Dealer Floor Plan Pilot Initiative Notice and Request for Comments SBA docket No

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1 August 5, 2009 Grady Hedgespeth 409 Third Street, SW Suite 8300 Washington, DC RE: Dealer Floor Plan Pilot Initiative Notice and Request for Comments SBA docket No Dear Mr. Hedgespeth: I am writing on behalf of the National Marine Manufacturers Association (NMMA) and its affiliate the National Marine Bankers Association (NMBA) to comment on the Small Business Administration s new Dealer Floor Plan Pilot Initiative. 1 The boating industry strongly supports the Small Business Administration s (SBA) Dealer Floor Plan Pilot Initiative (DFP). The Initiative establishes a pilot 7(a) loan guaranty program dedicated for lines of credit that provide floor plan financing and will allow boat dealers to acquire boat and boat trailer inventory. The credit crisis has had a profound effect on the boating industry. Lenders and financing companies that had been the traditional sources of wholesale or floor plan financing have abruptly left the market. Those remaining lenders have significantly tightened the availability of credit and increased the cost of these loans. Boat and boat trailer manufacturers and dealers have felt the impact of the credit shutdown resulting in a loss of over 135,000 U.S. jobs. The SBA Floor Plan Pilot Initiative has the potential to assist boat dealers to establish critical lines of credit with SBA approved banks to replace those lines that have either become unaffordable or have disappeared. The comments below reflect our industry s desire to improve upon the DFP Initiative and NMMA welcomes an opportunity to continue work with SBA to ensure the success of this important Initiative. Summary NMMA strongly supports the DFP Initiative and in the spirit of ensuring that the program is successful in ensuring an adequate supply of wholesale or floor plan credit to small businesses recommends that SBA Initiate direct discussions with individual SBA lenders on the new program in order to replace misinformed assumptions with solid facts. 1 SBA Notice and Request for Comments on Dealer Floor Plan Pilot Initiative, 74 Fed. Reg. 32,006 (July 6, 2009).

2 Page 2 of 8 In lieu of the current one year expiration date, announce the DFP Initiative as a three-year pilot program that will automatically renew unless SBA determines that floor plan financing is readily available from the private market. SBA can then provide itself with the option of reviewing the Initiative on an annual basis in order to respond to any concerns with the program or to adapt to changing conditions. Clarify that lenders should not be required to hire new additional staff to participate in the DFP Initiative, but rather ensure that this task has been assigned to a competent employee. In addition, lenders should clearly have the option or using inventory management companies to conduct on site inspections of inventory. Remove the restriction on lenders who have less than $15 million in floor plan lines of credit in its current portfolio or that has been making floor plan lines of credit for less than 5 years (so called Less Experienced Floor Plan Lenders ) to making loans only to customers with which [the lender] has a banking relationship that existed prior to the effective date of this pilot initiative and instead allow banks to market DFP loans to any willing customer. Amend the 7 day monthly financial statement requirement to provide for a 15 day requirement to ensure that dealers will be able to collect and report the required data. Provide additional language to be clear that the SBA has determined that boats and boat trailers in all States and the District of Columbia qualify under the program regardless of the ability to title a specific boat in a given state. Allow the refinancing of an existing inventory loan by an existing lender, just as it does for a new lender. Afford boats and boat trailer loans the same level of guarantee provided to new auto loans. Reconsider the prohibition of the sale of SBA loan guarantees in the secondary market and investigate whether such a prohibition is causing lenders to choose to not participate in the DFP program. Establish a streamlined review process to determine independence for any boat dealer loan when, as it typically the case, the boat dealer operates under multiple agreements from different boat, trailer and engine manufacturers. All of these points are discussed in more detail below. I. NMMA Urges SBA to Conduct More Outreach to Lenders to Encourage Participation in DFP Program Since the DFP Initiative announcement, marine dealers have been busy contacting local lenders to explore the option of using the SBA DFP loan program. Boat industry dealers and manufacturers have reported to NMMA that they have found a significant lack of information about the DFP Initiative among contacted SBA lenders and even regional SBA staff. NMMA recognizes that the agency has succeeded in doing an extremely quick roll-out of a new program, and we appreciate this quick action, however, the result has been a lack of solid information in the lending community.

3 Page 3 of 8 NMMA requests that SBA initiate direct discussions with individual SBA lenders on the new program in order to replace misinformed assumptions with solid facts. Such an outreach effort should afford SBA lenders multiple opportunities for in-depth instruction on the program so that lenders have all the facts before deciding whether to participate. For example, lenders have reported to boat dealers that due to the 2% cap on servicing fees for 7(a) loans that the lender was not interested in an SBA guarantee for a floor plan loan. SBA, recognizing that this was a concern, waived the 2% extraordinary servicing fee cap. 2 Unfortunately, this information has not been understood by the lending community. II. Short Term of Pilot is a Deterrent to Lender Participation in the DFP Program SBA has compromised the goal of the Dealer Floor Plan Initiative (DFP) -- to ensure an adequate supply of wholesale or floor plan credit to small businesses -- by limiting the initial pilot term to only one year. Given the current market conditions, lenders who have considered the DFP program have shown a reluctance to devote resources to expanding either a current wholesale lending program to include SBA 7(a) DFP guarantees or to develop a new wholesale lending program because of the short term of the program. In the Notice, SBA defends the expiration date of the program by noting that this pilot initiative is intended to complement the American Recovery and Reinvestment Act of 2009 (the Recovery Act) (Publ. L , 123 Stat. 115) provisions that will expire on September 30, However, the SBA authority for the floor plan program will not expire on September 30, While SBA regulations had in the past prohibited the use of SBA lending for dealer floor plan financing, the SBA has always had the authority to guarantee these loans and this authority will continue after the Recovery Act provisions expire. NMMA can find no justification for SBA s decision to have this pilot initiative expire on September 30, Given that SBA also commits to evaluating the Initiative at that time to determine if the pilot will be extended, certain aspects made a permanent part of SBA s lending programs, or terminated, it is even more appropriate for SBA to simply schedule a review in 2010 rather than setting the program to expire so quickly. In lieu of the one year expiration date, NMMA urges SBA to announce the DFP Initiative as a three-year pilot program that will automatically renew unless SBA determines that floor plan financing is readily available from the private market. SBA can then provide itself with the option of reviewing the program on an annual basis in order to respond to any concerns with the program or to adapt to changing conditions Fed. Reg. at 32,008 ( SBA will allow lenders to charge an extraordinary servicing fee that is higher than the 2 percent allowed by Agency regulations at 13 CFR (b) provided that the fee charged is reasonable and prudent based on the level of extraordinary effort required to adequately service the floor plan line. )

4 Page 4 of 8 NMMA has also heard from lenders who were confused as to how the cessation of the program would impact an existing revolving line of credit. SBA should provide clarification on whether loan guarantees would continue for the entire term of the lending agreement regardless of the continuation of the dealer floor plan lending program. III. SBA s Restrictions on Lender Eligibility Have Created a Disincentive to Lender Participation in the DFP Program SBA has also compromised the goal of the Dealer Floor Plan Initiative (DFP) -- to ensure an adequate supply of wholesale or floor plan credit to small businesses by limiting lender eligibility for DFP lending. Specifically, SBA has put two limitations on lenders that are a disincentive for lender participation: (1) unclear designated personnel requirements; and (2) limitations on doing business with new borrowers. First, SBA has required that lenders participating in the pilot initiative have designated personnel who are responsible for making and servicing floor plan lines of credit. This language has proven to be a source of concern for lenders and as it is currently drafted appears to be more restrictive than we understand SBA to intend. A lenders current asset based lending staff should be able to easily transition to do floor plan risk management work. Lenders should not be required to hire new additional staff, but rather ensure that this task has been assigned to a competent employee. In addition, lenders should clearly have the option of using inventory management companies to conduct on site inspections of inventory. NMMA encourages SBA to clarify this requirement. Second, SBA has limited lenders who have less than $15 million in floor plan lines of credit in its current portfolio or that has been making floor plan lines of credit for less than 5 years (so called Less Experienced Floor Plan Lenders ) to making loans only to customers with which [the lender] has a banking relationship that existed prior to the effective date of this pilot initiative. In addition, these lenders must submit all Dealer Floor Plan applications to the Standard 7(a) Processing Center for approval over the life of the pilot. See 74 Fed. Reg. at 32,008. The boating industry is faced with the challenge of attracting new lenders while at the same time existing lenders are exiting the boat industry lending business. Because of the reliance on national finance companies, few boat industry dealers have existing relationship with the community and regional banks that typically provide SBA loans. This existing customer provision has made it extremely difficult for such a dealer to find a new lender by severely limiting the available pool of lenders the dealer may choose from. NMMA appreciates and supports the need for a lender to have floor plan procedures in place along with dedicated staff in order to keep the guarantee and the bank within acceptable risk levels. The new DFP Initiative should be creating a prime opportunity for a lender build on either an existing

5 Page 5 of 8 small program or to establish a new program so it may take advantage of the opportunity in the marketplace. Instead, under this restriction, if that lender has not been in the floor plan business previously, the DFP limits would preclude it from participating in this program or from working with new customers (dealers) in their own community. This provision is self-defeating, an unreasonable outright barrier of entry to this lending market, and a clear disincentive for new lenders to get involved in the DFP program. SBA can ensure that all banks meet clear risk management objectives without resorting to prohibiting new or smaller lenders from entering this market. NMMA strongly urges SBA to remove this provision and allow banks to market DFP loans to any willing customer. In addition, once SBA is assured that a so called Less Experienced Lender has an adequate risk management program there should be no difference in the processing of loans from these lenders. IV. Monthly Financial Statements Turn Around Too Quick Among the requirements for an appropriate DFP program is a requirement that the borrower provide to the lender copies of its monthly manufacturer s dealership financial statement (for dealers of new inventory) or monthly financial statement (for dealers of used inventory) no later than 7 days after the end of the previous month. This is a very short turnaround time for a document that is not typical of the boat industry. Due to the small size of boat industry dealers, NMMA recommends SBA amend this to provide for a 15 day requirement to ensure that dealers will be able to collect and report this data. V. SBA Should Provide Clarification and Additional Flexibility for SBA to Determine the Scope of the Inventory Covered by the Pilot Initiative In addition to the standard 7(a) loan program qualification terms, SBA has limited the eligibility of the DFP to retail dealers of titleable inventory (both new and used) that require licensing and/or registration by a State authority after acquisition. In addition, SBA has noted that eligible small businesses include, but are not limited to, dealers of boats (including boat trailers). 74 Fed. Reg. at 32,007. NMMA strongly supports the inclusion of dealers of boats and boat trailers into the program. Boats are registered in all states and the District of Columbia, the majority of states provide for boat titling, and some boats are eligible to be documented under federal law. 3 In addition, boat trailers typically are registered and titled under a state s motor vehicle regulations. Based on a number of questions NMMA has fielded from dealers and lenders on this provision, NMMA urges SBA to provide additional clarifying language that the agency has determined 3 Vessel documentation is a national form of registration, dating back to the 11th Act of the First Congress. Documentation provides conclusive evidence of nationality for international purposes, provides for unhindered commerce between the states, and admits vessels to certain restricted trades, such as coastwise trade and the fisheries. Since 1920, vessel financing has been enhanced through the availability of preferred mortgages on documented vessels. For additional information go to:

6 Page 6 of 8 that boats and boat trailers in all States and the District of Columbia qualify under the program regardless of the ability to title a specific boat in a given state. Such a clarification would aid lenders and dealers in understanding the program. In addition, SBA should consider providing flexibility for the agency to expand the scope of the program within certain guidelines. For example, SBA may want to avoid unintentionally making ineligible dealers of products that may not in all cases be titled or registered or avoid excluding products that are typically bundled together and sold as a packaged unit. Therefore, NMMA recommends that SBA add flexibility to allow it to include floor plan loans for products when the Administrator has determined that liens on these products can be sufficiently protected under state or federal law. VI. SBA Should Not Restrict the Refinancing of Existing Floor Plan Loans SBA allows for the refinancing of an existing inventory loan only if a new lender is refinancing an existing lender. However, there may be instances where the existing lender is not willing to continue financing a business without something to mitigate that risk. In other cases, where the retail sales have slowed below the level anticipated by the loan, the imposition of curtailments and other risk mitigation measures have made an existing loan far too costly for a dealer to carry. In such cases, a SBA guarantee could serve a more affordable way to mitigate that risk without imposing draconian costs on a dealer. NMMA urges SBA to allow the refinancing of an existing inventory loan by an existing lender, just as it does for a new lender. In addition, there is confusion as to whether SBA permits the refinancing of an existing floor plan loan with a different lender. NMMA urges SBA to ensure this provision is made clear to dealers and lenders in its continued outreach. VII. All DFP Loans Should be Eligible for the Same Guarantee SBA is allowing for a higher guarantee level for new autos than other inventory. NMMA appreciates SBA s decision to allow for a 100% advance rate for boats and boat trailers as this allows for current industry practices to be maintained. 4 However, NMMA urges SBA to afford boats and boat trailers the same level of guarantee provided to new autos. Indeed, the mere fact that SBA has treated these inventory types differently has inadvertently sent the message to lenders that marine products are riskier than new auto products. In our discussions with local SBA offices, there is anecdotal evidence that this is serving to restrict the availability of financing for boat dealers. Collateral is collateral and should be treated as such Fed. Reg. at 32,008 (SBA provides that a lender can have an advance rate of 100% for all inventory, in such a case the maximum SBA guarantee will be 67.5% for new automobile inventory and 60% for all other inventory financed by the lender).

7 Page 7 of 8 VIII. SBA s Ban on Secondary Markets is Puzzling in Light of Effort to Restore These Markets SBA has, unlike typical SBA loans, prohibited SBA loan guarantees made under the DFP Initiative from being sold under SBA regulations at 13 CFR Part 120 Subpart F for Secondary Markets. In addition, SBA loan guarantees approved under this program cannot be included in any participating lender financings or other conveyances, including securitizations, participations and pledges. SBA does not explain why this provision was included and the provision provides yet another disincentive for lenders to participate in the DFP Initiative. Under securitization the lender would still hold the unguaranteed portion of the note and the risk from servicing the debt properly. NMMA asks SBA to reconsider the prohibition of the sale of SBA loan guarantees in the secondary market and investigate whether such a prohibition is causing lenders to choose to not participate in the DFP program. IX. SBA Should Establish Procedures to Streamline Independence Review for Boat Industry Dealers SBA must evaluate potential borrowers to determine whether affiliation exists such that it may find that another party is actually controlling the entity and therefore the business is not independent and not eligible for a small business loan. In addition, SBA has specific procedures for circumstances where a franchise or license agreement is involved. In such a case, SBA looks to see that the borrower have the right to profit from its efforts and bears the risks of loss commensurate with ownership. 13 C.F.R The practical effect of this requirement is that a lender will have to submit certain documents to SBA s General Counsel for review prior to the approval of any loan. Obviously, this has the potential to significantly slow any loan approval. SBA has in a number of instances, provided for specific guidelines for certain industries. See SBA SOP (a) at 87. In addition, SBA has specifically exempted new car manufacturer dealers from such document review. NMMA requests that SBA establish a streamlined review process to determine independence for any boat industry dealer loan when, as it typically the case, the boat dealer operates under multiple agreements from different boat, trailer and engine manufacturers. The existence of such business arrangements should be sufficient to demonstrate independence and would save SBA s General Counsel s office from the unnecessary review of a dealer s contracts. * * * NMMA appreciates the opportunity to comment on the SBA Dealer Floor Plan Loan Initiative. We are available to discuss our comments further with you and your team on this important program. Please contact me at ; csquires@nmma.org to schedule a meeting or if you have any questions.

8 Page 8 of 8 By way of background, the National Marine Manufacturers Association (NMMA) is the leading national recreational marine trade association, with nearly 1,700 members involved in every aspect of the boating industry. NMMA members manufacture over 80 percent of recreational boats, engines, trailers, accessories and gear used by boaters and anglers in the United States. The majority of NMMA members are small businesses. The National Marine Bankers Association is affiliated with NMMA and educates current and prospective lenders in marine financing procedures, promotes the extension of credit to consumer and trade borrowers, maintains alliances with industry partners, measures and reports on the vitality of the marine lending market, and actively maintains networking and communication benefits for its members. Sincerely, Cindy L. Squires, Esq. Chief Counsel for Public Affairs and Director of Regulatory Affairs