Commercial Funding was identified as a major challenge for community banks in the ABA/ABA Banking Journal Community Bank Competitiveness Survey earlier this year. This is the first in an ongoing series of articles exploring Funding alternatives for community banks.
Credit scoring of Commercial Loans has had a downside for community banks: largerbanks use scoring to launch national or regional branchless small-business lending programs.
But now it may have an upside too. Improvements in credit scoring are playing a part in moving banks' participation in Commercial Loans securitization beyond the beachhead. So are some recent regulatory changes.
A secondary market for the guaranteed portion of Commercial Loan has been around for some time. However, until recently, securitization of the nonguaranteed portion of Commercial Funding (by banks, that is) and the securitization of conventional Small Business Loans has been stymied. The promise, for players who get involved, is increased liquidity for their portfolios and a new source for Commercial Funding demand particularly at a time when deposit growth at many community banks has been lagging loan growth.
Small Business Funding, which is also nearing its launch date, is taking an approach that is both similar and different compared to Lori Mae.
Secured Commercial Loans between $50,000 and $250,000 (lenders may use credit scoring by Fair, Isaac; Dun & Bradstreet; or some other program if the conduit approves); unguaranteed portions of Commercial Funding; first trust loans made under the SBA 504 program; and conventional commercial real estate loans between $200,000 and $2 million. Sellers must retain at least 10% of the underlying loans to participate in the company's programs. They also must be members of the company's SBFC Network. For a nominal fee the company reviews the bank's portfolioed loans for sale-ability. SBFC has a minimum pool size of $5 million.
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