PACE Roundtable: Removing Barriers to Small Business Lending
By Matt Horton
Following up on the Policy and California’s Economy (PACE) roundtable’s October 2014 roundtable session, the Milken Institute’s California Center, in collaboration with the U.S. Small Business Administration (SBA) and the Federal Reserve Bank of San Francisco, convened a third meeting to further explore strategies for easing processes for small businesses seeking loans. Recommendations from previous roundtables served as the backdrop for conversations among participants, who discussed the importance of sourcing technology and innovative solutions for resolving underlying technical assistance hurdles that precede the loan origination process.
Experts attending the roundtable include SBA local and regional leaders, SBA lending officers and local development as well as community banking representatives. SBA Associate Administrator Ann Maria Mehlum, of the Office of Capital Access, joined California Center Managing Director Kevin Klowden in facilitating the session. As Mehlum explained, the primary role of her office is to find ways to get capital into the hands of small businesses. She outlined ongoing SBA efforts to improve lending, especially in underserved communities (e.g., veterans, minority groups and women-owned small businesses). Data show that micro lending and small loans, typically under $150,000, are the most vital to these underserved markets. In the wake of the financial crisis, such smaller loans were not economically feasible for banks and credit unions to undertake. As a result, SBA efforts focus on enhancing the profitability to lenders of these loans though fee elimination and innovative tools to expedite loans at origination.
Participants cited concerns about the regulatory climate’s imposing barriers to lending, especially the seemingly heavy handed concentration limits and occurrences when the Office of the Comptroller of the Currency (OCC ) scrutinizes SBA score validation. Suggesting that in cases where regulation is less warranted, a special designation for lenders and community banks who participate in the SBA’s Community Express program could alleviate OCC regulatory delays.
Participants also stressed the importance of ongoing technical assistance efforts, especially those intended to cultivate the ability of small businesses to demonstrate value and profitability. Roundtable participants urged that improving banks’ ability to make smaller loans should continue, with an eye toward resolving the risk assessment hurdle and continuing efforts to identify and connect with undeserved and minority groups. They suggested the SBA seek to maintain its relevance by exploring modernization tools. By focusing on specific gaps and meeting certain scalable needs, the SBA might be able to facilitate increased data sharing among lenders.
For its part, the SBA asserts its program efforts have contributed to a 20 percent increase each year in the availability of small loans. The SBA also supports recommendations stemming from past PACE roundtables, including a proposed small increase in the interest rate lenders charge for smaller loans, as well as a proposed state bank to serve as a loan fund repository – to be coordinated by groups of SBA-approved lenders. These strategies were intended to address the divide between institutional and community interests, and resolve technical barriers between businesses and lenders, while mitigating the risk assessment hurdle the banks face.
For next steps, the SBA has expressed willingness to discuss the feasibility of revisions to its guidelines to allow for an increase in the interest rate for smaller loans. With current programming efforts – dedicated to demonstrating overall cost savings and program efficiencies – the prospect of potential new revenues will be matter of (political) timing. New SBA programs, such as the pilot referral connecting system (which allows small business in need of capital to solicit among lists of pre-approved vendors, such as Community Development Corporations, Community Development Financial Institutions, community advantage and micro lenders) – could provide a scalable structure for the proposed state bank.
In the near term, the California Center plans to convene a follow up meeting among local and regional SBA representatives and state banking and regulatory officials to focus on two key areas. First is a working group to develop and propose concrete regulatory changes and actions that the SBA and Congress can take. Second is to convene experts to address mechanisms for improving the sustainability of smaller loans for banks to undertake, either through pooling risk data, providing an ongoing fund to back such loans, or both. We will publish a series of white papers to further quantify the benefits of a small-loan rate increase as well as to provide structure to a potential transformation in the role of the state infrastructure bank. We will then convene a small business summit, focused on actionable strategies related to consolidated risk assessment and potential regulatory changes.