Bond finds SBA?s default estimates excessive

It appears the government is significantly overestimating the level of defaults in the Small Business Admin-istration's 7(a) Guaranteed Loan Pro-gram, unnecessarily bottling up at least $950 million in reserve monies that could be used to fuel more loans to credit-worthy borrowers and reduce the program's cost to taxpayers.

What these overestimates mean, in real terms, is that the federal government collected more money than it needed as a "rainy day fund" to cover losses in small business loans.

Since fiscal 1992, defaults and recoveries were significantly misestimated: defaults by nearly $2 billion, and recoveries by $450 million. During a recent meeting of the Senate Committee on Small Business and Entrepreneurship, officials of the General Accounting Office unveiled the results of an in-depth analysis of 7(a) credit subsidy rate calculations.

The purpose of the credit subsidy rate is to determine the amount of funds that Congress should appropriate each year to cover losses charged to the federal government when borrowers default on 7(a) loans.

I am concerned that estimates for defaults have been overstated for years and believe that that what the GAO uncovered has confirmed my worst concerns. However, SBA officials have insisted they were justified in using higher default estimates, based on the historical performance of the 7(a) Program since 1986.

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 Office of Management and Budget.

If a more accurate default rate were used, credit subsidy rates could be reduced, lower fees could be charged to small businesses borrowing money, and the 7(a) Program could be expanded to assist more small firms that need loans all without charging the taxpayers more.

According to the GAO's testimony, after analyzing data collected by the Small Business Administration, it was unable to pin down the reason for higher loan default estimates for each year from 1992 to 1997. Furthermore, the GAO concluded that the SBA overestimated defaults by as much as $2 billion over the past 10 years, resulting in nearly $1 billion in excess fees and appropriations being charged to the 7(a) Program.

I have asked the president's budget director, Mitch Daniels, to review this problem and report to Congress before Oct. 1 to suggest what adjustments can be made to the credit subsidy rate to make it more accurate for Fiscal Year 2002.

It is vital to ensure adequate funding for small businesses to help them lead us out of the current economic doldrums.