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Women, Minority Lending Program Yanked Away

By Bizbox

The Wall Street Journal runs a fascinating article today that exposes a specific problem with the Small Business Administration's ailing marquee program, 7(a) loans. A type of loan designed for women- and minority-owned small businesses has been rejiggered entirely to exclude many such small businesses, particularly those in middle class neighborhoods. In addition to being not at all what the program's founders would have had in mind, it doesn't exactly make for great press.

There is a type of 7(a) loan called a Community Express loan that, historically, has been set aside for small businesses owned by women, minorities, and veterans. However, the SBA expanded the program to target all small businesses--no matter their owners--that operate in SBA-designated Historically Underutilized Business Zones (HUBZones) or in communities considered "distressed" under the federal Community Reinvestment Act. (Start-ups looking for under $25,000 may still receive Community Express loans no matter their locations, according to the SBA's Website.)

According to the article, this change, made in response to the credit crisis, has had the effect of decreasing the amount of 7(a) loans that go to women- and minority-owned businesses, which was the program's original purpose, because the emphasis is now on a business's location rathern than its ownership. Or, as an SBA officer puts it, the new structure "changed the program from a demographic-based program to a geographic-based program." On the one hand, we can't say we're saddened to see the SBA reaching out to these distressed communities. At the same time, the administration essentially took this program away from small businesses--specifically those in middle class neighborhoods--owned by minorities and women. There's really no defending that, even if the explanation puts the SBA in a slightly less-harsh light.

Now, we've known for some time that 7(a) loans have been falling massively: 30% in total number of loans, 13% in dollars, from FY 2007 to FY 2008. Everyone from "Anonymous Banker" to Sen. Olympia Snowe have given their thoughts on why, and on how to fix the program; the SBA has even instituted additional rules meant to encourage banks--the ones who actually decide whether to make the loans, which are backed anywhere between 50% to 90% by the SBA--to loan more.

According to the article, what happened was that several months ago, an influx of applications for Community Express loans came through due to the credit crunch elsewhere. At the same time, the Community Express program is legally mandated not to take up more than 10% of all 7(a) loans. To deal with increased demand and static supply (or, really, given the fall in 7(a) loans generally, constricting supply), the SBA decided to institute the relevant rule change, which decimated demand by making many prior applicants--basically, women and minority owners of small businesses not located in a designated troubled neighborhood--ineligible for the program.

It's easy to see where the SBA was coming from, and in fairness, because it is not actually making the loans, there is only so much it would be able to do when faced with that 10% rule and a sharp decrease in available credit.

Still, results speak for themselves, and these results are dismal. It's bad enough that women-owned small businesses do not get their legally mandated share of federal contracts. Now one of the SBA programs specifically designed to help them is...no longer specifically designed to help them? This needs to be fixed, and now.

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