Small Business Administration Proposes Rule Increasing Number Of Non-Bank Lenders

The Small Business Administration (SBA) has proposed a rule increasing the number of non-bank lenders in its 7(a) loan program to provide more lending options to underserved small businesses.

The Business Journals reports the Biden administration and the SBA said in October it wanted to revisit lending participation. SBA Administrator Isabel Guzman said in May the agency was considering expanding the role of Fintechs in its lending programs.

Supporters of the proposed rule, which includes fintech representatives, said it will increase access to capital for small businesses, especially in underserved areas. Attorneys and accountants say businesses, especially small ones, are becoming more interested in SBA loans and grants, but some in the banking industry have concerns about increasing access to the fintech industry.

Hundreds of banks participate in the SBA 7(a) lending program and more than 1,500 banks made loans in 2022. However, since 1981, the agency has limited non-bank licenses that give 7(a) loans to just 14 “small business lending companies,” that are regulated by the agency.

However, the agency has been dipping its toes into expanding its lending options.

In 2011 the SBA created the Community Advantage Pilot Program (CAPP) to provide smaller 7(a) loans to mission-oriented lenders focused on economic development. The pilot was extended to 2024 earlier this year.

The SBA has used non-bank lenders before. In the initial days of the COVID-19 pandemic, the SBA used non-bank lenders to help distribute Paycheck Protection Program (PPP) funds.

The SBA anticipates it can add three new non-bank lenders to its lender network, based on the resources it will take to supervise them. Additionally, the agency said the lenders in CAPP would also be able to apply to the program and it would not increase the number of lenders the agency has to supervise, since they’re already part of the SBA lending system.

The agency has also proposed removing the existing loan authorization requirement for lenders seeking SBA authorization for 7(a) and 504 loans. Currently, both SBA loans require a loan authorization providing the terms and conditions under which the agency will make or guarantee business loans.

Instead of its current process, under the proposed rule by the agency, it will rely on the terms and conditions of the loan application submitted by the SBA lenders. The agency is also working with HBCU fraternities and Sororities to help close the wealth gap