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Ninth District
April 1989
Community
i: ach year, the U.S. Office of
LConsumer Affairs recognizes
the role of consumers in the marketplace by designating National
Consumers Week. During this
week, state and federal agencies
and a variety of private busi
nesses sponsor programs on
consumer issues or renew efforts
to let their customers know how
important they are.
The theme of this year’s week is “Con
sumers Open Markets.” With this in
mind, we at the Federal Reserve Bank
of Minneapolis would like to share our
thoughts about a particular banking
market—the community investment
market. Often overlooked or simply
misunderstood, this is nevertheless a
lending area where banks, consumers
and communities can work together to
open new markets.
We also approach the subject with the
Community Reinvestment Act in mind.
The Community Reinvestment Act of
1977 was enacted by Congress against
a backdrop of concern about unfair
treatment of prospective borrowers by
depository financial institutions and for
Volume 4, Number 2
unwarranted geographic patterns in
their lending activities. In CRA,
Congress reaffirmed that each deposi
tory financial institution has a continu
ing and affirmative obligation to help
meet the credit needs of its entire
community, including low- and
moderate-income neighborhoods,
consistent with safe and sound banking
practices. The practical effect of the
law is that banks should view their
low- and moderate-income customers
and neighborhoods as part of their
market.
Community investment credit requests
sometimes fall short of a bank’s credit
quality standards. However, by using
public and nonprofit sector credit
enhancements available in the marketplace, banks can often turn marginal
credits into sound loans. This issue of
Community takes a look at one of
those enhancements, the Small Business
Administration’s guaranty program.
The Community Investment
Lending Market
Community investment is a market
and, as in any other market a bank
wants to serve, the banker should enter
it with the expectation of making safe
and sound loans and, in the end,
making a profit. The banker who enters
the community investment market only
to “do good,” expecting to make risky
loans, will not be addressing the longterm needs of the community. The less
fortunate areas of our communities
need an ongoing supply of capital for
housing and business development.
Only if the bank makes an acceptable
return will it continue to help provide
that capital.
April 23—29
Produced by the Federal Reserve Bank of Minneapolis
National Consumers
Week
, w,
COMMUNITY welcomes your
comments and observations.
You are aLso invited to share
your community reivestment
progamcir community
developiñent initiatiyes with
COMMUNITY by writing
Carolyn Lin; Comimmity’
Affairs Coordinator, Federal
Reserve Baik of Minàeapolis:
250 Marquette Aveue;
Minneapolis, MN 55480; or
telephone 612-340-2048.
To make address changes or to
order additional copies. contact
p coi’uiVrry at the same
addrc&i
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The protection afforded by the Small Business Administration
(SBA) guaranty allows lenders to make loans which would
normally be denied due to maturity or collateral risk, or
because a less-seasoned business is involved. In effect, the SBA
absorbs the risk associated with making long-term loans to
small or new businesses. Nationwide, the SBA guarantees 30 to
40 percent of all long-term loans to small businesses.
Special lenders programs include the Designated Lender
Strategy, the Certified Lenders Program and the Preferred
Lenders Program.
Under the guaranty program, the lender provides all of the
money, and the SBA offers full faith and credit guarantees of
90 percent on loans up to $155,000 and 85 percent on larger
loans, to a maximum guaranty amount of
$750,000. Rates can range as much as
2.75 percent over the prime rate, depending on the loan’s maturity.
I Under the Certified Lenders Program, the SBA relies on
certified lenders to provide complete, accurate and adequately
analyzed loan guarantee applications. Certified Lenders are
given faster turnaround on their applica
tions.
. The Designated Lender Strategy is designed to assist a lender
in qualifying for Certified Lender status. Lenders must submit
a minimum of twelve quality loan applications a year.
To qualify for this program, a lender must
demonstrate a thorough understanding of
SBA procedures and policies through a
Lenders submit completed application
packages to their local SBA office and U.S. Small Business Administration satisfactory history ofparticipation in SBA
lending which includes processing, servic
deal directly with SBA loan officers. The
most active and expert lenders qualify for streamlined lending ing and liquidation. To continue in the program, a lender must
submit a minimum oftwelve quality loan applications per year
programs and are delegated partial or full loan authority.
and maintain an acceptable repurchase rate.
Special Lenders Programs
The SBA has streamlined its financial assistance delivery . Public Law 96.302 allows the SBA to delegate the loan
system by delegating greater authority to experienced lenders approval decision and additional servicing and liquidation
who have a good track record with the SBA. Lenders that meet responsibilities to certain lenders. These “Preferred Lenders”
SBA’s requirements can also be an excellent resource for other may unilaterally decide to guarantee an application, although
lenders, for whom they can provide services on a fee basis. In they receive a lower guaranty percentage. Preferred Lenders
this way, bankers’ peers are available to ease frustrations, Program nominees are selected from the most successful
concerns or worries over feasibility, funds or lack of expertise. certified lenders.
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ND
in ihe Ninth District
First American Nationa’ Bank
1 1 th and West St. Germain Street
St. Cloud, Minnesota 56301
Metro Community Lending
First Bank NA.
120 South Sixth Street
Minneapolis, Minnesota 55480
First Interstate Bank of Billings, NA.
401 North 31st Street
P.O. Box 30918
Billings, Montana 591 1 6
First Security Bank of Missoula
1 704 Dearborn
P.O. Box 4506
Missoula, Montana 59806
Mountain Bank
3rd & Spokane Avenue
P.O. Box 100
Whitefish, Montana 59937
Norwest Bank Kalispell, NA.
201 First Avenue
P.O. Box 88
Kalispell, Montana 59901
Western Bank
100 North Phillips Avenue
Box 1225
Sioux Falls, South Dakota 51101
in the Ninth District
MIchigan
Small Business Administration
300 South Front Street
Marquette, Michigan 49855
(906)225-1 108
Minnesota
Small Business Administration
610-C Butler Square
1 00 North 6th Street
Minneapolis, Minnesota 55403
(61 2)370-2324
Montana
Small Business Administration
Room 528
301 South Park, Drawer 10054
Helena, Montana 59626
(406)449-5381
North L*kota
Small Business Administration
Room 218
657 2nd Avenue North
Fargo, North Dakota 58102
(101)239-5131
‘iJ
South Dakota
Small Business Administration
Suite 101
101 South Main Avenue
Sioux Falls, South Dakota 57102
(605)330-4231
Ninth District counties in WIsconsin
are served by the Madison field
office:
Small Business Administration
Room 213
212 East Washington Avenue
Madison, Wisconsin 53703
(608)264-5261
iP!
An
SBA
Nearly 20 years ago, First American
National Bank of St. Cloud began to
work with Small Business Adminis
tration lending programs. Now First
American National Bank (FANB) is one
of seven Preferred Lenders in the Ninth
District and one of two in Minnesota.
This designation reflects FANB’s cornmitment to the small business market
and its success with SBA programs.
First American National Bank is a $220
million asset bank operating in St.
Cloud, Minnesota. FANB is active in
the small business lending market
because First American bankers are
committed to the view that small busi
ness is important to St. Cloud, the state
and the nation. They point to a direct
correlation between new small business
development and general economic
development in the St. Cloud area.
SBA-guaranteed loans are an important
part of FANB’s strategy for working
with small business just as working with
local banks is important to the SBA.
In fact, Preferred Lenders can serve as
SBA “branch” offices, making SBA’s
service delivery more efficient and
extensive. FANB Senior Vice President
John Herges notes that this partnership
between the SBA and preferred lenders
is in keeping with the general emphasis
on shifting more responsibility for
administering and financing federal
programs to the private sector.
SBA lenders often process loans for
other banks within their state. However,
whether a banker chooses to work
through an SBA lender or directly with
the SBA office, that banker still
contributes knowledge of the local
community and the individual customer
to the loan review process.
Service to Customers
Through its Preferred Lender Program,
First American processes loans either
directly or for affiliates and other Minne
sota banks. First American relies on loan
officers who specialize in SBA lending.
John Herges emphasizes this principle
of community development lending—ex
perienced, professional lenders who are
familiar with government programs are
key to success.
Preferred
Lender
not have to be included when calculat
ing the bank’s legal lending limit. This
is particularly important to smaller
banks which may have to forego loans
because of their size.
Government guarantee. Small business
lending is not risk-free. The SBA
guarantee is one way to reduce that
risk. John Herges emphasizes, however,
SBA programs offer banks and commu that the guarantee is not a substitute for
good credit quality, but can reduce risk
nities other advantages, as well:
in borderline situations.
Immedkte liquidity. The SBA loan proCollateraL SBA guaranteed loans are
gram can provide a source of funds not
acceptable
as collateral for Treasury
otherwise available to the community or
Tax
and
Loan
Accounts and for
the bank. The guaranteed portion of an
discount
borrowings
from the Federal
SBA loan can be sold in the secondary
Reserve Bank.
market, an immediate gain in liquidity
for the lender. This can be important in Small Business is Big Business
communities where loan demand has
As John Herges points out, “Small
outpaced deposits.
business is big business—big business in
Increased earnings. The SBA program
its contribution to the economy and big
can be a profit center for banks because business for our bank; and the SBA loan
Other features of First American’s
program include sharing of fee income
with customer banks. FANB’s customer
banks can also buy back all or part of a
loan (a matter of some importance particularly to smaller banks that may need
loans). Another matter of importance to
banks is that they retain deposit and
other relationships with the borrower.
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First Arnericim Niional Bank ofSt Clou4 Minn, Commercial Li.,an Officers
(from left) 0. J. Spanier, vice predeñt Alexandra Andreottola, assitant vice
; president, and John Herges, seniorvice presidentand manager.
.
loans are generally sold at a premium
and the bank also earns a servicing fee.
Long-termfixed-rate loans. Long terms
and fixed rates are very important to
small businesses, but it is difficult for
banks, whose deposit base is short-term,
to offer longer-term loans. Using SBA
guarantees and selling loans in the
secondary market in one way to achieve
longer terms.
Loans in excess of lending limits. The
guaranteed portion of an SBA loan does
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program provides an opportunity for
our bank to meet some small businesses’ loan requests that might otherwise
not be feasible.”
Many times, banks want to encourage
small business development in their com
munities but find it difficult to lend to
these businesses. Sometimes, perceived
problems with loans may stem from misperceptions or frustrations that bankers
continued on back
St. Cloud continued
0UTREAC4{
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The Community Affairs staff at the
Federal Reserve Bank of Minneapolis
encourages banks to meet their
communities’ credit needs by, among
other things, offering educational
programs for banks and community
leaders. We would like you to become
familiar with us and what we do.
Dick Einan, Community Affairs
Officer, has been at the Federal Reserve
for over 20 years. He is a graduate of
Macalester College and completed
advanced programs at the National
Consumer Lending School and Bank
Administration Institute. Dick has been
active in the community as president
and board member of Twin Cities
Neighborhood Housing Services, Inc.,
PTA president, United Way volunteer,
Rotarian and youth athletic coach.
Carolyn Line has been with the Federal
Reserve Bank of Minneapolis for 15
years and is the Bank’s Community
Affairs Coordinator. She is a graduate
of the University of North Carolina
(BA, MS) and William Mitchell College
of Law (JD). Carolyn was admitted to
the Minnesota Bar in 1978. Her varied
community activities include five years
on the Board of Trustees, Charities
Review Council of Minnesota.
Eileen Halvorson, Community Affairs
Specialist, is a newcomer to the Federal
Reserve System. Her background
includes mortgage banking in addition
to teaching at the secondary level.
A graduate of Moorhead State
University, Eileen is currently pursuing
a Masters in Business Administration
with a concentration in finance at the
College of St. Thomas.
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EDITOR
aro1yn P Line
ASSISTANT EDITOR
Ei1en A. Ha1vorson
GRAPHICUES1GN
Barbara Birr
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EDITORIAL BOARD
Richard K. Einan
J. Hedblom
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may have had working with small
businesses or government programs in
the past. Herges and FANB Vice
President 0. J. Spanier emphasize that it
is important for banks to take a progres
sive look at their opportunities and at
the credit enhancement tools available.
CRA and Small Business Lending
Both Herges and Spanier also see a
direct connection between helping meet
the needs of small businesses and the
Community Reinvestment Act’s requirements. The Community Reinvestment
Act of 1977 reaffirms the intent of
Congress that depository institutions
help meet the credit needs of the com
munities they are chartered to serve. It
is not uncommon in some communities
to find bankers who believe that this
means housing development. However,
CRA encourages banks to assess their
communities’ principal credit needs. In
nany smaller communities, the greatest
need for credit may be for business
loans that create or increase employment opportunities or that address other
community development needs.
Most bankers want to help community
businesses, but experience—or their
credit analysis—may say otherwise. By
reconsidering loan requests in the light
of available credit enhancements or by
contacting peers experienced in one or
another area of community investment
lending, bankers iriay well discover
opportunities that open new markets for
them and have a direct and positive
effect on the longer-term well-being of
their community.
For information about FANB ‘s Preferred
Lender Program, contact John Herges or
0. 1 Spanier; First American National
Bank ofSt. Clou4 Eleventh and West St.
Germain Street; St. Cloud MN 56301;
(612)251-3300. For injbrniation about
SBA programs, see addresses of SBA
field offices in this issue.
@FedFRASER