Business life: My finance news blog

Huge losses in the Small Business Administration’s main loan program have led President Barack Obama to propose phasing out the government subsidy for 7(a) loans beginning in fiscal 2012.

This would force the agency to support its government-guaranteed loans by charging higher fees on borrowers and lenders. That’s what occurred when Congress ended the subsidy for 7(a) loans – at President George W. Bush’s request – in 2004. Congress restored the subsidy this fiscal year, at a cost of $80 million.

The economic stimulus bill provided the SBA with an additional $375 million to waive fees for borrowers on most 7(a) loans and 504 loans, which mostly finance real estate, and increase the government guarantee on SBA loans from the typical 75 percent to 90 percent. Those enhancements made the loans more affordable for borrowers and less risky for lenders, enabling SBA lending to rebound after cratering during the financial crisis.

SBA loans are an important source of credit for small businesses that can’t obtain conventional loans.

In December, Congress came up with another $125 million to extend the fee reductions and higher loan guarantee until the end of February. Obama wants Congress to pass additional legislation extending them through Sept. 30, the end of the fiscal year.

The president’s budget proposal for next fiscal year, however, reveals that defaults on SBA loans have exploded over the past year, costing the government a projected $4.5 billion. Most of the problem loans were made between 2005 and 2007.

The administration proposes a $165 million subsidy for 7(a) loans next year, double this year’s subsidy if economic stimulus funds are excluded.

Beginning in 2012, however, Obama wants to give the SBA “the flexibility to adjust fees in the program to enable it to be self-sustaining over time,” according to the president’s budget plan. This would “strengthen the program’s long-term economic foundation,” the budget plan states.

Default rates for 7(a) loans aren’t much worse than the default rates for conventional loans, said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders, which represents SBA lenders.

If the economy improves, default rates should fall, he said. A better business climate also could make an end to the government subsidy for 7(a) loans bearable, he said.

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