The Small Business Administration's new cap on 7(a) loans has backfired, the agency's chief told a Senate panel Thursday.

To conserve limited funds, the SBA on May 5 imposed a $500,000 cap on 7(a) loans. But notice of the cap sparked a $1 billion lending rush in the three weeks before it kicked in, SBA Administrator Aida Alvarez testified before the Senate Small Business Committee.

"We have experienced a run on the bank," she said. "Even with the cap, we now face a situation where the resources available for the rest of the year are probably not sufficient."

Ms. Alvarez's announcement rescued her from an expected grilling by committee members. Lawmakers have questioned whether Ms. Alvarez misled the committee when she testified in late February that no shortfall in the 7(a) program was expected.

The program guarantees loans underwritten by banks for business startups and expansions by creditworthy companies. With nearly five months remaining in the current fiscal year, SBA already has guaranteed $6 billion of the $7.8 billion in loans it is permitted to back, Ms. Alvarez said.

Ms. Alvarez said SBA needs to guarantee even more loans in fiscal year 1998. She asked Congress for authority to guarantee $10 billion in 7(a) loans, an 18% increase from the $8.5 billion the Clinton administration has already requested for next fiscal year.

Ms. Alvarez does not want more money-just the authority to back more loans. She provided few details on how SBA will support increased lending without increased funding. The agency, she said, will make efforts to trim the cost of its programs.

Ms. Alvarez blamed the balloon in lending on the requirement that SBA notify Congress 15 days before making major changes to programs.

SBA-which guarantees 75% to 80% of loans to qualified small businesses- announced April 15 that it would halve the cap on the size of 7(a) program loans for the rest of fiscal 1997, which ends Sept. 30. Robust loan demand threatened to deplete the program's budget by mid-August.

As a result, the average daily volume of 7(a) loans jumped to $50.6 million in April and $97.7 million so far in May, up significantly from the $32.1 million average in the first half of fiscal 1997, SBA said.

In the week of April 28 alone, SBA guaranteed $552 million in loans, 80% of which exceeded the $500,000 cap, Ms. Alvarez said. "Some lenders took advantage of the 15 days to process huge volumes of larger loans," she said.

Sen. John F. Kerry, D-Mass., said he had "serious questions about the size of these loans and what they are for."

Ms. Alvarez responded that she has ordered a review of the loans made during the 15-day period to ensure lenders maintained safety and soundness standards.

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