By Patrice Dickens
Capital News Service
Tuesday, April 30, 2002

WASHINGTON - Federally guaranteed loans to small businesses in Maryland were more likely to be partially written off than those in the rest of the nation, according to an analysis of five decades of Small Business Administration records. 

The analysis of the SBA's 7(a) loans from 1953 through April 28, 2000, showed that 17.08 percent of Maryland's 8,298 loans were charged off -- or partially paid off by the government, which then pursued the debt instead of the banks that made the loans. 

The national charge-off rate during the same period was 13.01 percent on 782,892 loans that could be accounted for. 

A Capital News Service analysis of the SBA database showed just 66 percent of the Maryland loans and 73 percent of the loans nationwide were either paid off or charged off. 

The others could not be accounted for, likely because they were still active, SBA officials said. 

Officials could not say why the charge-off rates are so high. But, while worrisome, they also noted that it is not surprising given the SBA mandate of encouraging banks to make otherwise risky loans. 

"If SBA's losses were the same as the banks', SBA would be criticized," said a former senior official of the SBA, who asked not to be identified. 

If it's too low, he said, critics say the agency is not doing its job of reaching small businesses. But if the rate is too high, the SBA would be accused of "going too deep into marginal businesses." 

"So you try to reach a happy medium but knowing that you are not able to please everyone," the official said. 

The SBA's 7(a) General Business Loan Guaranty Program is the agency's largest lending program. It makes private loans available to small-business borrowers who might not otherwise be able to obtain financing, by guaranteeing the bank that the government will pay off at least part of the loan. 

If a bank loaned someone money to start a business, for example, it could demand that the SBA pay the guaranteed share of the loan -- up to 85 percent -- if the borrower fell behind in payments. 

"If a loan is two months behind, the commercial lender can ask the SBA to act on its guarantee," said Mike Stamler, an SBA spokesman. SBA officials said the maximum amount for 7(a) loans is $2 million, but the most the agency can guarantee is generally $1 million. 

The maximum guarantee varies depending on the size of the loan, from 85 percent for loans of $150,000 or less to no more than 75 percent for loans above that amount. 

In the case of a hypothetical $1 million loan that had an SBA guarantee of 75 percent, for example, the SBA would pay the bank $750,000 if the loan was charged off. 

The bank would absorb the $250,000 loss and the SBA could then work with the borrower to see if they could work out a schedule to bring the loan up to date. 

Charge-off is when "some portion of the loan is written-off," Stamler said. "It could be anywhere from $1 to more, but it's never going to be the full portion of the loan," Stamler said. 

"If that's the case, then that would mean it was charged-off without a single payment being made or any collection on collateral." 

In the worst cases, the loan would be written off and the SBA would go after the borrower's assets to try to recoup some of its loss. 

But Stamler said that "25 percent to one-third of the loans whose guarantees are purchased are (later) returned to current status." 

Any number of things--from late payments to inadequate cash resources to bad management--can contribute to a loan being charged-off, experts say. Because there is often more than one factor involved, however, it is difficult for the experts to isolate any one as the single reason for a loan winding up as a charge-off. 

"It's a combination of a number of things. They are very integrated and interrelated," said LeAnn Oliver, SBA's deputy assistant administrator of financial assistance. "The bottom line is the failure is on the part of the business." 

Oliver would only say that the Maryland and national charge-off rates seem "very high" and that "charge-off rates are subject to what's going on in the economy." 

But Frederick Greene, associate professor of Management at Manhattan College in Riverdale, N.Y., concurs with those who say the SBA program, by its nature, will have a higher rate of defaults and write-offs. 

"It's sort of a Catch-22," Greene said. "If you provide riskier loans, you have a higher default rate. If you don't provide loans, the banks would ask why?"  

Copyright © 2002 University of Maryland College of Journalism