Financial Trades: SBA Lacks Capacity to Manage Expanded Loan Program

NAFCU and banking group raise concerns over agency proposal to include fintechs in lending program.

The Small Business Administration (SBA) does not have the capacity to supervise loosely regulated fintech lenders that would be permitted to make loans under an expanded 7(a) loan program, financial trade groups told the agency last week.

Citing problems that plagued the pandemic-related Paycheck Protection Program, NAFCU told the agency that it should not authorize additional Small Business Loan Corporations (SBLCs) to make loans under the agency’s most common lending program.

“The SBA, by allowing lenders with a bad track record and who are relatively unfamiliar to the SBA, to be supervised by an office already at capacity that lacks experience dealing with unregulated entities, risks a repeat of the PPP fiasco and the demise of new SBLCs,” NAFCU Regulatory Affairs Counsel James Akin told the agency.

“SBA itself acknowledges in the proposal that it does not have the proper staffing or resources necessary to provide oversight to an expanded SBLC lending environment,” James Kendrick, first vice president for accounting and capital policy at the Independent Community Bankers of America, wrote in a separate letter.

Background

The SBA has proposed allowing SBLCs, non-depository lending institutions, to make loans under the 7(a) program. Unlike credit unions and banks that make loans in the program, SBLCs are regulated solely by the SBA. The agency also has proposed allowing mission driven SBLCs to make loans.

In the past, there was a moratorium on SBLCs permitted in the loan program because the SBA said it did not have the capacity to supervise them. In the proposal, the SBA officials said they believe they now have the expertise to supervise up to three new SBLCs.

In explaining the proposal, officials outlined the need for additional small business lenders, saying, “SBA has determined that certain markets where there are capital market gaps continue to struggle to obtain financing on non-predatory terms.”

Further Concerns

However, Democrats on the House Select Subcommittee on the Coronavirus Crisis last month said that unregulated fintechs ran roughshod over the PPP program, making questionable loans with little oversight.

The financial trade groups said the PPP experience demonstrates that the SBA should not expand to allow fintech lending in the 7(a) program.

“While they may offer loans in more places to more entities, it is not altruism that motivates them, it is their understanding that through less restrictive lending criteria and fewer borrower protections, they can offer loans at a profit where other financial institutions cannot,” Akin wrote. “As long as a fintech culture geared toward quick, easy profit persists, the incentives for fintechs will always run counter to safe and responsible lending.”