With the volume of loans backed by the Small Business Administration slipping, community bankers are pressuring the agency to lower its fees and reduce the paperwork.
However, the SBA says the decreased volume is a byproduct of the faltering economy, not a consequence of its fees.
As of April 4, the number of 7(a) loans this fiscal year (which began Oct. 1) had dropped 17.6% from the same period in the previous fiscal year, to 41,032, according to the National Association of Government Guaranteed Lenders, an Oklahoma City trade group. The gross dollar amount decreased 8.7%, to $6.4 billion.
Eric Zarnikow, associate administrator for the SBA's office of capital access, said volume has dropped because a handful of the agency's largest lenders are scaling back. The top 10 SBA lenders are among the largest financial institutions in the country and do 60% of all the 7(a) loans.
"Quite honestly, I think a lot of them pushed the credit box too far," Mr. Zarnikow said. "And the losses they were having were larger than they expected."
Paul Merski, chief economist for the Independent Community Bankers of America, said small banks would like to fill the void.
"A big lender cutting back is going to make a huge dent in the capital available to small businesses," he said. "I see this as a golden opportunity for community banks to step in."
However, many community banks also have scaled back their SBA lending in recent years, saying that the agency's fees are too high, and that the application process is too arduous.
Last week, ICBA Chairman Cynthia Blankenship, the vice chairman and chief operating officer of the $250 million-asset Greater Southest Bancshares in Irving, Tex., testified at a Senate Committee on Small Business and Entrepreneurship hearing about the credit markets and small-business lending. In her testimony, Ms. Blankenship stressed the need for small businesses to have access to capital during the economic downturn. She also said that oversight and processing fees, along with the elimination of a popular simplified application program, had discouraged small banks from using the SBA's 7(a) program.
"Simply stated, costly and negative changes to the SBA loan programs in recent years have forced hundreds of community banks to drop out of the SBA programs," Ms. Blankenship said in her testimony.
She then submitted a list of recommendations for motivating community banks to offer more SBA loans. The recommendations included beefing up the administration's budget, cutting fees in half for a year, and reinstituting the simplified application known as the "Low-Doc" program.
Late last year the SBA introduced Rural Lender Advantage, a pilot program similar to Low-Doc, in a number of states. That program is now being tweaked, Mr. Zarnikow said, and is expected to be introduced nationwide over the course of the year. But he said there are no plans to lower fees.
Congress has temporarily cut the SBA's fees in the past to stimulate lending activity. The ongoing servicing fee for lenders, established in 1995 at 0.5% of the loan, was cut to 0.25% in 2003 and 2004. The current fee is 0.494%.
The guarantee fee that borrowers pay on the smallest tier of loans — those of up to $150,000, which make up 79% of SBA lending — is 2%, the same as it was in 1985. Congress had reduced the fee temporarily to 1% for 18 months in 2003 and 2004.
Still, it is not a given that lowering the agency's fees would increase loan volume.
During the same Senate committee hearing where Ms. Blankenship testified, SBA Administrator Steven Preston said demand is down largely because economic uncertainty has diminished demand for credit.
"SBA has seen a decline in its loan guarantee volume both because of a lower demand for capital and because of a tightening of credit standards," said Mr. Preston, who on Friday was nominated to be the secretary of the Department of Housing and Urban Development.
Some bankers interviewed for this story agreed with Mr. Preston's assessment and said that borrowers are wary about taking on too much new debt in the current economy.
Diane Wier, the SBA coordinator for Commerce Bank in Kansas City, Mo., said applications at the subsidiary of the $16.8 billion-asset Commerce Bancshares Inc. are steady, but the loan amounts now are smaller than they used to be, and the borrowers have poorer credit.
David Bartram, the president of the SBA division at the $1.3 billion-asset Temecula Valley Bank in California, said it wants to expand its SBA lending, but "it's a very challenging time, and a lot of clients are slow to move" into new debt. Mr. Bartram is the chairman of the National Association of Government Guaranteed Lenders.
Even though overall loan volume is down, demand is up in some markets, such as the Dallas area. Ms. Blankenship said her company's lead bank, Bank of the West, has eight 7(a) loans in the pipeline so far this fiscal year, the same number it did for all of last year.
