Lenders gave the Small Business Administration an earful Monday about a proposed pilot program for underserved borrowers.

Lyle D. Frederickson, senior vice president at First Capital Bank in Phoenix, said the plan unfairly excludes banks, which make approximately 75% of the loans guaranteed under the agency's 7a program.

"The most efficient way to increase lending is to give incentives to existing lenders to increase their efforts in the desired areas and (market) segments," Mr. Frederickson testified at a public hearing on behalf of the American Bankers Association.

The SBA introduced its New Markets Lending Company proposal in January. Part of a broader initiative to bring credit and equity to small businesses in distressed communities and to businesses owned by minorities, women, veterans, or the disabled, the program would license 10 nonbank lenders and give them financial incentives to reach the underserved groups.

The SBA is aiming to implement the program by Oct. 1, and it estimates that the five-to-10-year pilot would consume $300 million in guarantee authority during its first year.

An SBA spokesman said the program's structure remains fluid. It is conceivable, for example, that banks or bank holding companies would be allowed to set up nonbank subsidiaries that could apply for one of the 10 New Market slots. The agency will continue to accept public comments over the next two weeks. "These questions are not resolved yet," he said.

Several other witnesses representing the 14 existing nonbank lenders were also critical of the proposal.

Martin D. Teckler, an attorney at the Pepper Hamilton law firm, said the SBA should pursue its pilot program through legislation, not executive fiat. Several witnesses complained that the New Markets program would reduce the value of the existing nonbank licenses, which lawmakers fixed at 14 in 1982 and which can be traded.

But Penn J. Ritter, an executive vice president at Medallion Financial Group, called the current scale of lending to underserved communities a "national embarrassment" and said his firm would seek to obtain one of the 10 New Markets licenses.

Mr. Frederickson suggested that the SBA waive the 50-basis-point guaranty fee, to induce existing lenders to make more loans to underserved businesses. Tax credits, an option being discussed by the SBA, might also be useful, Mr. Frederickson said. But to be fair, he said, such credits should also be extended to existing program participants.

The best way to reach underserved companies is to offer incentives to existing 7a participants, said Richard Wise, president of American National Bank, Parma, Ohio, and a member of the board of the directors of the National Association of Government Guaranteed Lenders. He suggested the SBA increase its guarantee to $135,000 of a $150,000 loan, up from $112,500 today.

Mr. Frederickson said the SBA's pilot should be slimmed from 10 new lenders to three, and that banks should be allowed to compete for those slots.

Unlike nondepository institutions, he said, banks have considerable experience with lending to underserved markets, because of their Community Reinvestment Act requirements.

Moreover, he said, while federally insured banks are subject to rigorous safety-and-soundness standards, nonbank lenders are not. The SBA has yet to complete its congressionally mandated examinations of the 14 nonbanks already licensed to make SBA-guaranteed loans, Mr. Frederickson said.

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