By John Reosti

Lawmakers and banking trade groups say community banks might abandon the Small Business Administration's flagship 7(a) lending program in droves if the agency follows through on plans to eliminate a popular program that provides lenders with a streamlined approval process and enhanced guarantees on small loans.

A bipartisan group of lawmakers, including the chairmen and ranking members of the Senate Committee on Small Business and Entrepreneurship and the House Small Business Committee, sent a letter to SBA Administrator Hector V. Barreto Friday asking him to detail his plans for the agency's LowDoc program by June 17.

Paul Merski, the chief economist for the Independent Community Bankers of America, said that the SBA wants to funnel loans that are currently being made under LowDoc into its SBA Express program, which features a streamlined application process similar to LowDoc's but provides for a significantly smaller loan guarantee - 50% as opposed to 85%. (Conventional 7(a) loans carry a 75% guarantee but take much longer to approve - up to six weeks, instead of two to four days for SBA Express and LowDoc Loans.)

Both LowDoc and SBA Express are components of 7(a), the SBA's largest lending program. Sen. John F. Kerry, D-Mass., one of the lawmakers who signed Friday's letter, said in a press release that LowDoc loans account for 20% of the total made through 7(a).

The ICBA, the American Bankers Association, and others say the proposal to eliminate LowDoc is part of a wider plan to gradually enlarge SBA Express until it encompasses all 7(a) lending activities. For the government the appeal of such an outcome is obvious: It would make more loans eligible for an SBA guarantee without increasing the program's costs.

Critics, however, say that if there were less variety in the types of loans and guarantees offered under 7(a), it would be much less attractive to many lenders and many would stop using it altogether.

"That's how we see things," said James Ballentine, the American Bankers Association's director of community development. "You're running the risk of reducing choices, and there'll be fewer lenders operating in that kind of scenario."

The SBA proposed eliminating the program as part of its fiscal 2006 budget. Tee Rowe, the agency's acting associate administrator for congressional and legislative affairs, said Tuesday that concerns that the SBA was trying to do away with the choices available to lenders and borrowers under the program were overblown. He pointed out that the 85% guarantee is also available on conventional 7(a) loans of $150,000 or less.

But Mr. Ballentine said the guarantee size is not the only appealing aspect of LowDoc. He said lenders particularly like the program because it also has looser collateral rules than either SBA Express or conventional 7(a) loans.

Borrowers, for example, can put up their personal vehicles as collateral under LowDoc. That combination of easier collateral requirements and a high guarantee gives banks enough leeway to approve loans they would otherwise have to reject as too risky, Mr. Ballentine said.

And unlike SBA Express, where lenders have to qualify as preferred lenders before they can participate, any bank can make a LowDoc loan.

"The process is very simple," Mr. Merski said. "Banks can use their own forms and paperwork. It's widely used by banks that don't do a heavy volume of SBA lending. This way, they don't have to have a full-time SBA lender on their staffs."

In their letter to Mr. Barreto the lawmakers echoed the trade groups' concerns. They argued that "combining the several 7(a) sub-programs into a 'one-size-fits-all' loan program simply will not help meet the intended purpose of the programs: to reach a diverse group of small businesses that cannot obtain adequate financing elsewhere."

Signing the letter along with Sen. Kerry were Sens. Christopher S. Bond, R-Mo.; Olympia J. Snow, R-Maine; and Mary L. Landrieu, D-La.; and Reps. Donald A. Manzullo, R-Ill., and Nydia M. Velazquez, D-N.Y.

One issue SBA critics did not address was the LowDoc program's credit quality. Though he did not cite statistics, Mr. Rowe said Tuesday that LowDoc loans had much higher delinquency and default rates than either SBA Express or conventional 7(a) loans, pushing up costs for all borrowers.

Mr. Ballentine acknowledged that LowDoc loans are riskier than other loans, but, "In many cases you're speaking about people who have little more than their dreams," he said. "Sure it's risky, but that's how entrepreneurs thrive."