The Small Business Administration could conserve its scarce funds by eliminating government guarantees on seasoned loans and restricting credit to repeat borrowers, according to a report released Wednesday.
Under these proposals, the SBA would drop the 7(a) guarantee from insured loans after a set number of years, although it did not indicate a time frame.
The agency also could limit the amount of 7(a) loans a single borrower could receive or lower the guarantee rate on subsequent loans.
These were among the ideas SBA Administrator Aida M. Alvarez culled from meetings with nearly 200 lenders in five cities since the spring. The suggestions were included in a report to Congress, which is watching SBA warily because of heavy loan demand and internal accounting troubles.
"The SBA's objective during this process is not to develop a 'Band-Aid' or 'quick-fix' approach, nor is the SBA looking to completely reinvent the 7(a) program," the report said. "However, increased program demands coupled with tight budgetary constraints require new approaches."
Other options in the report included lowering guarantee percentages and increasing fees to lenders and borrowers on larger loans to prevent the agency from exceeding its loan volume cap.
Lenders also urged SBA to establish a reserve fund for higher-risk loans. It would be capitalized by lenders, borrowers, and the agency.
Under another proposal, the SBA would reduce its guarantee to between 20% and 25% of the loan. However, the agency would allow the lender first crack at the collateral. This means the agency would pay out fewer guarantee claims but would recover less money per default.
"Some of these are good ideas," said Anthony J. Feraro, senior vice president of small-business lending at Zions First National Bank, Salt Lake City. Lowering guarantee levels would cause lenders to be more vigilant about the quality of their SBA loans, he said.
But bankers said stripping the guarantee before a loan matures would deter sales of 7(a) loans in the secondary market. "That would be pretty radical," said Brian W. Burke, national SBA program manager for Banc One Corp.
Plans calling for higher fees are unfeasible because the program already charges too much, bankers said.
Some suggestions represent the views of just one or two institutions, cautioned Anthony R. Wilkinson, president of the National Association of Government Guaranteed Lenders. "The lending industry will have serious concerns about some parts of the report," he predicted.
SBA said that it will mull these suggestions closely over the next few months as Congress considers the agency's fiscal 1998 budget.
