Small Business 7(a) Loan Reform
By Kaley Schafer, NAFCU Regulatory Affairs Counsel
Small businesses are the backbone of this country, and access to capital is vital in order to stimulate the economy and ensure they thrive. One lending option credit unions may not be aware of is the Small Business Administration (SBA)-guaranteed 7(a) loan. In an effort to assist both borrowers and lenders the SBA recently reformed the 7(a) loan program to enhance oversight and expand accessibility. The changes made are outlined below. If you are interested in offering 7(a) loans, the SBA provides several resources including a monthly webinar series on the different loan programs available. To give you an idea of how successful the SBA’s 7(a) loan program is, as of March 31st, SBA 7(a) gross loan amount totaled over $12 billion dollars. In fiscal year 2017, SBA 7(a) gross loan amount totaled over $25 billion.
The NAFCU-backed Small Business 7(a) Lending Oversight Reform Act of 2018 (the Reform Act) was signed into law on June 21st and makes several amendments to the Small Business Act (SBA Act). The Reform Act establishes and codifies an Office of Credit Risk Management (the Office) that is responsible for supervising 7(a) lenders, as well as establishes a Lender Oversight Committee. In addition, the Reform Act expands the definition of the “credit elsewhere” test and increases the SBA Administrator’s authorization cap for offering 7(a) loans. According to a report by the Federal Reserve Bank of New York on small businesses, roughly 55% of loan applicants sought credit in the amount of $100k or less, and only 46% of applicants received the total amount of credit requested. Of the total applicants in 2017, 26% sought an SBA loan or line of credit, and only 9% applied for credit through a credit union.
Office of Credit Risk Management
An appointed director will lead the Office and is responsible for oversight of lenders and conducting periodic compliance and performance reviews of both lenders and participants. The Office has supervision and enforcement authority, which includes the ability to assess civil monetary penalties of $250,000 or less and permits the director to take informal or formal actions against 7(a) lenders that violate statutory or regulatory requirements in a standard operating procedures manual or policy notice.
Beginning January 1, 2019, written reports to 7(a) lenders must be delivered no later than 60 days after the date of the conclusion of the review. If the SBA requires a response, then the lender has 45 days to reply after receiving the report.
The SBA published a notice of amendment to its delegation of authority on September 26, 2018, delegating its lender oversight and enforcement authority to the Director of the Office.
Lender Oversight Committee
The Lender Oversight Committee will consist of 8 or more members selected by the SBA. Committee duties include reviewing formal enforcement action recommendations by the director of the Office, and voting power to recommend action to the SBA Administrator.
Amended Definition of “Credit Elsewhere”
During the application process, applicants are asked about their prospects of obtaining credit from other sources. Previously, the definition of “credit elsewhere” only inquired about the availability of credit from non-Federal sources. This meant that if the applicant was able to obtain credit from the State and a private source, then both of those sources would be considered by the lender when deciding whether or not to extend credit.
The new definition of “credit elsewhere” includes non-Federal, non-State, or non-local government sources. The definition is broadened to include other factors such as:
- The business industry in which the loan applicant operates;
- Whether the applicant is an enterprise that has been in operation for a period of not more than 2 years;
- The adequacy of the collateral available to secure the requested loan;
- The loan term necessary to reasonably assure the ability of the loan applicant to repay the debt from the actual or projected cash flow of the business; and
- Any other factor relating to the particular credit application, as documented in detail by the lender, that cannot be overcome except through obtaining a Federal loan guarantee under prudent lending standards.
Authority to SBA Administrator to Increase Amount of General Business Loans
If the SBA Administrator determines that the amount of the commitments for general business loans authorized under Section 7(a) could exceed the limit on the total amount of commitments, then the SBA Administrator may authorize an increase in commitments for the fiscal year in an aggregate amount equal to or less than 115% of the limit. Prior to the increase, the SBA Administrator must submit notice 30 days beforehand to both the House and Senate Small Business Committees and Appropriations Subcommittees on Financial Services and General Government. This increased cap is only permitted once per fiscal year.
To find out more information about the different SBA loan programs, tune into the SBA’s free webinar on October 2nd at 9:00 am EDT. Registration is required. Please register here. This free live webinar is offered the first Tuesday of every month. Currently, there are 154 NAFCU members that reported having at least one outstanding SBA 7(a) loan during the last year. NAFCU has an established line of communication with the SBA, please reach out to us with any questions and we are happy to assist you. NAFCU and the SBA signed a Memo of Understanding during NAFCU’s 2017 Congressional Caucus, and we are committed to ensuring credit union access to SBA loans.