The Business Journals Feb 11, 2025
The Small Business Administration’s flagship 7(a) loan program lost hundreds of millions of dollars in 2024 as agency fee reductions combined with an increase in loan defaults to result in negative cash flow.
It's a marked change for a program that generally has operated with a large surplus. And it could mean higher loan fees in the future.
Those findings, and others, come from a detailed risk assessment by the SBA of its 7(a) portfolio through June 30, 2024, that was obtained by The Playbook as part of a Freedom of Information Act request. It shows a portfolio stressed by rising defaults, more loan purchases and less money coming from fees. The report also shows a change, starting in late 2023, when it comes to the impact of loan-origination fees, which long have covered the cost of purchasing failed loans from lenders.
The SBA's recent financial performance has made it a prime target for Republican lawmakers as well as the agency's administrator-nominee, former Sen. Kelly Loeffler.
According to the documents provided to The Playbook, the 7(a) program saw positive cash flow of about $651 million in fiscal 2022. That sum fell to a positive $88.2 million in fiscal 2023.
The agency posted positive cash flow of $133 million in the first quarter of fiscal 2023, but just $22.7 million in gains in the second quarter and $29.7 million in the third quarter before registering a $97.2 million loss in the fourth quarter of its fiscal 2023.
The decline happened after the SBA said it would begin to reduce loan-origination fees across most loan types, in addition to dropping some guarantee and annual-service fees. Among such moves, the SBA eliminated an upfront guarantee fee for loans under $500,000 in fiscal 2023.
The SBA reduced loan fees even further in fiscal 2024. It eliminated upfront guarantee fees for loans longer than 12 months and less than $1 million. It cut in half those same fees for loans between $1 million and $2 million. Loans with less than 12 months of term also saw their fees reduced, and annual service fees were cut as well.
The SBA ended up with negative cash flow of about $274 million in the first three quarters of its fiscal 2024, through June 30.
The SBA report obtained through the public-records request attributed about $49 million of the negative cash flow to reduced fees. It attributed $174 million to a backlog of about 500 guaranteed loan purchases from fiscal 2023 that were paid in fiscal 2024. The additional $51 million of the $274 million total was not attributed to a specific cause.
The 7(a) program historically has operated with a large surplus — about $4 billion since 2013, and nearly $1 billion since 2021, according to the report analyzed by The Playbook. It was unclear from the report how long the 7(a) program could run at a loss.
But the SBA said in a statement the program does not use a reserve fund and has run without a subsidy from the taxpayers for the last several years, and that the programs cash flow analysis is used to determine the fee structures for new loans, and whether they should be higher or lower for the next fiscal year.
"SBA consistently assesses the program’s net cash flow to determine whether its fee structures for new loans should be higher or lower for the next fiscal year, subject to a limit set by Federal law," the agency said in a statement. "The net cash flow analysis does not affect SBA’s ability to pay guarantees; it adjusts how much SBA thinks it needs to charge for new loans."
The agency in July said it would again limit certain fees for its fiscal 2025, which began Oct. 1. In announcing its current fee schedule, the SBA said it was continuing to expand "access to capital for underserved populations through small dollar loans."
"To continue to encourage small dollar lending, the agency will continue to set zero or extremely low fees for small dollar loans, including no fees for loans $500,000 or less in its flagship 7(a) program," the SBA said.
SBA 7(a) loans see rise in delinquencies and defaults
The SBA's fee reductions have come at a time when the agency also has seen an increase in the number of troubled loans, adding pressure to the agency’s balance sheet. While Federal Reserve data shows defaults are rising among all commercial loans, the SBA has shown a steeper uptick in recent months relative to loans from private-sector banks.
The percentage of SBA's “stressed loans" — or loans more than 31 days past due, deferred or delinquent — rose from 1.77% in October 2023 to 2.4% in June 2024, according to the SBA report. The last 12-month default rate, or the gross balance of all defaulted loans over the past year compared to the average active balance, grew from a low of 1.32% in 2022 to 2.76% in June 2024.
That 12-month default rate is roughly the same as it was during the peak of the Covid-19 pandemic. It previously had not been that high since late 2012, as the agency was emerging from the Great Recession and financial industry collapse several years earlier.
Default rates are hitting specific industries harder than others, according to the SBA’s data. It found construction and manufacturing with the highest rate of default, while food services and accommodation saw below-average default rates.
The SBA report laid out a number of enforcement actions it took in fiscal 2024, although it was unclear against which lenders those actions came and if any monetary penalties were involved. The agency listed 540 increased supervision actions and 104 suspensions and debarments, among thousands of lender reviews and loan-compliance checks.
SBA's 7(a) program in the Congressional spotlight
The relative health of SBA’s 7(a) program has come up as a discussion point in recent weeks. SBA Administrator-nominee Kelly Loeffler said during her nomination hearing before the Senate Small Business Committee last month that tackling rising delinquencies and early defaults were top priorities.
“These are the types of things, red flags, that should have been put up sooner,” Loeffler said, adding the 7(a) program historically functioned with zero subsidy from taxpayers but is in danger of needing additional support. “We are in a position right now as this year starts that that may not happen,” she said.
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