Dear Ms. Contreras-Sweet,
I have a vested interest in the U.S. Small Business Administration (SBA). I've been a small business owner and a small business lender for more than a decade, and I specialize in the SBA 504 loan. Early in my career I learned how powerful the 504 loan can be, with the ability to help small businesses create wealth through commercial property ownership and lower the risk for lenders at the same time. In fact, I even have a 504 loan myself. It's the perfect public-private partnership (as close to perfect as I can imagine), and I decided to build a business that specializes in this particular loan program. Back then, I got a lot of funny looks when I told people I wanted to start a commercial lending firm with only one loan product, and a government-backed one at that.
Nevertheless, 11 years on, we're still going strong (over $1.39 billion financed to date) and we've been able to help hundreds of small business owners purchase, construct, and expand their facilities. I mention all this simply to give context for what you're about to read. There are a few actions that I believe should be taken both to grow SBA 504 loan volume and to help small business owners get access to credit that will allow them to grow as we continue to climb out of the Great Recession. This is my three-item wishlist:
First, I strongly urge you to press Congress to reinstate the SBA 504 refinance program that expired in September of 2012. When the program was enacted, $15 billion were authorized for the two-year run. Of that amount, only about $2.5 billion were used. The SBA 504 refinance provision is important because it allows small business owners to tap the embedded equity in their commercial facilities. Using a 504 loan in this way gives America's job creators access to capital that will help grow their businesses. As more and more lenders and borrowers learned about this refinance opportunity and became familiar with it, there was a huge increase in application volume. The short time frame -- made even shorter because the regulations governing the program weren't issued for several months -- cut short the massive impact that 504 refi could have had. If the program were reinstated and borrowers were allowed to utilize the approximately $12.5 billion that were once set aside, we'll be able to fully realize how beneficial it can be for small business owners and our economy.
Second, the First Mortgage Lien Pooling (FMLP) program ought to be reinstated. It was also part of the Small Business Jobs and Credit Act of 2010, alongside 504 refi, and had the same sunset date. The FMLP program deserves another run because it helps small business owners get financing for difficult-to-fund special-purpose properties. As a former community banker, I have a feeling you're all too aware how regulations often dictate what property type a commercial lender might or might not finance. Hotels and restaurants are two examples of out-of-favor special-purpose properties that became much easier to fund under the FMLP program (nearly $2 billion of the allotted $3 billion were left unused). Reinstating FMLP will help mitigate the inherent risk in special-purpose property financing, allowing more lenders to help finance these critical businesses... small businesses where Americans stay and eat every day.
It's also worth mentioning that the 504 refinance and FMLP programs are, by nature, user-fee-supported. They were both designed to operate with zero subsidies and be budget-neutral. This is one of the things that I love most about the 504 program: It helps small business owners in big ways historically without leaving American taxpayers to foot the bill.
Third, I'd like you to address how SBA 504 construction projects are regulated for commercial lenders (I think your community banking background may give you insight here as well). As it stands, 504 construction projects count against a bank's construction bucket "guideline." This limits the amount of 504 construction projects a bank can undertake at any given time. Construction projects funded with other small business lending programs, such as SBA 7(a) loans or USDA B&I loans, however, aren't counted against a bank's construction bucket because the government guarantees are made on the front end, in anticipation of the completion of construction. With a 504 project, the SBA guarantee doesn't functionally come into play until a certificate of occupancy (or equivalent) is issued. If the impending guarantee for a 504 project could be treated by regulators the same as that of a 7(a) or USDA loan, it would be possible for banks to do more 504 construction projects. This would be a very big deal, as we're seeing more and more small business owners wanting to build and renovate their commercial facilities. In 2013, 66% of my firm's loan volume came from 504 construction projects, and we consistently turned away deals because our construction bucket was overflowing.
Now that I've dumped a laundry list of requests on you, let me say that I'm very excited at your nomination. When speculation swirled last year about who President Obama might nominate for this post, I wrote an article about some of the qualities the new SBA Administrator should possess and embody. Having someone with your background and experience heading the SBA makes me hopeful for the future of small business in America. I'm not a proponent of big government by any stretch, but I believe the SBA is a necessary entity for the representation and benefit of America's small business owners. I look forward to your confirmation and all the good work you'll able to do as SBA Administrator.
CEO & Cofounder, Mercantile Capital Corporation