WASHINGTON - House Republicans and the Small Business Administration are floating a compromise reauthorization bill that would eliminate once and for all the congressional credit subsidy for the agency's flagship 7(a) program.
Until now lenders, small-business advocates, and Democratic lawmakers have been united in opposing plans to do away with the annual subsidy, which pays for the SBA's loan losses.
But Paul Merski, the chief economist for the Independent Community Bankers of America, said the SBA appears to be flexing some political muscle. "I think SBA figured, 'Bush won reelection, so let's throw something out there and see what happens.' "
For the compromise plan to succeed, the SBA would have to persuade lawmakers to drop the subsidies they have already approved and replace them with money generated by increased fees on the lenders and borrowers who use 7(a).
Before the election both the House and the Senate passed reauthorization bills that included a 7(a) credit subsidy - $79 million in the House version and $70 million in the Senate one - but the legislation died before making it to President Bush's desk.
Neither the ICBA nor the American Bankers Association has shown any inclination to change their positions. Both groups want to retain the subsidy, which totaled $79 million in the last fiscal year, and use it to lower fees charged to lenders and borrowers.
However, a third trade group, the National Association of Government Guaranteed Lenders, appears to have accepted the compromise plan, which was drafted by House Small Business Committee Chairman Donald Manzullo, R-Ill.
At its core, the plan calls on the SBA's opponents to sign off on eliminating the subsidy and making a new, higher-fee structure that took effect last month permanent. In return, the SBA would agree to guarantee $14.5 billion of loans this fiscal year and to increase the maximum size of the loans eligible for a 7(a) guarantee by 50%, to $1.5 million. A special fee of 0.25% of the loan amount would be assessed on any loans that exceed $1 million.
Additionally, the SBA Express program, which offers reduced paperwork and expedited approvals in return for a smaller guarantee, would be expanded so that it could accept loans as large as $350,000. The program currently can take loans of up to $250,000.
The compromise would also give the SBA's administrator the authority to adjust fees on an annual basis; he could raise them when demand is high and lower them when it is not. Right now it takes an act of Congress to adjust 7(a) fees.
The banking industry and congressional Democrats oppose any plan that gives the SBA control over fees.
"The proposal gives the SBA a lot of flexibility to raise and lower fees, and we're concerned about that," said James Ballentine, the ABA's director of community development.
Rep. Nydia M. Velazquez, D-N.Y., said, "These changes effectively end the public-private relationship that has been the cornerstone and foundation of the 7(a) program's success. By eliminating the federal contributions and forcing entrepreneurs and community lenders to have to shoulder the entire cost of the program, 7(a) will cease to serve the purpose it was originally created for - making capital accessible and affordable to those small businesses that traditionally lack access to capital markets."
Congress has passed neither the reauthorization bill nor the agency's fiscal 2005 budget, but Rich Carter, a spokesman for Rep. Manzullo, said that the SBA and the 7(a) program would continue to operate. It would be governed by its prior authorization and the continuing budget resolutions lawmakers have been enacting to keep the government running until the fiscal 2005 budget is finalized, he said.
The National Association of Government Guaranteed Lenders' decision to back a compromise measure is the first crack in what had been a united front by trade groups against SBA Administrator Hector V. Baretto's plan to eliminate the subsidy.
Anthony R. Wilkinson, the group's president and chief executive officer, did not return a phone call seeking comment.
Mr. Baretto, a Bush administration appointee, first proposed eliminating the subsidy and replacing it with higher fees in February. Since then he has made little headway, in large part because of fierce opposition from trade groups representing lenders and small businesses.
Fees paid by borrowers and lenders increased last month, because Congress failed to extend a 2-year-old pilot program that had halved them. However, a coalition that included the ICBA, the ABA, the government-guaranteed lenders group, and the U.S. Chamber of Commerce fought successfully to keep the 7(a) credit subsidy.
Mr. Ballentine said the compromise measure sprang from negotiations between the government-guaranteed lenders group and the SBA that began after the election. He also said the compromise offers little to attract the ABA.
A credit subsidy "is still very much needed, and we definitely would like to see fees lowered," he said. "Lenders are already paying more than their fair share" of 7(a) costs.
Mr. Merski said the SBA is not offering nearly enough to persuade the ICBA to drop its opposition to ending the subsidy.
"If we're going to give that away, I want a lot more in return," he said. For starters, he said, the SBA could drop its prohibition on "piggyback" loans, in which lenders include SBA-guaranteed loans in a larger credit package. In a typical case, a bank might include a $1 million 7(a) loan in a $3 million financing package.
The SBA and the 7(a) program have been in a state of almost constant flux since January, when a funding shortfall forced the agency to shut the program down for more than a week. Mr. Merski said lawmakers could go along with the latest proposal, because they are probably getting sick of the debate. However, he warned that if lawmakers give up control over the SBA's budget, they would have little influence over its operations.
"Having to pass a subsidy every year keeps Congress engaged in overseeing the program," he said. "Once they don't have to fund it, SBA can do whatever it wants."
