Rob Reid, owner of Great Lakes RV, thought he sold five RVs this week off his sales lot in Elkhart, Ind. But when his customers went to their local bank for a loan, all five got rejected, despite credit scores in the 700-range.
It’s a story that occurs daily across the country and has crippled the RV industry nationwide since autumn of 2008. Credit at all levels of the industry, from manufacturers and dealers to finance their businesses to consumers to buy their products, has dried up.
Freeing up frozen credit markets and helping small businesses get the capital they need to survive, especially for RV dealers like Reid, was the focus of a Dealer Floor Plan Financing Conference today (Feb. 5) in Elkhart, organized by U.S. Rep. Joe Donnelly, D-Ind., whose district includes Elkhart County.
The Hoosier Democrat invited several dozen RV manufacturers and dealers and Midwestern lenders to interface with officials from the Small Business Administration (SBA) to “crack the nut” and help thaw frozen credit. The audience of some 50 key leaders also got a sneak peek at highlights of a plan that was announced later in the day by President Obama in a speech in Maryland.
However, the disconnect between the U.S. lending community and the RV industry quickly surfaced during the conference in Elkhart. And based on random comments from participants during and after the conference, the freeze may continue, even after the SBA revealed proposals designed to make SBA loans more attractive to lenders and owners of small businesses.
Obama announced two new small business lending initiatives and continued to ask Congress to permanently increase maximum loan sizes for the SBA lending programs.
The two temporary SBA initiatives include a refinancing program for small business owner-occupied commercial real estate and an expanded working capital loan program.
The president also said the SBA 7(a), 504 and micro loan programs should have higher loan ceilings to help small businesses and shield commercial lenders from more risk. He also recommended extension of the successful small business Recovery Act lending programs.
Obama proposes to raise the loan limit on the SBA’s 7(a) program from $2 million to $5 million and to raise the limits on SBA’s Express program from $350,000 to $1 million.
The Obama administration is requesting $7.5 billion in new 504-loan authority for Fiscal Years 2011 and 2012.and FY12.
This requested financing authority is separate from that of the regular 504 program, for which the administration has already requested $7.5 billion in its FY 2011 budget submission to Congress.
If Congress approves both requests, the total lending authority by 504 for regular loans and refinanced debt would be $15 billion annually.
The two-hour-long conference in Elkhart drew CEOs from some of the leading Midwestern RV companies, including Coachmen RV, Gulf Stream Coach Inc., Damon Motor Coach and Monaco RV LLC.
Lenders included GE Capital, KeyBank, Wells Fargo Bank and several smaller regional banks.
Eric Zarnikow, the associate administrator for SBA’s Capital Access program, was the lead SBA presenter.
Donnelly lobbied last year to make SBA lending more attractive to RV dealers by convincing Congress to include RV dealers in a bill designed to help the beleaguered auto industry. But for all his efforts, the new SBA program has attracted a mere 48 borrowers in 22 states who borrowed a total of $53 million. Just two of the 48 are RV dealers. And the program is set to expire the end of September.
The RV industry has expressed its appreciation to Donnelly for his efforts, but the initial results have been disappointing. The Hoosier congressman said he organized Friday’s conference to explore ways to make the program more appealing to lenders and the RV industry.
The problem, as lenders expressed during a lively give-and-take with the SBA representatives, is that compliance with the SBA requirements creates way too much overhead for most small, regional lenders, thereby making the loans, even with the SBA guarantee, unattractive.
Even raising the portion that SBA will guarantee, from 75% to 90% of the loan, as the SBA is suggesting, doesn’t seem sufficiently beneficial to many banks, said Joseph Burr, a vice president with Wells Fargo Bank, who came down from his office in Milwaukee, Wis., for the event.
Other lenders in the audience, such as from Lake City Bank in Warsaw, Ind., implied the higher loan guarantees could make the program more attractive. But when one of the Lake City bankers asked if the SBA would ever guarantee 100% of the loan, Zarnikow said that would not happen.
Bill Burton from South Bend-based 1st Source Bank, the largest locally based bank in Northern Indiana, said most small banks are not set up to make dealer floorplanning loans. He also said many banks fear the SBA guarantee being “compromised,” and another speaker said some banks don’t know for sure they have a guarantee until or unless the loan goes into liquidation.
Indeed, the SBA averages paying back about 95% of what it says it will guarantee when borrowers do default on their SBA loans, Zarnikow conceded. But the SBA has improved on its speed in which it makes such reimbursements, from 270 days just a few years ago to about 45 days now, he noted.
At one point, Bill Fenech, CEO of Damon Motor Coach, engaged in a lively exchange with Burr, implying that banks don’t want to lend money.
And Coachmen’s Mike Terlep came to the defense of small banks at one point, saying that making dealer floorplanning loans may not be in their core competencies.
Claude Donati of Gulf Stream Coach said his extensive phone survey of some 30 banks last year showed they were not interested in the SBA program, for many of the reasons cited by the lenders during Friday’s conference. He fears they will hold to their beliefs, even with the more attractive guarantees.
Peter K. Lannon of GE Capital Solutions reported that GE has resumed lending to the RV industry and that new loans on the books exceed $200 million. He said the SBA proposal to reduce banks’ risk in making the dealer floorplanning loans will help solve the problem.
Donnelly thanked the participants, saying he is armed with new insights to take back to Washington as the federal government continues to search for ways to help the economy.