Fintech lenders eager to capitalize on
The Senate Small Business Committee
While the Cardin-Ernst legislation makes Community Advantage — an SBA pilot program Cardin strongly supports — permanent, it also places strict limits on SBA's authority to open its flagship 7(a) lending program to nondepository small-business lending companies. That expansion, a key Biden administration goal, has drawn the ire of Ernst and other congressional Republicans who fear that wider SBLC participation would expose 7(a) to
The bill caps the number of nondepository 7(a) lenders at 17, three more than the 14 that are currently active. The bill would also make any SBLC authorized after June 1 wait five years before it is eligible to obtain delegated lending authority.
Under 7(a), SBA guarantees loans up to 85% on loans of $5 million or less. Delegated authority permits a lender to approve a 7(a) loan without agency review.
Scott Stewart, CEO of the Innovative Lending Platform Association, a trade group representing online small-business lenders, called the Cardin-Ernst legislation "a terrible policy outcome." According to Stewart, the bill effectively reestablishes a 1982 moratorium that limited the number of SBLCs permitted to participate in 7(a) to 14.
"We've replaced the Reagan moratorium of 1982 with the Cardin-Ernst moratorium of 2023," Stewart said Wednesday in an interview. "If you're given a license but you're unable to exercise that license for five years — what privately held company would agree to that."
Funding Circle, a fintech lender that plans to seek one of the three SBLC licenses made available under SBA's new rules, said in a statement the Biden-Ernst legislation "places unfair and burdensome rules and regulations on some small-business lending companies while exempting all 2,200 participating banks, credit unions, and community development financial institutions. … We believe that the rules and regulations should apply equally to all lenders in the program."
The Cardin-Ernst bill would reduce the number of 7(a) loans Funding Circle is able to make over the next three years by 26%, including loans in low- and moderate-income neighborhoods and rural areas, said Ryan Metcalf, the company's head of public affairs. "The removal of our ability to get delegated authority adds seven to 10 days" to the approval process, Metcalf said. "It makes it more expensive and harder for us to do [small-dollar] loans."
Advocates for banks and credit unions, which currently make the overwhelming majority of 7(a) loans, have signaled their support for the Cardin-Ernst legislation. They argued in a July 24 letter addressed to both senators that the new SBA rules, which overhauled long-standing underwriting guidelines in addition to opening the door to more nondepository SBLCs, "may negatively impact the performance of 7(a) loans, threaten the integrity of the program, and lead to increased borrower and lender fees."
A group representing African American CDFIs active in the Community Advantage program endorsed the Cardin-Ernst bill in a July 18 statement, lauding Cardin for "thoughtfully developing this legislation with the reforms we have contemplated for years regarding Community Advantage."
SBA finalized new rules covering SBLCs and its underwriting policies in April, six months after the idea of ending the 1982 moratorium was
The rule would allow the 12-year-old Community Advantage pilot, whose lenders focus on loans of $350,000 or less, to sunset but provided for program participants to be classed as nondepository SBLCs in order to maintain their 7(a) links.
SBA began accepting applications for SBLC licenses from nondepository lenders in June. Though the agency plans initially to limit the number to three, the number could increase as it strengthens its oversight capacity. Unlike the Cardin-Ernst legislation, which includes a hard cap of 17, the SBA's rule places no limits on the number of SBLCs.
It came as little surprise the Community Advantage Loan Program Act of 2023 was overwhelmingly approved by the Small Business Committee on July 25, the same day it was introduced, given that it was sponsored by panel leaders. The full Senate has yet to act on the bill, and passage is far from certain, said James Ballentine, a former head lobbyist for the American Bankers Association.
"I see this as the first quarter with three very long quarters to go," Ballentine, founder and CEO of the Ballentine Strategies consulting firm, said of the bill's status. The legislation could also encounter opposition from the White House. "This is not what they wanted," Ballentine said. "It puts the car in reverse."
A key House lawmaker, moreover, suggested Cardin-Ernst did not go far enough to satisfy members of that chamber's Small Business Committee. "While we are happy the [Senate committee] passed a bill, there are more changes that need to be made before it would be able to pass the House," Roger Williams, R-Texas, the chairman of the House Small Business Committee, stated in an email to American Banker.
Representatives want to include restrictions on self-certification, which was permitted by the PPP, as well as strengthening of the credit-elsewhere test that is intended to ensure only eligible small businesses receive SBA assistance.
"I am optimistic that my Democrat colleagues in the House will be able to work with us to reinstate this vital component of the program as well as other guardrails necessary to ensure the long-term success of SBA's lending programs," Williams stated.
For his part, Stewart said the online lenders his group represents want the chance to help SBA meet its goal of expanding access to capital to more underserved borrowers. "We're hopeful the administration will prevail in efforts to advance 7(a) lending to left-behind populations," he said.
