Squeezing the SBA

Small-business borrowing may get more expensive.

Beginning of the End?

To some critics of the Administration’s proposal to eliminate federal subsidies, the worry is not just that some borrowers might be priced out of the market, but that the proposal might signal the beginning of the end for the 7(a) program. They point to recent history to support their suspicions. Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders (NAGGL), notes that President Bush’s proposed fiscal 2004 budget called for giving the 7(a) program only $9.3 billion in lending authority that year, even though the program was, at the time the budget was unveiled, already doing $1 billion of business per month.

Congress ultimately authorized $9.5 billion, but with funds being parceled out under a continuing resolution on a quarterly basis, the 7(a) program ran out of money before the end of its first fiscal quarter. That prompted the SBA to lower its maximum loan amounts and even shut the program down for several days. It marked the fifth time in 10 years that the SBA cut the program’s maximum loan size below the statutory limit of $2 million. “The Administration really put us in a bind,” says Wilkinson. Congress ultimately appropriated additional subsidies that gave the program another $3 billion in lending power and allowed it to remove the tighter loan caps. Still, says Wilkinson, “We think we missed $500 million to $1 billion in loan demand.”

NAGGL members — banks and other SBA-approved lenders — also lack confidence in the formula being used by the Office of Management and Budget to set loan loss reserves for the 7(a) loan portfolio. Historically, the OMB overestimated the potential for loan defaults, says Wilkinson, to the extent that from fiscal 1995 through fiscal 2003, the 7(a) program returned $1.2 billion in unused subsidies and excess user fees to the Treasury. The OMB adopted a new reserve formula in fiscal 2003, but Wilkinson says he’d like to see it tested against real-world conditions for several more years before dramatic changes are made to the 7(a) program. If the formula turns out to be flawed and yields insufficient reserves, or if business conditions prompt default rates to skyrocket, loan fees for an unsubsidized 7(a) program would have to be jacked up dramatically in a self-funding environment. “If your default rate doubled and fees had to double, you would have no place to go,” frets Wilkinson. “Once you’re off the appropriation cycle, good luck getting back on.”

Randy Myers is a contributing editor of CFO.

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