Bank trade groups blast SBA’s fintech proposal

A new proposal to allow fintechs to participate in the Small Business Administration’s flagship loan program is drawing strong pushback from banking trade groups that argue the move would threaten the program’s integrity and harm borrowers.

The new SBA proposal would end a 40-year moratorium on admitting new non-bank participants to the agency’s 7(a) loan program by allowing fintechs and other non-depository lenders to apply for a small business license.

Vice President Kamala Harris said the move is aimed at increasing the programme’s lender base and increasing lending to small businesses in underserved markets.

But traditional firms have expressed concerns with the proposal.

In a comment letter submitted last week, the Independent Community Bankers of America said the agency has failed to provide critical details about how it will oversee new and existing SBLCs, noting that the agency itself has acknowledged it lacks the necessary the staffing or resources necessary to provide oversight to an expanded SBLC lending environment.

“SBA’s proposal to allow non-bank fintechs and other non-federally regulated institutions to participate in the successful 7(a) loan program could inadvertently harm the very borrowers SBA is trying to help, as well as the program’s underwriting standards,” ICBA President and CEO Rebeca Romero Rainey said in a statement last week.

Chris Hurn, founder and CEO of non-depository lender Fountainhead, which has been an SBLC-licensed lender since February 2019, has called the move a “recipe for disaster,” adding to the agency’s slow response times and slow approval processes, indicates that the SBA is “having a hard enough time right now overseeing the current SBLCs.”

The SBA’s flagship 7(a) program provides small businesses with loans of up to $5 million. Under the program, the small business agency guarantees up to 85% on loans up to $150,000, and 75% on loans over $150,000.

Funding Circle, a fintech that has lobbied for involvement in the program for years, applauded the SBA’s proposal in a comment letter it submitted last week.

Lifting the moratorium would allow fintechs to apply for 7(a) loans nationally, Funding Circle said.

“This will allow us to leverage our platform technology and more than a decade of lending experience to expand access to 7(a) loans for underserved communities and do it faster, at a lower cost and with a superior customer experience,” the company said. .

In response to opponents’ claims that fintechs are ill-equipped to make SBA loans, Funding Circle pointed to its experience with government-guaranteed lending in the UK, where it is headquartered.

The firm said it has partnered with state-owned British Business Bank since 2013 and given billions to thousands of companies as one of the largest loans originators under the coronavirus Business Interruption Loan and Recovery Loan Arrangements.

The company also participated in the U.S.’s own pandemic relief program, originating $685.2 million to 17,631 small business lenders for the Paycheck Protection Program, the company noted.

However, banking trade groups argue that OPS is a good example of why fintechs should not be given access to the government loan program.

Noting a recent House report that concluded several fintechs had lax anti-fraud standards, as well as several ongoing investigations into PPP fraud among non-banks, the Consumer Bankers Association urged the SBA not to invite fintech entities into another federal government program before all investigations are completed.

“While these investigations are ongoing, several early findings indicate a direct link between PPP fraud and non-bank Fintech participation in PPPs,” the CBA wrote, a sentiment echoed by the ICBA in its own letter.

“ICBA recommends that SBA take no further action on the SBLC formation until all federal, state and local investigations into PPP fraud are complete,” the trade group wrote.