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Dive Brief:
- The Small Business Administration is ending a 40-year moratorium on admitting new nonbank lenders to its 7(a) loan program, a move that opens up the agency’s flagship lending program to fintech participation.
- The new rule, which was published in the Federal Register on Wednesday, allows fintechs and other nondepository lenders to apply for a Small Business Lending Company license.
- Proponents say the rule, which takes effect May 11, will grow the program’s lender base and increase small-business lending in underserved markets. The rule, however, has drawn push back from bank trade groups who argue adding more nonbanks to the program could threaten its integrity and harm borrowers.
Dive Insight:
Opening the lending program to neobanks could give fintechs that have been entering the payments realm more capital wherewithal to compete with traditional service providers.
The SBA’s 7(a) program offers small businesses loans of up to $5 million. Under the program, the agency guarantees up to 85% on loans up to $150,000, and 75% for loans more than $150,000. The SBA approved 51,856 7(a) loans totaling $36.5 billion in 2021, the agency said.
Since 1982, the number of SBLC licenses, or nonbank participants, has remained unchanged at 14, according to the SBA. In order to become an SBLC under current regulations, an entity must acquire one of the existing licenses from an entity exiting the 7(a) loan program.
The SBA said it received comments expressing concerns the agency would have difficulty overseeing additional SBLC participants.
Some comments claimed an additional SBA proposal to streamline certain standards, coupled with adding new lenders, would loosen guardrails, weakening the program, the SBA said.
The agency defended its decision, saying it conducted in-depth assessments to ensure it has the capacity to provide oversight and servicing to its entire portfolio of lenders, including any potential additional SBLCs.
“SBA has successfully overseen transition and operation of various organizational structures of SBLC entities,” the SBA said.
The agency, which noted there have been more than 60 holders of the 14 authorized SBLC licenses, said it plans to admit three new SBLCs into the program.
The agency also addressed concerns that it’s opening the program to fintechs at a time when several reports have linked some such firms to Paycheck Protection Program fraud.
The SBA, however, said it was not a fair comparison to equate fraud in PPP with potential fraud in the regular 7(a) loan program, citing the latter program’s “well-established and robust operating policies and procedures.”
Several comments also questioned whether adding new participants would increase lending to underserved markets, a pitch the agency and Vice President Kamala Harris made when the proposal was first announced in October.
The SBA said other comments in support of licensing new SBLCs stated that non-bank lenders and fintechs often offer flexible credit options and small dollar loans, services that are not prioritized at traditional banks.
Fintech lender Funding Circle applauded the move, saying the decision to admit new nonbank participants promotes competition and innovation.
“This is an opportunity for the more than 8,000 community banks and credit unions that don’t offer 7(a) loans to partner with Fintech lenders to offer affordable loans quickly in underserved communities,” the fintech said in a statement. “Congress should now focus on ensuring SBA has the resources necessary to license more than three new lenders in its SBLC program in order to increase competition and distribution of government guaranteed loans in underserved communities.”
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