SBA 7(a) proposal would modify long-standing prudent lending standards

December 5, 2022

Proposals from the Small Business Administration would make “detrimental shifts” in the SBA’s 7(a) lending program, CUNA and other organizations wrote to House and Senate Small Business Committee leadership. Up to 85% of loans made through the 7(a) program are guaranteed by the federal government, and the guaranteed portion of the loans do not count against a credit union’s member business lending cap.

The proposals would lift the moratorium on the number of non-federally regulated institutions that can make loans under the 7(a) program and loosen or remove the 7(a) program’s requirements for how lenders underwrite loans and how borrowers may use loan funds.

“Both propose removal or modification of long-existing prudent lending standards which have ensured programmatic integrity for decades,” the letter reads. “It is into this framework of significantly loosened lending standards that the SBLC Proposed Rule also intends to open SBA’s flagship 7(a) program to a potentially unlimited number of SBLC lenders, including non-bank financial technology companies, or ‘FinTechs,’ that would be regulated solely by SBA.”

“SBA’s stated intention for these sweeping changes is to aid traditionally underserved borrowers, a laudable goal which our organizations and our thousands of SBA lending partners fully support,” it adds. “However, we believe that the changes, as proposed, will not actually help minority and underserved communities, and could unintentionally harm the very borrowers that SBA is trying to aid.”

Specific concerns include:

  • The proposals will not promote missions lending, as the proposal states political appointees will establish participation parameters on a lender-by-lender basis.
  • SBA would assume supervisory responsibilities over the new non-federally regulated lenders, and the organizations believe SBA’s Office of Credit Risk Management (OCRM) lacks the resources to take on additional supervisory responsibility.
  • SBA failed to propose any regulatory requirements that would attempt to mirror, for the new SBLCs, the federal regulatory and compliance requirements imposed on depository institutions that are supervised by a federal regulator.
  • The proposed regulatory language does not limit SBA’s ability to add an unlimited number of SBLC licenses at any time that the agency sees fit.
  • One proposal would remove the detailed list of factors to be considered when lenders are determining whether a loan applicant is creditworthy. This “wholesale stripping of prudent lending standards” is concerning.
  • SBA is acting rashly by proposing to expand the number of SBLCs before the numerous investigations relating to fraud in the Paycheck Protection Program (PPP) have been concluded by Congress.