Impending changes at the U.S. Small Business Administration are stirring up whirlwinds of controversy – in Rhode Island and in Washington, D.C. – as the federal agency adopts new rules that will govern how it runs its lending network.
SBA Administrator Isabella Casillas Guzman has stated repeatedly that the Biden administration wants to increase lending to small-business owners in underserved communities – specifically to veteran-, women- and minority-owned businesses, and businesses in rural areas. SBA’s loan programs serve creditworthy small-business entrepreneurs who otherwise are unable to obtain conventional sources of capital.
No one is arguing the merits of expanding opportunities for small-business growth and development, but lenders in the Ocean State and key members of the U.S. Senate’s Small Business Committee are taking issue with how the rules will change the way the SBA distributes those loans.
“The changes seem heavily focused to giving lenders greater autonomy and less guidance, enabling them to rely on automation,” U.S. Sen. Ben Cardin, D-Md., chairman of the Small Business and Entrepreneurship Committee, said during an April 26 hearing on Capitol Hill. “Absent proper oversight, it’s easy to imagine a scenario in which these changes enable predatory lending practices to creep into the program.”
Cardin warned of “unforeseen and regrettable consequences down the road” if the rules are enacted without significant revisions and increased oversight.
One of the key sticking points: the new rules allow financial technology – or fintech – companies and other nondepository lenders to apply for small-business lending company licenses.
The SBA is lifting a four-decade moratorium that prevented it from adding new lenders to its flagship 7(a) and 504 loan programs. The revision also provides permanence for more than 100 nonprofit, mission-oriented lenders in the Community Advantage Pilot Program. Another change loosens affiliation standards, streamlines lending requirements, and reduces paperwork for SBA lending programs.
Opening the programs to fintech companies, which are largely unregulated, could put the entire SBA lending program at risk, says Frederick Reinhardt, CEO and president of Greenwood Credit Union in Warwick.
More lenders will require more oversight, and the regulators already don’t have enough resources to monitor for criminality. Cardin said the SBA’s Office of Credit Risk Management is so short-staffed that it cannot keep up with oversight of the 7(a) loan program.
“There’s too much potential for fraud and abuse,” said Reinhardt, pointing to a December 2022 congressional report that accused several fintech companies of raking in billions in fees from the SBA-administered Paycheck Protection Program.
Even the best of the fintech companies don’t have knowledge of the local economy, Reinhardt says.
“The process of getting an SBA loan is about more than filling in the blanks,” Reinhardt said. “A faraway lender is not in the best interest of the small business. A fintech can’t provide personal assistance.”
Of course, expanding the universe of SBA lenders also risks cutting into the business of credit unions, which traditionally have facilitated a significant proportion of SBA loans. The loans present little risk to lenders because anywhere from 75% to 90% is guaranteed by the federal government.
“Borrowers aren’t necessarily sophisticated,” Reinhardt said. “Though we don’t provide legal help, as bankers we provide experience with insights, thoughts and recommendations to guide the business owners to success. A fintech won’t do that.”
Jeffrey Cascione, senior vice president in charge of commercial lending at Smithfield-based Navigant Credit Union, says he is waiting for the SBA to finalize the instructions and guidelines that will spell out the particulars of how the new rules will impact lending.
“It’s just knowing what the landscape is going to be,” Cascione said. “We don’t want it to turn into the Wild West. We want everyone to serve as advisers, more than just giving money. There are some good-sized fintechs that offer rapid access to capital, but they lack the advisory side of it, the financial wellness guidance, that we can offer to small-business startups.”
U.S. Sen. Jodi Ernst, R-Iowa, ranking member of the Small Business Committee, lambasted Guzman during the April 26 hearing for ignoring revisions to the SBA rules suggested by the committee before they were finalized.
Ernst said the SBA is not prepared to evaluate the use of artificial intelligence or machine learning algorithms for underwriting and loan processing. Neither does it have the capacity to enforce federal anti-money-laundering laws and know-your-customer compliance, both vital controls in the U.S. financial system that keeps money from flowing to and from bad actors.
“I want to be very clear: We need to come to a bipartisan agreement on a legislative response to these rules before we begin negotiations on other aspects of modernizing the SBA,” Ernst said.
SBA Rhode Island District Director Mark S. Hayward says the SBA issued about $151.6 million in small-business loans in Rhode Island in 2022. Through the end of March 2023, the agency had issued loans totaling nearly $70 million.
“Through all the PPP, disaster loans, grants, and restaurant revitalization during the pandemic, we did about $4.1 billion in the state,” he said. “That’s a lot of money on the street in a short time.”
Hayward says it was too early to comment on the impact the changes in the rules would have on lending locally.
“We’ve been told to wait for the [new guidelines] to drop,” Hayward said. “We’ll have a better explanation then.”
