Bank of America Slashes SBA Loans.

Bank of America, long characterized as a leader in SBA loans, has suddenly and dramatically curtailed its lending to that crucial small-business sector of the Los Angeles and California economies.

The pullback comes at a time when small-business growth is more important than ever to sustaining economic growth here.

News of the pullback drew expressions of concern from officials at the U.S. Small Business Administration and outrage from community development officials.

"When NationsBank took over the BofA in 1998, they were very loud about their record in community development," said Alan Fisher, executive director of the California Reinvestment Committee. "But in reality that record was the work of the old BofA, and since then what has happened is what people expected to happen with the bank's headquarters moving out of state. They have gotten less involved in community development, and their small-business loans are no longer targeted at low-income neighborhoods."

BofA officials took issue with such characterizations; they insisted the bank is still extremely active in small-business lending in California in general, and Los Angeles in particular.

"There is no question about it," said Jim Roby, market manager of Bank of America's Community Development Division. "The new bank is as committed to small-business lending as before. That commitment is alive and well."

But new numbers released by the SBA tell another story.

In the SBA fiscal year ended Sept. 30, 1998, BofA made 665 such loans in L.A., but in 1999 the total dropped to 410 loans. And over the first three quarters of 2000, the bank has made just 59 SBA loans here, according to the L.A. district office of the SBA.

"This is a very dramatic drop, there's no other way to describe it, and we are very concerned about this," said Alberto Alvarado, district director for Los Angeles with the SBA. "We are especially disappointed because in the past we have held them up. as a model small-business lender."

SBA loans are government-guaranteed loans that are especially important for many small, minority- and women-owned businesses that cannot qualify for conventional bank loans.

One particularly worrisome development, according to Alvarado, is that BofA used to be a leader in providing the very smallest SBA loans of around $50,000, for which there is a lot of demand among local businesses.

But as the number of its SBA loans has dropped, the average size of the loans has increased. Through the first three quarters of this year, BofA made 162 SBA loans throughout California with an average size of $169,000, according to the SBA. During the same period last year, the bank made 799 SBA loans in the state with the average amount being $60,000.

"Most of the small-business owners I talk to just want some working capital, loans of $20,000 or $30,000 maybe," said Alvarado. "There are many lenders who do the big loans of $200,000 and more, but Bank of America was unique in that it provided many of the smallest loans. If these type of loans are no longer available to businesses that don't qualify for conventional loans, that will be very detrimental to the local small-business community."

Indeed, with the Los Angeles Community Development Bank entangled in lawsuits and busy restructuring its operations, there are fewer options out there for small businesses, particularly in low-income neighborhoods. Even if they are well-run enterprises, small businesses can lack the appropriate credit history needed to qualify for a conventional loan.

Liam McGee, president of California operations for BofA, was not available for comment on the issue last week, but in a recent interview (see page 32), when asked about BofA's small-business lending, he said: "We have to get better. I think we've made a lot of progress on this, but we're also realistic enough to know we have to keep making progress."

BofA's target

Roby said the decrease in the number of SBA loans is made up for by BofA's large and growing portfolio of conventional small-business loans in California. In L.A. County alone, he said, the bank made 13,260 conventional small-business loans in 1999, with a total value of $654.4 million. That pencils out to an average loan size of about $50,000.

"In the current strong economic climate, more small businesses qualify for conventional loans," said Roby. "The tools provided through SBA lending are more effective in an unhealthy economy than in a healthy one. If an economic downturn were to occur, I'm sure that our volume of SBA lending would go up again."

Only small businesses that don't qualify for conventional bank loans can get money through an SBA program, so it does stands to reason that if more small businesses qualify for conventional loans, the volume of SBA loans would go down while the volume of conventional loans would go up.

But that theory doesn't sit well with a number of community development officials who maintain there are as many small businesses as ever in the least affluent parts of L.A. County that cannot qualify for a conventional business loan.

"There is a huge unsatisfied demand for micro-loans here," said Dean Jones, executive director of the Economic Development Partnership for South Los Angeles. "We hear all the time from people who are unable to get such a loan because the banks are not interested in making them."

A notable exception to that pullback by BofA and other large banking institutions is California Federal Bank.

The number of SBA loans issued in California by Cal Fed shot up during the first nine months of this year to 243, up sharply from just 83 such loans during the like period of 1999. Meanwhile, the average size of Cal Fed's California SBA loans actually decreased from $101,000 to $74,000.

Cal Fed is now the largest SBA lender in the L.A. district.

"Other banks dropped the ball, doing fewer and bigger business loans," said Heather Endresen, Cal Fed's SBA lending manager. "Cal Fed is moving in the opposite direction by doing more and smaller loans, and is meeting the needs of our small-business customers in a way that's also profitable for the bank."

Endresen attributed Cal Fed's small-business loan growth primarily to the SBA express loan program.

"We already had our own express loan program for conventional loans of less than $100,000," said Endresen. "As the SBA express loan program expanded in October of 1999, we have been very successful in integrating this into our existing program."

The SBA express loan program allows a bank to use its own paperwork to process SBA loan applications, but the SBA will only guarantee 50 percent of the amount of such loans, as opposed to the maximum of 75 percent on the most common, 7(a) SBA loans. Thus, while the risk to the lender is greater under the express program, there are also greater cost savings.

"The loans have performed remarkably well," said Endresen. "We expect to see moderate growth in the number of SBA loans in California next year. It's true that the larger small businesses are finding it a little easier to qualify for conventional loans, but from the smaller ones there is still great demand for SBA loans."

While Cal Fed is enthusiastically embracing SBA loan applicants looking for amounts of less than $100,000, it is more the exception than the rule.

Besides BofA, several other major banking institutions have been issuing fewer and larger SBA loans in California and Los Angeles, apparently concluding that the paperwork requirements and relatively high risk of smaller SBA loans are not worth the returns, especially when there is healthy demand for less-risky conventional small-business loans.

Wells Fargo Bank, for example, saw the average size of its SBA loans in California go from $164,000 for the first three quarters of 1999 to $206,000 for the like period this year. However, the number of Wells Fargo SBA loans actually went up sharply, from 120 to 308, over that period.

Jones of the Economic Development Partnership for South Los Angeles pointed out that it is more labor intensive for banks to make a large number of small loans than to make a handful of big ones to satisfy community redevelopment commitments.

With fewer small loans available, it's common for small-business owners to either mortgage their homes or borrow from friends and family members, if they can, to raise funds to expand their businesses.

BofA's Roby conceded that the procedures that banks must follow in making SBA loans are an important factor that affects both the number and size of loans made.

"It has resulted in fewer and bigger loans," said Roby. "With the express program, that allows a bank to use its own paperwork (to make SBA loans) and which we pioneered in the early '90, procedures were extremely transparent when there were just 16 banks involved. Now that there are more than 600 banks making these loans, the SBA has started to standardize procedures for this program, which makes it more difficult and less efficient for big banks that do a lot of these loans."