For the last three years the Small Business Administration has been funding its 7(a) and 504 loan programs with user fees charged to borrowers and lenders, eliminating the need for a congressional subsidy that been used for that purpose for five decades.
Now, Democrat-sponsored legislation that would provide a new subsidy in order to lower loan fees is making its way through Congress and could set up a showdown with the Bush administration.
The House passed its version of the bill in April; the Senate's was passed by the Small Business and Entrepreneurship Committee.
Lawmakers and banking industry officials maintain that lowering the fees would make the SBA's loan programs more attractive to borrowers and lenders and in turn make more capital available to small-business owners.
"Small businesses have had to pay increasing costs to access what was intended to be affordable financing for far too long now," Rep. Nydia M. Velazquez, D-N.Y., chairwoman of the House Small Business Committee, said on April 25. "Today, with this bipartisan effort, entrepreneurs will see some relief."
Supporters of the legislation say they are optimistic it will pass the full Senate and be sent to the president, though there is no guarantee he would sign it.
President Bush has vetoed just two bills since taking office in 2001 - the most recent was a war funding bill tied to troop withdrawals - and the White House has never said publicly that it would veto the SBA bill.
But it is on record as opposing the bill that passed the House; it argues that the SBA loan programs have run more smoothly when not reliant on government funding. (In past years budget delays had forced the SBA to reduce the size of loans it guaranteed and even briefly shut down loan programs.)
In a news release last month, the White House said that the number of loans the SBA has guaranteed under its 7(a) and 504 programs more than doubled between fiscal 2001 and fiscal 2006, largely on account of the elimination of the subsidy.
"HR 1332 could potentially reverse this success by reintroducing or increasing taxpayer-funded subsidies for small-business loan programs," the release said. "The administration therefore cannot support House passage of HR 1332 unless it is amended to delete provisions that would increase these subsidies and the need for appropriations."
The House bill, sponsored by Rep. Melissa Bean, D-Ill., passed 380 to 45, above the two-thirds majority needed to override a presidential veto. The Senate bill, sponsored by Sen. John Kerry, D-Mass., unanimously passed the Committee on Small Business and Entrepreneurship.
SBA Administrator Stephen Preston, appointed by President Bush last summer, was not made available to comment on the proposed legislation, but an agency spokesman pointed to a May 2 release, "SBA Loan Program Funding: Myth v. Fact," to bolster the White House's argument.
The three-page fact sheet said it is a "myth" that the SBA raised fees to make up for the loss of the subsidy, and that it merely restored the fees to pre-9/11 levels.
After the terrorist attacks, Congress temporarily cut fees to stimulate interest in the loan programs.
Another myth, the SBA said, is that the fees have led to a decline in 7(a) lending by making loans too expensive. It pointed out that it guaranteed a record 95,900 7(a) loans in the first year the program operated without the subsidy, fiscal 2005, and topped that the next year, guaranteeing more than 97,000 loans.
But those in favor of restoring the subsidy argue that the funding changes have made 7(a) loans smaller on average.
"The size of the loans has been going down," said Paul Merski, the chief economist for the Independent Community bankers of America. "It is fine to have smaller loans, but it is important to have a broad mix of loans and loan products to meet the needs of a variety of borrowers."
Lowering fees would also encourage more community banks to offer SBA loans in their communities, Mr. Merski said, noting many small banks quit making SBA loans after the fees returned to pre-9/11 levels.
"It is no secret that the larger lenders are gobbling up the lion's share of the SBA loans," Mr. Merski said.
James Ballentine, the American Bankers Association's director of grassroots and community outreach, said ABA members think more small businesses would use the SBA program if fees were lower.
"It is not a program that is overwhelmingly used by entrepreneurs in America. We believe there could be greater use of this program with the SBA reducing the fees," Mr. Ballentine said.
After 9/11, Congress cut fees on loans under $150,000 from 2% of the guaranteed amount to 1%. The fee on loans of $150,000 to $700,000 was trimmed from 3% of the guaranteed amount to 2.5%. The fee for larger loans stayed at 3.5% of the guaranteed amount.
The fees returned to their former level on Sept. 30, 2004, and in April of that year Congress added a surcharge of 0.25% on loans above $1 million.
The legislation would permit the SBA to cut fees on loan programs if Congress were to make an appropriation. It also would let borrowers take out 504 and 7(a) loans at the same time; allow borrowers to refinance part of their private debt with 504 loans; and create programs to encourage 7(a) lending in rural areas. The Senate bill contains a provision to increase the maximum amount of a loan that can be guaranteed under the 7(a) program, currently $2 million, to $3 million.
The 504 program gives businesses long-term, fixed-rate financing for fixed assets such as land and buildings. The 7(a) program can be used to start, expand, or buy a business. Currently these loans cannot be used to refinance existing debt. The 7(a) program guarantees up to 85% of loans of $150,000 and less, and up to 75% of loans above $150,000.
The Bush administration also opposes the provisions that would let borrowers refinance private debt using SBA loans, and it has said the rural lending provision is unnecessary because it would duplicate lending programs run by the Department of Agriculture.
