SBA lenders fear another 7(a) shutdown, press Congress to act
The three biggest banking lobbies are among those urging lawmakers to approve a $99 million credit subsidy to prevent a shutdown of the Small Business Administration's 7(a) program.
Through the first 11 months of fiscal 2019, which ends Sept. 30, the agency backed more than 47,000 loans totaling $20.9 billion under the flagship program, with the vast majority originated by banks. Without congressional action, 7(a) will be required to cease operations at the end of the month.
Conflicting estimates of the program’s credit-quality prospects for fiscal 2020 lie at the crux of the issue. Though user fees have generated more than enough revenue to pay 7(a)’s credit costs for nearly a decade, the Office of Management and Budget is predicting that fees alone won’t be enough in fiscal 2020.
The SBA, in its budget request, asked for a $99 million subsidy or the authority to increase fees.
A collection of groups representing 7(a) participants insist that credit quality has never been better, characterizing the subsidy calculation as “flawed” in a letter addressed to lawmakers earlier this month. But with the SBA seemingly unwilling to adjust its numbers, a group called the Small Business Access to Capital Coalition is pressing Congress to approve the subsidy to keep 7(a) running.
“In the absence of a correction to the subsidy rate estimate, a modest appropriation would be required in lieu of raising fees yet again on small business borrowers,” the group wrote in its Sept. 4 letter.
The proposal to hike fees was deemed dead on arrival.
In April, Rep. Nydia Velazquez, D-N.Y., chairman of the House Small Business Committee, threatened to block action on the SBA’s fiscal 2020 budget until it documented the math used to determine that higher fees were necessary.
While neither the OMB nor SBA have disclosed any calculations, the Government Accountability Office, at the request of a bipartisan group of House lawmakers, has agreed to study the subsidy.
The GAO is “conducting analysis on SBA’s credit subsidy estimates for its 7(a) program, but [has] not yet established our time frame for reporting,” said Charles Young, the agency's managing director of public affairs.
“You’re always hopeful that analysis by the GAO will help prove your point,” said Paul Merski, group executive vice president of congressional relations and strategy at the Independent Community Bankers of America.
“It really, quite frankly shouldn’t be that complicated,” Merski added. “We need more transparency in how the formula is calculated…It still a black box, and no one is willing to fix it.”
Proponents of the 7(a) program want avoid what would be a second shutdown in less than a year.
“It is critically important that there is no disruption in the 7(a) program,” said James Ballentine, the American Bankers Association’s executive vice president of congressional relations. “This loan program continues to play a vital role in helping small businesses contribute to our economy.”
The Consumer Bankers Association is also part of the Small Business Access to Capital Coalition.
The Trump Administration and the House have signaled support for the credit subsidy, said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders, which is also a part of the coalition. The question is whether the Republican-controlled Senate will agree.
“They’ve been quiet so far,” Wilkinson added.
The Small Business Access to Capital Coalition said that the 7(a)’s credit performance “has never been better.” The SBA’s most recent performance report, made public on July 23, measured the program’s chargeoff rate at 0.57% through the first nine months of fiscal 2019. That compared to 0.51% for fiscal 2018.
With a relatively benign credit climate, the user fees generated by the 7(a) program have been more than sufficient to pay its credit costs. The coalition estimates that excess fees for all SBA credit programs have totaled $1.5 billion since 2010.
The coalition expects the trend to continue, so any credit subsidy Congress provides for fiscal 2020 will ultimately be a “phantom appropriation,” meaning funds will go unspent and be returned to the Treasury Department, Wilkinson said.
"We need Congress to stand up in support of small businesses by preventing a program shutdown and prioritizing accountability at these agencies,”
said Matt Haller, senior vice president at the International Franchise Association. “Many franchise businesses rely on SBA 7(a) loans, and a program shutdown or fee increase means these business owners can’t open their doors, hire local workers, and serve their communities.”
A spokeswoman for the Senate Small Business and Entrepreneurship Committee said in an email that members were “concerned that the program requires taxpayer support.” The committee is examining a broad range of issues, including the 7(a)’s fee structure and subsidy model, and “continues to work with appropriators and the administration to ensure that the program remains available to small businesses,” she added.
The committee, chaired by Sen. Marco Rubio, R-Fla., seemed on track to complete an ambitious reauthorization of the Small Business Act until last month, when a dispute over broader regulatory relief, including proposals aimed at giving small businesses more chances to comment on proposed government regulations, stalled progress.
Despite the impasse, the coalition's members are hopeful lawmakers will agree on a budget compromise in time to keep 7(a) past September.
“There’s a lot of hard policy issues in Washington," Merski said. "This one seems like there are some straightforward solutions that could be accomplished pretty quickly."