What’s the issue?
The Small Business Administration’s (SBA) Section 7(a) program is a loan guarantee program designed to encourage lending to small businesses that might not otherwise have access to financing. The SBA works with lenders to reduce the risk of making loans to small business borrowers that are creditworthy, but cannot qualify for a conventional loan, by guaranteeing repayment on a significant portion of the loan even if the borrower is ultimately unable to pay. The program has traditionally been limited to federally-supervised depository lenders, with a very limited number of exceptions. Recently, the SBA adopted new regulations amending various regulations governing the 7(a) program, including loosening underwriting standards for these loans and opening participation in the program to an unlimited number of non-depository lenders.
How does this impact my community?
Increasing access to credit for small businesses is a laudable goal, but loosening underwriting standards and opening participation in the 7(a) program to non-depository lenders, such as fintechs, introduces significant risks to a taxpayer subsidized government program. Non-depository lenders are not subject to the same level of supervision as banks and credit unions, which means they are not examined to ensure robust compliance and underwriting programs essential to promote prudent lending.
For example, a recent report issued by Congress’ Select Subcommittee on the Coronavirus Crisis found that non-depository fintech lenders participating in the Paycheck Protection Program (PPP) “approved a high volume of fraudulent PPP loan applications” in part because of relaxed SBA protocols and procedures. The report cautions, “Congress and the SBA should consider carefully whether unregulated businesses such as fintechs, many of which are not subject to the same regulations as financial institutions, should be permitted to play a leading role in future federal lending programs.”
SBA does not have the staff or resources to adequately supervise these new lenders directly, which could introduce higher losses, fraud, and ultimately harm the very borrowers that SBA seeks to assist through the program. Borrowers do not benefit when they receive poorly underwritten loans they cannot repay, and anticipated losses by 7(a) lenders would be passed along to all program participants in the form of increased SBA fees.
What can policymakers do about it?
SBA adopted final regulations expanding non-depository participation in the 7(a) program and loosening underwriting standards over objections from industry stakeholders and members of Congress. The House and Senate Committees on Small Business should exercise their oversight and legislative authority to ensure that the SBA does not implement changes to the 7(a) lending program that would introduce significant risk of loss to the program, and could potentially hurt the small business borrowers the program was designed to serve.