It took us all by surprise,” says Frank Mercardante. “And it makes absolutely no sense.” It is an apparent decision by the U.S. Small Business Administration to limit the loan amount available through the 7A lending program to a maximum of $500,000. Because of economic pressures, the nationwide budget for 7A loans would be sliced from about $10 billion to about $4.5 billion.

“I don’t know how this program impacts the budget, because the only impact on the program would be defaulted loans,” Mercardante says. “And it probably has (had an increase in defaults), but I can’t see that it would be that much. For crying out loud, they just raised the guaranteed amount to $1 million a year ago.”

Anthony Vigil, deputy district director for the San Diego SBA office, says the alleged cutback is so far just a notice that was not numbered or signed off on, and is therefore not a directive. However, if it becomes SBA policy it would have gone into effect by Oct. 1. Only the size of the loan would be affected, not the size of the government-guaranteed portion.

The 7A glitch could affect loans in the pipeline. “If I get approved for a 7A today, the SBA may grandfather any application submitted prior to Oct. 1,” Vigil says. “Or they might say if it hasn’t closed by Oct. 1, they have to change it. The fair thing is that any application in process should be grandfathered.”

Even if the 7A cut is approved, borrowers still will have an option in the agency’s 504 program. (But note: the 504 program is strictly for purchases of real estate, while the 7A loan can be used to fund real estate and/or operations.)

Using the 504 program, borrowers can get into a property for 10 percent down. In a hypothetical purchase of a $1 million property, the borrower puts down $100,000, the bank puts up as much as $500,000, and the SBA through the Community Development Corp. puts in a second trust deed for $400,000, which is a 20-year loan.

The SBA guarantees the second, and sells it as a bond on Wall Street. With 10 percent paid for, and 40 percent guaranteed by the SBA, it’s obvious that the bank, the borrower and the SBA have an interest in seeing the transaction succeed. This may, in fact, look a lot like a de facto guarantee on the entire amount, but Vigil says, “We (the SBA) are interested in protecting our 40 percent that’s sold to Wall St. The 50 percent is a stand-alone loan; we have nothing to do with that loan.”

— Richard Acello