16. Almanacs

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Legislation Reduces Cost of SBA Loan Programs

Lawmakers cleared legislation in late September that reduced the level of federal loan guarantees for small businesses and increased fees on lenders and borrowers. Backers said the bill would reduce the costs to the government of two Small Business Administration (SBA) programs and allow the programs to assist more businesses. President Clinton signed the bill into law Oct. 12 (S 895 - PL 104-36).

House Small Business Committee Chairwoman Jan Meyers, R-Kan., said taxpayers paid $2.74 for each $100 in loans guaranteed by the SBA in 1994. She said that under the bill, the taxpayers' rate would be reduced to $1.06 for each $100 in loan guarantees. The bill was designed to save $255 million over two years in the amount that Congress had to appropriate to cover the loan guarantees. Under credit reform rules enacted in 1990, Congress was required to appropriate a small percentage of the loans guaranteed in a given program was a hedge against defaults.

The main change was to the SBA's popular 7(a) Guaranteed Business Loan Program. The program gave small businesses greater access to commercial bank loans by guaranteeing repayment of a portion of the loan. The SBA guarantee allowed banks to extend the term of a loan for more than the two or three years that was typically offered to small businesses. Under the 7(a) program, a borrower could get a loan term for up to 20 years, though the average term as about 12 years.

Demand for loan guarantees under the program had grown dramatically over the preceding decade, outstripping the funds that were available to support it. In fiscal 1992 and 1993, Congress had provided supplement appropriations to keep the 7(a) program going. But SBA advocates in Congress were concerned that, with the emphasis on deficit reduction, funding the program through supplementals had become a thing of the past. Senate sponsor Christopher S. Bond, R-Mo., said the program was due to run out of money Sept. 1.

The bill provided for the SBA to guarantee 80 percent of loans of less than $100,000 and 75 percent on loans that exceeded $100,000. Prior to enactment, the guarantee levels were up to 90 percent for loans of less than $155,000 and up to 85 percent for loans up to $750,000.

The bill also increased the annual fee charged to lenders who sold the guaranteed portion of their loans on the secondary market from 0.4 percent under prior law to 0.5 percent. This fee could not be passed on to the borrower. The bill also established a 0.5 percent fee on the outstanding principal of all 7(a) guaranteed loans that were not sold.

Guarantee fees, imposed when a loan was first granted, were increased to 3 percent on the first $250,000 of the guaranteed amount of the loan, rising to 3.5 percent with the next $250,000. If the guarantee exceeded $500,000, the fee would be 3.9 percent. The fees were paid by the lender but could be passed on to the borrower. Previously, the fee was 2 percent of the guaranteed portion on all loans.

The bill also addressed a second SBA account, the 504 program, which aimed to help small businesses acquire commercial financing for real estate and capital asset acquisition. The measure imposed an annual fee of one-eighth of 1 percent on the outstanding balances of SBA loan guarantees in the 504 program. The implementation of this fee, paid by the borrower, was expected to make the program entirely self-funding.

The bill started in the Senate Committee on Small Business, which approved its version (S 895 - S Rept 104-129) July 13 by a vote of 18-0. Sponsors Bond and Dale Bumpers, D-Ark., won approval by voice vote of an amendment to allow lenders to accept lower guarantee levels in return for lower fees. The Senate passed the bill by voice vote Aug. 11.

In the House, the Small Business Committee gave voice vote approval to its version of the bill (HR 2150 - H Rept 104-239) on Aug. 4. The House passed the measure easily on Sept. 12 by a vote of 405-0. The House then inserted the provisions of HR 2150 into the Senate-passed bill, approved the amended version by voice vote, and sent it to conference. (Vote 653, p. H-188)

Meyers said the bill would "significantly simplify the system." She said that the SBA could make an additional $3 billion in new loans without Congress having to appropriate any new funds.

House and Senate conferees agreed on a final bill Sept. 28 (H Rept 104-269). One of the main differences between the two chambers' versions of the bill lay in how the increased annual fees would be calculated. The Senate proposed to calculate fees based on the portion of the loan that was guaranteed by the federal government. The House bill proposed to base the calculation on the total amount of the loan. Conferees accepted the Senate approach. They also included a provision allowing lenders to accept lower guarantee levels.

The Senate adopted the conference report Sept. 28 by voice vote without debate. The House did the same Sept. 29.

Congressional Quarterly Almanac

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