SBA gives Community Advantage lending a shot in the arm

The Small Business Administration is breathing new life into a struggling, 11-year-old pilot created to give low-income borrowers and those in underserved communities wider access to capital.

The SBA announced Wednesday that it is extending Community Advantage, an Obama-era program that has approved more than 7,200 loans for $981 million since its inception in February 2011. The agency is also lifting a moratorium on new participants, enabling it to expand the network of Community Advantage lenders for the first time since October 2018. It’s boosting the maximum Community Advantage loan size by $100,000 to $350,000 as well as doubling the maximum size for an unsecured loan, to $50,000. The extended program will run through September 2024.

Community Advantage operates as part of the SBA’s flagship 7(a) loan guarantee program. The key differences are nonbank lenders are permitted to participate in Community Advantage. The program also allows a higher interest rate, prime plus 6%, compared with the maximum rate of prime plus 4.75% for regular 7(a) loans.

The extension offers fresh hope for a program that endured a precipitous drop in loan volume in the past four years. Although the Trump administration approved an extension of Community Advantage to Sept. 30, 2022, it also put several restrictions on its operation in response to a study that determined the program’s loans were riskier than regular 7(a) loans and defaulted at a higher rate.

In addition to the moratorium on new lenders, the Trump administration implemented stricter underwriting on loans to refinance debt, raised the minimum business credit score for Community Advantage borrowers by 20 points, to 140, and required program lenders that sold loans on the secondary market to boost loan-loss reserves.

Bloomberg

Community Advantage loan volume, which hit a record $157.5 million in the 2018 fiscal year, dropped 15% in fiscal year 2019, the first year it was under tighter guidelines. Loan volume fell further during the coronavirus pandemic, to just $76.2 million in fiscal 2020. It rebounded modestly in fiscal year 2021 by 9% to $82.8 million. Through the first six months of the 2022 fiscal year, which started Oct. 1, Community Advantage lenders made 302 loans for $44.7 million, according to the SBA.

Overall 7(a) loan volume stood at $10.2 billion as of March 25.

While SBA chief Isabella Casillas Guzman did not disclose any production targets for Community Advantage, she said in a press release that expanding the program “will … create a broader distribution network, and better ensure the opportunities of our nation’s accelerating recovery are accessible to more entrepreneurs.”

The Community Advantage program exists "to increase access to credit for small businesses located in underserved areas and expand points of access to the 7(a) loan program by allowing non-traditional, mission-oriented lenders to participate,” a spokeswoman said in a statement to American Banker.

Guzman has made expanding access to capital for minorities and underserved borrowers a hallmark of her tenure.

The SBA restricts participation in Community Advantage to nonbank community development financial institutions, certified development companies, microlenders and other mission-driven lenders. While banks are excluded, they play a prominent role in the program, referring clients and providing participating lenders with financial support. Banks’ assistance to Community Advantage lenders is eligible for credit toward their Community Reinvestment Act obligations, according to the Office of the Comptroller of the Currency.