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President's FY20 budget request presents shocking positive subsidy
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President's FY20 budget request presents shocking positive subsidy with serious ramifications for the 7(a) program; NAGGL calls on Congress to challenge it 

On March 18, 2019, the President’s FY20 budget request was released to Congress and the SBA budget request presents a shocking picture: SBA announced a positive subsidy for the 7(a) program of 33 basis points, or $99 million. This is a major shift from the program’s track record of operating at zero subsidy since FY05 (except during the years covered by the Recovery Act).  

Zero subsidy means the fees collected from borrowers and lenders cover the projected cost of lending. By projecting a positive subsidy for FY20, the budget request indicates that SBA believes they need to collect $99 million in fees from small business borrowers and lenders in addition to the fees already collected in order to cover the cost of making loans—which are currently being collected at their statutory maximums as authorized by the Small Business Act.

What does this mean?
Absent the Office of Management and Budget (OMB) and SBA formally amending the subsidy calculation, Congress must either appropriate $99 million to the 7(a) program or amend the Small Business Act to raise the current caps in order to collect more fees from borrowers and lenders to cover the cost of the program.  Both congressional options would need to pass votes in the Senate and the House and to be signed into law by the president. If one of these paths forward is not successfully completed by October 1, 2019, the 7(a) program will shut down

Remember, much of SBA’s FY20 budget request proposals are just that—proposals. It is Congress that must choose how to draft the actual budget.  However, OMB and SBA are given authority by the Federal Credit Reform Act (FCRA) of 1990 to calculate the subsidy cost for the 7(a) portfolio, so this portion of the FY20 budget request is not just a proposal; it provides to Congress the cost it must react to. 

Why a positive subsidy?
The positive subsidy does not follow logic for several reasons. First, the 7(a) portfolio’s performance has never been better, as evidenced by SBA’s own data and the FY20 budget request’s data on the program. 

  • For instance, SBA projects a 37.29% recovery rate for loans originated in FY20. However, we know that the 7(a) program’s FY18 recovery amount as a percentage of the purchase amount as reported to Congress in December  was 50% as of June 2018, with the preceding years showing a steady uptick in that percentage.  

  • In addition, we know that for the past eight fiscal years, SBA has collected fees in excess of what they need from borrowers and lenders, overcharging participants $3.2 billion in excess fees that are simply returned to the Treasury. The FY20 budget states that in FY18 alone (on an annualized basis), SBA collected $757 million from borrowers and lenders in excess of what was required to cover the cost of the program. This means that the portfolio is performing better than projected in SBA’s original subsidy calculation and that the model being used has been consistently wrong.

The subsidy model is composed of a number of assumptions about future economic projections and future portfolio trends that must be challenged and discussed.

Although the subsidy is calculated using a complex model, it does not consist of absolute mathematical formulas that cannot be challenged—subsidy calculations are projections about how loans that are made during FY20 might perform over the lifetime of those loans, as required by the Federal Credit Reform Act of 1990.

What would the proposed increased fees look like?
Currently, SBA has presented to Congress a significant restructuring of and increase in fees. SBA’s budget indicates to Congress that raising fees on borrowers and lenders is the agency’s preferred solution to cover the positive subsidy it presents. You can find SBA’s chart of proposed fee increases hereNAGGL understands exactly how significant these fee changes would be to your borrowers and to your institution.

NAGGL is currently working closely with Congress to challenge both OMB and SBA, asking them to explain the subsidy calculation in detail, and specifically, the assumptions used to create the calculation and how they are weighted in the subsidy model. NAGGL is calling for an amendment to the subsidy calculation to be submitted to Congress by OMB and SBA —something that has happened once in the history of the program. 

NAGGL will testify on the Hill twice in the next two weeks on these matters, calling on Congress to get involved in this critical issue

On Wednesday, April 3, NAGGL Chairwoman Julie Huston will testify in front of the Senate Committee on Small Business and Entrepreneurship on congressional efforts to reevaluate the Small Business Act this year.  As part of her testimony, Chairwoman Huston will speak to industry concerns with the FY20 budget.  On Wednesday, April 10, NAGGL President and CEO Tony Wilkinson will testify in front of the House Small Business Committee in a hearing specifically on the FY20 budget request for a positive subsidy in the 7(a) program.  On those dates, you will be able to find links to watch both hearings on NAGGL’s homepage.

What else is in the proposed FY20 budget?
There are several other areas of the FY20 budget request that cause NAGGL concern:

  • SBA repeats its request from last year’s budget request for borrowers and lenders to pay for SBA’s employees’ salaries and expenses by collecting fees in excess of what SBA needs to cover the cost of the program. This is an outrageous request, especially given the questionable positive subsidy calculation this year. NAGGL will continue to staunchly oppose the provision as an additional tax on small business borrowers. Congress firmly rejected this proposal in the FY19 budget request at NAGGL's urging.

  • SBA states that it intends to offer fee waivers for veterans in the SBA Express program in FY20; however, it is unclear how that is possible given the Small Business Act’s clear direction on how SBA is to utilize these waivers. The Hill is likely to get involved in reviewing the validity of these waivers. It is unclear whether or not SBA intends to offer fee waivers for borrowers in rural and HUBZone areas; but if they are offered, it would have to be padded into the cost of the proposed positive subsidy.

    While NAGGL would like to see fee relief to help facilitate increased lending to veterans utilizing the Express program, it does not want borrowers and lenders put in a precarious position should they follow guidance from SBA that obviously violates the Small Business Act.

The budget request also proposes

  • $30 billion authorization cap for the 7(a) program 
  • $12 billion authorization cap for the Secondary Market Guarantee Program
  •  Proposed new fee on the Secondary Market Guarantee Program to contribute to the positive subsidy cost
  • Increase in the maximum cap on SBA Express loans to $1 million

Watch naggl.org and your inbox for updates.

 

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