SBA Proposes Overhaul of 7(a) Loan Program Under fire for briefly shutting down its largest loan guarantee program and imposing a cap on loans, the Small Business Administration is urging Congress to adopt a sweeping overhaul of the 7(a) program that would reduce the federal guarantee on loans to 50% from the present 75%. If the proposal is enacted, SBA says it would immediately lift the current $750,000 cap on 7(a) loans, would not increase fees for borrowers and lenders, and would increase lending authority by one-third during the current fiscal year, making available up to $3 billion in additional loans. “The plan calls for the expansion of the successful SBA Express program, which accounted for a remarkable 33,000 SBA loans in 2003, and has proven effective in reading underserved and rural markets,” Administrator Hector Barreto told the Senate Small Business Committee Fed. 12. SBA Express provides loans up to $250,000, with 50% guaranteed by the government. The program uses an expedited application process with an application that is only a few pages long, compared to what Barreto called the “phone-book-sized” 7(a) application. SBA says applications can be turned around within three days. Under its proposal, SBA said the 50% guarantee would eventually apply to all 7(a) loans; those above $250,000 now qualify for a 75% guarantee. The agency gave no details on when the lower guarantee would be put into effect for larger loans. The leading industry group, the National Association of Government Guaranteed Lenders, is not impressed with the proposal. Cutting the loan guarantee to 50% “does not seem to be reasonable,” the association’s president, Anthony Wilkinson, told the committee. He said Express “is primarily a credit-scored product,” in which lenders use a point system based on set criteria to decide whether to approve a loan. The procedures are used only for small loans. He said the average loan through SBA Express is about $48,000, with “not many” for more than $100,000. Wilkinson complained that SBA developed its proposal without consulting lenders. “The program is not broken, and it doesn’t need an overhaul,” he declared. The Senate committee chair, Olympia Snowe (R-ME), took no position on the proposal. The chairman of the House Small Business Committee, Rep. Don Manzullo (R-IL), said the overhaul “will fix and strengthen the 7(a) program for years to come with no pain to the small business community.” In addition to lifting the loan cap, he said the proposal would allow SBA to again guarantee loans as part of a “piggyback” arrangement, when an SBA loan is coupled with other forms of financing. SBA stopped “piggybacking” in January. But the House committee’s ranking minority member, Rep. Nydia Velazquez (D-NY), said the proposal would lead to “the deconstruction of the only agency with the sole focus of assisting our economy’s most important sector - small business.” “This ‘fix’ was either poorly thought out, or it is an intentional way to destroy the program once and for all,” she added. Barreto said the proposed changes are part of his drive to concentrate on smaller loans to smaller businesses. He said such firms are most in need of government-guaranteed credit. When he took office in 2001, Barreto said, the average 7(a) loan amount was nearly $250,000; last year it was about $160,000 and 95% of the loans were for less than $750,000. SBA guaranteed a record 67,000 loans through the 7(a) program last year. By expanding SBA Express, Barreto predicted, the number of loans could reach 90,000. “We’ll reach more of those smaller, emerging-market businesses than we ever have in our history,” he told the Senate committee. He wants to shift larger loans to the Section 504 program, which provides government-backed financing for the purchase of real estate and other fixed assets. He said the 5% of 7(a) loans that amount to more than $750,000 eat up 30% of the program’s money. The 504 program, on the other hand, is underutilized. He said SBA is authorized to make $4.5 billion in 504 loans, but “every year we leave $2 billion on the table.” Barreto said the proposed changes would also make the 7(a) program self-sustaining without increasing fees on lenders or borrowers, as SBA has proposed in its 2005 budget. He said the fees might even be reduced next year if the proposal is adopted. If the program paid for itself, taxpayers would save $100 million. By law, the 7(a) loans can be as much as $2 million. SBA imposed the $750,000 cap on loans and shut down the program for a week in January because it was about to run out of money. Barreto said that happened because of a “tremendous spike” in loan demand in December, coupled with Congress’s failure to adopt the agency’s budget for the 2004 fiscal year that began in October. SBA was operating under a continuing resolution, freezing its spending at 2003 levels, until the 2004 appropriation was passed by Congress in late January. After the program was re-opened, SBA continued the $750,000 cap. Barreto said that was necessary to make sure the program doesn’t run out of money again. If the proposed changes are adopted, he said, 7(a) lending authority for fiscal 2004 would increase by about one-third, to $12.5 billion. “The lenders have told us that is critically important to them,” he said. SBA has asked for the same amount in its 2005 budget. Several members of Congress and representatives of lenders said SBA should raise its loan limits to the full $16 billion authorized by Congress. “We’re trying to create jobs,” Sen. Snowe said, “Why create that ceiling?…It just doesn’t make any sense to me.”