'Back to Normal': Obama Budget Would Cut SBA Funding By 45%

At first blush, the Obama administration's 2012 budget proposal seems to take a hatchet to the Small Business Administration.

The proposed budget would provide 45% less money to the SBA than the agency received in 2010, with much of the cuts representing supplemental funding that reduced fees for borrowers and lenders and raised loan guarantees. Industry observers say the plan is keeping pace with an improving lending environment that no longer requires incentives to meet credit needs.

"I think this budget is reflecting a return to normalcy," said James Ballentine, senior vice president for political operations at the American Bankers Association. "It will not be received as well, that return to normalcy, for many lenders," he added. "But it's something that the lenders will adjust to going forward, particularly those that have offered the SBA programs for many years."

The budget would provide $985 million for the agency, compared with $1.78 billion in 2010. (A 2011 budget has not been approved.) The 2010 total included $962 million of supplemental funding, which helped extend the lowered fees and higher loan guarantees first implemented under the stimulus bill in 2009.

Those funds ran out at the end of 2010.

Paul Merski, a senior vice president and chief economist with the Independent Community Bankers of America, said that, as loan demand returns, more borrowers may qualify for traditional commercial loans, eliminating the need for incentives.

"The lower fees and higher guarantees were very timely and highly successful during the economic downturn to help bridge the gap of getting credit to businesses when they were more likely to qualify under SBA loan programs," Merski said. "Now that things are getting back to normal, with the proper fees there should be enough credit available to meet the SBA loan demand."

Excluding the supplemental funding, the 2012 request is $161 million, or 2%, higher than the 2010 budget.

The proposal calls for $27 billion in loan guarantees, including $16.5 billion in Section 7(a) loans. The 7(a) guarantees include an estimated $14.5 billion in term loans and $2 billion in revolving lines of credit, which are expected to support $48 billion in total economic activity over the life of the guarantees.

Though the economy has improved, the administration expects the cost of loan subsidies to rise due to higher defaults on prior loans.

The agency's guaranteed loan programs are expected to record a $3.7 billion increase in losses and subsidy costs in 2011 on their outstanding loan portfolios, particularly loans made between 2004 and 2008, according to the budget proposal. It was the highest in the agency's history since the implementation of credit reform in 1992.

Projected economic conditions and higher-than-anticipated default rates have doubled the estimated cost of new 7(a) loan guarantees for 2012, compared with 2010.

As a result, the Obama administration plans to offer a legislative proposal that would put the 7(a) loan programs back on the path to self-sustainability by allowing the SBA to adjust fees on new loans starting in 2013.

Merski said the most important thing is that lenders be equipped to provide the same level of SBA loans - even if that means changing the fee structure.

"It's better to adjust the fees properly to make sure the SBA loan demand can be met by the banks, rather than turn away small-business borrowers that need credit," Merski said.

In the meantime, the administration would increase loan subsidy costs by 159% in 2012. The move will help offset losses on those loans for another year, said Tony Wilkinson, president of the National Association of Government Guaranteed Lenders. By 2013, he expects economic improvement will reduce the losses to the portfolio and lead to lower subsidy rates for lenders.

"Our pitch has been we need one more year to get on down the road," Wilkinson said. "So it looks like this is a [budget] request that we would have hoped for."

The budget would also support $7.5 billion in guaranteed lending for commercial real estate development and heavy machinery purchases; $1.1 billion for disaster loans; $3 billion in Small Business Investment Company debentures to support new businesses; and $25 million in direct microloans.

The proposal would also create two new programs within the Small Business Development Company.

One program would provide $200 million in guarantees for matching funds for investors aiming to support "innovative" new companies.

The other would provide $200 million over the next five years to support investments in economically distressed regions, for disadvantaged groups and for sectors that have been identified as national priorities.

The budget proposal would also boost funding by $2 million, or 12.5%, for the Office of the Inspector General. And it would cut funding for administrative costs at Small Business Development Centers.

Michael Stamler, an SBA spokesman, said that the history of the agency's budget over the past decade has made year-to-year comparisons difficult.

In some years the SBA's subsidy costs were zero, which looked on paper like a budget cut. In 2005 it received a huge appropriation for disaster loans after a spate of hurricanes in Florida, and in 2006 received even more funding in the wake of hurricanes Katrina, Rita and Wilma.

In the next few years, the agency did not need additional disaster loan funds, making it appear as though the funds had been cut.

"Year-to-year comparisons really are more complicated than simply looking at the top line, or the bottom line," Stamler said.

"What we have to look at in SBA's budget, especially from the perspective of your readers, is what does it do for the loan program, and it provides substantial assets for that," he added.