CU Trades Ask Congress to Limit Expansion of SBA Lending

As the House Small Business Committee prepares for a markup Thursday, financial services trade groups, including CUNA and NAFCU, are calling on Congress to rein in SBA activities that would expand the use of non-federally regulated lenders to make business loans.

Such an expansion would threaten the integrity of the key 7(a) loan programs and could result in increased borrower and lender fees, the groups contend.

However, none of the bills listed for consideration on Thursday would directly address the concerns outlined in a letter the trade groups sent to the panel.

Backstory and Context

The SBA has announced that it is removing the moratorium on Small Business Loan Companies (SBLCs) and would authorize up to three such companies to participate in SBA lending. As those companies are not banks or credit unions and lack a prudential regulator, the SBA would serve as the companies’ regulator.

The trade groups have said that the SBA is not equipped to do that job and have cited billions of dollars of fraud found in the administration’s pandemic-related programs as evidence.

Inside the Letter

In their letter to the House Committee, the trade groups said that Congress should cap the number of SBLCs so that the SBA cannot drastically increase the number of lenders. They also asked that Congress reinstitute guardrails that limited SBLCs to only the 7(a) program.

Along with CUNA and NAFCU, the groups signing the letter include the Consumer Bankers Association and the Independent Community Bankers of America.

The letter also asked that Congress provide additional authority for the SBA’s Office of Credit Risk Management, so that it can properly supervise any non-federally regulated lenders.

“Removing prudent lending guardrails opens the door to the potential for small business borrowers to receive loans they cannot repay—a crippling consequence for these borrowers,” they wrote.

The trade groups also blasted the SBA for replacing day-to-day technical guidance with what is known as updates to agency Standard Operating Procedures (SOPs). The SOPs recently introduced by the agency make policy changes that never were discussed in the agency’s rule-making process, the groups said.

In addition, some of those changes should be considered by Congress because they are not technical in nature, according to the groups.

“The recent rule and SOP changes erode the reliance upon decades-long prudent SBA lending standards, which have ensured acceptable loss rates and have kept program costs down for the very borrowers we all aim to aid while avoiding the need for a taxpayer subsidy,” the letter states.

How Will Congress Respond?

House Small Business Committee Chairman Rep. Roger Williams, R-Texas, has echoed some of the same concerns as the financial services trade groups.

However, none of the bills to be considered directly address those concerns. Instead, they deal with ways to enhance the agency’s assistance in rural areas and ways to ensure that pandemic-related fraud may continue to be reported.