Efforts by the Small Business Administration to enhance and expand its lending program have been rebuffed by the US Congress. We assess how the newly proposed Community Advantage Loan Program Act of 2023 may clip the SBA’s wings.

The Small Business Administration (SBA) oversees several programs designed to encourage lenders to provide loans to those small businesses "that might not otherwise obtain financing on reasonable terms and conditions”.  The most well-known SBA program is the 7(a) Loan Program, which offers government guaranteed loans to eligible small businesses for their short-and long-term working capital needs, refinancing business debt, and purchasing of furniture, fixtures, and supplies. 

The SBA does this by guaranteeing 75% to 85% of the total amount of a loan offered to small businesses from a network of private lenders. Should any small business default on the loan, the private lender is only liable to cover the loss of the non-guaranteed portion, and the SBA covers the remaining amount.

Potential Changes

In an effort to increase access to SBA lending and supplement President Biden’s ‘Invest in America’ agenda, the current administration is working with SBA Administrator Isabella Casillas Guzman both to streamline the loan application/underwriting process and expand the number of lenders eligible to participate in SBA lending.¹  

Introducing changes to the standard operating procedure of the SBA has become a divisive topic. The SBA has introduced substantial changes that went into effect on August 1, 2023 – but these had already been met with stiff bipartisan resistance from Congress. 

Impetus for Change

The SBA contends that the standard operating procedure is ripe for revision for a number of reasons:

• Traditional bank loans impose sales revenue and/or other financial demands that many small businesses cannot meet
• The interest rates offered by banks continue to increase in lockstep with Fed rate hikes
• The existing SBA application process is "prohibitively complicated and time-consuming"
• Women, minority, and veteran-owned small businesses have historically struggled gaining access to capital.

As a result, the SBA has proposed a set of changes designed to simplify the application process by removing many of the existing eligibility requirements; expand the list of who is able to provide SBA lending to non-depository institutions (think fintechs); and loosen regulations to reach more potential small businesses.

Not So Fast…

The SBA has long served as a ‘last resort’ for small businesses unable to gain approval through private lenders. Drastically expanding the funnel of eligibility represents a significant shift in the inherent purpose of the Administration. 

Opponents have serious concerns whether the SBA is capable of handling these significant changes to their flagship lending program.² They assert that each proposed rule is problematic individually, and the combination of adding more lenders to the program while simultaneously reducing underwriting standards adds untenable risk. 

Given the level of fraud prevalent in the pandemic lending programs, opponents want Congress to ensure that any changes will not threaten the integrity of the 7(a) program that has been operational for decades. They believe the SBA’s proposed rules go against its prudent lending practices and will undoubtedly increase the volume of defaults & fraud on the taxpayer's dime.
 
The Senate Small Business Committee’s Community Advantage Loan Program Act of 2023 would effectively:³

• Cap the number of eligible Small Business Lending Companies (SBLCs) to limit entry by non-bank fintech companies and address an SBA plan to lift the moratorium on new SBLCs
• Provide additional guardrails and authority for the SBA’s Office of Credit Risk Management to enhance oversight of non-federally regulated 7(a) lenders for which SBA serves as the primary regulator
• Reinstate the SBA Franchise Directory and Loan Authorization to ensure the government programs target the intended businesses and are not taken advantage of by larger entities.

While it was introduced in late July, there is as yet no accompanying written report for the Community Loan Program Act of 2023, so it is unclear at the time of writing when this bill will be formally presented and/or voted on in the Senate.

Regardless of whether the Act is passed into law or not, one thing is certain – banks will need to be ready to adapt to change and be nimble enough to quickly adjust their SBA policies, procedures, and processes to remain compliant.

Capco’s Commercial Banking practice helps Banks of all sizes quickly evaluate and reengineer their business processes. Our subject matter experts combine their deep commercial banking industry experience with our history of successful platform strategy & implementation services. 

References:
¹ https://www.sba.gov/article/2023/05/11/biden-harris-administration-announces-new-development-improvements-loan-program
² https://www.congress.gov/118/meeting/house/115925/documents/HHRG-118-SM00-20230517-SD006.pdf
³ https://www.congress.gov/bill/118th-congress/senate-bill/2482