R47909 — Small Business Administration (SBA) Business Loan Program Rule Changes in the 118th Congress: Background and Summary

In April 2023, the Small Business Administration (SBA) finalized two major rules revising regulations related to its business loan programs. The new rules made significant changes to the 7(a) loan guarantee program, under which the SBA provides partial loan guarantees to approved private lenders to facilitate loans to small businesses that cannot otherwise access credit. Some changes made by the new rules would also affect the SBA’s organization and other programs. Major changes to SBA programs made by these rules include the following: Reopening applications for new Small Business Lending Companies (SBLCs) for the first time since 1982. Most 7(a) lenders are federally regulated depository institutions (banks and credit unions). The SBA licenses a small number of nondepository loan funds to participate in the 7(a) program as SBLCs. Supporters argue that SBLCs have expanded the program’s reach and serve disadvantaged borrowers better than some traditional lenders. Opponents are concerned that permitting new SBLCs into the program could increase program risk, especially if financial technology (fintech) lenders are allowed to participate. Creating of a new type of entity—Community Advantage Small Business Lending Companies (CA SBLCs)—to make the Community Advantage Pilot Program (CA pilot) permanent. The CA pilot started in 2011 as a temporary pilot program, and has since been extended multiple times. The CA pilot allows nontraditional lenders (such as nonprofit organizations) to participate in the 7(a) program, and also eases some loan requirements (e.g., it allows more flexible collateral). Congress has not provided statutory authorization for the CA pilot. The SBA sunset the CA pilot on October 31, 2023, and transitioned CA pilot lenders to become CA SBLCs. Supporters say this change made the CA pilot permanent and provides certainty to previously active and prospective lenders. Opponents criticize the new rules for not including other key features of the CA pilot, such as the underserved market lending requirement, and prefer that the CA pilot be made permanent through an act of Congress. Increasing the workload of the SBA’s Office of Credit Risk Management (OCRM) by expanding the number of SBA-supervised lenders. For banks and credit unions that participate in the SBA’s programs, the OCRM only supervises their participation in SBA programs, while other federal regulators conduct overall supervision. For entities without a federal regulator (such as SBLCs and CA pilot lenders), the OCRM supervises both their participation in SBA programs and their overall safety and soundness. Supporters say there are benefits to having more nontraditional lenders in the SBA’s programs and that the OCRM has the resources to supervise them. Opponents argue that the OCRM is already understaffed and giving it more work without expanding the office will result in lower-quality supervision, which may increase program risk. Changes to certain business loan program requirements, including the removal of the requirement for a loan authorization and changes to underwriting standards and borrower affiliation rules. Supporters argue that these requirements were unnecessary, duplicative, and difficult to implement. Opponents are concerned that changes in the loan authorization and underwriting standards may increase program risk and that the changes to affiliation rules may allow large businesses to benefit from programs meant for small businesses. These changes have generated substantial feedback from Members of Congress. The House and Senate small business committees both held oversight hearings on the rule changes, and Members have sent multiple letters to the SBA, including a letter from Senate Committee on Small Business and Entrepreneurship leadership and a “four corners” letter from House and Senate small business committee leadership. Partly in reaction to the SBA’s final rules, the Senate Committee on Small Business and Entrepreneurship reported legislation related to SBA business loan programs. A section-by-section summary of S. 2482 is in the table below. A comparable House bill has yet to be introduced. The House rejected an appropriations bill amendment (H.Amdt. 672) that would have blocked the SBA from implementing the CA SBLC program. Section-By-Section Summary of Key Provisions in S. 2482 SectionSummary Community Advantage Loan Program Section 101This section would provide permanent statutory authorization to a Community Advantage Loan Program that is broadly similar to the Community Advantage Pilot Program (which was temporary and has expired). Similar to CA pilot: maximum loan amount for most lenders would be $350,000; provides a path for nontraditional, mission-oriented lenders to participate; CA program lenders must make 60% of their loans in underserved markets; higher threshold for requiring collateral; CA program lenders must maintain a loan loss reserve account. Different from CA pilot: higher loan guarantee rate for loans of $350,000 or less (80%-90%); allows up to eight “experienced lenders” to make CA program loans of up to $750,000; the SBA must conduct training and outreach to current and prospective CA program lenders. Lending Criteria Section 203 This section would codify the simplified lending criteria from the rulemaking for 7(a) loans of $350,000 or less and for all 504 loans. It would codify lending criteria similar to those in effect before the rulemaking for 7(a) loans of more than $350,000. It would also prevent the SBA from requiring a lender to consider an applicant’s “character and reputation,” which may include an applicant’s criminal record. Lenders may consider an applicant’s character and reputation if they choose to do so. Affiliation and Franchise Directory Section 204 This section would codify the previous affiliation standards, including the principle of control, for the 7(a) program. For the 504 program, it would codify affiliation standards similar to the SBA’s revised affiliation standards. This section would also require the SBA to publish a franchise directory to assist lenders in determining the eligibility of franchisees. Loan Authorization Section 205 This section would codify the requirement that the SBA issue a loan authorization prior to a lender making a guaranteed loan. This requirement was removed by the SBA rulemaking. Oversight of Small Business Lending Companies Section 206 This section would codify the maximum number of SBLC licenses at 17 (3 more than before the rulemaking). This section would also codify several authorities and duties related to SBLCs for the OCRM: (1) the OCRM may revoke an SBLC license for certain causes; (2) the OCRM must conduct annual stress tests of each SBLC’s loan portfolio, including for interest rate risk; (3) SBLCs must comply with Bank Secrecy Act, Know Your Customer, and Anti-Money Laundering laws. Office of Credit Risk Management Section 207 This section would make two changes to the OCRM: (1) It would reorganize the SBA to have the director of OCRM report directly to the SBA Administrator, removing it from the Office of Capital Access; and (2) It would require the OCRM to report certain data on early defaults of 7(a) loans in its annual report to Congress. Denied Loan or Loan Modification Request Section 208 This section would return the SBA’s loan denial reconsideration process to the process in effect before the rulemaking, in which the director of the Office of Financial Assistance makes the final decision for SBA, and the SBA Administrator may not intervene in any decision on a reconsideration. Direct Lending Section 209 This section would require the SBA to notify Congress at least 60 days before starting any direct lending (where the SBA itself is the lender) business loan program or pilot program. Restriction on Refinancing Debt Section 210 This section would prevent 7(a) lenders from processing any 7(a) loan that would refinance debt held by that lender using delegated authority. It would still be possible to use a 7(a) loan to refinance debt held by the lender, but the section would require those loans to be completed through regular processing, where the SBA makes the final credit decision. GAO Study Section 211 This section would require three GAO studies: (1) on the effectiveness and fraud prevention strategies for using alternative credit models for smaller 7(a) loans; (2) an audit of the OCRM; and (3) a survey of 7(a) lender practices regarding borrower criminal history for underwriting private loans. Source: CRS analysis of S. 2482 (as reported). Notes: Please see full report for a detailed description of each section. CA=Community Advantage; GAO=U.S. Government Accountability Office; OCRM=Office of Credit Risk Management; SBA=Small Business Administration; SBLC=Small Business Lending company.

Curated by CRS — every bill listed in this report's relatedMaterials. Edge type cited_in_report, gold confidence.

• HR 4664 — Making appropriations for financial services and general government for the fiscal year ending Septe · 118th Cong
• S 2482 — Community Advantage Loan Program Act of 2023 · 118th Cong