BID® Daily Newsletter
May 9, 2011

BID® Daily Newsletter

May 9, 2011

NEED SMALL BUSINESS LOAN GROWTH?


Pacific Coast Bankers' Bank is considering rolling out an innovative national program (the "Program") that would allow participating banks to efficiently originate small ($5,000 to $25,000), unsecured, C&I loans (Express Loans under the 7(a) SBA Program). We are still doing our due diligence on this opportunity, but need your help to finish that off. The Program is connected with Sam's Club (WalMart) and allows banks to provide loans to their small business members (for Sam's, the Program drives higher store sales). Under the Program, Sam's Club members go to the Sam's Club website, complete an online loan credit application and then electronically submit it. The system pulls credit bureau reports, accesses various identification databases and verifies the identity of the potential borrower to help with KYC/BSA as well. It also scores and packages loan documentation in one electronic place.
As conceived, Banks interested in signing up for the Program would give PCBB a target amount of loans they wish to originate with pre-approved credit and loan criteria. The Participant then receives a pool of loans that meet the agreed upon criteria. Participants then electronically approve each loan, in order to ensure compliance and maintain control over the process. Once approved by the Participant, loans are then prepared for funding and the transaction is processed through the Participant's PCBB account. The Program is designed so Participants also would not need to service these small dollar loans.
It is estimated that Participating banks could generate $1mm to $25mm of unsecured, unguaranteed, C&I SBA loans per year at an average loan size of $11,000 (depending on parameters). Loans are fully amortizing with a 7Y maturity and carry a floating rate priced at Prime + 3.50%. The minimum FICO score is 700 and the average FICO score is expected to be around 755. While it is best to declare the widest geographic area possible in order to achieve the highest volume in the Program, the ability exists to go down to any zip code or political area, depending on production. It should be noted that the SBA guaranteed portion of each loan will be sold off (these are 50% guaranteed) in a transaction unrelated to the Program, but the proceeds of that process will allow for a separate guarantee so that loans 90 days delinquent could be repurchased up to 10% of par amount.
The Program has been run on a test basis with Sam's Club over the last couple of years and cumulative losses on that portfolio have been approximately 7.2%. The 10% amount was chosen in an effort to cover approximately 3 standard deviations of credit movement and provide loan loss coverage up to that amount.
One downside of the Program is that despite the electronic application, packaging, underwriting and servicing; banks may still find these loans too small. Further, unsecured small business credit may not be for every bank. In addition, this is the unguaranteed portion of SBA loans under the Express 7(a) Program, so Participants should also consider that in making their decision.
On the plus side, in addition to the factors identified already, the Program allows Participants to generate more small business loans (perfect for SBLF banks), add C&I diversification, capture more potential customers that can be cross-marketed to and generate more CRA loans to minorities and woman (a large part of this type loan production).
It is important to note that our due diligence process is continuing and we have not yet officially approved this Program. To that end, we would like to get some direct bank feedback on your potential interest. To do this, we will be holding a Webinar tomorrow at 10:00am PT, where we will step through the credit model, process and provide more details in order to garner your feedback and gauge interest. In exchange your feedback, should we go forward with this Program, participating bank will not only give input to help shape the process; but will get first preference for desired criteria.
To sign up for the Webinar, see the "SBA Lending Program Webinar" link in our Related Links section on the bottom right of this page.
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