Lawmaker Wants to Reverse SBA's 7(a) Loan `Zero Subsidy'

WASHINGTON – If one legislator has her way, the SBA’s 7(a) loan program, which is currently operating under a “zero subsidy,” would see funding control returned to Congress. Rep. Nydia Velazquez (D-N.Y.)has proposed reversing the subsidy through her Small Business Access to Capital Act of 2005 (H.R. 1868) bill. The bill would not actually restore the Congressional subsidy but would reduce the fees lenders and borrowers pay; increase the size of loans eligible for a 7(a) guarantee to $3 million; and reinstate an arrangement that combined an SBA-backed loan with a credit union or bank loan in a single financing package, commonly referred to as “piggybacking.” Velazquez is asking for $80 million. Despite the SBA’s data which shows 7(a) loans are up, she has said loan volume has fallen by $400 million from October to December 2004, the first quarter of the SBA’s fiscal year compared to July to September. Lending also fell another $140 million from January to March 2005, she added. CUNA has thrown its support behind the bill concerned that credit unions are paying higher fees to participate in the SBA’s 7(a) program, said Gary Kohn, vice president of legislative affairs. CUNA has also always been a loyal advocate of the 7(a) loan program but has also pressed for the highest possible appropriation in order to keep reduced fees and make the program accessible to credit unions, the trade group said. “The greater the number of available sources of credit to small business, the more likely a small business can secure credit and contribute to the nation’s economic growth,” CUNA said. In July 2004, CUNA President/CEO Dan Mica wrote to legislators urging them to reconsider providing $79 million towards the 7(a) loan program rather than implementing President Bush’s zero subsidy plan. He said the requested funding level for 7(a) would equal the appropriation in fiscal year 2004 and will provide approximately $14 billion in financing when combined with the current fee structure. In December 2004, President Bush approved $16 billion for the 7(a) program. The program is now operating without a congressional appropriation or at zero subsidy, meaning that the program is self-supported through fees paid by lenders and borrowers. Borrowers and lenders, including credit unions, saw changes in the fee structure: the fee on processing a 7(a) loan of $150,000 or less went from 1% to 2% of the SBA guaranteed portion; and loans from $150,000 to $700,000 increase to 3% from 2%. The lender annual service fee also increased to 0.50%, up from 0.36%. The fee for loans over the $700,000 mark remained the same at 3.5%. After 51 years, the 7(a) program has become the largest single source for lending to the country’s 25 million small businesses. The government guarantees up to 85% of loans issued by banks and other commercial lenders for small-business applicants who can’t otherwise qualify for loans due to insufficient collateral or other credit-challenging situations. The loans can go as long as 25 years, compared to typical business loans that end after three or five years with a balloon payment. It is also the only SBA program available for refinancing outstanding loans. The SBA has said the higher fees will cover such program costs as loan defaults and Congress appropriations will no longer be relied on. This independent leap could also mean thwarting a shutdown of the 7(a) program down altogether, the agency has said. That scenario occurred in January when the SBA ran out of temporary financing it had received. Velazquez told CUNA the resulting increase in user fees has led to a steep decline in borrowing. The dollar volume of loans guaranteed under 7(a) has fallen steadily since Oct. 1, when the agency did away with the annually appropriated congressional subsidy that had funded its 7(a) credit costs since the early 1950s. The SBA has said 7(a) loans approvals are already up compared to the start of its fiscal year 2003. The most current numbers show the agency has approved more than 23,197 loans totaling $3.56 billion since the start of its fiscal year, which began Oct. 1, 2004. That’s compared to 18,822 loans worth $3.12 billion in the same period a year earlier, and 13,759 loans worth $2.24 billion two years ago. -