Abington Savings Bank officials say the U.S. Small Business Administration’s reduction in the size of guaranteed loans may be necessary to ensure a greater number of businesses have access to the program.

Efforts by the U.S. Small Business Administration to reduce the maximum size of its guaranteed loans under its flagship 7(a) program are drawing mixed reactions from local banks.

Beginning Oct. 1, the SBA will reduce the size of guaranteed loans offered by the administration’s 7(a) program to $500,000, down from $2 million, in order to focus on the needs of smaller businesses, the SBA said in a letter to Congress.

While some lawmakers and bankers are furious with the administration’s limit on guaranteed loans, Jack Meehl, senior vice president-business banking for Abington Savings Bank, believes the SBA has administered the reduction so that it can reach as many small businesses as possible.

“We’ve been a [Preferred Lender Provider] for two years and the 7(a) program has worked well for us,” said Meehl. “It’s a great avenue for small and growing businesses to get financing at reasonable rates and it helps to provide additional assurance to the bank in the event that the business runs into difficulty.”

But some competing bank officials and lenders believe otherwise, concerned with the damaging effect the cutback could have on the economy.

“It’s an absolutely ridiculous reduction,” said Dan Rich, senior vice president of the Danvers Savings Bank SBA Loan Center, which issued approximately 96 small business loans worth a total of $18.5 million in Massachusetts during the 2002 fiscal year. “It makes no sense. The SBA usually funds $10 billion to $11 billion a year in 7(a) loans and jobs are created by these loans, along with taxes paid by people getting these jobs, which has a tremendous positive impact on our economy.”

The new $500,000 limit will be applied to the combined loans of each borrower to prevent lenders from making a series of smaller loans to help their customers elude the cap. By lowering the subsidy rate, the SBA could guarantee more loans without raising its budget further, according to the letter to Congress.

“We are not impacted from a limitation standpoint because 90 percent of our loans would be SBA loans,” said Michael Savage, vice president and credit enhancement manager in Sovereign Bank’s Small Business Loan Department, the fourth-largest lender in New England, which approved approximately 125 SBA 7(a) loans – 50 in Massachusetts – during fiscal year 2002. “It’s not uncommon that different types of scenarios take place in the SBA, but these changes normally don’t impact bigger banks significantly – we know there is funding available, but the question is under what program.”

The 7(a) Loan Guaranty Program is one of SBA’s primary lending programs. Providing loans to small businesses unable to secure financing on reasonable terms through normal lending channels, the program operates through private-sector lenders that provide loans guaranteed by the SBA.

More With Less

SBA loan programs are generally intended to encourage longer-term small business financing but actual loan maturities are based on the ability to repay, the purpose of the loan proceeds and the useful life of the assets financed. However, maximum loan maturities have been established: 25 years for real estate and equipment and, generally, seven years for working capital.

Lenders point out that other options are available, including the SBA’s 504 Plan.

“From the limitation of the dollar amount, I don’t anticipate a negative impact on banks, clients or customers because of the 504 program, which will finance up to 90 percent of the customer’s project,” said Meehl.

According Savage, the administration’s 504 program is a benefit to lenders and small businesses because it offers options to clients based on their financial needs.

“The lender has the choice of submitting under the 7 (a) program and getting a specific guarantee or [using the] 504 program and [getting] money available at different rates and limitations,” said Savage, who believes the SBA is promoting the available funds in both programs.

Savage says there are benefits to these changes including a decrease in the cost to get an SBA loan, which encourages banks to accommodate the smaller banking needs of clients.

“I don’t think there is a relative impact on the economy,” said Savage. “One has to look at the average amount of loans actually distributed from the SBA. The majority of these loans are under $250,000 so the bank gets less of the SBA guarantee and the SBA has no real affiliation with the lender.”

Another benefit to the SBA’s plan is the reduction of fees a bank pays to the SBA for securing the loan.

Lenders and borrowers pay a fee to administer the program and protect it against losses. To offset the cost of the agency’s loan programs to the taxpayer, the SBA charges lenders a guaranty and a servicing fee for each loan approved. The fees can be passed on to the borrower once the lender has paid them and the amounts of the fees are determined by the amount of the loan guaranty.

Under the new plan, guarantee fees for loans under $150,000 have been reduced from 2 percent to 1 percent. The banks also pay an ongoing fee on SBA loans, which have been cut to 25 basis points to protect against losses.

“The SBA has been very proactive to try and assist borrowers,” said Savage. “STAR Loans are available through early 2003 that provide separate funding for a borrower that have been negatively impacted by [the events of Sept. 11, 2001] and those loans were funded outside the 7(a) funding. Unless no money becomes available, these changes will not negatively impact our banks – we try to accommodate all of our borrowers and our small businesses.”

But officials at smaller banks like Danvers Savings say that the administration is not doing all it can to meet the needs of small businesses in a downward economy.

“If the SBA continues to finance businesses throughout the country, it will in turn it strengthen our economy,” said Rich. “But the administration says one thing and they do another thing by cutting the program in half.”

Currently, the SBA backs 75 percent of loans for more than $150,000 up to a maximum guarantee of $1 million. It is not clear what the upper limit on guarantees will be under the new policy. The Massachusetts SBA District Office declined to comment on the new limitations.

“From a regulatory perspective, small business lending is obviously important and it pulled us out of the last recession,” said Steven Antonakes, first deputy commissioner to the state commissioner of banks. “We are going to monitor [the loan limit change] and see what the final outcome is. We have very good communication lines open with the industry and we’ll see what happens … and what is really being impacted.”

As a director of The National Association of Government Guarantee Lenders, a national trade association of approximately 750 members who provide 7 (a) loans nationwide, Rich admits that there will be no immediate effect on the small business community, but as the only member from New England he plans on fighting against the set reduction.

“We will be contacting our members and encouraging them to contact their representatives and senators explaining the economic impact this will have on their community,” said Rich.

While Congress continues to fight major budgetary constraints, Meehl and Savage do not anticipate that the administration’s loan appropriations will have a great effect on small businesses and lenders in the community.

“We’ve known for a while that [the limitation] was going to happen. The reduction in the cap is something new but it has to do with the amount of funds, or commitments, granted to the SBA,” said Meehl. “It’s a simple case: We don’t have as much money, and by lowering the cap the SBA can reach more businesses.”