NADA Urges SBA to Increase Auto Dealer Floorplan Financing Guarantee Limit to $5 Million

The National Automobile Dealers Association has requested that the White House exert pressure on Congress to increase the maximum on dealer floorplan loan guarantees to at least $5 million.

The NADA has also requested a 90% increase in the amount of each loan guaranteed under a Small Business Administration pilot program which launched last May. In a letter to that agency, the NADA cited the current loan guarantee levels as being insufficient to attract lenders to participate in the program. In that letter, the NADA’s regulatory executive said, “Hundreds of small car and truck dealerships have lost their floorplan lines and are having difficulty replacing them, and others may soon lose their floorplan financing, due not to their own financial situation.”

Under the current plan, the SBA guarantees up to 75% of loan amounts of $2 million and less.

Last week, Senators Mary Landrieu (D-LA) and Olympia Snowe (R-ME) introduced legislation that would require similar increases in SBA loans in general. In the House of Representatives, a similar bill is scheduled for consideration on Thursday. That bill would increase the SBA loan limit from $2 million to $3 million. Lobbyists for the NADA are pressuring House members to up that amount by an additional $2 million.

President Obama has sided with the NADA and endorsed its recommendation to increase the loan limit to $5 million. In a statement issued earlier this month, the White House said, “Historical results suggest that larger loans are better performing for SBA than smaller loans.” This past Saturday, President Obama said that large banks that have received federal assistance should increase their lending to qualified small businesses.

The NADA also recommended increasing the maximum eligible loan size to between $5 million and $10 million and lowering the minimum qualifying loan amount to $100,000 from its current $500,000 level.

The SBA’s current floorplan pilot program is scheduled to continue through September of next year.

According to SBA spokesman, Dennis Byrne, the agency had approved guarantees of over $27 million as of October 26. She said the guarantees were issued on 24 separate loans from 21 banks.

Banking consultant Bert Ely quipped, “Are we going to rename the agency the Large Business Administration? It appears that some people want the SBA to step in and perform the role of the captive finance companies.” Ely said, “If we do this for dealers, who else are we going to have to do it for? Why not home builders?”

According to Ely, the proposals under consideration raise questions about how much credit risk taxpayer should be required to assume and speculates that the floorplan financing crisis results from an overabundance of domestic auto dealers.

In addition to expanding the top and bottom limits on qualifying loans and increasing the guarantee amounts across the boards, the NADA has also recommended extending the SBA program until mid-way through 2012 or later.

Finally, it recommends allowing non-depository lending institutions to participate in the program provided they can demonstrate the necessary experience and abilities. Of 40 financial institutions surveyed by the NADA, including credit unions, captive finance institutions and banks, 19 are currently not participating in the SBA program. Of these, only three indicated that they were considering participating in the future.

The NADA, along with 25 other groups, plans to send Congressional lawmakers a letter tomorrow urging them to raise the current $2 million loan limits in the House bill to $5 million. The letter states, “The failure to completely unfreeze credit markets for small businesses is slowing the recovery efforts and stalling the significant job creation potential of small business entrepreneurs.” Among the letter’s signatories are the National Small Business Association, Associated Builders and Contractors and the U.S. Hispanic Chamber of Commerce.

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