By John Reosti

Flooded with seven-figure applications submitted after it announced last week that it intended to cut the maximum size of its popular 7(a) loans by more than half, the Small Business Administration said Wednesday that it was immediately shutting down the cash-strapped program until it resolves funding issues.

Lenders, who had been told that they had until today to submit applications for loans of up to $2 million, were caught flat-footed and were predictably furious. Several said that they had just submitted large applications while others were planning to hire additional loan officers to keep pace with soaring demand for 7(a) loans.

"Holy lightning," said Edward N. Clift, the president and chief executive of the $331 million-asset Merrill Merchants Bancshares in Bangor, Maine, when told Wednesday of the SBA's abrupt decision. "We just approved some credits with SBA guarantees yesterday."

Bernard H. Clineburg, the president and CEO of Cardinal Financial Corp. in Tysons Corner, Va., said his $563 million-asset company had just submitted a loan with a $1 million guarantee.

"They pulled the rug completely out from under us and our client," he said. "This is completely outrageous and unprecedented in SBA history. We have people who are waiting for money to run their business and are counting on these funds."

The SBA has given no indication of when it would resume guaranteeing 7(a) loans. It said that applications it had not begun to process would be returned to the lenders, and that those already in progress would be canceled.

"This is going to cause problems," said James Ballentine, who handles SBA-related issues for the American Bankers Association. "We simply don't know when the program is going to resume. This has come as a surprise to us, to our lenders, to members of Congress, to everyone."

Indeed, the move came less than a week after the agency said it would cap the size of 7(a) loans at $750,000 as part of an effort to slow the pace of its guarantees. The SBA budgeted enough to guarantee loans totaling $9.55 billion under 7(a) in fiscal year 2004, which began Oct. 1. From October through December, however, it guaranteed $3.8 billion of loans, causing officials to worry that funding would be exhausted well before the fiscal year ended.

In an interview last week, though, Douglas Heye, the agency's press secretary, said officials thought the cap would be enough to prevent a shutdown.

"We think that this is better than having to announce that the program is out of money in March," he said in an interview Dec. 31. "You can imagine the criticism we'd get then."

But in an e-mail dated Jan. 6, Anthony R. Bedell, associate administrator of the SBA's office of congressional and legislative affairs, said the already-high application volume increased dramatically in January.

On Jan. 2, just two days after the SBA announced the impending cap, it guaranteed $115 million of loans -- more than double December's daily pace. Mr. Bedell added that it was working on another 189 applications for loans of more than $750,000, which would have used up another $221 million of guarantees.

Tony Wilkinson, the president and CEO of the National Association of Government Guaranteed Lenders in Stillwater, Okla., said Mr. Bedell's numbers are probably too low. He said the SBA was processing $800 million of loan applications, big and small, before the shutdown.

According to Mr. Wilkinson, the SBA does not want more money -- it wants Congress to let it resume operations without funding those large applications, even though all were submitted before the Jan. 8 deadline it had set. Otherwise lenders could simply resubmit their packages once the 7(a) program resumed operating, he said.

"There are some lines being drawn in the sand here," Mr. Wilkinson said. "This isn't about money; there is a belief by this administration that this program should not grow."

Congress has shown no inclination to let the SBA throw out its applications for large loans. Rep. Nydia M. Velazquez of New York, the ranking Democrat on the House Small Business Committee, said she has urged the agency to seek additional money and fund all the 7 (a) loans it can, regardless of size.

"Instead of meeting the capital needs of our small firms, SBA is leaving them with no way to grow," she said in a press release Wednesday. "Not only will small businesses feel the negative impact of this decision, but so will the U.S. economy as a whole."

At press time, the SBA's Mr. Heye had not returned repeated calls seeking comment.

Mr. Wilkinson said he could recall only one other time, in the early 1990s, when the SBA shut down the 7(a) program. During other years when it experienced funding problems, it either capped the size of the loans it would guarantee or sought a supplemental appropriation from Congress.

During fiscal year 2003 -- the 12 months through last September -- the SBA guaranteed more than 67,000 7(a) loans, for $11.3 billion. But $1.8 billion of that was funded with money appropriated under a special program to aid small businesses hurt by the 9/11 terrorist attacks.

Lawmakers and banking trade groups, citing soaring demand, had said they hoped that the SBA would ask for enough money to fund at least $12 billion in the current fiscal year. But the agency deemed the $1.8 billion a one-time windfall and requested only enough money to fund $9.3 billion of 7(a) loans.

Congress added $250 million to that total, but it was hardly enough to meet demand, which according to Mr. Wilkinson, has been running at more than $1 billion a month since April.

"Everyone told them to request $12 billion," Mr. Ballentine said. "Everyone seems to be able to estimate the needs of this program except the SBA."

Dana Drago, the president of small-business banking at Bank of America Corp., the nation's largest SBA lender, said the agency runs the risk of undermining confidence in the 7(a) program with abrupt stoppages like the one it announced Wednesday.

"What I can say is that we hope the SBA loan guarantees are restored as soon as possible, for the benefit of America's small-business owners," Mr. Drago said. "SBA financing is important to them, and they are important to sustaining our economic recovery."