A key House committee will meet Wednesday to vote on legislation that would restructure two Small Business Administration programs used by thousands of banks.

Lawmakers, concerned that costs are too high for the agency's 7(a) and section 504 loan guarantee programs, are pressing for reforms.

House Small Business Committee Chairwoman Jan Meyers, R-Kan., who will run Wednesday's hearing, has told SBA Administrator Philip Lader there "may be significant potential for cost savings from further privatizing SBA collections/liquidation activities."

Bankers agree. "If we can speed up the collections process and the liquidation of the collateral process by privatizing it, then it's to our advantage to privatize," said Bill Gossett, president of Liberty National Bank in Longwood, Fla.

Lyle Frederickson, vice president and manager for government guaranteed lending at Bank One Arizona, said bankers have more expertise working out loans than do government bureaucrats.

An overhaul of SBA may be in the offing, according to experts.

"If the SBA creaks through this year, I think it will have to be radically restructured in the next Congress," predicted Karen Shaw, president of ISD/Shaw, a Washington consulting firm.

Loan volume under the SBA's 7(a) and 504 programs has exploded in recent years. In 1990 the 7(a) program guaranteed 9,000 loans worth $4 billion. By 1995 the program had 56,000 loans totaling $8 billion. During that period, the 504 program grew from 1,400 financings at $400 million to 4,500 at $1.5 billion.

However, while the agency's portfolio was expanding, the subsidy rate for both programs was climbing. In 1995 the subsidy rate for the 7(a) program was 2.74%, up from 2.15% the prior year, and for the 504 program it was 6.85%, up from .51% in 1994.

The subsidy rate reflects the net cost of the government's guarantee on SBA loans. The subsidy rate is expressed as a percentage of the total loans outstanding in each program.

SBA officials refused to comment on the bill being considered Wednesday but argued that legislation enacted last year has already lowered the 7(a) subsidy rate to 1.06% this year.

The 1995 law lowered the agency's guarantees and allowed SBA to levy new fees on lenders. For the 7(a) program, all guarantees for loans $100,000 and up were lowered to 75%, while loans under $100,000 were guaranteed at 80%.

Previously, loans under $155,000 were guaranteed at 90%, while larger loans with maturities under 10 years were guaranteed at 85%. Large loans made for more than 10 years carried 75% guarantees.

But the positive effects of the legislation may be short-lived.

A review of SBA's loan records from 1982-1995 and a re-calculation of the agency's 1996 expenses led the Office of Management and Budget to peg next year's subsidy rate at 2.68%.

When SBA figured the subsidy rate for this year, it estimated a recovery rate of 62% on the loans that went into default. But after OMB looked at the updated books, it said SBA will get back just 50% of the value of those loans.

The lower percentage hurts the agency because it is losing more money than previously thought.

As a result, the SBA created two teams to focus on restructuring the 7(a) and 504 programs. Among the many areas targeted, the teams, which included some bankers, focused on improving the liquidations and collections processes.

"Bankers contend that more rapid collections can increase SBA recoveries by preserving the physical and technological quality of assets involved and by preventing the accrual of additional charges for mortgage payments, taxes, and maintenance," according to a letter Reps. Meyers and Bill McCollum, R-Fla., sent Mr. Lader last month.

Mr. Lader disagreed when he wrote back on June 24.

"Improvements in SBA's loan servicing and liquidation areas can be made, (but) we are not convinced that simply moving these additional loan functions to the private sector will necessarily result in a real improvement to the programs or result in savings to the SBA," wrote Mr. Lader.

According to Mr. Lader, about 60% of loans are serviced and liquidated by private-sector firms. The agency does not break down its recovery rate to show whether the agency or outsiders collect more on defaulted loans.

The legislation before House Small Business Wednesday would give the SBA's most frequent lenders under the 7(a) loan program more authority to collect and liquidate loans.

For the 504 program, which provides loans for real estate projects, the bill increases the down payment for high-risk borrowers to 15%, from 10%. Borrowers are considered high-risk if they have been in business two years or less or are financing such limited-use real estate as a car wash. Another change increases the borrower fee to 5/8% of the total loan, from 1/8%.

Finally, the bill would allow banks to securitize the nonguaranteed portion of their SBA loans.

The American Bankers Association supports the bill for the most part but opposes a provision that would restrict a test program that has reduced the documentation and approval time for 7(a) loans.

The so called "low-doc" program now accounts for 80% of 7(a) loans. But the bill would limit the low-doc and all other test programs to 10% of total 7(a) loans.

Currently, any lender can submit the shorter approval forms. Under the legislation, only certified and preferred SBA lenders would be able to. The legislation also would limit the number of lenders that qualify as certified or preferred by imposing volume restrictions.

Community banks would need to make four 7(a) loans a year for two consecutive years to qualify. The requirement would be doubled for banks in urban areas.

The ABA estimates that the number of certified and preferred lenders would be cut to 800, from 1700, and that 6,000 lenders would lose the ability to use low-doc applications.

"We have very serious concerns about the low-doc provisions, but we're quite supportive of the rest of the bill," said ABA lobbyist Floyd Stoner.

Mr. Olaya is an intern with the Institute on Political Journalism, a program of the Fund for American Studies.

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