Businessweek Archives

Deadbeats Beware


Frontier -- Keeping Score

Deadbeats Beware

The SBA is getting out of the loan-collection business--and private outfits won't be so lenient

For years, the Small Business Administration has been one the country's most forgiving creditors. No payment? No problem. Compared with private lenders, the SBA was slow to collect and loath to foreclose.

The agency's not about to start breaking legs, but change is on the way for anyone who's late on a small-business or disaster loan. That's because the SBA is getting out of the collections business, selling its loan portfolio to private-sector institutions. Such outfits tend to be less patient than government collectors--bad news for those unwilling or unable to repay.

The SBA is required to make loans, currently at 4%, to uninsured disaster victims. It also guarantees business loans, at 80% of their value, made by commercial lenders to entrepreneurs who otherwise might not be eligible for financing. If the loans go bad, they come back to the SBA for collection.Pressure. And go bad they do. At the SBA's most recent loan auction, in August, 24% of business loans made under the disaster program and 47% of nondisaster loans were in default--a consequence of allowing nonperforming loans to drift for years. Leniency played a big role. "The SBA would never squeeze someone," says John Boyd, a former SBA liaison in the Virgin Islands. By contrast, commercial lenders are far more likely to restructure loans, pressure recipients, or foreclose and seize collateral. "Some banks will foreclose on a $140,000 house to get $20,000," Boyd says.

Behind the move is a congressional authorization for all federal agencies to sell their loan assets to the private sector. As part of the push, the SBA plans to unload its entire $10 billion direct-loan portfolio by 2003, and up to $1 billion in new loans every year thereafter. The move makes sense, says Richard Blewett, the agency's director of asset sales, because commercial institutions possess sophisticated loan-servicing methods that the SBA lacks. "They can throw the necessary resources at these loans," Blewett says.

Private financiers are snatching up the loans for an average of 50 cents to 60 cents on the dollar. In August, for example, a package of debt with unpaid balances of $1.2 billion sold for just $530 million.

The high default rates don't appear to be deterring buyers. "It's a judgment call," admits Jeff Leu, executive vice-president of the financial-markets group at the Watzata (Minn.) conglomerate Cargill Inc., which recently bought a package of SBA guaranteed loans. But the deep discounts make it a gamble worth taking, he says. Other major buyers, including affiliates of BealBank in Dallas, apparently agree."Wasteful." Some critics cite the fire-sale prices as evidence that the SBA should abandon the lending business. "Selling for 60 cents on the dollar unveils how wasteful it is," says Scott Hodge, executive director of the Tax Foundation, a Washington group that monitors fiscal policy.

SBA supporters, who argue the merits of the program, agree the discounts are big, but point out they're still more than the agency would get if it tried to collect the bad loans itself. "It's appropriate to get the bad loans off the books and have the money available for the next disaster," says Roberto Barragan, president of Valley Economic Development Center Inc., a Van Nuys (Calif.) small-business consulting firm.

Of course, SBA borrowers won't be thinking about policy debates when more efficient debt collectors come knocking. They'll probably just wish the bureaucrats were still in charge.By Theresa Forsman


Cash Is for Losers
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus