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House Votes to Reinstate Subsidy for SBA Loans

 

June 15, 2005--The House approved a proposal to restore federal funding to the Small Business Administration's 7(a) loan guarantee program, which could cut application fees in half and make a popular program even more so.

Yesterday afternoon, 36 Republicans joined Democrats in approving an amendment to a House appropriations bill that sets aside $79 million the program. The money will be used to help guarantee 7(a) loans for small businesses. Since October 2004, the SBA has backed the loans using only application fees paid by businesses and their creditors. If the amendment is approved, application fees for a $150,000 loan could fall from $3,000 to $1,500.

While the amendment's sponsor Nydia Velazquez (D-NY), lauded the passage as, "a great victory for small-business lending," detractors say the subsidy is unnecessary. Don Manzullo (R-IL), Chairman of the House Small Business Committee, pointed to a 22% increase in the number of loans approved over last year and said that reinstating the subsidy will destabilize the program.

While bankers did not dispute the current demand for the 7(a) loans, they said renewing the subsidy would help insure the long-term success of the program, especially in rural areas.

Morgan Johns, senior vice president of the SBA Lending Group at Sovereign Bank, said that while demand for SBA loans has been strong in 2005, the increased fees could eventually cause businesses to look outside of the program for financing. "It is not enough to prevent us from doing a deal now, but it is of great concern," he said.

James Ballentine, director of Grassroots and Community Outreach at the American Banking Association, agreed adding that the high fees will cause volume to drop, and could push rural and community banks out of the 7(a) lending business. "[The program] will continue to operate and operate well," said Ballentine. "But it gets at the issue of whether you want to have a smaller loan program that is making smaller loans or a program that is serving the needs of all business.

Raul Cisneros, an SBA spokesman, disagreed, pointing to increases in approval rates of the agency's loans programs in rural areas. "I think we're doing fine across the board," he said.


Max Chafkin

Senior writer Max Chafkin has profiled companies such as Yelp, Zappos, Twitter, Threadless, and Tesla for the magazine. He lives in Brooklyn, New York.


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