Criticism Mounts over SBA’s Proposal to Increase Fees on its 7(a) Loan Guarantee Program

In its Annual Performance Report, the Small Business Administration (SBA) announced that to cover the costs of its 7(a) loan guaranty program, SBA  would either have to raise fees or it would need an additional $99 million in Congressional funding.

With the 7(a) loan program, SBA guarantees up to 90 percent on small-business loans of $5 million or less. According to government reports, SBA approved more than 60,000 7(a) loans totaling more than $25 billion in fiscal year (FY) 2018. The average loan amount was $420,000, and about a third of the loans go to minority-owned businesses with just under 1 percent going to American Indians.

SBA charges users an “upfront fee” when a loan closes and an “ongoing fee” as long as a loan stays on the books. Under the current fee structure, SBA earned $94 million more than needed to cover the program’s credit costs in 2017 and $757 million more than credit costs in 2018. It is projected to earn $143 million more than the program’s credit costs for the current fiscal year as well.

Despite these profits, SBA has stated that the program would not operate under zero subsidy unless it changed its fee structure. “Due to a refinement of the model to increase precision for estimating purchase amounts and sensitivities of the model related to long term macroeconomic assumption, the 7(a) program will not operate at zero subsidy in FY 2020 under current law.”

The 7(a) loan program has historically achieved a zero subsidy rate, which is when the program generates enough revenue, mostly via fees, to not require congressional funding to issue new loan guarantees. In fact, Congress did not provide funding for the program from 2007 to 2009 and from 2014 to 2019.

SBA is proposing the following changes to the 7(a) program’s fee structure:

• Increase the ongoing fee for loans over $1.5 million to 0.69 percent, from 0.55 percent;
• Increase the upfront fee for loans over $1.5 million to 3.75 percent, from 3.5 percent;
• Increase the upfront fee for loans $500,001 to $700,000 to 3.5 percent, from 3.0 percent;
• Increase the upfront fee for loans with a maturity of one year or less to 0.5 percent from 0.25 percent.

SBA’s proposal has generated substantial criticism. Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders, argued that the 7(a) loan program had recorded one of the strongest credit metrics ever in 2018, leading to historically low chargeoff rates. “We simply cannot see where there has been a negative shift in portfolio performance,” said Wilkinson. “Without justification, how can we accept [the SBA’s] calculation?”

The House Small Business Committee held a hearing last Wednesday to hear from the SBA on its proposed changes to the program. Timothy Gribben, SBA’s chief financial officer, doubled down, arguing that either Congress must provide SBA with $99 million or it would have to adjust its fee rates which it cannot do without Congressional authorization.

Committee Chairwoman Nydia Velazquez (D-NY) denied SBA’s request until SBA could prove that the changes to the fee structure are the best way forward. “I will not do anything — no legislation — until we are convinced that this is the way to move forward,” said Velazquez. “Everyone in this room knows SBA is going to end the year with a surplus.”

In a rare moment of bipartisanship, Committee Ranking Member Kevin Hern (R-OK) also questioned SBA’s estimation that it would end the year in a deficit without a change in its fee structure. “As a member of the Budget Committee, where we get to see [economic] assumptions of both parties, there isn’t a doom-and-gloom scenario from either, yet [Gribben] thinks there is,” said Hern. “I’d like to get his thinking. Maybe he has a crystal ball the rest of us don’t have.”

With the immense popularity and bipartisan support for the program, it will be challenging for SBA to obtain congressional authorization to increase its fees for its flagship loan guarantee program.