By Michael S. Gerber

An administration proposal to revamp a popular small-business loan program has drawn opposition from many lenders and businesses that participate in the program.

After reaching a short-term compromise to save the Small Business Administration (SBA) 7(a) loan program earlier this year, industry, lawmakers and the administration are preparing to return to the negotiating table in hopes of hammering out a long-term solution before the fiscal year ends this fall.

The SBA proposal for fiscal year 2005 is almost identical to the plan it submitted in February for the rest of this year, which Congress changed significantly before passing it in late March. There was “wide dismissal” of the plan among industry lobbyists, according to a lobbyist for the American Bankers Association (ABA).

The loan program faced funding problems earlier this year, and the SBA suspended it for a week in January before reopening the program with a reduced maximum loan size of $750,000. The legislation increased lenders’ fees, which enabled the SBA to resume backing loans up to $2 million. Through last week, more than $6 billion in 7(a) loans had been doled out this fiscal year.

But now the administration is looking to zero-out subsidies for the program, which received a $79 million appropriation for the current fiscal year. In addition to lenders’ fees, which would help make up for the lack of appropriations under the plan, the SBA has suggested lowering the government guarantee on 7(a) loans from 75 to 50 percent, modeled after the level set by the SBA Express program.

Small businesses and lenders realize that the SBA is just one of many agencies facing budget cuts this year, but they also hope that Congress will step in and continue to fund the program, which they argue creates jobs and is an important part of the economic recovery.

“We accept the fact that appropriations are going to be very tough to come by,” said Giovanni Coratolo, director of small-business policy for the U.S. Chamber of Commerce. “[But] we also have concerns about trying to restrict the 7(a) program to a total SBA Express program. … We feel that it will have devastating effects on small business in the future.”

“There will be a number of lenders that will not participate in the program” if the government guarantee is reduced, said one banking lobbyist who is a part of a coalition put together by the Chamber and other business and banking trade associations, including the ABA and America’s Community Bankers.

But the SBA said that relying on Congress to appropriate funds is exactly what led to the temporary shutdown in the first place. With budget cuts coming to many agencies and programs, administration officials say it makes sense to look for other ways to keep the small-business loans viable.

“Our No. 1 priority is to make sure the program stays up and running,” said SBA spokesman Doug Heye. “Unfortunately, Congress doesn’t pass our budget on time every year. We don’t want to be in a position like we were in January” when the program ran out of money.

Lending industry officials said they expected to continue to support the program through fees, but not to the extent that the administration has asked for. “The administration continues to place too much of a burden on the lending community to fund the program,” said the ABA’s James Ballentine.

Industry leaders are in the process of reviewing the proposal further and discussing strategy. They expect to work closely with the lawmakers who oversee the small-business committees: Donald Manzullo (R-Ill.) and Nydia Velázquez (D-N.Y.) in the House and Olympia Snowe (R-Maine) and John Kerry (D-Mass.) in the Senate.

“The Hill knows that we were opposed to these same provisions when they came out in February,” said Tony Wilkinson, president and CEO of the National Association of Government Guarantee Lenders, which represents lenders that participate in the 7(a) program. “In fact, I believe that most of the Hill was opposed to them as well.”

Complicating negotiations is the looming SBA reauthorization debate. The entire agency is running under short-term authorization legislation, and Congress has yet to pass a full reauthorization of its programs.

“These programs are on life support as it is,” said one business lobbyist.