Rep. Nydia M. Velazquez, D-N.Y., has introduced a bill that would reverse the sweeping changes made to the Small Business Administration's 7(a) loan program last year.
She claims the resulting increase in user fees led to a steep decline in borrowing. The dollar volume of loans guaranteed under 7(a) has fallen steadily since Oct. 1, when the agency did away with the annually appropriated congressional subsidy that had funded its 7(a) credit costs since the early 1950s, she points out.
But the agency says a more appropriate comparison shows an increase.
The bill may have little chance, because it faces opposition from congressional leadership, SBA, and the Bush administration.
It does have plenty of industry support, though, including the American Bankers Association, the Independent Community Bankers of America, and the credit union industry's largest trade group.
Rep. Velazquez said she would work to win support on both sides of the aisle in the House. "We're reaching out to every sector that impacts the financial community," she said at a press conference Wednesday. "We're reaching out to Republicans, and I hope this will be a bipartisan bill."
The legislation makes no provision to restore the 7(a) credit subsidy - whose end has been SBA Administrator Hector V. Barreto's signature achievement. But it would slash the fees lenders and borrowers pay; increase the size of loans eligible for a 7(a) guarantee by 33%, to $3 million; and reinstate "piggybacking," the practice of combining an SBA-backed loan with a conventional bank loan in a single financing package.
Tony Wilkinson, the president and chief executive of the National Association of Government Guaranteed Lenders, in Stillwater, Okla., said Rep. Velazquez's bill would lead inevitably to a return of the congressional subsidy, because SBA replaced subsidy funding with the revenue from user fees.
Cutting fees without a subsidy "would lead to a reduction of credit, if not a total shutdown," Mr. Wilkinson said in a phone interview Tuesday.
Rep. Velazquez is working to restore the 7(a) credit subsidy in the Appropriations Committee as part of the regular budget process. "We're looking for a Republican appropriator that we can sit down with and get to restore the subsidy," she said. "All we're asking for is $80 million."
SBA officials did not return calls, but Mr. Wilkinson, whose group neither supports nor opposes the bill, said eliminating the subsidy and funding 7(a) with fee income instead has given the program a stability it lacked. Delays in passing a budget frequently caused the agency to reduce the amount of available credit or impose temporary shutdowns.
"Our position is, 'Yes, fees are high; and yes, we'd like to do more lending,' " he said. "But we're not willing to risk a cap or a shutdown. The cost of caps and shutdowns is as expensive if not more than the higher fees."
William Gossett, the president and CEO of the $60 million-asset Islands Community Bank in Beaufort, S.C., agreed that 7(a) is more stable outside the appropriations process. However, he said, the higher fees have made obtaining the loans "prohibitively expensive" for many small businesses.
For example, he said, borrowers' up-front fees on a $2 million loan now exceed $53,000 - about 19% more than last September.
Islands Community, which opened in 2001, has made about 30 SBA loans, totaling nearly $30 million, said Mr. Gossett, who spoke at Wednesday's press conference.
"We've been through shutdowns, slowdowns, and cramdowns," he said. "I found those things distasteful, and it was problematic for our borrowers not knowing whether the program was going to be there or not. But at the same time, we're pushing higher costs on the businesses that are least able to afford them."
According to Rep. Velazquez, the dollar volume of loans guaranteed under 7(a) has dropped significantly since October, when the subsidy was terminated and fees were raised. Volume fell by $400 million October-December - the first quarter of fiscal 2005 - compared with the July-September quarter. It fell another $140 million in the January-March quarter, she said.
"I think given these realities, Congress must realize that this grand experiment has not worked," she said.
But SBA insists it is on pace to break records in both the number of under 7(a) loans guaranteed and overall dollar volume. From October through March it guaranteed 46,603 loans for $6.98 billion, up from 36,646 loans and $5.7 billion a year earlier, the agency said.
Rep. Velazquez pointed out that budget difficulties forced the program to cap guaranteed loans at $750,000 for most of the winter of 2004, which makes year-over-year comparisons "disingenuous."
