Karen Mills Rejuvenated the SBA

June 3rd, 2013

Karen Mills Rejuvenated the SBA

As published in American Banker on June 1, 2013:

Change Agent: Karen Mills Rejuvenated the SBA

Karen Mills will soon step down as the head of the Small Business Administration, and you can count Wells Fargo’s Dave Rader among the bankers who will be sad to see her go.

SBA lending soared to record highs in each of the last two fiscal years and Rader, Wells Fargo’s head of SBA lending, says long-overdue policy changes that Mills has championed over the last four years are among the reasons why.

Bankers had long clamored for the SBA to increase its loan caps so they could make larger loans. Under Mills, the maximum size of an SBA loan was raised from $2 million to $5 million. They complained that the agency is too bureaucratic. Under Mills, the SBA streamlined its application processes and reduced wait times on key loan products. And lenders had urged the SBA to offer its guarantees on more revolving credit lines, not just term loans. Mills responded by re-engineering a little-used program that lets businesses borrow against inventory and accounts receivable.

“Karen Mills made [the SBA] better,” Rader says. “She did a good job changing the agency’s perspective and listening to some of our concerns about bureaucracy and some of the outdated regulation. And she did a very good job of listening to [lenders] on what would work to bring more capital to the small-business owner.”

Mills, who was named SBA administrator in 2009, announced in February that she would not serve a second term in the Obama administration and would step down as soon as a successor is confirmed. (As of mid-May, the president had not yet nominated a replacement.)

In the resignation letter shared with her staff in February, Mills laid out some of the agency’s accomplishments during her tenure: it guaranteed $106 billion of loans to 193,000 businesses over the last four years; it secured a pledge from 13 large and regional banks to lend $20 billion to small businesses over three years; it welcomed more than 1,000 community banks back to its loan programs; and it beefed up its outreach to small businesses by expanding its network of business development centers and strengthening mentoring programs.

“Four years ago, when I arrived at the SBA, America’s small businesses and entrepreneurs were struggling in the face of the worst economic environment since the Great Depression-and a banking sector that was frozen,” Mills wrote to her colleagues.

“Together, we rolled up our sleeves and went to work. And from day one, each of you stepped up and fulfilled the mission of what the agency was created to do. And you should be proud because our accomplishments are significant.”

Maria Coyne, executive vice president for consumer and business banking at KeyCorp, says that when Mills—a former venture capitalist—took the helm at the SBA she easily could have focused her attention on the SBA’s venture capital programs because that’s where she had the most expertise. Instead, Coyne says, Mills went right to work strengthening and streamlining the agency’s core 7a and 504 programs because that’s where the greatest need was. The venture capital initiative would come later.

“She started where she felt there was the most opportunity to do the most good and she put a lot of focus on the simplification of 7a and 504,” Coyne says. “That helped the borrowers, it helped the banks and it helped the agency.”

Mills took on the SBA job at a precarious time for the agency—and the economy. Following five straight record years, SBA lending ground to a halt in late 2008 and early 2009 as banks were busy tending to credit woes and as business owners became skittish about taking on more debt. At the same time, the secondary markets seized up, so even healthy banks essentially stopped making SBA loans because they couldn’t find buyers for them.

The turnaround began in early 2009, after President Obama pushed through a massive economic stimulus package that included several significant changes, many of them temporary, to the SBA’s key programs.

First, the new law eliminated fees on all SBA loans, lowering costs for borrowers and lenders. It also raised the government guarantee on SBA loans from 80 percent to 90 percent, a move that helped unclog the secondary market and gave banks more confidence to lend.

The impact was immediate; the average weekly volume soared by more than 60 percent in the weeks after the American Recovery and Reinvestment Act when compared with the weeks prior, and the number of loans approved increased by 50 percent.

But lenders say it was the 2010 jobs bill, and specifically a provision that more than doubled the size of the loan caps, that provided the biggest jolt to SBA lending. Craig Street, a senior vice president for business banking at Huntington Bancshares in Columbus, Ohio, says the loan size had not been adjusted for inflation in many years. When it finally was raised, it instantly enabled the bank to serve customers with larger credit needs.

“Some of these companies can have pieces of equipment that can cost over $2 million, and that hasn’t even factored in the cost of property,” says Street.

In 2011, the first full fiscal year after the jobs bill was passed, loan volume in the SBA’s 504 and 7a programs topped $30 billion for the first time in the agency’s history. It eclipsed that mark again in fiscal year 2012 and is on pace to do so again this fiscal year.

Mills did not increase the loan caps on her own—Congress had to do that—but bankers say that she and her staff were instrumental in convincing lawmakers to include the provision in the jobs bill.

Street says the agency did a “tremendous job” of reaching out to lenders to ask what they needed, and then communicated those needs to policymakers. “From our perspective, the loan size increase was a home run,” Street says.

Coyne agrees and says bankers appreciate that Mills always seemed to be looking out for their interests. That was not always the case during President George W. Bush’s administration, when hundreds of banks dropped out of SBA loan programs because, as one banker put it, the agency had “burned bridges” when it eliminated a popular low-documentation loan program.

Mills “has always had a more of a focus on partnerships,” Coyne says.

If increasing the loan caps was a home run for the SBA, then the revamping of its line-of-credit program might best be described as a triple.

Though the so-called CAPLine program is not new, lenders and borrowers hadn’t used it much over the years because they saw it as too restrictive. Specifically, a business owner who needed working capital but did not have property or equipment to put up as collateral had to pledge his or her personal assets in order to obtain a loan.

After multiple meetings with banks on how the program could be improved, Mills retooled CAPLine to allow businesses to borrow against accounts receivable, inventory, contracts and purchase orders.

“When a business lands a big order or wins a federal contract, they often don’t have the necessary cash on hand to hire workers and buy materials to fulfill it,” Mills wrote in a blog post in late 2011. “Now more than ever we need to make sure a business in that position can secure the necessary financing to take full advantage of those opportunities.”

Lenders and borrowers clearly have welcomed the change. In fiscal 2012, CAPLine loan volume more than tripled from the prior year, to almost $415 million, and it is on pace to top $500 million this fiscal year.

Before, Wells Fargo “was never a big user of the program because it was not customer friendly,” says Rader. “Now we’re rolling it out across our small-business banking world. We think we are going to help more small businesses with their working capital needs and help the economy add jobs.”

Another key initiative under Mills’ tenure has been the simplification of the loan-application process, particularly for small loans.

Lenders have long complained that small loans aren’t worth their while because they take as much time to process as larger loans, but are not nearly as profitable. So in early 2011, the SBA established the “Small Loan Advantage” program, promising a streamlined application process to select lenders that committed to making loans of less than $250,000.

The response was tepid at first, in part because only a few hundred “preferred lenders” were eligible to use the program, but it took off after additional changes made in June 2012 opened up the program to all SBA lenders and raised the maximum loan amount to $350,000.

“There are almost 5,000 [lenders] that have SBA loans on their books, and we want to make it easier for those that only do one, two or three loans to do five or six or 10 a year,” says Mills, who spoke with American Banker Magazine in an interview this spring. “Once they get to 10 they are used to our processes and will do even more.”

There is still room for the SBA to improve. Rohit Arora, the CEO of Biz2Credit, a New York firm that matches borrowers with lenders, says he believes the SBA needs to make more significant investments in technology to further streamline the loan process and reduce overall costs.

And though the agency has added field offices and invested in mentoring programs, Coyne says many U.S. business owners still do not know much about the SBA’s programs.

“Even [Mills] would tell you that more awareness is better and that there is more we can all do to spread the word about what these programs can do,” Coyne says.

But Coyne says you only have to look at Obama’s most recent budget request to see how much the SBA’s fortunes have turned under Mills.

In one sign of confidence in the agency’s condition, the president’s 2014 budget proposes to eliminate fees on all 7a loans of less than $150,000.

Even more notably, the budget proposes a 12 percent reduction in the SBA’s operating budget and requests no additional Congressional subsidy for the 7a program—not because the agency wants to reduce lending but because defaults are shrinking and it can live with a smaller cushion.

“It’s a testament to [Mills’ tenure] that in 2014 the 7a program is going to operate without a subsidy,” Coyne says. “That just shows how healthy [the SBA] is and how good the oversight has been.”

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