SBA lifts 7(a) lender moratorium, loosens underwriting requirements

The Small Business Administration issued a final rule today to lift the moratorium on the number of nondepository lenders in the 7(a) program. Through the 7(a) program, banks and other lenders provide loans to underserved small businesses. The number of nondepository institutions in the program has been capped at 14 institutions for decades, but that cap is eliminated under the rule.

The final rule creates a new type of small-lending company to make 7(a) loans: “Community Advantage SBLCs.” SBA stated that it has the resources to license, service and provide oversight to three new SBLCs, and that each new SBLC has the potential to increase 7(a) lending by approximately 425 loans per year over the next four years. The final rule also removes the loan authorization as a required document for 7(a) loans. In a change from the rule as proposed, SBA will require Community Advantage SBLCs to maintain a loan loss reserve account as determined in the SBA administrator’s discretion.

On Monday, SBA issued a separate final rule that removed the nine-factor underwriting standard for 7(a) loans found in existing regulations. The rule replaced that standard with a requirement that lenders use “appropriate and prudent generally acceptable commercial credit analysis processes and procedures consistent with those used for [the lender’s]similarly sized, non-SBA guaranteed commercial loans” or use a “business credit scoring model.”

The American Bankers Association opposed SBA’s lifting, without limit, the moratorium on the number of nondepository institutions that can become 7(a) lenders while at the same time loosening underwriting standards. ABA noted that recent reports found limited SBA oversight of nondepository lenders in the agency’s programs and significant fraud committed through Paycheck Protection Program loans originated by fintech firms. In March, the bipartisan leaders of the Senate Small Business Committee expressed similar concerns with SBA’s two 7(a) rules as proposed, stating that the proposals “establish broad and sweeping changes that do not reflect congressional input or authorization.”