By KENT HOOVER
khoover@bizjournals.com

Expect a boom in Small Business Administration lending in the fourth quarter, thanks to passage of legislation that increased the government guarantee on SBA loans and waived fees for borrowers.

The Small Business Jobs Act (H.R. 5297) increases the government guarantee on the SBA's flagship 7(a) loans to 90 percent through Dec. 31. The bill also temporarily waives fees on both 7(a) loans and 504 loans, which primarily finance real estate. Combined, these breaks will make SBA loans less risky for lenders and more affordable for borrowers.

These breaks originally were funded by the economic stimulus bill, but they expired at the end of May. Since then, SBA lending has fallen sharply.

The chance that Congress would revive these breaks, however, led many lenders and their borrowers to hold off taking out SBA loans. This pent-up demand will explode now that Congress has reinstated these breaks, according to Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders.

About $500 million in 7(a) and 504 loan applications is on a waiting list set up by the SBA for borrowers who wanted to wait to see if the higher loan guarantee and fee waivers were reinstated. Wilkinson said lenders also have been holding onto another $1.5 billion in SBA loan applications, in anticipation that the breaks would be renewed.

These loans will now go forward, thanks to passage of the Small Business Jobs Act. The Senate passed the bill on a 61-38 vote Sept. 16, and the House - which already had passed a different version of the legislation - was expected to sign off on the Senate bill by Sept. 23. The bill will then be quickly signed into law by President Barack Obama, who made the bill a top legislative priority.

Many SBA lenders also will take advantage of another piece of the legislation. The bill creates a $30 billion lending fund that community banks can tap for use in making loans to small businesses. Many community banks will use this money to increase their SBA lending, Wilkinson predicted.

For borrowers, these changes mean it is "a great time" to get an SBA loan, he said.

"I can't see it getting any better than this," Wilkinson said. "This is the time to search out an SBA lender."

The legislation is "going to be a shot in the arm for the fourth quarter," agreed David Bartram, who heads the SBA division for San Diego-based Seacoast Commerce Bank.

Bartram's bank makes business loans in Texas, Arizona, Oregon and Washington, as well as California. It plans to tap as much capital as it can get from the new $30 billion lending fund, he said.

"It really fits in perfectly with our SBA lending," he said.

If the bank gets $1.8 million in capital from this Treasury Department-run fund, it can leverage that into $18 million in small-business loans, he said. With a 90 percent SBA guarantee, the bank can leverage that $18 million into $180 million in new SBA loans, because the bank sells the guaranteed portion of its SBA loans on the secondary market.

Some small businesses may be holding back on seeking credit because of economic uncertainty, but Bartram sees plenty of demand for loans.

"We are not having a problem finding deals," he said.

Hundreds of other small and medium-size banks also see opportunities to make more small-business loans but "are pulling in their horns now to preserve their capital," said Paul Merski, senior vice president and chief economist at the Independent Community Bankers of America.

These banks can't raise capital on their own because private capital markets are still largely frozen, he said. The new Small Business Lending Fund will provide these banks with the capital they need, he said.

Under the program, the Treasury Department will charge a 5 percent dividend rate for the capital. This dividend rate would decrease if a bank increases its small-business lending and rise if a bank doesn't use the capital to boost loans to small businesses.

"This could lead to the moral hazard of banks making risky loans to avoid paying higher interest rates," said Sen. Olympia Snowe, R-Maine, who supported much of the legislation but voted against it because of the Small Business Lending Fund.

Businesses are going to tap this fund, he said.

The program could become available to community banks as early as the fourth quarter of this year, Merski predicted. The key to the program's success, he said, is whether regulators will treat Small Business Lending Fund investments in banks as Tier 1 capital, the best form of capital, as far as bank regulators are concerned.

"If it's not counted as Tier 1, it's not going to work," Bartram said.