April 12, 2023

SBA finalizes rule to increase 7(a), 504 participation

SBA loan documentThe Small Business Administration (SBA) issued its final rule to change regulations governing SBA's 7(a) and 504 Loan Programs related to lending criteria, loan conditions, affiliation standards, and more. The SBA noted these changes are “to encourage and facilitate more lenders to make small dollar loans.”

While NAFCU offered support for provisions of the proposed rule that would reduce costs and burdens on credit union SBA lenders, the association raised concerns about loosening guardrails for non-depository lenders that lack a prudential regulator – potentially increasing risks to the loan programs and creating an uneven playing field between credit unions and fintechs. NAFCU asked the agency to pause this and another related rulemaking on Small Business Lending Companies (SBLCs) to better understand the rules' separate and collective impacts. The SBA responded to these concerns by noting that SBA Supervised Lenders such as SBLCs that do not make non-SBA guaranteed commercial loans will need to submit their credit policies, including credit scoring models, for review by SBA prior to approval to participate in the program.

The final rule includes provisions, among others, to:

  • require lenders to underwrite SBA loans using the same credit analysis processes and procedures used for their similarly sized, non-SBA guaranteed commercial loans;
  • increase the threshold for 7(a) and 504 loans requiring hazard insurance on collateral to loans greater than $500,000 – a significant increase from the proposed rule threshold of $150,000;
  • allow borrowers to use 7(a) loan proceeds to purchase a portion of a business or an entire business, which was previously prohibited; and
  • provide the Director of the Office of Financial Assistance with the authority to delegate decision making related to reconsideration after denial of a loan application or loan modification to designees, and also allows the SBA Administrator to make the final agency decision on reconsideration.

The final rule takes effect May 11. NAFCU will continue to engage the SBA to ensure the safety and soundness of its business loan programs.