SBA’s plan to open 7(a) lending program to fintechs nears public release | Venable LLP
Noncustodial financial institutions, including fintechs and other alternative lenders, can apply for new Small Business Lending Company (SBLC) licenses to participate in the Small Business Administration’s (SBA) 7(a) lending program. The Biden-Harris administration recently promoted an SBA plan to issue a Notice of Proposed Rulemaking that would lift the moratorium in place since 1982 on new SBLC licenses — licenses that allow noncustodial financial institutions to participate in 7(a) Loan program.
For fintechs and alternative lenders, becoming an SBLC and an SBA 7(a) program participant is an opportunity to better serve their existing small business customers, reach new customers, and expand their lending portfolio while by managing risk.
Through the SBA 7(a) Loan Program, the SBA seeks to increase small businesses’ access to capital by guaranteeing loans from private lenders. Under the standard 7(a) loan program (there are several variations and related programs), the SBA offers an 85% guarantee rate for loans up to $150,000 and 75% for loans over of USD 150,000 to participating lenders. The maximum loan amount under the standard program is $5 million.
SBA 7(a) Loan Program Lender Requirements
Lenders must meet several general criteria to participate in the 7(a) lending program. They must (1) have an ongoing ability to appraise, process, close, disburse, manage and liquidate small business loans; (2) be open to the public for making such loans (not be a financing subsidiary, engaged primarily in financing the operations of an affiliate); (3) be of good character and reputation; (4) be supervised and reviewed by a federal or state banking regulator; (5) be in good standing with the SBA; and (6) operate under safe and sound conditions, using commercially reasonable lending policies, procedures and standards.
However, lenders who are not supervised or reviewed by a federal or state banking regulator can still participate in the 7(a) lending program, if they hold an SBLC license. The license authorizes lenders to make loans under the program and subjects them to the regulation, supervision and review of the SBA. By the time the SBA issued the moratorium on new SBLC licenses in 1982, there were 14 existing SBLC licenses. These licenses may be transferred, with prior written approval from the SBA, but no new licenses have been issued since.
In addition to meeting the general criteria applicable to all 7(a) lenders, SBLCs are currently subject to additional eligibility and compliance requirements. SBLCs must be a corporation, limited liability partnership or limited partnership and can only make loans under section 7(a) or SBA guaranteed loans to intermediaries (i.e. say a loan under the SBA’s microcredit program). SBLCs cannot control another SBLC, be controlled by another SBLC, or be under common control with another SBLC.
SBLCs must maintain an internal control policy, annual audits, specific minimum capital requirements, full-time professional management (a CEO and credit/risk manager, plus at least one other professional full-time employee partial), loyalty insurance and double control on the disbursement of funds and the withdrawal of securities. SBLCs are also subject to reporting and record-keeping requirements, accounting requirements, and periodic audits by the SBA.
Overview of the regulatory proposal
The Biden-Harris administration highlighted the proposed rule as part of its efforts to improve racial equity by increasing funding available to underserved communities on Oct. 4, 2022. The administration said the goal of the rule proposed is “to increase the number of lenders who receive its loan guarantee, thereby increasing lending to small businesses, especially in lower-dollar and underserved markets, where borrowers are most severely excluded from current lending” The proposed rule lifting the moratorium on new SBLCs was part of the Biden administration’s Spring Regulatory Agenda, which was released on June 21, 2022.
Additional Considerations for Potential SBLCs
Small business lenders are subject to many requirements and sources of potential compliance risk. Although many states do not require a license to engage in small business lending, some states do require a license for small business lending activities, and some have specific disclosure requirements and restrictions applicable to lenders. to small businesses. Additionally, the Consumer Financial Protection Bureau, pursuant to a statutory mandate, has proposed a rule that would require lenders to disclose information about their small business loans. The Federal Trade Commission Act (the FTC Act) gives the Federal Trade Commission (FTC) broad authority to take enforcement action to stop deceptive and unfair practices by lenders and financing providers, including specialists marketers, lead generators, service agents, and debt collectors (and, generally, state mini-FTC laws give similar authority to state attorneys general). In addition, the Equal Credit Opportunity Act and the Fair Credit Reporting Act may apply in some cases to small business loans.
The SBA has not yet published the notice of proposed rulemaking, but may do so this fall (or later). It will be important to examine the contours of the proposed rule because, as recently as December 2020, the SBA pointed out that the expansion of the 7(a) lending program is constrained by its limited oversight resources.