WASHINGTON—As the House Small Business Committee holds another hearing focused on recent rules that modify the Small Business Administration’s (SBA) 7(a) lending program, both NAFCU and one banking trade group are sharing concerns.
“While these new rules have a laudable goal of trying to increase financial inclusion, we think they miss the mark,” Vice President of Legislative Affairs Brad Thaler wrote in NAFCU’s letter to Congress. “As champions of financial inclusion, credit unions have been at the forefront of efforts to increase access to personal and small business financial services for underserved communities. Credit unions have grown their overall business lending portfolio by more than 20% this past year, which is nearly identical to the growth rate over the past five years.
‘Worked Tirelessly’
“At the same time, NAFCU has worked tirelessly to ensure that non-depository financial institutions such as fintechs operate on a level playing field with credit unions to protect consumers and small businesses. Unfortunately, we are concerned that these new rules will end up running counter to these efforts by opening the programs to unregulated competition,” Thaler continued.
Thaler pointed to the increased risk of fraud incurred by fintechs participating in the Paycheck Protection Program (PPP) and flagged additional concerns about them lending through the 7(a) program, including what he said was a lack of supervision related to:
- Compliance with Bank Secrecy Act and anti-money laundering requirements
- Concentration caps
- Safety and soundness parameters
- Stress test parameters
- Other regulatory criteria to promote prudent lending
Two Final Rules Issued
The SBA in April issued two final rules. The first changed regulations governing its 7(a) and 504 loan programs related to lending criteria, loan conditions, affiliation standards, and more. The other amended its 7(a) loan program regulations to lift the moratorium on licensing new small business lending companies (SBLCs) and add a new type of entity, called a “Community Advantage SBLC.”
Bankers Cite ‘Serious Threat’
In addition, the Independent Community Bankers of America (ICBA) told Congress the Small Business Administration should pause new rules lifting the moratorium on the number of non-federally regulated institutions, including nonbank fintech companies, that can make loans under its 7(a) program.
In testimony before the House Small Business Committee hearing, Bank of Charles Town (W.V.) President and CEO Alice Frazier said opening the 7(a) program to unregulated entities poses a serious threat to a program designed to expand lending in underserved areas.
“The new SBA rules, which were rushed through the process without input from Congress or the industry, will undermine this critical goal,” said Frazier, who chairs the ICBA’s Bank Operations Committee. “We recommend the agency hit the pause button and convene a working group of existing SBA lenders to determine how we can better align the program with the SBA mission of reaching the smallest businesses and entrepreneurs.”
‘No Substitute’
Frazier told legislators that online-only lending can “never substitute for on-the-ground, relationship-based community bank lending that partners with small businesses to support long-term success.”
She further stated 68% of SBA loans were made to underserved borrowers in fiscal 2022, exceeding the agency’s goal of 42%, while nonbank fintechs’ higher default rates and incidence of fraud would drive 7(a) fees higher and make the program more costly and less accessible to borrowers.