Courtesy: CDC Small Business Finance
According to world-renown economist Hernando de Soto, once identified by Forbes as of the 15 people in the world who will “re-invent your future”, the only way to achieve the goals of freedom, compassion for the poor, respect for the social contract, and equal opportunity is to extend the tools of capitalism to underserved markets. The United States Small Business Administration (the “SBA”) launched the Community Advantage pilot program in February 2011 to achieve very similar goals. The SBA has recently extended the pilot initiative, originally set to expire in 2014, an additional 3 years. Thus far the SBA has approved approximately 50 institutions to participate and the program is growing. There are scores of potentially eligible institutions throughout the country which could benefit from incorporating Community Advantage loans into such institutions’ set of financing vehicles. Certainly, communities throughout the United States need better access to affordable capital to help grow local economies. Which institutions may participate in the program and how may such institutions utilize the program’s tools to extend necessary financing to underserved business communities? Here we provide a brief overview that we hope will answer just those questions.
The SBA has identified three types of lending institutions which provide financing to underserved markets as potentially eligible to participate in the SBA’s Community Advantage Program: SBA-Authorized Certified Development Companies (“CDCs”: non-profit corporations certified and regulated by the SBA to package, process, close and service loans through SBA’s 504 loan program), SBA-Authorized Microloan Intermediaries (entities participating in SBA’s Microloan Program), and Non-Federally Regulated Community Development Financial Institutions (“CDFIs”: financial institutions certified by the Department of the Treasury that do not have a Federal financial regulator which provide economic development, affordable housing, and/or community financial services). For the purposes of the Community Advantage Program, lending institutions must provide financing to underserved markets, and can do so by offering financing to:
• Businesses in Low-to-Moderate Income (“LMI”) communities;
• Businesses for which more than 50% of the full time workforce is considered low-income or which resides in LMI census tracts;
• Businesses in Empowerment Zones, Enterprise Communities, and HUB Zones, as defined in the SBA’s Standard Operating Procedures and the Coded of Federal Regulations;
• New businesses (firms in business for no more than two years); and/or
• Businesses eligible for Patriot Express including Veteran-owned businesses.
If such institutions desire to participate in the Community Advantage Program, such institutions should apply to the SBA Field Office responsible for the area where the applicant institution is physically located. A list of field offices may be found at Here and applications (SBA Form 2301, Part E) may be found Here.
Field Offices screen and evaluate such applications and provide assistance to applicant institutions in completing the application. As the Community Advantage Program is part of the SBA’s 7(a) loan program, SBA evaluates applicants to determine if the applicant has the necessary expertise, financial capacity, and infrastructure to participate in the 7(a) program. During the evaluation process, the SBA make three determinations: 1) is SBA satisfied with the mission lender’s ability to successfully operate as a Community Advantage Lender; 2) If yes, should the lender be given delegated authority to make credit decisions without prior SBA review; and 3) If requested, should the lender be authorized to submit CA loans to the secondary market for SBA approval to sell loans on the secondary market. The evaluation process will include an examination of the applicant’s experience, portfolio size, financial viability and additional factors, including:
• Compliance with the applicant’s organizational documents, applicable state law governing such organization, and the applicant’s good standing with the laws under which it is organized;
• Knowledge of SBA’s 7(a) Loan Program Requirements;
• Experience with small business lending and the applicant’s capacity and ability to make, service and liquidate small business loans;
• Ability to provide or obtain services to provide management and technical assistance (M&TA);
• Financial viability, including adequacy of loan loss reserves;
• Ability to meet the needs of underserved markets and an understanding of how participation in Community Advantage Program will further help further that goal, including a knowledge of the geography, products, loan size, volume, and other aspects of the very low income populations which will benefit from the program;
• Adequate infrastructure and internal controls to manage the CA Lender’s SBA loan program and portfolio;
• Adequate staffing to manage and service the CA Lender’s SBA 7(a) loan portfolio;
• Other risk characteristics identified by SBA such as rapid growth, inadequate capital or loan loss reserves, outstanding enforcement actions, or any adverse or supervisory actions issued by a state or federal regulator; and
• Information from the CDFI Assessment and Rating System (CARS) and CDFI assessments, SBA risk ratings and reviews, and/or other similar types of information, as available.
• For participation in the secondary market sales of Community Advantage loans, and for delegated authority, additional factors will be considered.
A potential Community Advantage lender not only must demonstrate the requisite knowledge and staffing capable to participate in SBA’s 7(a) loan program, but if approved as a designated Community Advantage Lender, must follow the program guidelines in order to effectively participate in the program and maintain the guarantee for the loans in its subsequent loan portfolio. While all Community Advantage Lenders will be ultimately responsible for its loan program, SBA has approved Community Advantage Lenders to utilize the assistance of third-party service provides called Lender Service Providers (“LSPs”) to assist in the origination, underwriting, servicing, and liquidation of Community Advantage loans. It is essential to comply with program requirements, and finding a staff with the knowledge to manage a 7(a) loan program correctly can be difficult. Financial assistance is available for new lenders. For more information, please contact us.
Download the Community Advantage Participant Guide:
Enter your email and get it now!
Simply enter your email address and the download link will be sent right to your inbox.