Bridging the Gap: SBA's Regulatory Reforms for Small Business Funding

Join us for a fireside chat with Katie Frost, Associate Administrator of the Office of Capital Access at the U.S. Small Business Administration and Chana Schoenberger, the Editor and Chief of the American Banker as they discuss the recent regulatory reforms introduced under the Biden-Harris Administration aimed at enhancing collaboration with banks and financial institutions. Discover how these changes are designed to address persistent gaps in access to capital impacting small business owners in underserved communities. This is an opportunity to connect with industry peers, share best practices, and ensure you're equipped to navigate this evolving landscape.


Transcription:

Chana Schoenberger (00:10):

Hello. We ran a little over in the last one, so we're going to get started right away. We have our cleanup hitter, who's also our main event for the conference. Katie Frost, a Associated Administrator of the Office of Capital Access at the SBA. So if you all have questions about the SBA or it's programs, this is the person who runs them all. So cool. So you brought your bazookas. I'm sure

Katie Frost (00:37):

I'm ready. I'm embraced. I'm ready.

Chana Schoenberger (00:40):

Okay. Okay. Okay, cool. Well, thank you for flying all the way from DC just for this. It's very exciting. This is a room full of people who do small business banking and a lot of them have seven, eight programs and they're dying to hear from you about how it's working. So you've been at the SBA now for almost four years since the pandemic, and many of the people in this room, you have your scars from PPP. And tell us about what are some of the highlights of things that have gone on in the SBA recently?

Katie Frost (01:12):

Yeah, so thank you so much, first of all for having me and I'm thrilled to be with you all here in Las Vegas. Always enjoy coming back to the desert. I'm actually from Southern California, so it feels very at home in the warmth To me.

Chana Schoenberger (01:24):

It's a hundred degrees today.

Katie Frost (01:26):

It is very warm, but it feels inviting. So wonderful to be with all of you here. There's so much work that we've done at the SBA under Joe Biden and Administrator Guzman that I'm really proud of. But for the purposes of this question, I'll try to be succinct and highlight. I think the two biggest things that we're really excited about from the past four years, the first of which is exactly where you started the pandemic, kind of taking us all back to where we were in early 2021. That was a crazy time. Everyone, right? The vaccine wasn't really available yet. Main streets were still closed. A lot of the schools were still closed. I know many of you were already nine months into the PPP program and what that looked like. And then the Biden Harris administration took over and Administrator Guzman started at the SBAI joined shortly thereafter, got to work PPP, COVID Idle and some of the other pandemic programs.

(02:22):

And we are incredibly proud of the role that PPP and the other pandemic programs played in helping our small businesses and our national economy overall really recover and come out of the pandemic. I think that's got to be one of the biggest things that we all collectively in this room. And of course, many, many people outside of this room should be incredibly proud of the America America's economy from the pandemic, the recovery is the envy of the world and I don't think SBA was the only reason, but it was a big part of that story and I'm incredibly proud of the role that I had to play. And I hope all of you who are involved in PPP, I'm sure that's most of you in this room, feel similarly about the work that your teams and your banks did through the pandemic. But another big focus for us over the past four years has been our small loan program under the seven A platform right now, we all know SBA loans, they're all small loans, they're all under 5 million.

(03:18):

There's always been a lot that are actually smaller dollar, but the loans under 500,000 decreased significantly during the Trump administration by about 38%. So down quite a bit. There was a lot of room to grow and we focused on that. We initiated some of the biggest changes to the program in quite some time. They went live last August, and so now we've just wrapped fiscal year 24 and that's the first full year of lending since those policy changes we made last August and the results look pretty strong right now. We are up 27% in loans under 500,000 compared to last year. And guys, last year was a good year too. We're up 82% compared to four years ago. It's the highest overall number of small dollar loans. So under 500 K since 2008, and I think we all know that a $500,000 loan in 2008 bought a lot more than a $500,000 loan buys now.

Chana Schoenberger (04:10):

Thank you. Inflation.

Katie Frost (04:11):

Yeah, so we're incredibly proud of that focus on small dollar and the work that we've done in partnership with, I'm sure many of you in this room and our other lenders around the country.

Chana Schoenberger (04:21):

So why is it important to have small dollar loans? Why are you guys focusing on those?

Katie Frost (04:25):

We're incredibly focused on small dollar because that speaks so directly to this hardest to reach small businesses in the country. And because I think that the banks and all of you in this room have faced an increasingly challenging time of getting those loans to work, you have to make the loan pencil out. And I think part of the reason why they had declined previously is you see the per unit cost the bank's got to spend to make the loan. It's not change too much. And so because the loan wasn't penciling out for the lenders, they were having a lot of trouble delivering that product. And when you look at the Federal Reserve surveys or you look at these other national surveys of small businesses, you see it's those very small dollar loans that are some of the hardest for the small businesses to find SBA. We're all about trying to help plug those gaps. And so we saw that as a big gap and we wanted to tackle it directly.

Chana Schoenberger (05:18):

Okay. So what are some of the priorities of the SBA for banks that serve small businesses? What are the big challenges in the market and how can bankers help the government address?

Katie Frost (05:30):

So our priorities and goals for all of you are quite simple, although I'll say they're not easy. Our goal for you is to get money into the hands of the small businesses who need it and to give them the best deal you possibly can. So I want you all to compete with one another to try to get the small businesses the best opportunity to get the financing they need to start, grow and expand their businesses. But as I said, I know that's not easy. Banks today are facing a ton of challenges you guys have ever-evolving regulatory landscapes that you're working through. We had an interest rate hiking environment for years that's of course just recently kind of changed or changing, I should say cybersecurity, the ever evolving pressure on technology and systems changes and trying to integrate that with your operations as smoothly as possible.

(06:18):

All of those things are hard and I hope that the federal government can be a partner with you in facing those challenges to support our small businesses. And I think maybe highlighting two quick ways that that could look. One is as a member of the federal government, we want to hear from you, and I'll say for SBA and for my team running our loan programs in particular, we want to hear from you think about what it is that the federal government is trying to accomplish with whatever change it is that they're making or proposing. And if you've got a better idea of how to get there, tell us, help us know what's going to work and not work with your organization and for the small businesses that you serve in that spirit. SBA, starting our first lending council, we've had one for many other SBA programs but not for our loan programs previously, and we hope to name the members of that council later this month.

Chana Schoenberger (07:10):

Are they going to be bankers?

Katie Frost (07:12):

There's going to be a lot of bankers, absolutely. It's going to be about 25 people and I think 17 of those slots are held for lenders.

Chana Schoenberger (07:19):

Wow. Okay.

Katie Frost (07:20):

And then the other kind of big thing to focus on is just use the programs the federal government has to offer. Of course, I'd highlight SBAs programs, would love to talk more about those, but Treasury has some great programs as well with the S-S-B-C-I. Of course, there's a lot of different tax credits coming out now through the Inflation Reduction Act and CHIPS and others. And you can leverage those products to support your customers, which of course then can help you.

Chana Schoenberger (07:45):

Okay. Okay. What do you wish bankers understood about small businesses and their banking needs?

Katie Frost (07:52):

What do I wish bankers understood about small businesses and their banking needs? I think that each small business has this really unique need that feels absolutely special to them. And you guys know this better than anyone because you're the ones trying to constantly serve them using whatever products are available to you from your credit team that are going to fit into your credit box and kind of follow all of your regs and your standards. I would really lean into the service side of the work that you guys do. And what I mean by that, I have a bit of an untraditional background for my position. I started in management consulting, but actually before SBA most recently was working in public transportation and working in public transit. I think about infrastructure and the way that we help a community with the people being able to kind of get around in a lot of ways, banks or the financial infrastructure of this country, you keep the money circulating, you keep the economy moving, and in particular, you allow small businesses to achieve their dreams through the financing that you're able to provide for them. That said, you are not like a public transit agency in that you don't have that level of support from the government yet you face a tough governmental regulatory environment and you have a lot of that same level of responsibility as an infrastructure provider. I think that means there's a huge opportunity to work in partnership with government to continue fulfilling that service role, that almost infrastructure level role, while at the same time meeting the other demands that you all have as private companies.

Chana Schoenberger (09:27):

So sometimes you have to go express and sometimes you have to go local.

Katie Frost (09:30):

There you go. Absolutely.

Chana Schoenberger (09:31):

Yeah, it's all trains. Did you work at the metro or was it a different transit agency?

Katie Frost (09:37):

Yeah, so I worked for, it's called wada, for those of you who know DC well, so the actual buses and trains, data analytics for them to help them get a little bit better.

Chana Schoenberger (09:45):

Moneyball for trains.

Katie Frost (09:47):

Moneyball for trains.

Chana Schoenberger (09:48):

I love Metro. I grew up, I'm also from DC originally, and I grew up riding the metro when I was allowed to, which was not often. It used to be a lot more dangerous than it's today. Okay. So what are some areas that you think banks should serve differently? And when I say banks, I also mean credit unions. We have a lot of credit unions here who were just telling me over lunch about all the great things they're doing lending to small businesses now.

Katie Frost (10:13):

Absolutely. Well first of all, love to the credit unions and the crowd as well. One of the things that I would continue to lean into in your service space in this kind of almost infrastructure providing role that I've been describing here is really thinking about what you can do to make your reach go a little bit farther. And I'll say that is a core element of what we try to do through our loan programs at the SBA, try to help you reach small businesses you couldn't otherwise reach or try to help you give them a better deal than you'd be able to give them using conventional products. I'm sure many of you in the room are seven A lenders, very familiar with some of the changes we made last year, but for those of you who either don't lend a lot with SBA or maybe heard there were some changes, not exactly sure what it is. I'd love to tell you some of the things we tried that we changed last year, really working to make our programs a little less clunky as you and I were discussing and a little bit easier to use for our banking partners. I'll focus on two things. One is modernizing our loan standards and second is really just cutting some red tape. When I say modernizing our loan standards, we actually hadn't touched the underwriting component of SBA loans in 25 years.

Chana Schoenberger (11:26):

It's a while.

Katie Frost (11:26):

It's a while. I think anyone in the room who's been banking small business banking for more than 25 years, hands up. I assume that there are at least a couple. Okay. Has anything changed in the past two and a half decades? No, nothing at all. I think many of us would say a lot has changed in finance and data and technology in those past 25 years. And SBA decided we'd take a modest step in getting with the times. And so what that looked like, for example, prior to our changes, no matter what the SBA loan was, you had to use our nine point underwriting standard to do it. So if we're talking about a $400,000 loan, nine point underwriting standard, if we're talking about a four and a half million dollars loan, same exact standard. What we did last August as an example was we cracked the door to some innovation by allowing for some innovation in those smaller dollar loans.

(12:16):

So loans under 500,000 now for loans under 500,000, there's actually four different ways to underwrite the loan. You can still use our nine point standard. If you love it, it's there for you. Don't worry it didn't go away, but you can also score the loan, you can cashflow the loan or you can follow whatever your bank does for similarly situated non SBA loans and you can do that for your small SBA loans. We think that contributed a lot to that 27% growth. I mentioned in the under 500 K, making it just a little bit easier to use the product. Another big example of, or I guess the other side here is how we tried to make it a little bit easier to work with the SBA. We've heard that our products can be a little bit cumbersome and we are trying hard to, I will say chip away at that block. It's not the sort of thing you're going to solve in one fell swoop. Maybe solve isn't even the right word, but we are seeking to address it with input from our lending community. And some of the changes that we made we're bringing some of the core eligibility checks in-house, getting away of the loan authorization wizard, some of you know what I mean by that, but functionally having to reenter a lot of the data already entered again at the end of the process.

Chana Schoenberger (13:26):

So it's like the common app for loans now.

Katie Frost (13:28):

In some ways, yeah, we're working toward that. I think we're probably not quite there yet, but really trying to examine where we can intelligently streamline the product and if folks have additional ideas, we'd love to hear it.

Chana Schoenberger (13:40):

Interesting. Okay. Very cool. So you've got a big role in the Helene response. In fact, you're here representing the administrator because she's off somewhere solving hurricane problems, right? There was a hurricane on, there was another big hurricane, a lot of climate change going on right now. What is SBA a's role in the response? How's that going?

Katie Frost (14:01):

So thanks for asking that question. I actually think a lot of folks don't know the role that SBA plays in disaster response. So we provide direct low interest, fixed term loans or fixed interest long-term loans for disaster survivors. And it's actually small businesses, homeowners, renters and nonprofits. And so we do that all across the country. We're active in 30 some odd disasters right now, including Helene. And of course Milton struck the Tampa coast last night and I imagine that is being declared or will be declared a natural presidential disaster very soon.

Chana Schoenberger (14:36):

Surprised if not.

Katie Frost (14:38):

Yeah, maybe even happened today. And so what we do is FEMA comes in and provides the lifesaving grant assistance, but SBA comes in and we help people get back on their feet. So our loans can go up to 500,000 for homeowners, up to 2 million for businesses, and we do somewhere between 2 billion and 9 billion in disaster loans every year, depending of course on how many disasters and where they strike, et cetera, et cetera. So for Helene, we have 150 some odd SBA employees deployed right now, and my team is underwriting those loans. We've already received over 28,000 applications and already awarded or made about 300 offers for little north of 16 million, which is pretty quick. The storm wasn't that long ago. However, we've got a significant challenge with our disaster loans right now. It is everyone's least favorite challenge, which is we are running out of money.

(15:35):

Congress did not give SBA any additional subsidy money. That's money we can actually use to make the loans in the continuing resolution that they passed just at the beginning of October. That's taking most of the government through December 20th. We are rapidly running out. I'm authorized to share publicly. This is all very, very tightly held that we've got less than 50 million to lend guys. We are very, very near scraping the bottom of this barrel. And so my team right now is operationalizing how and if we need to stop giving away or stop lending stop disaster loans very soon and I imagine we are likely to see a pause in the disaster loan program at SBA.

Chana Schoenberger (16:20):

So this is not a program, this is not something that banks can fix. This is a congressional issue.

Katie Frost (16:26):

This is a congressional issue. Definitely. And this certainly not banks.

Chana Schoenberger (16:29):

You guys didn't do this.

Katie Frost (16:30):

Banks did not do this, but can banks help fix it? Well, there's some things we can do together that I would love to just highlight for the group. The first is if you are an SBA lender and you've got a seven a loan, we actually on our quarterly connect call if you joined it, we just covered in detail all the different flexibilities you can give your small businesses if they were impacted by these disasters or really any disaster. But these ones in particular, so if your loan is not sold on the secondary, you can do deferment for up to six months. You don't have to tell us about it. Just do that if that's going to help you and help the small business. If you are sold on the secondary, you can do the same for 90 days and you can do other things with investor approval, reach out to SBA, reach out to my team if you guys are trying to find solutions for folks impacted by these disasters with your SBA loans outside the SBA loan products, I know some banks are able to provide things like bridge loans. It is my hope and expectation that we will receive funding from Congress and a bridge loan will be an appropriate product to get a small business or someone through so that we're able to support them. But of course there is risk there and I'd ask you all to do what's right for your organizations and the customers you're supporting.

Chana Schoenberger (17:40):

Which is what you guys do every day.

Katie Frost (17:42):

Which is what you do every day.

Chana Schoenberger (17:44):

Okay, so that's sort of a good segue. The administration has been royal. You has been public about your wish to increase participation among non-bank lenders. How is that going and are there any plans to get more community banks and credit unions to lend through the SBA?

Katie Frost (18:03):

Absolutely. We have been very vocal in seeking to increase competition for the opportunity to lend to small businesses. We want to help small businesses get the best possible deal on their financing and we think that banks have a ton of advantages in being able to provide those loans. But there's also some advantages from non-banks, from different loan funds, from the nonprofit sector or from mission driven lenders. And so we have opened the program for all types of lenders and we welcomed in our first new small business lending companies, BLCs, I'm trying from the government, I got to use some acronyms and welcomed the first ones new in the program in the first 40 years. So three new came in. We've still got two of them and rural, one rural based lender in Arkansas and one focused on serving native communities up in Alaska. I know that a lot of the non-bank lenders in our program do have kind of specialty niche small business types that they're seeking to serve and trying to reach those small businesses is a major focus of ours.

Chana Schoenberger (19:09):

Okay, and what about fintechs?

Katie Frost (19:11):

Yeah, so fintechs I think can be a huge part of how lending gets better in this country. I imagine many of you partner with fintechs. Maybe some of you consider your banks to be FinTech adjacent or maybe moving in that direction as you incorporate more and more financial technology into your lending platforms. But some of our non-bank lenders do consider themselves to be fintechs and I think fintechs like banks, like credit unions, there are fantastic fintechs. There are those that are less strong and everything in between, and we are working to make sure that we are partnering with responsible lenders across all different lender types.

Chana Schoenberger (19:49):

Okay. So what about direct lending? Any thoughts on the SBAs plans to lend directly to small businesses?

Katie Frost (19:59):

So the primary direct loan program that SBA has and has had for decades is the disaster loan program that I mentioned.

Chana Schoenberger (20:06):

Okay.

(20:07):

The one that's running out of money.

Katie Frost (20:08):

The one that is running out of money, and so that is our direct loan product for small businesses. The administration has been actively exploring the potential for other direct loan products and we've asked Congress for certain opportunities and authorities to introduce that product, but we do not have any current plans to introduce that product.

Chana Schoenberger (20:29):

Okay. Okay. What about making capital available to historically disadvantaged borrowers? There are a lot of groups in this country that have not historically had an easy time getting banks or even credit unions to lent to them. What are you guys doing about that?

Katie Frost (20:46):

I think that's a huge challenge and a huge problem and a big part of our loan reforms, part of why we focused on small dollar loans is to try to invite in those hardest to reach small businesses. And I think we all know the sorts of small businesses we're talking about. We're talking about rural small businesses, women owned, owned perhaps by immigrants or folks who are black and brown folks with disabilities. Sometimes veterans start small businesses or I'm a military spouse. Sometimes military spouses start small businesses and they can be a little more challenging to lend to the military community as an example, moves around all the time and so it's harder to build that relationship with a local credit union or your local bank branch. That is part of our strategy in inviting in some non-bank lenders who perhaps specialize in those communities. But a huge part of our focus has been on the small dollar loan because when you're talking about these underserved small businesses, they are traditionally looking for lower dollar loan amounts.

(21:48):

Some good research done by the small business majority and others show that a lot of the first loans that a business is going to seek is actually under even $200,000. And so it's that initial loan that's going to help them wherever they are in their business journey, that then they're going to be ready to go get that 700 K loan next time and then hopefully a $2 million loan. They're going to buy their building and kind of start them on that journey. I think it's a huge opportunity for all of you in the room to capture those customers early and we're hopeful that some of the changes we made to our products will allow you to use our products to go get them.

Chana Schoenberger (22:24):

Okay. Last question. It's possible that there might be a change of administration next month, but assuming you are still around, what are your plans for the coming year?

Katie Frost (22:35):

Ooh, there's always a lot cooking at SBA and so we are incredibly excited on some of the things that we're working on even now, even before the end of this calendar year I'll say. And of course a big focus for my team right now. Our primary focus is of course the disaster loan program as I mentioned. But those of you who are keen watchers of the SBA program noticed there was not an SOP 50 10 update this year and there often is one every year. So we are right now putting together our package of what we are hoping to introduce in next year's SOP update with the continued mission to chip away at the block of what makes these programs hard to use, what makes them clunky. We want 'em to be easier to use. We want these to be the sort of products you guys can use broadly to serve your small businesses.

(23:25):

And we want to make sure that we can help the small businesses of today and of the future. So with changes like the rule change we did for how we set affiliation standards has really opened the door for high growth, innovative small businesses, those who are tackling climate change, who are using AI or perhaps even producing the AI tools the rest of us use a lot of those types of businesses have equity investors, right? Usually minority stake. Previously, the way that we defined an affiliate was quite complicated as to whether or not those types of businesses qualified as small for SBA. Some of the changes we made last year make that easier and certainly clearer for our lending partners and then also for our lovely attorneys at SBA to make sure that they do qualify as small and therefore can use our products. So we are kind of, I'd say in the same spirit of the changes that we introduced last year, we are working on some updates for next year, but we're not quite ready to share exactly what those are yet.

Chana Schoenberger (24:27):

Okay. Alright. To be continued, we have a couple minutes for questions, so if you have a question, please raise your hand and we have a mic that will come around. This is your chance to ask a question directly to a government regulator. You don't have to leave a voicemail. Yes.

Audience Member 1 (24:53):

How do you think about the adoption of AI? Hold on, hold on, hold on. Can you speak into the

Katie Frost (24:58):

I'm happy to. No, please. She's got the mic. Yeah.

Audience Member 1 (25:00):

How do you think about the adoption of AI for SBA loans greater than 500 K?

Katie Frost (25:06):

Okay. I love that question. What are we thinking about AI at the SBA in short? I think it's incredibly exciting and I think that we are eager to find the right ways to appropriately introduce that both into our operations and to ensure that we can allow our lenders to appropriately introduce it into their operations. So I'll give you just a little kind of look under the hood at what I mean by that for our operations and then some of what we're thinking about within the lender community. PPP, as you all know, really challenged the agency to scale in a way that SBA couldn't have previously imagined. I'm sure many of you feel that way about the work your banks did as well. And one of the huge things that we did was we leveraged a machine learning tool. This was under the Biden administration. This is something we introduced to help review every single loan and risk rate the loan, right?

(26:00):

Then we kind of use that risk rating for triage so that we could use our manual reviews intelligently and put 'em on the loans that are going to be the most likely to have some sort of fraud issue. And so even that use of something like a machine learning algorithm that we were able to build and develop was revolutionary for SBA and really a big step forward that we are both very proud of and very excited about and that we continue to explain to our auditors today because they are maybe a little less excited about it than we are. I'm sure that many of you feel similarly about introducing AI and similar tools into your organizations, which is to say I think there's a huge potential and we all need to make sure that we are doing it intelligently and that we're using it in the right way. My personal take for AI is don't start with your golden goose. So maybe don't put AI on underwriting as the first thing that you do in your loan programs. Think of other great ways to use an introduce that tool so that you have an opportunity to learn from it, to get comfortable with it, to get your credit teams comfortable with it, and then think about how to introduce it more broadly.

Chana Schoenberger (27:09):

Like summarizing your salesman's emails.

Katie Frost (27:11):

I liked the Microsoft opportunity there. Yeah,

Chana Schoenberger (27:14):

Absolutely right. Interesting. Anyone else have a question?

Audience Member Brad Nelson (27:24):

Hi, I am Brad Nelson with US Bank. I know you mentioned you introduced the compliance portion that you pulled in that you guys are handling hasn't been easy, but so what are some of the things that you're working on to improve that experience, especially for larger banks that are processing a lot of loans?

Katie Frost (27:46):

Absolutely. So for those of you who aren't a hundred percent familiar with what we mean by that, starting last August, one of the things SBA introduced was for the first time ever, the agency is doing a risk review of every loan, including loans conducted under delegated authority. And so what that means is basically the loan comes into us, we do the risk review overnight and then the next morning, the vast majority of the time you're clear and you can move to close. That does mean even in that best case scenario, you've got a bigger delay than you were used to having, right? You've got to wait overnight, functionally when you were used to having it, boom right away. SBA has decided and learned from our pandemic programs that that little night over delay is worth it for the fraud fighting mission of the agency and to ensure that our program stays safe.

(28:38):

I know that SBA A is on the map in a way that we never were before the pandemic and that is great for all of you and for America's small businesses less great for those with malicious intent who are perhaps attacking our loan programs and perhaps even doing so through all of your loan programs. Now that said, every single risk review does not pass clean, right? Sometimes you have a compliance check code. Folks love this phrase and that basically means there's some sort of issue that needs to be cleared and in some instances cannot be cleared before we're able to move forward and approve the loan. We introduced this last August and I think it is very fair to say those of you who are quite familiar with our program will probably say it started pretty bumpy the first couple weeks. There was a lot of frustration and I think that we all have lessons learned and things that we at SBA would've done a little differently if we had the opportunity to roll it out again. We've improved dramatically since last August so far, and we are still working to tighten the controls and also make sure that we can work to clear the compliance check codes as quickly as possible. So if you guys have additional ideas on that, please let us know. The team is constantly improving the checks themselves and improving our processes on how to fix them.

Chana Schoenberger (30:01):

Great. Okay, we are out of time and the next thing we're going to do here is drink wine. So we are going to call it right now. I want to thank Katie Frost for coming all the way from the SBA to join me here. Thank you so much.