases is the lender treating this
packaging fee very similar to what a loan fee in most small business loans would be, which is generally 1.1 percent. This packaging fee used to be restricted based on a dollar amount and a few years ago we actually moved to allowing lenders to charge it based on a
percentage. So that’s where this ended up kind of evolving from. So, for instance, on that $500,000 loan, what I would normally see is a 1 percent packaging fee, making that a $5,000 packaging fee for that particular deal. It’s usually financed along with the upfront guarantee fee, so it’s not necessarily
anything out of pocket, but that’s kind of generally what that would look like. Kathryn Baxter: Oh, okay. Wonderful. I think the credit union appreciated that. Well, you know what? We are fresh out of time. We’d like to give our thanks to our speakers, Chris Webb, Scott Bossom and Rippy Madan, and we
want to invite all of our audience to our March webinar, which is on electronic services. You’re going to love it. It’s March the 22nd. Thanks to our host, Vanessa Lowe, and our behind the scenes guy, Franz Ayento. We thank also, we’ve had some interns ñ not interns; I’m sorry
ñ we’ve had some examiners in here helping us today, too; we thank them for their great assistance. Please join us March the 22nd for our electronic services webinar. This is Kathryn Baxter for Vanessa Lowe and all the
NCUA team. We will see you on the 22nd, so have a wonderful afternoon and a great week.

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