Published: May 18, 2023
by Small Business Editor
In Small Business News
During a recent full Committee on Small Business hearing, lawmakers voiced serious concerns over the Small Business Administration’s (SBA) recent alterations to its 7(a) Loan Program. The hearing, titled “Taking on More Risk: Examining the SBA’s Changes to the 7(a) Lending Program Part I”, was led by Chairman Roger Williams (R-TX).
The 7(a) Loan Program is the SBA’s flagship offering, providing a government-backed guarantee for loans given by regular lenders to small businesses that might otherwise struggle to secure funding. However, the SBA’s changes to the program, which include reducing underwriting standards, are causing concern among lawmakers.
“Today’s hearing did nothing to assuage our concerns over the Small Business Administration’s reckless rule changes to their 7(a) Loan Program which will reduce underwriting standards and add more risk of a taxpayer-funded bailout of the program,” Chairman Williams stated.
The concerns raised in the hearing centered around the perceived risk to taxpayers, who could potentially bear the financial burden should the loans default. The Committee on Small Business expressed its commitment to safeguarding the SBA’s cornerstone program and ensuring taxpayers are not left to cover the cost of bad loans.
One of the key concerns raised was the shift towards a more subjective underwriting method for loans under $500,000. This change is seen as increasing risk, as 75% of all 7(a) loans fall under this amount.
Rep. Meuser questioned the SBA representative, Mr. Kelley, on the matter: “By moving the program, the 7(a) portfolio, towards a more subjective underwriting method for loans under $500,000, how does that protect taxpayers from losses?”
The hearing also highlighted concerns around oversight. Rep. Luetkemeyer noted a shortfall in the Office of Credit Risk Management’s (OCRM) oversight, with only 108 of its planned 358 reviews of high-risk lenders conducted in 2019. He pointed out that the situation has worsened during the COVID-19 pandemic, with staffing levels dropping by an additional 38%.
Despite these concerns, the SBA has lifted the Small Business Lending Company (SBLC) moratorium, allowing more non-depository entities to enter the market. These entities are regulated solely by the SBA rather than federal regulators.
The changes to the 7(a) program raise critical questions for small businesses relying on these loans. The hearing underscored lawmakers’ commitment to addressing these concerns and protecting the interests of small businesses and taxpayers alike.
For the latest, follow us on Google News.
The Small Business Administration’s (SBA) 7(a) lending program, which provides federal-guaranteed loans to small businesses, recently saw some major changes in a 2018 regulation issued by the agency. These changes were meant to clarify some requirements for the lender and borrower involved in the 7(a) program, but some experts are raising serious concerns about these new rules and their potential to disincentivize lenders from participating in the program.
The changes to the 7(a) program require lenders to certify that the borrower meets all of the program’s criteria for its loan and that the lender retains the documentation needed to prove the borrower’s compliance. Additionally, lenders must now obtain a properly assigned obligation due from the borrower, which includes a promissory note, as well as a form of acuity bond or other acceptable form of acuity assurance.
While these regulation changes are meant to tighten up the program’s oversight, some experts are worried that certain lenders may be disincentivized from participating in the 7(a) program because of the additional paperwork and administrative burdens associated with these requirements. This in turn could lead to a reduction in available 7(a) funds for small business owners.
The SBA has recently defended the amendments to the 7(a) program, noting that it is important to ensure that the program remains cost-effective and associated risks are minimized. While this may be true, some experts believe that the additional paperwork and administrative burden puts lenders at a disadvantage, and could discourage them from participating in the 7(a) program.
These changes are concerning because the 7(a) program is an important source of financing for small business owners, and any decrease in lending could have a serious impact on the economy. It is therefore important that the SBA strikes a balance between regulation and access to capital for small businesses.
In short, while the SBA’s changes to the 7(a) program are intended to improve its effectiveness, there are serious concerns being raised about the potential for these changes to discourage lenders from participating in the program. It is important that the agency take these concerns into consideration and ensure that the 7(a) program remains a viable source of financing for small business owners.