July 11, 2018
By Bob Coleman
Editor, C-Suite Wednesday
C-Suite Wednesday — 83% Say Make USDA B&I Zero Subsidy
In our unscientific poll from Monday.
The Farm Bill calls for USDA’s community facilities and REAP loan programs to be operated at zero subsidy — all loan losses will be covered by borrower and lender fees.
The Farm Bill has passed the House and the Senate and is now in a conference committee before it is sent to the President for his signature.
USDA’s business and industry loan program is not slated for a zero subsidy model, thus Monday’s poll of gauging industry sentiment for House and Senate staff input.
For those of you who answered yes, the industry is split on how to fund zero subsidy.
- Secondary market “tax” similar to SBA 7(a) — 49%
- Additional levy on lender servicing fees — 33%
- Increased borrower guaranty fees — 36%
- Require “smaller” loans, which historically carry higher losses, to be processed SBA 7(a) or 504 — 28%
- Other — 23%
Here are some select comments:
The B&I program outshines the 7a program in its flexibility and its focus on rural economic benefits. What’s held it back is the lack of available funding to support the demand. After 3+ decades of underfunding it’s safe to say there’s no practical alternative to overcoming this problem than to make B&I a zero subsidy program. This is a chance for USDA to again show SBA how a guaranteed business loan program should be run. Instead of 7a’s rigid stair-step fee model based on guarantee size and whether the loan is less or more than 12 months, B&I could develop a formula that considers loan term, loan size, and loan risk.
USDA should cover loans either in industries the SBA won’t (poultry, farm, etc.) or B&I loans greater than $5MM or when SBA exposure is maxed out. The application process should be similar in both programs to promote a more seamless flow from program to program by the users.
While achieving a zero subsidy status is a worthwhile endeavor, the process shouldn’t be rushed in order to meet the deadlines of the farm bill. Out of your list of solutions, I take serious issue with two:
1 – A 3% upfront guarantee is already pretty onerous. Increasing the fee beyond where it currently stands would would essentially shut down the program.
2 – Having the SBA process rural business loans would be a nightmare. The reason why the B&I program is so successful is because of the regional and state delivery system and the knowledgeable employees that live in the rural areas they serve. SBA could never deliver the program as effectively.
Don’t raise borrower and lender fees! And don’t send good business to SBA! There’s a reason rural lenders like USDA and not SBA.
Consolidate the program into the SBA. No need to have both programs. It is difficult for lenders to be good at originating and servicing loans under both programs.
The fees to the borrower are already too high- you can’t increase those!
Maybe not a zero subsidy as that is not what increase SBA volume. However, additional financial support of the program to help reduce tax payer support is always a good idea.