Now that the struggle over funding the Small Business Administration's flagship 7(a) program has been settled, lenders are turning to an issue that may be even more important to community banks: "piggyback" lending.
Piggybacking, formally called combination lending, is the practice of including an SBA-guaranteed 7(a) loan in a larger financing package.
The SBA has let lenders make combination loans in the past - though it charged an extra fee for doing so - but since Oct. 1 the agency has prohibited the practice, and there is no indication when or if that will change.
Robert Coleman, who edits the Coleman Report, a newsletter about SBA lending, said the Office of Management and Budget objects to piggyback deals, because banks give the government-guaranteed component the junior slot on liens. (The OMB, commenting after press time, confirmed it objects to piggyback loans.)
It is unclear where the SBA itself stands on this issue. In a March 31 press release, the agency promised to publish "specific guidelines on piggyback loans that will allow them to become a consistent part of the loan program." However, those guidelines have not beenreleased.
Community banks in particular want piggyback lending revived. They argue that it is frequently the only way they can offer large loans to promising but untested borrowers.
Say, for example, a young, fast-growing company that has yet to establish a consistent profitability record is in the market for a $4 million loan. Piggybacking would let a community bank pair a $2.5 million commercial loan with a $1.5 million SBA-backed one.
If forced instead to consider a straight commercial loan for the same amount, many small banks would have to pass and risk losing the business to a larger competitor.
Thomas A. Bracken, the president and chief executive officer of the $3 billion-asset Sun Bancorp Inc. in Vineland, N.J., said such loans are precisely the kind for which his company wants government backing.
"It's a developmental thing," he said. "We use SBA for companies that are moving ahead but have not had enough time to develop."
Reinstating piggyback lending "would be very helpful," Mr. Bracken said. "Anytime you give banks more options and eliminate constraints, that's a good thing."
In the weeks following the start of the piggyback ban, the issue was overshadowed by the battle over 7(a) funding.
Last week, though, Congress handed SBA Administrator Hector V. Barreto a major victory by agreeing to abolish the annual subsidy it had given his agency since its creation in the early 1950s to pay for 7(a) loan losses. Instead, the program will be funded entirely through fees on borrowers and lenders.
Mr. Barreto unveiled his plan to fund the 7(a), by far the SBA's largest lending program, with user fees in February. However, the plan drew fierce resistance from lawmakers in both parties, as well as from a coalition of trade groups representing lenders and small businesses worried that higher fees would make 7(a) loans less attractive.
The break came when one of those groups, the National Association of Government Guaranteed Lenders, agreed to drop its opposition and back Mr. Barreto's plan. In return, the SBA agreed to increase the 7(a) program's maximum loan size by a third, to $1.5 million. Anthony Wilkinson, the trade group's president and CEO, said the larger limit would relieve some of the pressure on small lenders struggling to find a way to make larger commercial loans.
The SBA also agreed to help the government-guaranteed lender group arrange a meeting with OMB officials to plead their case for a resumption of piggyback lending. Raul Cisneros, the SBA's assistant administrator for public affairs, said Wednesday that such a meeting would take place soon.
