One of the things I hear constantly from bank loan officers is “we don’t plan to sell our 504 loans.” They make the point that once they find a loan fits their portfolio, they don’t want to give that loan up. After all, the bank had to endure the origination cost; dozens of hours of packaging, processing and underwriting; the loan committee gauntlet; and the not-so-invisible hand of the regulators.
Also, since 504 first liens are not government guaranteed, the premiums are minimal compared to SBA 7(a) loans. So for example, a four percent bid is not likely to induce a lender to sell their loan since the net interest margin is likely 3% to 4% range per year. I get it!
But what many loan officers are missing is that the opportunity to originate loans that are not a fit for their own portfolio can be converted to immediate bank income as well as relationship-building opportunities.
Too many loan officers still review borrower loan requests with a “Pass/Fail” filter. If the loan meets their underwriting criteria and the applicant accepts the pricing, the loan is designated for packaging and processing. If the loan either does not meet the bank’s underwriting criteria or the customer rejects the pricing, the loan officer will typically decline the loan with no thought to how the customer’s needs could be satisfied with assistance from the bank.
Loan officers should update their filters to “Pass/Fail/SELL,” which would broaden their review not only for loans to stay in their portfolio, but also for loans to sell to one of the growing list of 504 secondary market buyers. Selling lenders have the option of funding and selling a loan, having the loan table funded in the selling lender’s name, or referring the loan to the secondary market buyer for direct funding of the loan.
Benefits Of A Loan Sale Or Referral
There are many benefits of processing a loan for sale or placement with a secondary market buyer as compared to simply declining the request for credit, including:
Income – Secondary market premiums for SBA 504 first liens average about 4%, and all current secondary market buyers offer par pricing with no origination fee. A typical origination fee is 1.50% with 0.50% paid to the SBA, and 1% retained by the selling lender. This equates to 5% in total income, or $50,000 on an average sized $1,000,000 first lien.
Relationship Building/Cross Sell Opportunity – When an applicant applies for a loan and is turned down, it’s natural for that applicant to seek out a new potential lender. Most often, the lender that is able to accommodate the loan request will receive the customer’s depository accounts and other ancillary business. So a lender that declines a loan request also declines the overall relationship.
Conversely, a lender that is able to accommodate the applicant’s request – either on or off balance sheet – will often be able to attract or retain the overall business and personal banking relationship.
Better Rates & More Flexible Underwriting Requirements – Many community bank lenders are not able to compete against the larger institutions now focusing on small business lending such as Wells Fargo, Chase, BofA, US Bank, Bank of the West, and others. But by partnering with a secondary market buyer, a community bank seller may be able to provide more competitive pricing.
Most secondary market buyers offer 5 year fixed rates starting in the low 4’s (August 2014). One even offers a full 25 year fixed rate starting in the mid 5’s. Very few community banks able to offer longer term fixed rates, and many would be hard pressed offering 5 and 10 year rates available through the secondary market.
Credit flexibility may be another impediment for a community bank. Banks may have restrictions on property type, loan size, reliance on projections or past credit issues. Given the expanding universe of secondary market buyers, it’s quite possible that a selling lender can find a match for the applicant’s specific credit profile through one or more secondary market buyers.
The 504 secondary market provides a virtually untapped opportunity to generate significant fee income while building long lasting customer relationships. The list of secondary market buyers is growing nationally. If you can’t find one, contact me at .