SBA opens flagship lending program for fintechs

Dive card:

• The Small Business Administration is ending a 40-year moratorium on admitting new non-bank borrowers to its 7(a) loan program, a move that opens up the agency’s flagship lending to fintech participation.
• The new rule, which was published in the Federal Register on Wednesday, allowing fintechs and other non-depository lenders to apply for a small business license.
• Supporters say the rule, which takes effect May 11, will increase the program’s lender base and increase lending to small businesses in underserved markets. However, the rule has drawn push back from bank trading groups which claims adding more non-banks to the program could threaten its integrity and harm borrowers.

Diving Insights:

The SBA’s 7(a) program provides small businesses with loans of up to $5 million. Under the program, the agency guarantees up to 85% on loans up to $150,000, and 75% on loans over $150,000. 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. To become an SBLC under the 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 concern that the agency will have difficulty monitoring more SBLC participants.

Some comments claimed an extra SBA proposal streamlining certain standards, combined with adding new lenders, would loosen the handrails, 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 service to its entire portfolio of lenders, including any additional SBLCs.

“SBA has successfully overseen the transition and operation of various organizational structures of SBLC entities,” the SBA said.

The agency, which noted that there have been more than 60 holders of the 14 authorized SBLC licenses, said it plans to bring three new SBLCs into the program.

The agency also addressed concerns about opening the program to fintech participants in light of several reports linking the firms to Paycheck Protection Program fraud.

However, the SBA said it was not a fair comparison to equate fraud in the 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 suggestion the agency and Vice President Kamala Harris made when the proposal first came up. 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 a priority at traditional banks.

Fintech lender Funding Circle applauded the move, saying the decision to admit new non-bank entrants promotes competition and innovation.

“This is an opportunity for the more than 8,000 community banks and credit unions that do not offer 7(a) loans to partner with Fintech lenders to provide affordable loans quickly in underserved communities,” the fintech said in a statement. “Congress should now focus on ensuring that SBA has the resources necessary to license more than three new lenders in its SBLC program to increase competition and distribution of government-guaranteed loans in underserved communities.”