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The growth in the 504 program's volume over the past four years is a direct reflection of several factors beyond the regulatory strictures that have faced the 7(a) program: a flat yield curve providing low long-term rates, competitive pricing pressures in the market, and the relative expansion of real estate values making low down-payment financing even more than usually attractive.
The growth shown in the chart, 44% in numbers of debentures and 124% in dollar value has created problems as the network of CDCs has strained to handle the increase in product demand. CDCs are arguably more susceptible to the problems of growth management, lacking the ability, as overwhelmingly not-for-profit economic development entities, to raise financial capital to increase capacity. When combined with the remaining territorial restrictions on operations, many lenders have been faced with either gaps in a distribution network or settling for inefficient or ineffective product delivery.
Lenders need to make use of the fact that CDCs, now being at least de jure if not de facto statewide operations, are in competitive environments and are thus subject to the demands of the marketplace. These demands are frequently expressed as concerns over timeliness and a bias for problem resolution. Few people or organizations will admit to either tardiness or slovenliness, thus the problem is how to raise these issues in a way which may elicit more accurate and reliable answers as to actual performance?
Several straightforward questions may provide a lender with the needed information to determine if a specific CDC is a valued part of the solution:
When do you get involved?
If a CDC is unwilling to support your marketing effort, why should they expect your business?
When do you begin underwriting?
A CDC that waits for a complete package and only then begins underwriting can hardly be described as proactive.
Processing: ASM, PCLP or...?
A CDC can process a loan under several levels of delegated authority which usually have some basis in competence, After all, you market your PLP status, why shouldn't a CDC with similar status and ability?
Legal Counsel: Status, joint representation?
The same logic applies to CDC counsel, if they are priority status there is usually some correlation to competence and they can be easily motivated by the prospect of the lender's work.
Underwriting issues and liquidation posture?
As product demand translates into portfolio balances some CDCs may become concerned about a range of portfolio management issues. This will likely be magnified when forthcoming SBA liquidation regulations put the onus for liquidation actions on CDCs. This will eventually filter through to their marketing and underwriting posture and, in the worst case, will define their conduct as a participant creditor in a foreclosure action.
A COC that cannot provide reasonably coherent answers to these questions is not part of the solution; they are at best part of the landscape.
Thomas Wallace is president of SRD Corporation, a Florida CDC. He has extensive commercial banking experience, and is the recipient of awards from both NADCO and the SBA. He has published in the RMA Journal and The Banking Law Journal on various SBA -related topics. A NAGGL board member, Wallace also serves on the Technical Issues Committee and as an instructor for NAGGL.
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