Active lenders in the Small Business Administration’s 7(a) lending program say higher fees and stricter underwriting standards are needed to stem recent financial losses.
An approximately 90-minute Senate Small Business and Entrepreneurship Committee hearing on Feb. 26 centered on the impact recent changes have had on the solvency of the SBA’s flagship lending program. Last summer, the SBA released a fee schedule for this year waiving its annual service fee on loans of $1 million or less with maturities longer than 12 months. Shorter-term loans of $1 million or less face a fee equal to 0.17 percent of the loan amount.
The fee waiver was part of broader changes for the lending program. Also, the moratorium was lifted on nonbank participation, allowing a half-dozen to participate. Applicants’ personal financial resources were removed from the “credit elsewhere test.” Equity injections were waived, and insurance requirements were reduced.
Detractors say the changes caused the 7(a) program to have a negative cash flow of more than $370 million in the 12 months ending in June 2024. The default rate for SBA 7(a) loans exceeded 1 percent last year for early defaults and 2.5 percent for delinquent loans, both much higher than in 2022.
Reducing underwriting criteria has played a crucial role in recent economic crises, testified Timothy Fitzgibbon, senior vice president of Ames, Iowa-based First National Bank. He cited the subprime mortgage crisis of 2008 and accumulation of private debt through the Federal Parent PLUS student loan program as examples. Direct government lending can result in costly loan modifications — even debt forgiveness — to mask nonperforming loans, Fitzgibbon said.
“Originating government-backed loans for borrowers who can never repay them is predatory in nature,” he said. “It is imperative that the SBA closely monitor the impact of its reduced underwriting standards on the borrowers it serves.”
Opening the program to nonbanks raises the risk of fraud by allowing a potentially unlimited number of unregulated nondepository institutions to become licensed SBA lenders, said Joni Ernst (R-Iowa), chair of the Senate Small Business and Entrepreneurship Committee.
“Similar analysis done by third-party service providers show loans made under the new rules are defaulting at a much faster and higher rate than loans made in other years, particularly those originated by nonbank lenders,” Fitzgibbon added.
Sen. Jackie Rosen (D-Nev.) attributed the overall rise in defaults and delinquencies to economic uncertainty under the Trump administration, including tariffs and unreliable federal funding. The increase is partially caused by lenders not following their own prudent underwriting standards, added Raymond Lanza-Weil, president of Boston-based CDFI Common Capital.
The hearing also centered on the SBA’s Community Advantage Program, which provides capital access to small businesses in underserved communities, especially those who don’t qualify for traditional bank loans.
Supporters say it is needed for women of color and minority groups who face discrimination in the lending process. Small Business Committee Ranking Member Ed Markey (D-Mass.) spoke positively about the program. Without government backing, traditional banks would only lend to the largest businesses, he added. Lanza-Weil supports increasing the Community Advantage program loan limit to $500,000 from $350,000.