Loan program forces lenders to weigh risks

If Bob Beck can’t figure out how a U.S. Small Business Administration loan program is supposed to work, it probably won’t work.

Which means America’s Recovery Capital, ARC, could be in hot water.

And taxpayers could be, too, if the default rate matches the 56 percent projected by the Office of Management and Budget.

Beck, vice president of Mountain West Bank of Coeur d’Alene, makes more SBA loans than anyone else in the area, and by a wide margin. He’s been an SBA lender of the year several times, and he is a director of the National Association of Government Guaranteed Lenders.

They are not a happy bunch.

ARC is supposed to be a lifeline for established, viable businesses imperiled by the recession. They must have been open two years, profitable in one, with the strong likelihood they will return to profitability.

Owners might receive five-year, interest-free loans up to $35,000 for help making principal and interest payments on existing debt, not including older SBA loans. SBA guarantees 100 percent of an ARC loan and makes the interest payments.

Disbursements can be made over a six-month period, and owners have one year after the last disbursement to start repaying the principal.

Beck says the result is a program that might be attractive to borrowers – demand could quickly exhaust the $350 million budgeted – but offers little to lenders. They can charge only direct fees for items like appraisals, and the 5.25 percent interest rate will hardly provide enough revenue to cover administrative costs.

“It’s almost impossible to process the application,” says Beck, who adds he has not approved any of the seven or eight ARC loan applications received from borrowers with whom Mountain West already has a relationship.

He is also alarmed by the potential loss of the SBA guarantee if there is even the slightest misstep administering the loans, and concerned about how the Federal Deposit Insurance Corp. will treat ARC loans.

“You will have a customer on the books who has not made a payment for 18 months,” Beck notes.

SBA spokesman Mike Stamler downplays the possibility of the various regulatory agencies working at cross purposes. A 100 percent guarantee that loans will be made good should satisfy all the overseers, he says.

“We’re all in this together,” Stamler says.

Although loan activity has been slow so far, he says SBA expects momentum to build as lenders become more comfortable with ARC.

At State Bank Northwest, Vice President Lori Jo Knoles acknowledges the administrative challenges, but says ARC might be an opportunity to secure a new account or two.

A retailer, for example, may need money now to buy inventory for the Christmas season. But because weather decimated 2008 holiday sales, those goods may not be fully paid for.

“If we can help them through the cycle, we will try to do that,” says Knoles, who adds that SBA is reaching out to lenders far more than in the recent past.

Beck agrees, and says he expects modifications to ARC that will allay some of his concerns.

A few patches, and ARC might yet bail out distressed small businesses.