Small business lenders are learning that they sometimes have to take the bad with the good when it comes to congressional support for the Small Business Administration.

Last month, SBA Administrator Philip Lader announced a series of changes designed to eliminate the agency's reliance on congressional appropriations. The agency proposed reducing the percentage of each loan it would guarantee, added new fees, and said it would centralize processing, consolidate operations, and eliminate up to 500 full-time jobs.

While the proposals were largely viewed as favorable, some lenders are worried about their unintended side effects.

"I think all the lenders will have to look at what point the fees charged for the program become cost prohibitive," said Joy Manbeck, a senior vice president and head of the SBA program at Bank of North Georgia in Alpharetta. "The borrowers are already paying such high fees to close loans that I think this is going to hurt."

Ms. Manbeck said she favors doing everything within reason to ensure the SBA's survival, but she is concerned about the agency's plan to add a 50- basis-point surcharge onto the interest rate lenders already levy. Currently, borrowers pay up to 2.25% over prime for loans with maturities of seven years or less, and 2.75% over prime for longer loans.

If the plan is approved, the agency would collect 50 basis points regardless of the rate charged by the lender. Ultimately, this fee will have the effect of pinching the cash flow of these smaller companies, she said.

"That's a significant and tangible cost to them, and one that will be with them throughout the life of their loan," she said.

The goal of the proposals is to reduce the agency's subsidy to zero, thereby eliminating the need for the SBA to annually seek congressional appropriations.

The subsidy rate is currently set at 2.74% of the dollar amount in total loans made under the SBA's 7-A primary loan program.

The Office of Management and Budget, which came up with the rate, also helped the SBA design the current cost-cutting scheme, according to Mike Stamler, an agency spokesman.

Reducing the amount of each loan guarantee will reduce the SBA's total exposure, which would mean the percentage subsidy rate should also drop.

But this concerns Tony Wilkinson, president and chief executive of the National Association of Government Guaranteed Lenders. While generally in favor of removing the program from the appropriations process, Mr. Wilkinson fears changes in the subsidy rate formula may force the agency to go back to Congress, hat in hand.

"Trying to get a new line-item appropriation would be next to impossible," he said. "We've got to make sure that whatever deal is cut is enough that we won't have to go back."

To prevent questions in the future, he suggests that OMB fully disclose the assumptions it uses to determine the subsidy rate. Further, he said the SBA should search for ways to cut its costs in an effort to match the sacrifices that both lenders and borrowers will make under the proposal.

Despite the drawbacks, some lenders still see the plan as a breath of fresh air. Deryl Schuster, president of the central division for Emergent Business Capital Inc. in Wichita, Kan., said he is ecstatic about the proposals. He agrees with removing the SBA's loan programs from the appropriations process because it would split the new costs evenly between lenders and borrowers.

"This is exactly what I've been hoping for for years," said Mr. Schuster. "I hope the committees will carve out the loan programs and approve them as quickly as possible."

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