Call it the requiem for a subsidy.
For the past 50 years Congress has appropriated money for the U.S. Small Business Administration to use to pay off loan losses incurred by its flagship 7(a) lending program. But the $388 billion omnibus appropriation bill President Bush is expected to sign this week terminates the credit subsidy and replaces it with higher fees on lenders and borrowers.
The change is a major victory for SBA administrator Hector V. Barreto, who had been pushing to eliminate the 7(a) credit subsidy since February. His argument was that fee funding would eliminate much of the budget uncertainty that has dogged the program in the past few years.
Fees did increase in October, when lawmakers failed to renew a two-year pilot program that had cut 7(a) costs in half. Even so, there was a chance lawmakers who opposed his plan — virtually all Democrats and many Republicans, too — would use the budget or the agency’s reauthorization bill to reinstate the lower fee structure and continue the credit subsidy.
In addition to giving SBA leeway to guarantee $16 billion of loans under 7(a) in fiscal 2005, which runs through Sept. 30, the omnibus bill reauthorizes the agency for two years, makes the current, higher fee structure permanent, and eliminates the subsidy. Since that reauthorization will serve as a template for future ones, it seems unlikely that the 7(a) credit subsidy would be reinstated.
James Ballentine, the American Bankers Association’s director of community development, said the Bush administration had resisted passing the SBA’s reauthorization bill until now, figuring it could bury the controversial zero-subsidy plan in an omnibus bill.
“If you wait until the last minute, things that aren’t popular can get done,” he said.
Anthony Wilkinson, the president and chief executive of the National Association of Government Guaranteed Lenders, said the zero-subsidy solution became inevitable once Congress allowed 7(a) fees to double last month.
His group had been part of a coalition of trade associations that had opposed eliminating the credit subsidy, but last week it decided to negotiate a deal with the SBA. In exchange for the elimination of the subsidy, their agreement allowed—(among other things) for a 33% increase in the maximum size of the loans the SBA guarantees under 7(a), to $1.5 million.
“It was in our best interests to sit down and craft a deal that would serve our clientele,” Mr. Wilkinson said. “Zero subsidy had already happened.”
