The Senate Small Business Committee passed legislation out of the Committee in a  that would address 7(a) lending issues in response to SBA’s recent policy changes, both in rulemaking and SOPs. This comes after the Senate came to a bipartisan agreement on legislation over the weekend.

Remember, a markup is the process in a Congressional Committee in which the Committee debates, amends, and votes on passing a piece (or multiple pieces) of legislation before it goes to the full Senate or House floor for consideration. To be clear: just because legislation is passed out of a Committee does NOT mean that the legislation is passed into law—a markup is just a first procedural step. Any legislation needs to be passed by the FULL Senate, by the FULL House, and then signed into law by the President before it becomes effective. This bill is a first step for the Senate, the House has stated that they will be drafting a separate bill, and then the two approaches eventually would need to be reconciled.

The 7(a)-related legislation is attached to a bill titled, Community Advantage Loan Program Act of 2023. The full text of this legislation is not linked or posted on the Committee’s markup agenda, but NAGGL is that was voted upon this afternoon which has been made available to our organization.

 along with a large coalition of other financial services trade associations, including the American Bankers Association (ABA) and the Independent Community Bankers Association (ICBA), that expressed our organizations’ appreciation of the Senate’s efforts to respond to lender concerns and encouraged that the dialogue continue between the Hill and stakeholders as the process moves forward through Congress. However, while our organizations collectively encouraged that the legislation move out of the Senate Small Business Committee, the joint trades’ letter did not endorse the Senate legislation at this point and NAGGL looks forward to continuing the discussion with both the Senate and House on ways to continue further improving the legislation. We know that several of the provisions may not be fully drafted in the way that lenders may prefer and that there may be other issues to tackle. However, the legislative process will offer opportunities for such dialogue and, in the meantime, the legislation offers a substantive, bipartisan first step that tackles many of the key issues presented by SBA’s most recent policy changes.

Here is a quick topline summary of what is included in the Senate legislation (again, caveat: this is not law – it is just a legislative proposal that may continue to go through several iterations during the legislative process):

  • Capped SBLCs: Rather than SBA’s rule change which lifts the SBLC moratorium to allow an unlimited number of non-Federally regulated lenders into 7(a) lending, the legislation would cap the total number of SBLCs at a maximum number set at 17, allowing 3 additional licenses from the pre-rule change cap of 14.
  • SBLC Guardrails: Any new SBLC would not be able to get delegated status for 5 years. In addition the same minimum capitalization requirements that apply to existing SBLCs would be extended to all SBLCs, and the statute would require all SBLC licensees be examined under the same terms, ensuring there is no politicization of SBA’s review of one SBLC licensee over another.
  • Strengthening OCRM in SBLC Oversight: Several provisions would strengthen the regulatory authority of OCRM in overseeing SBLCs, allowing for a review and possible revoking of a SBLC’s license based on review of average default rates and failure to comply with various oversight requirements. In addition, SBLCs would be regulated for compliance with Bank Secrecy Act/ Know Your Customer and various consumer protection laws, as well as for compliance with stress testing as set by OCRM.
  • OCRM Independence: OCRM would report directly to the Administrator, rather than to the head of the Office of Capital Access.
  • Underwriting Criteria would be amended as follows:
    • For all loans: the applicant would be required to be creditworthy and the loan to be so sound as to reasonably assure repayment
    • For Loans Less than $350,000: carve-out of “do what you do” would be lowered to $350,000 from SBA’s $500,000 carve-out, and lenders also would be required to consider credit score or credit history, earnings or cash flow, equity or collateral, and the effect of any affiliates of the applicant that could have an impact on repayment ability
    • For Loans $350,000 and Over: Generally the nine longstanding regulatory criteria would be reinstated for loans over $350,000 and over (Namely: credit history, experience and depth of management, strength of the business, past earnings/projected cash flow/future prospects, ability to repay the loan, sufficient invested equity, potential for long-term success, nature and value of collateral, and effect any affiliate of the applicant may have on repayment ability. Note: no prescriptive underwriting criteria beyond consideration of these over-arching principles is included in legislation.)
  • Refinancing Same Institution Debt: No refinancing of same institution debt using delegated authority would be allowed; only non-delegated authority could be used.
  • Franchise Directory would be reinstated.
  • Loan Authorization would be reinstated (but this would not prohibit generation of the Loan Authorization through E-Tran or some other automated process)
  • Removal of Administrator Politicization: The Administrator would not be permitted to reverse loan denials or loan modification requests.
  • Affiliation: Generally would reinstate regulations that existed prior to the May 11, 2023 change.
  • Community Advantage (CA) Pilot Program Made Permanent: CA has existed as a pilot since 2011 and this permanent authority comes with several appropriate guardrails (e.g. maximum loan size capped at $350,000, interest rates required to mirror 7(a) lending, total volume of CA loans cannot be greater than 10% of total 7(a) volume, loan loss reserves required to reflect repurchase rates, etc.)
  • CA Experienced Lenders: Up to 8 CA lenders would be eligible for a type of “preferred” status that would allow them to make loans up to $750,000 (with a requirement that at least 60% of units be $350,000 or less.)