House Chair Sides With CUs: 'Serious Concerns' Over SBA's 7(a) Changes

The House Committee on Small Businesses held a hearing Wednesday to discuss two proposed changes from the Small Business Administration (SBA) and its 7(a) lending program. Committee Chairman Rep. Roger Williams (R-Texas) set the tone early with his objections, similar to NAFCU and CUNA, about opening the lending program to fintechs and the potential lending fraud that could ensue.

According to the SBA, the proposed changes included opening the 7(a) loan program to an unlimited amount of non-federally regulated lenders and fintechs.

During the opening statements of Wednesday’s hearing, Rep. Williams worried the changes SBA is proposing could leave taxpayers “on the hook if a significant portion of these loans go bad.”

Williams continued, “Additionally, these rules reverse the moratorium on licensing new Small Business Lending Companies, better known as SBLCs. This moratorium was initially put in place in the 1980s because the SBA recognized that they were not capable of being the primary federal regulator of these entities. Given the unacceptable levels of fraud that occurred in the SBA’s pandemic programs, I have serious concerns that the agency is not up to the task of taking on more responsibility.”

In letters to the committee, officials with NAFCU and CUNA shared similar concerns.

NAFCU Vice President of Legislative Affairs Brad Thaler said, “Allowing fintechs to participate in 7(a) lending on those grounds will place credit unions and other traditional lenders at a severe competitive disadvantage. Non-depository SBLC lenders implementing less stringent underwriting requirements, and with significantly less regulatory compliance cost, will expend fewer resources to offer SBA loans and will therefore be able to offer these loans at more favorable terms.

“Small businesses will likely gravitate toward these riskier lenders, reducing demand for SBA loans from depository institutions and gradually reducing the number of depository institutions participating in SBA lending. With a greater reliance on fintech lenders, SBA lending programs will be at increased risk of fraud, credit losses and reputational risk. This risk was clearly demonstrated in the early stages of the pandemic when fintechs participating in the Paycheck Protection Program experienced much higher levels of fraud compared to regulated financial institutions,” Thaler concluded.

CUNA President/CEO Jim Nussle noted that while the association supports the goal of the proposed changes, those changes could ultimately harm borrowers.

“However, we believe that the proposed changes may not actually help ease minority and underserved communities’ access to SBA funding, and in fact, could unintentionally harm the very borrowers that SBA is trying to support. Furthermore, we believe that the combined impacts of these proposed changes could lead to additional negative impacts on various stakeholders, including, but not limited to, current and future borrowers of SBA loans, by lowering material standards related to underwriting and portfolio performance,” Nussle said.