Senate Committee Finds Bipartisan Disapproval of SBA’s Final Rules to Increase Access to Capital

By: Eliza Joyner

Bipartisan disapproval for two SBA final rules took center stage in a Senate Small Business Committee hearing on April 26.

The hearing was to review the SBA’s two recent final rules, 1) Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a Loan Authorization and 2) Affiliation and Lending Criteria for the SBA Business Loan Programs, effective mid-May. Issued together, the rules are meant to increase access to capital for underserved small businesses by increasing lender participation and streamlining 7(a) and 504 loan requirements. Despite their intended purpose, there have been bipartisan concerns that the regulations open SBA’s 7(a) lending program to fraud and abuse while also removing critical guidelines and program safeguards. These concerns were brought up in a March SBA oversight hearing with Administrator Guzman as well as in a joint letter from Chair Ben Cardin (D-MD) and Ranking Member Joni Ernst (R-IA). During opening statements, the Chair and Ranking Member said they were surprised that none of the Committee’s concerns were implemented into the final rules, despite assurances by the Administrator that they would be considered.

The primary concern discussed at the hearing was the SBLC Moratorium Rescission rule which lifts the pause on licensing new SBLCs and adds a new type of institution called a “Community Advantage SBLC.” Most of the questions were directed to witness Patrick Kelley, the Associate Administrator (AA) for the Office of Capital Access (OCA) at SBA.

Chair Cardin and Ranking Member Ernst shared concern that removing the moratorium will allow an influx of unregulated lenders into the 7(a) program and give SBA authority that can be exploited in the future. Committee members expressed worry that the lack of guidelines in the rule toward underserved lending will steer the Community Advantage (CA) program toward high-dollar, large-lender loans, and away from the small-dollar lending that the CA program has successfully administered in the past. Specifically, the rule does not include the requirement for CA SBLCs to make at least 60% of loans in a defined “underserved market.” AA Kelley assured the Committee that such lending guidance will be included in a forthcoming Standard Operating Procedure (SOP) guidance expected in early May.

Contributing to the concern of Committee members surrounding exploitation is the inclusion of FinTech lenders in the program and the potential of predatory lending to small, underserved businesses. Ranking Member Ernst and Senator Risch (R-ID) referenced past fraud and abuse perpetrated by FinTech lenders in the Paycheck Protection Program (PPP) and questioned Mr. Kelley as to how the SBA expects to prevent this going forward. Mr. Kelley said that unlike in the CARES Act, SBLCs must abide by 7(a) program guidelines. Witness Sheldon Shoemaker, Deputy Inspector General at the SBA, supported Mr. Kelley by explaining that the 7(a) program and the PPP vary dramatically but insisted that FinTechs will require strong oversight by the SBA. Accordingly, there was discussion about the capability of the SBA’s Office of Credit Risk Management (OCRM) which oversees all SBA lenders. Chair Cardin expressed concern over the new heightened responsibility of OCRM to provide oversight to new SBLCs, considering the office remains understaffed.

What emerged from the hearing was a clear and bipartisan consensus that Congress must pass legislation to make the CA pilot permanent and enact necessary changes to the program. Specifically, Chair Cardin touted his legislation, the Community Advantage Loan Program Permanency Act, which is sponsored by Rep. Judy Chu (D-CA) in the House. In closing, Chair Cardin asked the two final witnesses, Hilda Kennedy, President of AmPac Capital in California, and Chris Pilkerton what suggestions they have for Congress to ensure that the CA program remains targeted on the smallest, underserved businesses. Ms. Kennedy said that codifying lending standards was of the utmost importance, as was a clear definition of “underserved.” Mr. Pilkerton stated that as the large influx of capital comes through the program, OCRM must be given the resources needed to effectively oversee new SBLCs.

In conclusion, these rules sparked an often rare, bipartisan support for legislative action for the CA program through the Community Advantage Loan Program Permanency Act, likely to be considered by the Committee this year. Chair Cardin and Ranking Member Ernst are dedicated to continuing the conversation over these rules and exploring ways the Committee can protect America’s smallest businesses.