Proposed SBA Budget Increases 504 Funds, Eliminates Guaranty Fee

If Congress approves the Bush Administration’s proposed SBA budget for FY 2008, loan funds for the 504 program will increase by 25% and the up-front “SBA Guaranty Fee” will be eliminated.

Under the proposal, the budget would authorize a level of $17.5 billion for the 7(a) Guaranteed Loan Program, $7.5 billion for the Certified Development Company (or 504 Loan Program) and $3 billion for venture capital support under the Small Business Investment Company Program. If the 504 program volume for FY 2007 comes in as expected at about $6 billion, this would allow for a 25 percent in FY 2008, which should be sufficient to fund demand in that year.

The SBA’s proposal also calls for eliminating the one-half percent “SBA Guaranty Fee,” which is a one-time, up-front fee paid by the borrower for the 504 loan. (Note that this is not the bank fee, which is paid on the first mortgage amount.) The elimination of the guaranty fee will prevent the 504 program from going into “negative subsidy,” i.e., contributing more fee money back into the Treasury than the cost of the program.
Loan default rates also are projected to decease from 4.11 percent for FY 2007 to 3.39 percent for FY 2008, or about 21 percent, according to the SBA. And, it has forecasted that the 504 recovery rate on defaulted loans for FY 2008 will increase to 42.50%, up from 40.84% in FY 2007.

A slight increase, however, is suggested for the on-going borrower fee, which is paid annually. That fee would rise by .3 basis points (0.00003) to 2.1 basis points (0.00021), but is viewed as an insignificant increase in program cost for the borrower.

Overall, the SBA’s proposed budget sets total spending for FY 2008 at $814 million, including $464 million in new budget authority, $329 million in carryover funds for disaster loans, and $21 million in reimbursable revenues. This represents a 5 percent increase over the total FY 2006 appropriations (excluding disaster and Congressional initiatives) and a 12 percent increase in core operating budget.

The proposed budget further provides funding for more than $1 billion in loans in the agency’s revamped disaster assistance program, which has undergone major changes since the 2005 hurricanes along Florida’s Gulf Coast region. As a result of those changes, more than 98 percent of the 160,000 approved disaster loan recipients have received all or some of their loans, or have chosen not to borrow.

Finally, the SBA’s proposed budget requests the continuation of its Microloan program on a zero-subsidy basis, allowing the agency to greatly expand its support to Microlenders across the country without seeking a new appropriation for the program. It also would discontinue technical assistance funding for Microlenders and instead work with existing technical assistance providers, including the agency’s Small Business Development Centers, SCORE counselors, and Women’s Business Centers, to arrange technical help for microloan clients.

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