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hi welcome to Coleman small business lending podcast Friday March 6 2015 sunny Southern California 72 degrees sorry to my friends back east on today's podcast is sponsored by the national alliance of commercial loan brokers conference that conference is also co-sponsored by both live in Las Vegas I will be the keynote speaker Tuesday March ninth I have a fun topic it is broker fraud if you are around please come up and introduce yourself and say hello should be a fun conference that get together about 50 lenders 250 brokers in the spark or education so this is important for the industry several things happened this week last week my son Joseph then I were in Augusta Georgia for the Georgia small business lenders conference the keynote there was by SVA associate minister and marine melon and I wrote on speaking at the Georgia lenders conference in the gusset last week and says we have a fairly new administrator maria contreras-sweet she's a community banker from California and she absolutely understands the challenges of smaller lenders she's highly committed to the success of the industry of small business lending she's remained ESPN from Small Business Administration to smart bold and accessible and she was pushing us every day to be smart bold and accessible what is a small SBA loan you the lender decides the amount of a small svec a loan that can be approved with SBS credit score this we wrote about on Wednesday that is the ticket way I got from the Georgia sve linda's conference last week in Augusta SBA continues to push lenders to approve more smaller loans the agency understands the cost to the lender in underwriting smaller loans that's relaxed underwriting standards here's the quick recap SVA defines the small sb7 a loan is less than three thousand dollars these small loans may be approved with SBS credit scoring system you enter basic borrower information into e tran and a credit score will be issued if it is above the minimum standard you may then approve the loan with reduced credit analysis and approved credit score assumes repayment ability of the business i want to repeat that and approved credit score assumes repayment ability of the business we're going to talk about that later however the streamlined s via credit memo requirements from your underwriters are one a brief description of the management in the business it brief means brief number two personal financial statements three we do need the IRS Form 4506 i mentioned i'm speaking about fraud to this day there are lenders who are still making loans without obtaining the 4506 to verify that what your borrower is telling you is what they are also telling the IRS for analysis that equity and pro forma debt to earth ratios are acceptable five proper verification of equity injection o is key six we need to list collateral and seven we do need to do some type of global cash flow analysis if there are affiliated companies now for the c-suite take away you may choose a lower threshold amount to start processing loans with a small business credit score from SBA in order to feel comfortable with their system say fifty thousand dollars and that's what anne-marie melam the SV associate administrator said in Augusta start with the lower mount see how it plays out you may also choose to only process loans but the higher credit score than SPS minim which is at 140 but the thing to remember these are SVS minimum requirements you are still the final arbiter of what is appropriate of what is prudent and you don't have to go down to that low bar you may say hey even though we're doing smaller loans we still want to do a cash flow analysis we may not want to worry about current asset ratio and all those other ratios again the rigs are allow us to do acceptable ratios and we get to determine that acceptable so those are some foods for thought now what's interesting I got two very astute feedbacks from bankers and let's start with Washington Trust Bank Doug will for Doug appreciate your comments your article today speaks to SB a credit score on small deals at the end you mentioned the lending institution could establish a threshold for credit approval above the 140 scored we actually were going to do this at the 160 level as this was identified at the lower end of the moderate risk stand by SBA I understand this is called an overlay we're in the bank established is a higher standard using a credit scoring program however after meeting with the FDIC and a Portland istic office function and talking about our compliance Department we abandoned the overly idea due to a possible compliance violation FDIC said we would have to continually understand and evaluate the overlay in order to justify ie we just can't pull it out of thin air they want to see some back up to that as this is basically an unknown for us at the bank we chose the one following order determined that we would process and not a credit decision to do to regulatory risk um has anybody else had that experience or better yet has anybody had you know we're bankers were not statistician has anybody had success in doing an overlay program that the FDIC has bought off if you have had that experience please let me know and i'll be happy to share with everyone on our website the next comment comes to my friend in Rhode Island Brian Murphy who is under tons and tons of snow as he said uh and what they are saying is a similar issue but this his regulator the OCC is pushing back on SVA scoring model it is treating these loans as substandard loans since the lint bank as the lender cannot demonstrate that the borrower in fact cash flows and I think that's really critical SBA is allowing the lender to say hey we don't have to do this if it spurs okay in this particular case with this community bank the regular saying we're not going to love it so they're not doing it so that's a problem he doesn't want to be booking a bunch of substandard loans so he's if he wants to do the smaller loans he's being instructed to do cash flow analysis what is your experience how are other bankers out there dealing with this I would appreciate your comments and i would like to start a dialogue on this topic these two topics um next way to go to Brian and we're going to talk a little bit more with him hi we're talking with Brian Murphy president and CEO of home loan investment bank providence rhode island you guys have some snow out there right lots and lots of snow he's will send it out to you guys are not watching it and saba7 california is gonna be 72 degrees today so don't don't hold bet against hey you want to talk about a couple things it's good to see you again it's been way too long 1321 program what's that about three two one program we have a credit matrix so we pay up to three points to a business referral partners and I know you're well connected throughout the whole SBA lending community so we'd like to get the word out that will pay up to three points what type of deals um really it's it's we don't limit by say a business industry type but it's more about you know we want one and a quarter debt service you know we sell are the guarantee portion secondary market so prime plus 2 75 you know the best price you can get we also do USDA be and I lending as well so it's more on the credit quality not necessarily the industry what we want you know the good credit will pay up to it will pay up to three points any geography restrictions um east of the Mississippi you know strongest in the Northeast but there's really anything west of mississippi would be an exception for all you know board approval but we'd still look at any good credit that's know all over the country well that's certainly very attractive types of referral fees i'm speaking next week to the nash loan broker Association so maybe maybe I can draw it drop your name for a plug from that standpoint in Las Vegas next week um the other thing I want to talk to you about brian is we ran an article the other day that talked about spie encouraging lenders to use their credit score the SBA credit score and by using that it automatically assumed certain things it assumes the lender can do a lesser underwriting memo they don't have to do a debt to work calculation in a few financial ratios it's a streamlined process however you're saying that your regulators are giving you negative feedback if you engage in that process yes we raised the issue a year ago when when you know the up to 350,000 kind of program was ruled out the amount you know the credit scoring model we were discouraged then art where we're OCC regulated and they view it as substandard we're actually in the midst of a month-long OCC examination right now and we raised the issue again and and again you know debt services is no cash is king debt service is the primary credit focus that they have so they don't under my impression there's not a mitigating factor that can offset that from the OCC's perspective fortunate I know SBA is really being the disruptor in the field in terms of leading the charge of getting microlending small loans out there what I report it was hey if used the lender or uncomfortable adopting SP is credit score what the 350 then do a lower threshold they started $50,000 but what you're seeing in your experience with the OCC even that is problematic that they would simply go in and classify that little substandard right off the bat yes and that's against our policy so you know we're not touching my fear is you know a few years down the road the office of credit management you know Oh CRM would be very critical of that credit if it went bad and said why did you do this loan and without debt service and and you know I we're just we just don't want to get burned and that's too bad that's fortunate Brian Murphy president home loan anticipate profit rhode island it's your snow shovel out of the car and hopefully spring will be there soon Thank You yeah we're all praying for it and this concludes Coleman small business lending podcast or friday March 6 2015 look forward to talking to you next Freddie thank you all very much