Republicans rip direct SBA lending in Dems' reconciliation bill: 'Inefficient, costly and inequitable'

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EXCLUSIVE: Republican lawmakers lambasted Democratic leaders on Wednesday for including a provision in their sweeping reconciliation bill that would allocate billions to the Small Business Administration for direct lending, slamming it as a "costly" way to get loans into the hands of small businesses. 

In a letter to Senate Majority Leader Chuck Schumer and House Speaker Nancy Pelosi, 15 GOP senators – led by Sen. Tim Scott of South Carolina – sounded the alarm over the authorization of nearly $4.5 billion over the next decade for the SBA to issue directly the popular 7(a) loans and $2.8 billion for 504 loans in the Democrats' $3.5 trillion tax and spending bill. 

Under the measure, small business owners would be able to go straight to the SBA to access the capital, rather than to private lenders and banks. 

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"We believe this would be an inefficient, costly and inequitable position to put both lenders and borrowers," the Republicans wrote in the letter, which is also addressed to the Democratic small business chairs.  

The GOP lawmakers cited the vast discrepancy between the issuance of Paycheck Protection Program loans, which were administered by banks and other private institutions, and Economic Injury Disaster Loans, which were handled by the SBA.  

For instance, in fiscal year 2020, the SBA approved 42,402 7(a) loans worth about $22.6 billion through 1,673 lending partners, in addition to about 12 million PPP loans worth about $800 billion through 5,467 different lenders. The Republicans lauded the partnership between the SBA and private lenders as "massively successful" in getting money to small businesses struggling due to the pandemic. 

But they pointed to the high rate of fraud in the SBA's direct handling of the EIDL loans: The SBA Inspector General recently uncovered $78.1 billion in potentially fraudulent EIDL activity; at the same time, the SBA had, as of mid-September, disbursed $290 billion in COVID-19 EIDL loans and grants – meaning the fraud rate could be as high as 30%.

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By comparison, the potential fraud rate for PPP loans is estimated to be about 4.6%. The senators noted that PPP loans hinged on banks, credit unions, fintech and other private-sector lenders, while the EIDL program was entirely government-run.

"This misguided liberal plan would take taxes from small business owners, and then lend it back to them with interest," Scott said in a statement to FOX Business. "It makes no sense. The private sector is simply much more efficient at running these programs than big government. This is yet another part of the Democrats’ massive plan to put the government in control of virtually every aspect of American life."

Democrats have argued the measure is intended to help small business founders who were "left behind" by the PPP – a vital lifeline during the pandemic – because they lacked banking relationships or their banks prioritized larger, more profitable loans.

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But Republicans countered the reconciliation bill should instead expand the lender pool in the 7(a) program – giving borrowers more options – rather than "giving the SBA the reigns to run its own lending program," which could "make it more difficult for existing lenders to participate and potential lenders to event want to join the program."

"As the United States emerges from the COVID-19 pandemic, the growth of small businesses and entrepreneurship must be a top priority," the letter said. "Unfortunately, under the reconciliation legislation currently under consideration, among other provisions, allowing the SBA to establish and run a lending program that they themselves regulate will harm job creators and hurt the United States as a whole."

Fox News' Andrew Murray contributed to this report

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