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Q: Cost to taxpayers of guarantees on small business loans. ( Answered 5 out of 5 stars,   0 Comments )
Subject: Cost to taxpayers of guarantees on small business loans.
Category: Business and Money > Accounting
Asked by: cjkc-ga
List Price: $25.00
Posted: 23 Jul 2006 11:00 PDT
Expires: 22 Aug 2006 11:00 PDT
Question ID: 748755
How much did it cost the American taxpayers in 2004 and 2005 to
guarantee SBA loans and Micro Loans (private lenders)?   While the SBA
advises that they guarantee around twelve billion a year for bank
loans and private lenders,  I can't find any information on how much
that costs the American Tax Payers;  i.e. how much of our taxes go to
the banks and the private lenders when the small business fails,  and
is the guarantee based on the balance of the loan at the time of
failure of the small businessman or on the original loan amount?    
Please ---plain language!
Subject: Re: Cost to taxpayers of guarantees on small business loans.
Answered By: keystroke-ga on 23 Jul 2006 14:52 PDT
Rated:5 out of 5 stars
Hi cjkc,

The surprising answer to your question is almost none compared to the
liability that taxpayers could possibly face from the loan guarantees,
with the exception of the microloan program.  The SBA's loan program
is required to be self-subsidizing. From 1991 to 2001, in fact, the
program made money (as it had such a low default rate and charged fees
to borrowers based on higher default rates than expected) and
politicians got upset over the charging of fees to the borrowers, as
this basically amounted to a tax that added to the government's
coffers.  However, things changed after the September 11 attacks, when
the SBA loaned money to thousands of businesses that had been
affected.  The borrowers for these loans did not have to begin paying
the government back until two years after the loans were granted-- so
the repaymnent schedule for most of these loans began in 2004 and the
borrowers did not have the opportunity to default until that time. The
default rate for these loans is extremely high compared to most SBA
loans, and the SBA wrote off at least $10 million of the difference to
taxpayers (see below for a more thorough explanation). This came to
light in October 2005.  The full extent of the difference that
taxpayers will face is not yet known, as the SBA is still seizing
collateral, attempting to get borrowers to continue repayment, etc. In
addition, many of the companies receiving loans under these favorable
terms had no connection to the September 11 attacks at all and are
guilty of fraud.

To add to this disturbing turn of events, the aftermath of Hurricane
Katrina has led to a wave of small business loans patterned after
those of 9/11, with calls for the paperwork to be sped up to allow
business to reopen.  The default rate on these has the possibility of
following the 20 percent default rate of the September 11 businesses.
The full effects cannot yet be studied, as many of the loans have not
yet been made or have not begun to be paid back.

This data has been compiled from the most recent information available
to the public.

2004 data-- 

2004 saw new changes in the SBA lending rules-- businesses could now
borrow up to $10 million and the paperwork and geographic rules
governing the loans were loosened, to open the loans to many more
potential borrowers.

Banks will tolerate a default rate of 0.5 percent. The SBA loans have
a 6 to 7 percent default rate-- it targets higher risk businesses that
can't get mainstream bank funding.

However, the taxpayers paid for none of it in fiscal year 2004.  The
goverment requires that the program be self-funding, so fees paid by
the applicants usually subsidize those who may default.

CFO Magazine provides some details:

"Historically, the SBA has relied on three principal funding sources
to make good on 7(a) loans that default: loan-guaranty fees, which are
assessed on lenders but are typically passed directly to borrowers;
loan-servicing fees assessed on lenders, which can't be passed
directly to borrowers but are taken into account by lenders when
setting interest rates on their loans; and federal subsidies. Should
losses exceed the funds available from those sources, taxpayers are on
the hook for the difference, beyond the federal subsidy, though an SBA
spokesman says that's never happened. In fact, he says, the default
rate on 7(a) loans is only slightly higher than the default rate on
comparable conventional loans. Meanwhile, the program boasts some
notable success stories: Callaway Golf Co., Intel Corp., and Outback
Steakhouse Inc. are all former borrowers."

Overall, the SBA's 7(a) program backed $12.7 billion in loans in
fiscal 2004 to nearly 75,000 US businesses.

Some of the microlending partners experience high default rates, but
the overall microloan program's default rate is low-- less than 1
percent, according to 2004 Congressional data.  This is because the
default rate of borrowers, about 8.3 percent, is absorbed by the
private partners which are guaranteed by the SBA, and reduced to less
than 1 percent or even 0 percent in some cases for the SBA itself.  In
fiscal year 2004, the program lent $33 million to 2,400 potential
entrepreneurs. It targets minorities, who often don't have the credit
necessary for bank loans, but its biggest recipients are women. The
program was on Bush's list of programs to delete from the federal
budget in 2006 for being too expensive to taxpayers. The problem with
the loans' expense is not with the loans themselves, which pay off
well. However, the government provides technical assistance along with
the loans to borrowers, to maintain a low default rate.  The technical
assistance, rather than being paid back, basically amounts to a
donation or grant to the borrower on behalf of the taxpayers. In 2004,
the government provided $26.5 million in loans through the program,
along with $15 million in technical assistance.  Only the $26.5
million must be paid back by the borrowers.  Therefore, the return on
the taxpayer dollar is lowered and the program isn't as cost-efficient
as it first appears to be.

According to the SBA administrator, Hector V. Barreto, during
Congressional testimony, "Every dollar lent under the program cost the
taxpayers ninety-seven cents."  That obviously does not really work in
the taxpayer's favor as a "loan" but is more appropriately called a
gift or a grant.

2005 data--

2005 saw many businesses defaulting on loans that had been granted to
them in the wake of the September 11 attacks.
"Roughly $1 of every $5 in loans the Small Business Administration
directly made to companies hurt by the Sept. 11 attacks has fallen
into default, leaving the government with an uphill effort to recover
millions of dollars in taxpayer money."

That is a 20 percent default rate.

The SBA lent $1.2 billion to 10,000 companies that claimed they were
directly affected after September 11.  Of that amount, $245 million is
in default, according to 2005 records.  The government often gave
businesses favorable terms that did not even require a first repayment
on the loan for the first two years of the life of the loan.

However, SBA officials only wrote off less than $10 million of that
money, claiming that they would regain the rest for taxpayers by
collecting on collateral, bringing delinquent payments up to date, or
negotiating settlements.

According to the report, "Among the loans already written off,
taxpayers are picking up the tab for a $992,000 loan made to an
Atlanta hotel; $986,000 to a Florida boat dealer; $620,000 to a Maine
broccoli farm; and $38,900 to a Lubbock, Texas, computer store."

Another post-September 11 program, the Supplemental Terrorist Activity
Relief program, has a smaller default rate of 5 percent.  $191 million
from that program has become more than 60 days overdue.  This program
backed banks which had given loans in the wake of the September 11

Overall, there is a risk associated with the loans for taxpayers.  
"Statutory taxpayer exposure. Total potential taxpayer exposure to the
SBA?s loan programs, under current law, includes the net present value
of its direct loans and the guaranteed portion of its guaranteed
loans. This is the total cost if all covered borrowers defaulted on
their loans and no recoveries were possible. At present this is
approximately $58.8 billion."

-- from the Center on Financial Institutions

However, since most borrowers will not default, the actual taxpayer
costs are much lower.  Since the fees charged to the borrowers and the
co-guaranty provisions of the loans with banks further protect
taxpayers, the SBA program is actually not as wasteful of taxpayer
dollars as many government programs can be.  The fees related to
defaults paid by taxpayers in 2005 arose solely from the disaster loan
program following September 11. So far, that is $10 million, but the
number could rise if the government fails to regain its money from
traditional sources. As the government is still attempting recovery
efforts, full data on their success is not available.

In addition, other than the disaster loans, the SBA's regular loan
programs, such as the 7a loan, experienced zero subsidy rates,
according to the SBA's budget requests for this year.
found here:

In addition, while the microlending programs in 2005 experienced a low
default rate to the government of 1.23 percent, they also benefited
from further technical assistance subsidies which made the program
more of a grant than a loan.  The SBA did not request for the program
to be continued because it still experiences the 97 cent-to-the-dollar
cost to the taxpayer outlined above.

"Fears for a Program That Lends Just a Little"
New York Times, March 17, 2005

"A Helping Hand"
Wall Street Journal, November 29, 2004

"Low Default Rate on Loans Puts Money in Bank for U.S."
Washington Post, September 10, 2001

Search terms:
(in Yahoo and Google)
sba loan default rates
sba loans default rates 2005
microloan default rates 2004
sba express loans 2004 default rates
sba loans default katrina
microloan costs taxpayers

If you need any additional help or clarification, let me know and I'll
be glad to assist.


Request for Answer Clarification by cjkc-ga on 25 Jul 2006 10:41 PDT
Thank you for your response but could you give me an answer in actual
numbers, the dollar ammount, that the SBA paid to the banks and the
private lenders on defaulted loans in 2004 and 2005.  Surely, that
number must be available and for lay people like myself,  it is much
more explanatory and understandable than rhetoric concerning premiums
and percentages of default, etc...
I am reading on the Internet and researching what constitutes an  SBA
loan, etc.for the purpose of writing an article on "franchising" and I
need the actual figures so that I can ask the SBA if they have the
means to separate out the defaults on franchise and franchise asset
Thanks for your help.  I am happy the SBA program has been so
successful,  and I will be happy to pay you and rate you if you can
get that info for me.

Clarification of Answer by keystroke-ga on 28 Jul 2006 08:09 PDT
Hi cjkc,

I'll be happy to help you with the exact figures and explain a little
more. As I said in my original answer, the SBA loan program is
self-subsidizing. It is required by the Congress to not cost the
taxpayers anything.  Since 2004, it has charged the potential
borrowers (and banks) fees and charges so that when someone defaults,
that is covered by the many other people who have not defaulted (which
is possible because the default rate is so low).  However, with all
the loans that were given out after September 11 (and probably those
borrowers were not investigated fully before giving them the loans),
the default rate is an astronomical 20 percent, and the fees charged
do not come close to covering the total. If the taxpayers had to pay
this complete total, it would be $245 million.

It is possible that that could be the actual amount that taxpayers end
up having to front. So far, $10 million has been written off, so the
totals would be:

2004: $0
2005: $10 million (and possibly more on those loans in future years as
the government finds they cannot collect from those borrowers on
behalf of taxpayers)

This is for the straight SBA 7a loan program. When the microlending
program is added, the truth is something different because the
microloan program also included a "technical assistance" to each
borrower-- so while the actual loan is paid back, the technical
assistance is not, and adds to the cost of the loan.  The loans are
estimated to cost taxpayers 97 cents on the dollar loaned.

2004 7a loans: $0 + microloans:  $25.71 million=

2004 totals: $25.71 million 

2005 7a loans: $10 million + microloans: $13.87 million=

2005 totals: $23.87 million

Without the microloans factored in (as they include grants that don't
go to banks, but to the borrowers themselves), the totals would be:

2004: $0
2005: $10 million

Of course, because $0 of taxpayer money was used for the program in
2004 does not mean that the banks didn't get paid. They were paid with
fees generated from all the borrowers themselves at the time of the
loan. This is required by Congress and from 1991 to 2001, the SBA
actually made money on this scheme. It doesn't cost the taxpayers
anything. The problem in 2005 and beyond has been all the disaster
loans, which have experienced huge rates of default and can't be
covered by the fees from the borrowers.

those in original answer +

If you have some more questions, please let me know.

cjkc-ga rated this answer:5 out of 5 stars

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