Posts Tagged ‘SBA Recovery Loans’

SBA Recovery Loans Perform as Predicted

Saturday, September 4th, 2010

On March 23 of last year, I posted a blog entry critical of the America’s Recovery Loan Program of the U.S. Small Business Administration. Specifically, I wrote that to mitigate the moral hazard risk (inherent in raising federal government loan guarantees), the SBA stipulates that the loans “are to be extended only to ‘viable’ small businesses, which it defines as those that have ‘demonstrated an earnings history and a proven record for success that may just need a little extra help to get through a short-term downturn’. (Shouldn’t all loans be limited to ‘viable’ businesses? And how did the SBA determine that the current economic downturn will exist only for the ‘short-term’?)”

On June 17, 2009, I posted a follow-up entry to write that there may be relatively few qualified applicants to apply for this program given its unusual requirements and that banks would not likely find the 2 percent premium paid by the government sufficient compensation for the onerous underwriting requirements.

Here we are a year later. The Recovery Loan program expires this month and the SBA has approved just fewer than 8,300 loans, even less than the modest number (10,000) of loans that the SBA had funds available to support. The New York Times has reported that meeting the “struggling but viable” criteria proved difficult for small businesses and banks had little appetite for the extensive underwriting requirements. When you contrast this lame “recovery” program with the Troubled Assets Relief Program (TARP) that bailed out Wall Street, it makes it clear where Congress’ priorities lie.