House Small Business Committee Hearing: Examining the SBA’s Changes to the 7(a) Lending Programs

By: Eliza Joyner

On May 10, the House Small Business Committee held the first of two hearings to review the SBA’s recent final rules 1) Affiliation and Lending Criteria for the SBA Business Loan Programs and 2) Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a Loan Authorization, effective May 11 and May 12 respectively. The sole witness testifying before the Committee was Patrick Kelley, the Associate Administrator for the Office of Capital Access at the SBA. Similar to the Senate Small Business Committee hearing on April 26, members expressed bipartisan concern over the implementation of the regulations – specifically, the removal of the moratorium on SBLC licenses and how these changes could steer lenders away from making small-dollar loans. At times, members used the hearing to make policy statements on telework and SBA’s capabilities, creating a partisan back and forth between Mr. Kelley and Republicans.

Chair Roger Williams (R-TX) and Ranking Member Nydia Velazquez (D-NY) opened the hearing by referencing the two procedural notices released by SBA the night before the hearing – 1) a notice on the Affiliation and Lending Criteria regulation and 2) a notice on the removal of the loan authorization in the SBLC Moratorium Recession regulation. The Chair and Ranking Member were disappointed that the SBA released the notices so close to the effective date of the regulations. Further, at the time of the hearing, the SBA had not released the requested SOP guidance, despite assurances by Mr. Kelley that it would be available by May 3. The SOP has since been released and can be accessed here. Ranking Member Velazquez asked Mr. Kelley if he would consider delaying the implementation of the rules to allow lenders and borrowers to familiarize themselves with the SOP. Mr. Kelley said no, stating that lenders wanted them to be implemented.

Tensions rose when Republican members questioned Mr. Kelley about the SBA’s protocols on telework and requiring employees to return to the office. Mr. Kelley failed to give specifics regarding the number of employees reporting in person to SBA headquarters. This prompted the question of SBA’s capacity to undertake the increased oversight responsibility brought by these regulations. Specifically, Vice Chair Blaine Luetkemeyer (R-MO) questioned Mr. Kelley on the Office of Credit Risk Management’s (OCRM) ability to regulate new SBLCs entering the program, considering OCRM’s declining staffing levels and the employees working remotely.

Representative Dan Meuser (R-PA) and Representative Morgan McGarvey (D-KY) questioned Mr. Kelley on the impact of SBA’s Affiliation and Lending Criteria regulation, which removes certain underwriting requirements for loans under $500,000. Mr. Kelley was adamant that the new criteria and the removal of the “red tape” for smaller dollar loans is supported by banks and lenders and has been the standard for over two decades.

Representative McGarvey asked why the underwriting requirements were removed for smaller loans but kept for larger ones, and if this disparity could create an environment where federally regulated lenders with strict underwriting requirements will have to compete with non-regulated SBLCs. Mr. Kelley said no, reiterating that banks and credit unions are the very institutions that have sought out these changes.

In a rare moment of appreciation, Representative Judy Chu (D-CA) said she was pleased that the SBA will hold all new Community Advantage (CA) SBLCs to the same requirements that exist in the CA Pilot Program. This includes a requirement that a minimum of 60% of the number of loans made by CA SBLCs must be made to underserved markets. Loan loss requirements for CA SBLCs can be found here.

In conclusion, members of the House Small Business Committee share the concern with their Senate counterparts that these regulations jeopardize the integrity of the 7(a) program. Primary interests remain on the potential for predatory lending, program abuse, and the SBA’s capacity to provide adequate oversight to new lenders. Expect part two of this hearing on May 17 to focus on the newly released SOP, and how these regulations will be implemented at the SBA. We also expect Republican members to touch on Mr. Kelley’s departure from the SBA following his testimony in this hearing last week.