The Small Business Administration is lifting its limit on the number of non depository lenders for its main 7(a) lending program, a move that is drawing the ire of community banking groups.
In a final rule issued April 12, the agency said the change will increase chances for employee ownership and modernize credit criteria and underwriting standards to incentivize a wider distribution network of small-dollar loans. The rule will allow lenders to make SBA lending decisions based on their existing credit policies for non-SBA loans similar in size; provide additional flexibility for loans of under $150,000; streamline required paperwork for lenders; and simplify and clarify affiliation standards for small business owners and lenders.
The number of Small Business Lending Company licenses had been capped at 14 since 1982. The SBA plans to initially admit only three new SBLCs into the program.
Supporters say the changes will help small businesses in underserved communities receive funding necessary to grow. “Modernizing and expanding SBA’s lending programs will open new opportunities to our highly entrepreneurial, yet underserved communities that have far too long been denied access to the funding they need to create jobs and grow our economy,” said SBA Administrator Isabella Casillas Guzman.
Community banking groups criticized the decision, noting that fintechs are not required to comply with Bank Secrecy Act and anti-money laundering rules and other regulations that banks abide by. ABA President and CEO Rob Nichols said it is unclear whether the SBA has the staff and resources to supervise the new lenders. Fintechs were disproportionately linked to fraud during the rollout of the Paycheck Protection Program, he noted. According to a University of Texas report, PPP loans originated through fintechs were “highly suspicious” at nearly five times the rate of loans from traditional lenders.
“We urge Congress to closely examine SBA’s decision, particularly in light of recent reports that found limited SBA oversight of nondepository lenders in the agency’s existing programs,” he said.
Independent Community Bankers of America President and CEO Rebeca Romero Rainey said her organization “strongly opposes” the decision. “This rule would undermine the 7(a) program and unintentionally harm the very borrowers the SBA is trying to aid,” she said. “And as members of Congress have told the SBA, the rule establishes broad and sweeping changes that do not reflect congressional input or authorization.”
Both Democrats and Republicans say the safety of fintech lending needs to be ensured before they support the expansion. Last month, Ben Cardin (D-Md.), chair of the Senate Small Business Committee, and Sen. Joni Ernst (R-Iowa), the committee’s ranking Republican member, released a letter urging Casillas Guzman to “go back to the drawing board on the agency’s irresponsible changes made to its loan underwriting while permitting an unlimited number of nonbank financial technology companies.”