Lawmakers cast fresh doubt on SBA’s fintech plans

Senior members of Congress are taking issue with how the Small Business Administration plans its discretionary spending, as well as plans to open its 7(a) lending program to fintechs.

The Biden administration released its 2024 budget on March 9. The plan allocates $987 million in discretionary spending authority to the SBA. That’s enough to support $57.5 billion in activity with the three primary lending and investment vehicles — the 7(a), 504 and Small Business Investment Company programs.

Lawmakers seemed happy with those funding levels. Last week, however, senior members of the Senate Small Business Committee and its counterpart in the House of Representatives called on SBA Administrator Isabella Casillas Guzman to hit the brakes on plans to end a long-standing moratorium that has limited the number of non-custodial small business lending companies (SBLCs). ) licensed to participate in 7(a), the SBA’s largest lending program, to 14 since 1983.

In November was SBA proposed a rule which would both eliminate the moratorium, allow new for-profit SBLCs—including potentially fintechs—and create a new category of nonprofit mission-based SBLCs that would focus on serving underserved markets and demographics.

One of the strongest calls for caution about the moratorium came from Rep. Nydia Velazquez, DN.Y., the House Small Business Committee’s ranking Democrat. At Thursday’s House Small Business Committee hearing, Velazquez asked the SBA to first address growing concerns about borrower misuse of pandemic relief funds before tackling Guzman’s ambitious plan to redesign 7(a).

“Simply put, the agency should slow down and address fraud issues in the Paycheck Protection program before moving forward with major policy changes to the 7(a) program,” Velazquez said.

Velazquez’s comments come a little more than two weeks after Sen. Ben Cardin, D-Md., and Sen. Joni Ernst, R-Iowa, chairman and ranking Republican on the Senate Small Business Committee, Guzman wrote warning that plans to open 7(a) to more SBLCs – which could also open the door to fintech participation – could hurt program performance and lead to increased loan losses.

Last week during the Senate committee hearing, Ernst Guzman asked to focus on fraud, not changes to 7(a). “Report after report has been released from the investigative community indicating massive levels of fraud, but the vast majority of stolen funds remain unrecovered,” Ernst said.

For her part, Guzman insisted that her team is working closely with SBA Inspector General Hannibal Ware to uncover as many illegal pandemic loans as possible. At the same time, Guzman said the SBA is seeking to end the moratorium “so we can allow more competition and a wider distribution network.”

The SBA’s 7(a) program, which any new SBIC will join, is the agency’s flagship program, regularly guaranteeing over $25 billion in loans to small businesses. The Biden administration provided 7(a) $35 billion in funding authority in the 2024 budget.

Guzman, who was sworn in as the SBA’s 27th administrator in March 2021, has made expanding access to capital for minorities and other underserved groups a hallmark of her tenure. She told lawmakers that non-bank lenders, including fintechs, will help achieve that goal. “SBA’s goal is to increase the number of lenders serving the hardest-to-reach small businesses,” Guzman said before the Senate Small Business Committee.

But overcoming lawmakers’ concerns about fintech, which was is considered a major, if unwitting, contributor to fraud in OPS by a congressional probe led by Representative John Clyburn, DS.C., in December, is proving to be a tough nut to crack for the SBA.

“The inspector general identified 70,000 potentially fraudulent PPP loans … and a disproportionate share of those loans were made by fintechs,” Velazquez said. “Lifting the moratorium on SBLCs to allow unregulated entities to participate in the SBA’s flagship lending program may not be the best way to reach underbanked communities.”

Texas Republican Roger Williams, the House Small Business Committee’s chairman, said the SBA is ignoring findings that could help root out more PPP fraud.

“Unfortunately, the SBA does not appear to be taking these recommendations seriously,” Williams said. He was referring to the agency’s recent decision to stop collection on PPP loans of $100,000 or less that were referred to the agency by lenders for nonpayment.

The move to halt collection efforts on small-dollar PPP loans “raises fundamental questions about the proper stewardship of American taxpayer dollars,” Williams said earlier this month in a news release.

The SBA’s inspector general also questioned the decision, but the agency has argued that the cost of collecting foreclosed PPP loans will far exceed any dollars earned.

Many in both the Democratic and Republican camps also expressed dismay at the agency’s plans to give its two-year-old Community Navigator pilot program a solid $30 million grant while reducing overall spending on the SBA’s established training and technical assistance networks, including small- business development centers, women’s business centers, veterans’ business outreach centers and the SCORE business mentoring program.

“The latest calculations available to us show that [small-business development centers] and SCORE are overachieving, they’re more than meeting their stated goals,” said Rep. Jared Golden, D-Maine. “It’s almost like they’re being punished for being successful.”

Williams promises to scrutinize the Community Navigators more closely, noting that they received more than $131 million in emergency funding in 2021 and 2022, but contributed to the creation of only 422 new businesses.

“We cannot continue to fund another duplicative, ineffective SBA program on the taxpayer dime,” Williams said.