Lawmakers, lenders aren't buying SBA's argument for higher loan fees

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A plan by the Small Business Administration to raise fees on borrowers and lenders under its flagship 7(a) program received a chilly response from lawmakers on the House Small Business Committee at a hearing Wednesday.

Rep. Nydia M. Velazquez, D-N.Y., the committee’s chairwoman, said she would block action on the SBA’s budget request for the 2020 fiscal year until the agency documented the process it followed in concluding a fee hike is necessary.

“I want every document submitted to the committee,” Velazquez said. “I will not do anything — no legislation — until we are convinced that this is the way to move forward.”

The SBA’s proposed fee increases, which would affect loans greater than $500,000, are part of the fiscal 2020 budget plan it released last month. According to the agency, it won’t generate enough revenue under the current fee structure to cover its credit costs. Without the hikes it’s asking for, the SBA said it will need a $99 million appropriation.

The agency is seeking authority to guarantee up to $30 billion of loans under 7(a), which is by far its largest lending program, in fiscal 2020. That would be the same amount as was authorized in the 2019 fiscal year. During the 2018 fiscal year, which closed Sept. 30, 7(a) guaranteed loans totaled $25.4 billion.

The budget for the 2020 fiscal year also proposes raising the dollar-amount threshold for SBA Express — a popular program that offers a reduced, 50% loan guarantee in exchange for a streamlined application process — from the current $350,000 to $1 million. Lenders who testified Wednesday praised that proposal, but they reacted with dismay to the prospect of a fee hike.

Raising fees would add thousands of dollars to the cost of loans, ultimately shrinking access to capital, said Lynn Ozer, president of SBA lending at the $20.7 billion-asset Fulton Financial Corp. in Lancaster, Pa. Ozer cited a $2.9 million loan Fulton made recently to a New Jersey trucking firm, noting the borrower would have been forced to pay nearly $6,000 more under the fee structure the SBA is seeking.

“That doesn’t sound like much, but for small businesses it make a huge difference,” Ozer said.

Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders, said the agency’s call for higher fees comes after 7(a) recorded some of its strongest credit metrics ever in the 2018 fiscal year. Recovery rates on purchased loans were up, while chargeoff rates fell to 0.51%, a historic low.

“We simply cannot see where there has been a negative shift in portfolio performance,” Wilkinson said. “Without justification, how can we accept [the SBA’s] calculation?”

Gail Jansen, vice president for business services and operations at the $4.4 billion-asset Kinecta Federal Credit union in Manhattan Beach, Calif., said she realized keeping 7(a) in a zero-subsidy status is important. At the same time, Jansen urged lawmakers “to examine every potential alternative to potential fee increases on small businesses and the small lenders who serve them.”

Jansen testified on behalf of the National Association of Federally-Insured Credit Unions.

The last time the SBA sought a credit subsidy for 7(a) was the 2013 fiscal year, when it asked Congress for $236 million. Since then, it has been able to fund its credit costs with the fees it charges lenders and borrowers.

SBA Chief Financial Officer Tim Gribben testified that the agency recently adjusted the formula it uses to estimate credit costs after determining it had been underestimating its purchase rate, which measures the amount it pays out on the loans it guarantees, for several years.

Under questioning by Velazquez, Gribben acknowledged the SBA has collected more than needed to fund 7(a)’s credit costs every year since 2010. According to Wilkinson, who has led the National Association of Government Guaranteed Lenders for three decades, the cumulative overage amounts to $3.2 billion.

“This is a staggering amount of money that means nearly a decade of unnecessary fees on small-business borrowers and lenders,” Wilkinson said.

Gribben, however, said those surpluses have been shrinking in recent years. “We’ve been coming closer and closer to that point where the fees were not going to cover expected defaults," he said, adding that fiscal 2020 is projected to be the tipping point.

Velazquez expressed skepticism. “Everyone in this room knows SBA is going to end the year with a surplus,” she said.

Rep. Kevin Hern of Oklahoma, the ranking Republican on the subcommittee on economic growth, tax and capital access, which held the hearing, had a similar reaction. “As a member of the Budget Committee, where we get to see [economic] assumptions of both parties, there isn’t a doom-and-gloom scenario from either, yet [Gribben] thinks there is,” he said. “I’d like to get his thinking. Maybe he has a crystal ball the rest of us don’t have.”

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