By Nicole Duran

Small-business lenders and borrowers, backed by members of Congress, think they are paying too much for Small Business Administration loan guarantees -- and want the White House to do something about it.

The National Association of Government Guaranteed Lenders and others have complained for years about the formula the Office of Management and Budget makes the SBA use to determine how much money is needed to cover losses. Critics say it overestimates defaults, and forces lenders and borrowers to pay too much in fees -- some of which end up in the general treasury for use on non-SBA items.

The General Accounting Office recently agreed, saying the SBA and the OMB have overestimated the cost of the 7(a) program by $958 million since 1992. Now the House and Senate small-business committees want to see changes in time for the fiscal year that will begin Oct. 1.

"My shade-tree analysis leads me to believe that small business borrowers, banks, and taxpayers are being overcharged as a result of faulty calculations by both the SBA and the OMB," said Sen. Christopher S. "Kit" Bond at a forum Wednesday organized by the Senate Small Business Committee.

The Missouri lawmaker, the committee's ranking Republican, called on the OMB to fix its math. "If a more accurate default rate was used, credit subsidy rates could be reduced, lower fees could be charged to small businesses borrowing money, and then the 7(a) program could be expanded to assist more small firms that need loans -- all without charging the taxpayers more."

The SBA is authorized to guarantee about $10 billion of loans in the current fiscal year. The subsidy rate for 2001 and 2002 -- unless a change is made soon -- is 1.07; that means the government sets aside $1.07 million each year in a loan-loss fund. The GAO says that when the additional fees collected are figured in, the rate is really a minus-0.54, so the fund is too large.

Anthony R. Wilkinson, the president of the lenders association, said these numbers mean that borrowers and lenders could save about 70% of up-front fees if the problem were fixed.

Money that is not needed for the rainy-day kitty gets deposited into the general treasury for use elsewhere.

The heart of the conflict between the industry and the OMB involves a key technical detail of the subsidy calculation. The OMB looks at default patterns as far back as 1986. Mr. Wilkinson and others say it should reach back only to loans made after the 1990 passage of the Federal Credit Reform Act, which forced the government to measure the cost of federal programs more accurately.

The GAO report, issued last month, concluded that the OMB's way has given the government a cushion in bad times, but that the "cushion ties up appropriations that could have been available to other discretionary programs."

Lloyd Blanchard, an associate director at the OMB, said it is working to get the formula "closer to zero" -- appropriating and charging enough to cover losses but nothing extra. This is a complicated mathematical process, though, and it will not be over in time for next year's budget, he said. The OMB is developing an alternative that considers key relationships between loan performance and economic and other indicators and is more accurate, Mr. Blanchard said.

An exasperated committee Chairman John Kerry, D-Mass., asked why the top accountants could not devise an interim solution so that small businesses would not pay excess fees that he equated to a tax.

The SBA has proposed to temporarily base default estimates on loan performance going back five years.

But Mr. Blanchard said that having one formula for 2002, another for 2003, and still another for 2004, is not a viable long-term solution, and it could complicate the development of a more accurate, permanent model.

Sensing that the OMB may not budge in time, industry officials and their allies are trying to find a way to pull an end run around the White House.

Mr. Wilkinson's group is shopping a fee reduction bill around Congress for a sponsor, and Sen. Kerry, only half-jokingly, said he might introduce legislation that would enact a rebate if he doesn't get satisfaction soon.

Some House lawmakers are also pressing for change.

Mimicking the lenders association's proposal, Rep. Nydia Velazquez of New York, the ranking Democrat on the House Small Business Committee, advocated cutting lender fees in half, to a 0.25% of the outstanding balance. She also would raise the size of loans, to $250,000 from $150,000, that qualify for lower borrower fees.