SBA Proposed Rule Expands SBA 7(a) Loan Program to New Lenders
On October 04, 2022, the Biden Administration (the “Administration”) released a Fact Sheet that announced the “new public and private-sector efforts to advance racial equity” that will be utilized by the Administration.
One of the many efforts announced was that the Small Business Administration (SBA) would issue a proposed rule to “expand its lender base by lifting the moratorium on new Small Business Lending Companies (SBLCs), which would allow new lenders to apply for a license to offer SBA-backed 7(a) small business loans.”
The objective of this policy change, according to the Administration, is “to grow the number of lenders that receive its loan guarantee, thus increasing small business lending, particularly in smaller-dollar and underserved markets, where borrowers are most acutely shut out of current lending.”
On November 7, 2022, the SBA issued a proposed rule giving effect to the Administration’s claims. Comments on this proposed rule closed on January 6, 2023 and, according to a statement given by SBA Administrator, Isabel Guzman, to Biz Journal, the SBA is working internally to finalize the Rule and aims to publish a final rule in the coming months.
While hundreds of banks participate in the SBA’s 7(a) program, the agency has historically limited the number of licenses given to nonbank institutions to make SBA 7(a) loans to just 14 SBLCs and any nonbank or nonbank entities hoping to receive one of these licenses has been required to acquire an existing SBLC beforehand.
According to Biz Journal, those who are in support of the Rule say that it could increase access for small businesses. Funding Circle, a current nonbank lender, has provided a statement to Debanked encouraging the lifting the SBLC moratorium so it can “expand access to 7(a) loans for underserved communities and to do so quicker, at a lower cost and with a superior customer experience[.]” Funding Circle suggested that when deciding whether to add a lender to the 7(a) loans network, the SBA should consider years of operation, whether the lender was publicly traded, and historical loan performance.
Other banking industry participants, however, have expressed concerns about the proposed rule increasing access for fintechs. Fountainhead CEO Chris Hurn to Biz Journal, that he believes the expansion may “negatively impact all U.S. small businesses.” Hurn continued that 7(a) loans are currently capped “relatively low” and “closely scrutinized” in comparison to PPP loans to “guard against default rates and charge offs[,]” while “fintechs typically charge high rates” and accept charge-off rates. Hurn believes that fintechs may carry these practices over into SBA lending, resulting in increased costs to taxpayers, increased scrutiny from Congress, and reduced access to capital.
Instead, Hurn believes the SBA should focus on driving more lending to small-business owners, relying less on automation and algorithms, and, instead, focusing on “[offering] higher loan guarantees on loans under $250,000” as well as “[reducing] paperwork, underwriting[,] and collateral requirements.”