SBA’s Main Lending Program Faces Deep Cut for Fiscal 2003

The Small Business Administration’s main lending program, hostage to a squabble between legislators and
the Bush Administration, could be cut in half just as an apparent economic recovery sends entrepreneurs
scrambling for loans to fund expansion of their businesses.

By JEFF BAILEY
Staff Reporter of THE WALL STREET JOURNAL

The lending program known as 7(a), the SBA’s largest effort to help smaller companies that have trouble
obtaining loans from banks and other conventional sources, would shrink to $4.85 billion in fiscal 2003 from
$10.70 billion in the current fiscal year under the Bush budget proposal.

Small business, of course, is next to apple pie and the war on terrorism in its popularity among politicians.
And neither Congress nor the Bush administration wants to be responsible for reducing lending to smaller
companies. The reduced funding request, rather, is the result of a long-simmering argument about how the
program is funded.

Loan Guarantees

Under the program, the SBA doesn’t actually make the loans — banks do, mostly — but it guarantees about
75% of the loaned amounts. And it covers losses on the guaranteed portions from a combination of fees
charged to banks and from taxpayer funds.

For the past decade, a period of unexpectedly strong
economic growth, the SBA’s estimates of future losses on the
program’s loans have consistently erred on the high side.
According to a report last August by the General Accounting
Office, the investigative arm of Congress, the SBA
overestimated costs, mostly loan losses, of the program by
$958 million since 1992. The SBA returns excess funds to the
Treasury.

Better Forecasts Needed

Congressional small-business committees have been asking
the SBA to devise a new, more accurate way of forecasting
loan losses that would allow the government to cut both the
fees charged on loans and the taxpayer funds committed to
the program.

Senator Christopher S. Bond, a Missouri Republican and the
ranking minority member on the Senate Committee on Small Business, said in an interview that the Office of
Management and Budget promised late last year to reduce the required taxpayer subsidy — in effect slashing
the estimate of loan losses — by more than half. Expecting that to happen, Congress passed legislation
reducing the loan fees charged to banks.

Smaller Than Expected

But then OMB’s reduction in the required subsidy was much smaller than promised, Mr. Bond said. And with the fees already cut, there wasn’t
enough money to fund the approximately $10 billion in loan authority that had been sought. "The program is falling short," Mr. Bond said.

Lloyd A. Blanchard, recently named chief operating officer at the SBA , was the OMB official who discussed the lower subsidy with Senate
officials.

"I didn’t promise anybody anything," Mr. Blanchard said. "I was reluctant to give them any estimate" until the final calculations were completed.
He did provide an estimate in the range Mr. Bond asserts, Mr. Blanchard said, but he said he emphasized: "Don’t bank on it."

The SBA now proposes to use excess lending authority from fiscal 2002 together with a separate lending program that is underutilized to make
up for any shortfall in the 7(a) funds available in fiscal 2003. Critics in Congress oppose that move.

"It’s just not fair," says Nydia M. Velazquez, a New York Democrat and ranking minority member on the House Committee on Small Business.
"At a time when the economy is slow, we have to provide every tool for small business. It’s up to the administration to instruct OMB to do the
right thing."

House and Senate officials hope to get OMB to take another look at the subsidy rate. "We’re trying to get them to reconsider," said a
spokesman for Rep. Donald A. Manzullo, an Illinois Republican and chairman of the House Committee on Small Business. "This is a problem
that’s been going on for a decade."

The debate centers on how much of a cushion to provide against potential loan losses.

Banks, savings-and-loan associations and some government lending agencies, of course, have come in for harsh and deserved criticism in
recent years for setting aside too little for possible loan losses. But setting aside too much money — that’s what the SBA is accused of — has
rarely drawn criticism.

Fees Passed On

The SBA’s big cushion, however, has made its loans more expensive — banks pass on the fees they are charged to their borrowers — and
Congress has been anxious to provide lower-cost loans to small business.

Paul Cooksey, chief counsel to Republicans on the Senate Committee on Small Business, said the SBA and OMB are being too conservative.
"You’d have to have a total collapse in the lending market to even begin to eat into these excess fees that have been collected," he said.

For now, there are four choices: live with a smaller loan program; raise the fees that were lowered; appropriate more money to fund the program;
or persuade the OMB to further cut the required subsidy.

Write to Jeff Bailey at [email protected]