A tiny provision in the Small Business Administration's fiscal-2007 budget proposal has lenders worried that they may eventually become the government agency's sole source of funding.
Under last month's $624 million budget request, lenders would be charged a fee of 4 basis points on 7(a) loans larger than $1 million. (They already pay a fee equal to 3.5% of the loan amount.) The SBA wants to use the money - about $7 million next year - to cover underwriting costs.
It would be the first time that lender fees had been used to pay administrative costs. To date the SBA has used fees only to cover credit costs or to pay lenders on defaulted loans. Money appropriated by Congress has funded the rest of its budget.
Lenders are afraid that the $7 million the SBA is seeking in fiscal 2007 could turn out to be just the beginning, and that it may want to fund more and more of its operating costs with fees.
"This is the camel's nose under the tent," said Paul Merski, the chief economist at the Independent Community Bankers of America. "You start out at 4 basis points and before you know it, it is 125 basis points."
"What is to stop them from asking for $17 million next year and more the year after that?" asked Anthony Wilkinson, the president and chief executive officer of the National Association of Government Guaranteed Lenders. "I'm worried about a scenario where all the lending programs are fee-funded and we're adding more fees to pay salaries and expenses."
Terry Jorde, the president and CEO of the $39.4 million-asset CountryBank USA in Cando, N.D., said she is worried that the new fees are part of a "back door" plan to end federal funding for the SBA or perhaps get rid of the agency altogether.
"In the last few years we've taken a giant step backward," she said in an interview last week. "A lot of start-up businesses don't have the money to pay these additional fees."
Bankers are expressing similar concern about another budget proposal that would give the agency authority to charge a fee on the secondary guarantees it extends when lenders sell their SBA loans to investors.
They said such a fee would probably equal just a few basis points of the total loan - hardly enough to drive anyone out of the business. But they added that they are worried about where it might go from there.
"You always worry when they raise fees," said Walter Horsting, first senior vice president of the $12.4 billion-asset Valley National Bank in Wayne, N.J. "Nobody is overreacting yet, but as it is now, it's a very expensive product."
SBA spokesman Mike Stamler defended the new 7(a) fee Wednesday, saying it would save taxpayers millions of dollars.
Mr. Stamler refused to rule out future fee increases. "I can only see one year in advance," he said.
The 7(a) program is the SBA's largest - nearly 75% of its lending activity. For fiscal 2007 it is asking Congress for enough money to make $17.5 billion of 7(a) loans.
The agency began shifting the costs of the program from congressional appropriations to user fees in fiscal 2005, when the agency proposed doubling the fees lenders and borrowers pay for 7(a) loan guarantees and using the money to cover credit costs.
Congress ultimately approved, but only after a long, bruising battle in which SBA Administrator Hector Barreto came under heavy fire from lawmakers and some lenders.
Despite critics' misgivings, the agency lent a record $18.9 billion in fiscal 2005, and lawmakers retained the fee formula in the 2006 budget, but only after another sharp debate.
Rep. Nydia M. Velazquez, the ranking Democrat on the House Small Business Committee and one of Mr. Barreto's harshest critics, said fees would eventually choke off 7(a)'s growth by making loans too expensive for entrepreneurs to afford.
"The 7(a) program has already been stifled due to fee increases over the past two years that are prohibitively too high," she said in a statement provided Tuesday to American Banker. "This whole new fee proposal will only continue to make the program less affordable and result in decreased lending opportunity overall."
Meanwhile, the SBA continues to grapple with disaster-relief loans related to hurricanes Katrina and Rita. It has approved a record $4.3 billion in disaster-relief loans to homeowners and businesses, but Mr. Barreto told Congress this month that the SBA needed about $1 billion in additional funding to meet soaring demand.
The Bush administration closed that gap by transferring $1 billion from the Federal Emergency Management Agency to the SBA, but Sen. John Kerry, D-Mass., said Tuesday that the agency would need another $1.3 billion to fund disaster-relief lending through Sept. 30.
Mr. Stamler said the agency's original projections assumed that homeowners would only seek about $33,000 on average, about what they sought after previous disasters. But the damage to homes in the Gulf region is exceptionally severe, he said, and the average loan request has been close to $70,000.
