TAKING ADVANTAGE OF "COMMUNITY ADVANTAGE"
The Small Business Administration (SBA) Community Advantage is a pilot loan program intended to meet the credit, management, and technical assistance needs of small businesses in underserved markets. Community Advantage provides 7(a) loan guaranties for loans of $250,000 or less to mission-oriented non-profit financial intermediaries focused on economic development. These innovative programs represent a potentially game-changing opportunity to increase access to credit for underserved entrepreneurs. The program reflects broader changes underway within the SBA and across related government agencies.
Click here to view a presentation prepared by AEO in 2011 on implemented changes to the Community Advantage Program.
GUIDANCE AND SUPPORT FOR MISSION-FOCUSED LENDERS
AEO members have responded enthusiastically to this opportunity to better serve entrepreneurs in their communities. Many organizations have reached out seeking guidance about the program and support in crafting their responses. AEO believes that the program creates opportunities for some members to participate directly in Community Advantage by making the transition to underwriting these new loan products. For other members, these changes may create opportunities for new high-impact collaborations to increase the odds of success for borrowers in their communities.
The note that follows is designed to answer questions including:
- What is the Community Advantage program and why did SBA create it?
- What are the primary elements of the pilot program design?
- How should lenders respond to this opportunity?
WHAT IS COMMUNITY ADVANTAGE PILOT PROGRAM AND WHY DID SBA CREATE IT?
The SBA launched a new three-year pilot initiative aimed at increasing the number of SBA 7(a) lenders who reach underserved communities. The Community Advantage Pilot Program is designed to allow mission oriented lenders (e.g. non-profit financial intermediaries that are focused on economic development in underserved communities) access to 7(a) loan guarantees for loans up to $250,000.
The SBA's Community Advantage Pilot Program resources page can be accessed here.
WHAT ARE THE PRIMARY ELEMENTS OF THE PROGRAM DESIGN?
Focus on Underserved Markets
The Community Advantage Pilot Program seeks to increase loans to underserved markets. At least 60% of the loans (by volume, not value) must be deployed to businesses in under-served markets. For the purposes of this program, an "underserved market" is defined as any of the following:
- Low-to-Moderate Income (LMI) communities
- Empowerment Zones and Enterprise Communities
- New businesses not more than two years old
- Any business eligible under Patriot Express or is a veteran-owned business
- Any business where more than 50% of the full-time workforce is low-income or resides in an LMI community
The requirement to disperse 60% of an intermediary's loan portfolio in underserved communities refers to the number of loans dispersed.
Only the following entities will be eligible to participate in the pilot phase in an effort to mitigate the risks associated with lending in underserved markets:
- Community Development Financial Institutions (CDFIs) certified by the U.S. Treasury but do not have a Federal financial regulator
- SBA Certified Development Companies (CDCs)
- SBA Microlenders
Note that this program is designed to expand the number of lenders. Current 7(a) program participants are not eligible for the CA Pilot Program.
Community Advantage Loans
Standard 7(a) loan terms and conditions, both for the lender and the borrower, apply to any loan made under the CA Pilot Program, with three major exceptions:
1. The maximum loan amount to any one borrower may not exceed $250,000
2. The maximum allowable interest rate is prime + 6%
3. Revolving loans are not allowed in the CA Pilot Program
SBA Microlenders are not allowed to use their SBA intermediary loan to fund any part of a Community Advantage (e.g. neither loan nor the required loan loss reserve fund for Community Advantage loans).
CA Lenders will be required to create a Loan Loss Reserve Account (LLRA) equal to at least 15% of the unguaranteed portion of the lender’s Community Advantage portfolio. Additionally, the LLRA must:
- Remain separate from any other reserve accounts the CA Lender may have
- Be deposited in a federally insured account
- Not be commingled with any other loan loss reserve fund; and
Management and technical assistance requirements
Provision of management and technical assistance is preferred but not necessarily required for every Community Advantage Loan.
Underwriting process and fees
CA Lenders may outsource lending operations including lender functions in originating, disbursing, servicing, or liquidating a specific SBA business loan or loan portfolio. Community Advantage lenders must secure approval from the SBA to outsource any function. The lender itself retains ultimate responsibility for evaluating, processing, closing, and liquidating its SBA portfolio.
The standard SBA guarantee fee and the lenders’ annual service fee apply to loans made through the CA Pilot Program. CA Lenders may charge the borrower the same fees charged under the standard 7(a) program.
CA Lenders are required to follow the credit underwriting procedures for the Small/Rural Lender Advantage (S/RLA) program.
Reporting Requirements and Oversight
CA Lenders will submit reports to the SBA demonstrating compliance with CA Pilot Program requirements, including each of the following:
- An annual report showing that a minimum of 60% of CA Loans have been made to small businesses in underserved markets;
- Quarterly reports containing a balance sheet, LLRA levels and income statements
- Monthly reporting that includes loan status information for all of their SBA loans using the SBA Form 1502
- All other 7(a) reporting requirements.
CA Lenders will be monitored to ensure compliance as well as for performance review purposes. The Office of Credit Risk Management (OCRM) will conduct off-site monitoring via the Loan and Lender Monitoring System (L/LMS). OCRM will also conduct desk reviews, targeted reviews, and on-site reviews at its discretion. CA Lenders are responsible for any costs incurred as a result of these reviews and are payable to the SBA. The SBA projects average oversight monitoring costs to be $150 per $1 million in loans originated. A comprehensive overview of oversight costs and requirements are outlined in the Community Advantage Participant Guide.
Organizations approved to participate, will be designated as a Community Advantage Lending Company (CA Lender). Each approved CA Lender will either be identified as a Small Business Lending Company (SBLC) or a Non-Federally Regulated Lender (NFRL) depending on whether the state in which it resides has regulation requirements.
All approved CA Lenders will be SBA Supervised Lenders and will be subject to applicable regulations.
Secondary Market Participation
CA Lenders that secure approval from the SBA will be allowed to sell SBA loan guaranties made through the CA Pilot Program on the secondary market. However, they may not be included in any participating lender financings or other conveyances, including securitizations, participations, and pledges.
HOW SHOULD ELIGIBLE LENDERS APPLY FOR THIS OPPORTUNITY?
Interested organizations should apply through their SBA district office using the application provided by the SBA. Completed applications will be reviewed within 45 days of their receipt.
Approved lenders will participate in the full three-year pilot program. Should the CA pilot program not be extended after the initial three-year pilot, CA Lenders will be required to continue to service the loans but may not make new loans.
The Community Advantage Program Participant Guide and overview can be accessed on SBA's website by clicking here.