words: subsidy rate. Previously an obscure term describing to the amount of congressional appropriations needed to fund a loan loss reserve for SBA's loan guarantee programs, it is now the focal point in a debate over the agency's future. The rate is determined by a complex formula incorporating the amount of revenues from fees and appropriations the agency will receive, less any expenses and expected loan losses. A lower subsidy rate means the agency can guarantee more loans. The Clinton administration has proposed raising fees charged to borrowers and lenders alike to replace the $215 million in appropriations received this year. The move is an attempt to make the program self-funding and allow the agency to expand its programs to meet demand. But the proposals have run into opposition from lenders. Many say the fees would make the programs too expensive for borrowers. They also fret that once out of the appropriations process, the agency would have an even harder time persuading Congress to provide funding if it were needed. Spearheading the administration's effort in this battle is Philip Lader. Formerly President Clinton's deputy chief of staff, as administrator he is assigned the task of increasing the agency's guarantee authority, while balancing the wishes of different lender factions and borrowers. He recently took the time to talk with the American Banker about the agency's future: Q.: How do you see the administration's proposals affecting the loan guarantee programs in the future? LADER: I view elimination of the taxpayer subsidy as the best insurance for the continued growth of this small-business lending program. If the loss reserve is self-funded, the SBA guarantees can rise to meet the levels of demand. Q.: But wouldn't it be better to maintain at least some link to the federal purse? LADER: So long as the agency stays in the appropriation process, the level of guarantee authority will likely be severely constrained. That is especially true in an environment of serious deficit reduction. Anyway, the taxpayer subsidy of small-business loans is not as defensible as a self- funding mechanism whose cost is borne by the principal beneficiaries of the program. Besides, the proposed fee increases are relatively modest for the average loan. Q.: How much more would they cost? LADER: For the average low-doc (low-documentation) loan - a five-year, $54,000 loan - the additional cost to the borrower would be $13.50 per month and require additional up-front fees of $108. The additional cost to the lender is $523 over the five-year term. For the program as a whole, the average loan is for 12 years and $170,000. Under the administration's proposals, the additional cost to borrowers would be $51 per month and $872 up front. Lenders would pay an additional $3,831 over the 12 years. Q.: Do you share the concerns of some lenders that the low-doc program will generate large losses for the agency? LADER: I have concern, but there is no current reason for alarm. The experience to date is that low-doc loans are performing as well, or even better, than the overall loan portfolio. Our currency rate and loss rates compare favorably to loans of $100,000 and less that were made in prior periods. I will hasten to add that since the program is only about one year old, these loans are not necessarily seasoned. We are monitoring these loans closely. Q.: What kind of efforts is the agency taking to make sure the program does not become a problem? LADER: Any new program, especially one so well received by the marketplace, warrants continued close monitoring. We have had teams out in the field at various times to review our low-doc partners' underwriting standards and each time they have reported satisfactory results. Q.: But has the SBA stretched itself too thin by starting all these new programs? LADER: It is true, we have initiated a large number of pilot programs in response to the excellent climate for small-business formation and growth. But these pilots are limited in terms of geography and monetary scope, and we shall be examining their performance in great detail before deciding to institutionalize them.

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