A first step toward modernizing the Small Business Administration's 7(a) loan program was taken in the recently enacted thrift fund rescue law.

The new law hands more responsibility to banks for liquidating defaulted SBA loans. It also allows a bank to sell the 25% of SBA loans that are not guaranteed by the government. Finally, it directs the SBA to set up a data base to track loans, making it easier to identify loss and default trends.

"This is part of an overall movement in Congress to make the SBA more efficient," said David Bundren, the American Bankers Association's associate director for small-business banking.

The agency has come under fire from Congress for soaring default rates on 7(a) loans and sluggish performance in liquidating them. Senate Small Business Committee Chairman Christopher S. Bond, R-Mo., has said that many of the agency's responsibilities, such as loan servicing, should be turned over to the private sector.

While several bankers agreed that the agency needs revamping, they stressed that the 7(a) loan program has been a money-maker for their institutions and a boon for small business.

"If it weren't for SBA loans, we wouldn't be as successful as we are," said Jack Goldstein, senior vice president at First Bank of Frederick, Md. "Making these loans contributes 30% of our bottom line; it has allowed us to grow from $30 million in 1992 to $87 million today."

In 1995, the SBA guaranteed $7.8 billion worth of 7(a) loans. These 55,000 loans were made by 7,000 lenders, roughly 90% of which are banks.

The provision in the new law allows banks with significant SBA lending experience to liquidate the collateral that backs defaulted loans. This is important because it can take the SBA up to three years to liquidate these loans, while the banks may only need six weeks, said Lyle Frederickson, senior vice president of First Capital Bank of Arizona in Phoenix.

"All assets are perishable to a certain extent ... so it's important that banks be able to get rid of the collateral as soon as possible," Mr. Frederickson said.

Under the 7(a) loan guarantee program, the SBA backs 80% of loans under $100,000 and 75% of larger loans. Before Sept. 30, when the law was enacted, banks were not allowed to sell the unguaranteed portion of SBA loans into the secondary market.

"With this new law, what was once an illiquid commercial term loan can be turned into money that can be lent back out," Mr. Bundren said.

While these changes are moving the SBA in the right direction, industry and congressional sources agreed that more must be done.

A Senate Small Business Committee aide who said Sen. Bond wants the SBA to hand off its authority to originate, service, and liquidate loans to banks called the bill "a baby step."

The agency should oversee and set performance standards for SBA lenders, he said. This would result in big savings - more than one-third of SBA employees are responsible for loan transactions - and it would bring default rates down because experienced bankers, not bureaucrats, would service the loans, the aide said.

"The agency needs to become more regulation-oriented and less transaction-oriented," the staffer said.

Sen. Bond will push these broader reforms next year, the aide said. The SBA's programs are up for congressional reauthorization Oct. 1, 1997.

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