SBA Reform Bill Sent to Clinton

Congress on Monday sent to President Clinton a legislative package reforming Small Business Administration loan programs, a move prompted by the discovery of default rates as high as 17% in some SBA programs.

The reform legislation, included in a mammoth omnibus budget bill, was proposed earlier this year after Congress’ Office of Management and Budget found that default rates were nearly double what the SBA had estimated. The OMB study also found that the subsidy rate--the amount of money the SBA needs to guarantee loans by private financial institutions--had to be nearly triple what the SBA figured.

“I’m a supporter of the SBA, but I don’t think they have good information,” said Rep. Jan Meyers (R-Kansas City), author of the reform legislation.

Meyers said the reform package means “we will be operating the SBA with better management and more safety and soundness.”

The reforms include computer tracking of loans, speedier liquidation of bad loans, limits on the number of experimental loan programs and hiring of an outside consultant to analyze the troubled 7A program for business improvement loans.

SBA officials did not oppose the reforms but noted that subsidy rates fluctuate from year to year and actually improved from 1993 to 1996.

“You need to look behind the numbers,” said Greg Walter, SBA deputy chief financial officer. “When you look at the number of loans that the government can make, the jobs created and the taxes generated, [the subsidy rate] is not that significant.”

The reforms still must be signed into law by President Clinton. The omnibus bill included $717 million for SBA operations for fiscal 1997, including funding to back up $7.8 billion in small business lending under the 7A program, an increase of $500 million.

Problems with the loan programs were revealed earlier this year after the Office of Management and Budget, as part of the federal Credit Reform Act, examined 25 million transactions involving 600,000 loans made from 1983 to 1995. About 89% of the loans fall under the 7A loan program. More than 100,000 of the loans are active, with 56,000 of them granted last year.

The examination revealed that the default rate for such loans was far higher than expected. And that increased the subsidy rate for the 7A program to 17.25% in fiscal 1997, according to the study. Another lending program that concentrates on real estate and equipment loans showed default rates of 19%, compared to the SBA’s estimates of 6%.

The default rate is significant because it helps determine the amount of money that taxpayers pay to cover the SBA-guaranteed bank loans. For fiscal 1996, taxpayers provided $1.06 for every $100 loaned, based on SBA estimates. But with the more accurate OMB figures, taxpayers will be required to pay $2.55 for every $100 loaned next year.

Earlier this year when President Clinton proposed increasing the SBA’s budget $219 million to $808 million to help cover these increased costs, Congress balked.

To bring down the size of the defaults, the House Subcommittee on Small Business, chaired by Meyers, proposed controls on the SBA loan programs.

“We began to ask questions and it became apparent to us they did not know where the problem lay,” Meyers said.

Meyers noted that the Low Doc program, so named because it requires less documentation and paperwork to secure a loan, gained in popularity about the same time default rates began to rise. The Low Doc program comprises about 20% of all the 7A loans, Meyers said.

The reform legislation restricts Low Doc lending to institutions with substantial experience in making small business loans.

But Don Cox, an SBA associate administrator, said the Low Doc program is not to blame because most of the OMB statistics were compiled before Low Doc began.

He said SBA critics do not take into consideration that the agency makes credit available “on the margins” to businesses that otherwise would not receive loans.

“That’s what the SBA is here for,” Cox said.