The Evolution of SBA Loan Service Providers
Back in the early 90’s, I was teaching bankers how to do SBA lending. I also helped in doing credit analysis and loan packaging. Everyone called me a loan packager. As my business has evolved into setting up SBA departments and finding people to fill SBA jobs, so has the cottage industry that seeks to support small SBA lending programs.
Today we call this industry that of the SBA Loan Service Providers or LSP. They come in all skill sets. Some just do SBA loan packaging. Others focus on SBA credit analysis, etc. There are a few that are what we might call “full service”, proclaiming that they have the expertise to be your entire SBA back office. While it would serve the SBA lending community for the SBA to classify LSPs as “certified” according to their skills and abilities, it will be incumbent upon you to check them out. Significant due diligence is required. Many will say they are full service. However, there are just a few nationwide that this author would recognize and agree as having the full service skill sets required to fully protect the SBA guaranty.
The SBA has set up a policy in the SOP 50-105 (f) that regulates the fees that the LSPs can charge and there are caps. But, LSPs have been very creative as to how to get around this SOP policy and charge for “add on services”. Any LSP agreement must be sent to the SBA for approval by the bank and not the LSP.
Why has there been a rise in the number of and use of LSPs nationwide? The simple answers are, 1) the cost of hiring experienced SBA lending staff that know their job well enough to meet SBA compliance and protect the SBA guaranty, and 2) the lack of available SBA lending talent.
When the recession hit in October of 2008, I started receiving hundreds of resumes of SBA lenders who had lost their jobs. This continued throughout 2009. Many of these people had no choice but to move on to other careers, most often outside of banking. Significant hiring did not occur again until the second half of 2011. During the good lending years, the SBA industry has been good about bringing in new and younger people and training them. But during this recession, the industry simply did not replenish the pool. So, not only did we lose good people, but we did not replenish.
Once hiring began again, all lenders were focused on new loan growth. If the hiring manager were able to add to their team, it would have to be a seasoned professional who could “hit the ground running!” Some of the people who lost their jobs were able to come back into the industry. But, demand has outpaced supply and we have seen a major increase in compensation for these seasoned professionals. Starting an SBA department today, with a comprehensive backroom capable of doing in excess of $20 million in loan production, will cost the bank in excess of $600,000 start up first year including software, etc.
With the significant rise in secondary market premiums, along with flush banks that need loan growth, the SBA lending program has gained significant popularity unseen since the mid 90’s. Increases in SBA compliance have also risen to greater degree. The fear of losing the SBA guaranty is real. The mandate from the SBA is to do it right or do not do it at all.
How does a bank that wants to start an SBA program get started without the high cost of staffing, software and insuring compliance? Enter the rise of Loan Service Providers.
In the next part of this series I will discuss the people behind the LSPs. Who are they? Where did they come from and gain their SBA expertise? How do you complete due diligence on these support companies? And, most importantly, what are the pros and cons of using LSPs?