In an effort aimed at funneling more capital to underserved borrowers, the Small Business Administration will eliminate a four-decade-old policy that set strict limits on the number of nondepository lenders authorized to participate in its flagship 7(a) loan guarantee program.
Under a rule that takes effect May 12, SBA is ending the moratorium that capped the number of small-business lending companies permitted to participate in 7(a) at 14. The agency has pledged to ensure approvals of new SBLCs are in line with its oversight capacity, so initially it is opening the door for just three additional nondepository lenders. But with the moratorium, which had been in effect since January 1982, out of the way, there is nothing to prevent SBA from gradually increasing that number as it upgrades its supervisory infrastructure.
The move comes despite concerns by banks, credit unions and prominent lawmakers that SBA might be buying trouble by adopting a policy that could result in many prospective new SBLC licenses being issued to fintechs, a group some have blamed for a disproportionate share of the fraud that
In a statement Wednesday, the day the new rule was unveiled, American Bankers Association President and CEO Rob Nichols urged Congress to "closely examine SBA's decision, particularly in light of … significant fraud linked to loans originated by fintech firms during the SBA's Paycheck Protection Program."
Nichols' fintech concerns were echoed in the comment released by National Association of Federally-Insured Credit Unions President and CEO Dan Berger, who claimed Wednesday in a statement that "allowing unregulated fintechs to participate in these programs heightens fraud risks — as evidenced by the alarming results of the [PPP]."
"We will continue to advocate for the SBA to safeguard the integrity of its essential programs from fraud-prone fintechs," Berger added.
The Independent Community Bankers of America has also declared its opposition to
SBA's largest permanent lending program, 7(a), has long been dominated by banks and credit unions. Through Thursday, roughly six and a half months into its 2023 fiscal year, SBA had approved more than 28,200 7(a) loans for $13.6 billion. Structured as a public-private partnership, 7(a) involves lenders making loans up to $5 million to qualified small-business borrowers for which the lenders receive guarantees of 50% to 85% from the agency.
Of the 1,301 institutions that have made at least one 7(a) loan during fiscal 2023, more than 1,150 are banks, while another 125 are credit unions.
SBA's first brush with fintechs came during the 2020-2021 PPP, created to assist small businesses hit by COVID-related economic displacement. According to agency statistics, fintechs and other state-regulated lenders made 1.46 million PPP loans totaling $28 billion. At the same time, a number of bank lenders partnered with fintech firms to help scale up their operations. It was to some of these partnerships to which a significant amount of fraud was attributed. In December,
The subcommittee report questioned whether fintechs "should be permitted to play a leading role in future federal lending programs," a conclusion that has been repeated by other congressional critics of SBA's SBLC expansion plans. Last month, Sen. Ben Cardin, D-Maryland, chairman of the Senate Small Business Committee, along with Sen. Joni Ernst, R-Iowa, the committee's ranking Republican, released a letter to SBA Administrator Isabella Casillas Guzman questioning SBA's stance on ending the moratorium.
"We are worried that SBA continues to press forward with a strategy aimed at granting more fintech entities access to the 7(a) program without taking into account the risks these types of entities pose to consumer protection or program integrity," Cardin and Ernst wrote.
In the end, SBA opted to move forward with plans to end the SBLC moratorium, spurred primarily by a desire to expand access to its program among underserved groups, which has been perhaps Guzman's main objective since taking office in March 2021. While 7(a) has seen a significant expansion in the number of small-dollar loans under $150,000, as well as loans to African-Americans and other minority groups the past two years, Guzman believes the trend hasn't gone far enough. SBA claimed in a press release Wednesday that two of three underserved entrepreneurs who sought credit in 2022 did not receive the funding they needed.
"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," Guzman said in the press release.
In response to concerns about fraud, SBA noted that it has a long track record of providing effective oversight to nondepository lenders in both its 7(a) and 504 lending programs. The agency added that the 70-year-old 7(a) program "has well-established and robust operating policies and procedures that have proven successful at protecting the integrity of the program," in contrast to the temporary PPP, which was conceived in a few weeks' time as an emergency remedy to forestall the collapse of the small-business economy during the pandemic.
"It is not a fair comparison to equate fraud in PPP with potential fraud in the regular 7(a) loan program," SBA stated in the rule.
For their part, many fintech lenders appeared delighted by the new SBLC policy. Funding Circle, a digital commercial lender that operate in the U.S. as well as Europe, issued a statement Tuesday applauding SBA for ending the moratorium, "thus ending its lender oligopoly in favor of competition and innovation."
"Congress should now focus on ensuring SBA has the resources necessary to license more than three new lenders in its SBLC program in order to increase competition and distribution of government-guaranteed loans in underserved communities," Funding Circle added.
