The SBA will be less helpful during this downturn

Feb 1, 2008

Banks usually make more Small Business Administration-backed loans when the economy weakens, but that's not the case this time around.

When credit standards tighten, lenders typically steer more small businesses to SBA loans. The government guarantees on these loans, which range from 50 percent to 85 percent, enable banks to make loans to businesses that don't qualify for conventional loans.

Fewer businesses may benefit from SBA loans during this downturn, however. The number of loans made through the SBA's flagship 7(a) loan program is down 14 percent so far this fiscal year compared with the same period a year earlier, and the dollar volume is down 6 percent. The SBA's fiscal year began Oct. 1.

Lending through the agency's 504 program, which primarily is used for real estate, is flat after several years of steady growth.

Uncertainty over where the economy is headed may be one reason why more small businesses aren't turning to the SBA.

"Not as many people are willing to stick their neck out and borrow money and expand," said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders, which represents 7(a) lenders.

Some lenders have tightened credit standards even for SBA loans, said Eric Zarnikow, who heads the SBA's Office of Capital Access.

SBA lending also has become less attractive for lenders, as fees for using the program go up and prices for the loans on the secondary market go down.

Nearly 400 banks have stopped making SBA loans over the past two years.

"It appears that the costs associated with the program have driven some lenders away," Wilkinson said.

Loan fees went up slightly for lenders and borrowers in October 2004, when Congress -- at the SBA's request -- stopped subsidizing the agency's 7(a) loans. Fees now cover loan defaults and other program costs. Community banks complained about the higher fees, but overall lending remained strong for the next three years.

The National Small Business Association opposed the move to zero subsidy, fearing the higher fees would make the loans too expensive for some lenders and borrowers. That's "happening now," said NSBA Vice President Molly Brogan.

The SBA also recently started charging lenders additional fees to pay for outside reviews of their lending portfolios -- a task the agency once paid for itself.

One lender was charged $81,000 for a $40 million loan portfolio, Wilkinson said.

"What do you think that guy is going to do?" he said. "Some of these guys are going to say, 'Forget this, come and get your license.'"

These charges will become higher this year, as banks are assessed for a full year of oversight.

"The head of a lender's SBA loan division simply cannot justify to senior management SBA's existing fees in light of the benefits received," Wilkinson wrote in a Dec. 17 letter to SBA Administrator Steven Preston.

Wilkinson's group asked for an indefinite suspension of lender oversight fees for banks already regulated by the federal government and a ceiling on loan fees for lenders that aren't federally regulated.

The SBA hasn't responded to the association's request, but Wilkinson expects the answer will be no.

Only the SBA's largest lenders have to pay the oversight fees, Zarkinow said. The fees have increased the agency's ability to make sure the loans go to eligible small businesses, he said.

Congress may consider reducing fees on 7(a) loans as part of its economic stimulus bill. Sen. John Kerry, D-Mass., is pushing for a $150 million appropriation so the SBA can cut 7(a) loan fees and enough money to support a $20 million increase in Microloans, which serve low-income entrepreneurs.

Congress may consider reducing fees on 7(a) loans as part of its economic stimulus bill. Sen. John Kerry, D-Mass., is pushing for a $150 million appropriation so the SBA can cut 7(a) loan fees and enough money to support a $20 million increase in Microloans, which serve low-income entrepreneurs.

"We need to make sure that entrepreneurs have money in their pockets to continue to grow their businesses," said Kerry, who chairs the Senate Small Business and Entrepreneurship Committee.

This fee reduction is "something we've been fighting for," Brogan said.

"Any relief would be helpful," Wilkinson said.

Zarkinow, however, said it's too early in the fiscal year to conclude that fees are dampening demand for 7(a) loans.

Congress should be cautious about making 7(a) loans dependent on appropriations, because that could lead to program shutdowns or lower caps on the size of loans if shortfalls develop, he said.

Wilkinson, however, said the SBA has prevented its lenders from "doing what we could be doing" to stimulate the economy.

"I'd like for us to be able to do more," he said. "Right now, the agency is doing its best to run some of its partners away."


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