Despite House Approving $79 Million for 7(a) Loan Program, SBA Stands Behind Zero Subsidy

WASHINGTON – What appeared to be a major win for U.S. Small Business Administration’s 7(a) loan program with the House of Representative’s recent approval of nearly $80 million in additional funding, is getting a lukewarm reception from the agency as it continues to seek zero subsidy from the federal government. CUNA President/CEO Dan Mica wrote a letter to all 435 House members urging them to grant the additional funding and said the Bush Administration’s proposed zero-subsidy for the 7(a) guarantee loan program for fiscal year 2005 would have “a disastrous effect on our nation’s small business owners and their access to capital.” “Without an appropriation, fees to lenders and borrowers would be significantly increased, and many credit unions and other financial institutions would be forced out of the program,” Mica wrote. The requested funding level for 7(a) equals the appropriation in fiscal year 2004, and will provide approximately $14 billion in financing for small business owners when combined with the current fee structure. “The greater the number of available sources of credit to small business, the more likely small businesses will be able to secure credit, thus continuing to fuel our nation’s economic recovery,” Mica wrote. The House would go on to approve the funding 281 to 137. Many Republicans voted against the funding saying the $80 million would take away from more pressing coffers including homeland security. The 7(a) program is the nation’s largest source of long-term small-business lending, backing 30% of all long-term loans, according to SBA. The SBA provides 58 cents for every $100 that banks agree to lend small businesses to help offset the application fee. It also backs the loans up to 85% for loans under $150,000 and up to 75% for those above $150,000. Bush’s proposal would have allowed the SBA to guarantee up to $12.5 billion in loans. The SBA guaranteed a record $11.3 billion in 7(a) loans in fiscal year 2003 and is on pace to exceed that level in 2004. A zero subsidy, SBA contends, would mean less reliance on restrictive loan caps and thwart any threats of a shut-down, similar to the one that occurred in January when the agency was forced to suspend making 7(a) loans when funding ran out because Congress had failed to pass the 2004 federal budget. SBA Administrator Hector Barreto, who will keynote NCUA’s Access Across America Economic Empowerment Summit this week, has long said a zero subsidy program means more independence and flexibility. In March, he testified before the House Appropriation subcommittee on commerce, justice, state and related agencies that the SBA is 27% ahead of where it was last year and programs like SBA Express would go further if the subsidy was implemented. In a May 20 opinion letter to the SBA, NCUA addressed a number of clarifications with its member business lending rules so that credit unions could more fully participate in the 7(a) loan program. Regarding the 12-year maturity limit/usury ceiling, NCUA wrote “as the member business lending rule does not address maturity or interest rate limitations, federal credit unions may rely on the exception provided in Federal Credit Union Act 701.21(e) and make MBLs as part of a government insured or guaranteed loan program for the maturity and interest rates permitted under the program.” On prepayment penalties and subsidy recoupment fees, NCUA said the SBA’s subsidy recoupment fee, which is part of the 7(a) program, does not appear to be a prepayment penalty and a FCU may collect it. The opinion also states that, even if the fee were a prepayment penalty, a FCU could charge it. While a FCU generally cannot charge a prepayment penalty on a loan, it can if it is a part of government guaranteed or insured loan program, NCUA wrote. On collateral and loan-to-value (LTV) requirements, a FCU may not rely on the exception for government guaranteed loans to avoid the MBL’s rule collateral requirements because the MBL rule expressly sets a borrower equity requirement for construction and development MBLs and maximum LTV ratios. If the SBA guarantees an MBL, however, the MBL rule’s general LTV requirements are relaxed. NCUA said in that case, a FCU may exceed the rule’s general 80% maximum LTV ratio requirement, up to 95%, because the MBL is guaranteed by an agency of the federal government. The opinion also notes that a FCU may seek a waiver from the appropriate NCUA regional office of the LTV requirements. NCUA is currently considering revisions to Part 723 to align the rule with the SBA’s lending programs. Meanwhile, many expect the Senate to approve the 7(a) funding as well. [email protected]