House And Senate Small Business Leaders Request Pause On SBA Lending Rule

Small business leaders from the House and Senate have requested putting the SBA lending rule on hold expressing concerns over the exit of key SBA official Patrick Kelley. Highlighting the risks associated with implementing the new rules in a hurry, they said that it’s important to have a stable leadership in place for smooth transition to the new lending rules.

The Small Business Administration (SBA) had announced on May 11 that Patrick Kelley, Associate Administrator for the Office of Capital Access, had left the organization. In a letter jointly sent to SBA Administrator Isabel Guzman, leaders of the House and Senate Small Business Committees expressed mutual worry over this and asked SBA Administrator Isabel Guzman to “pause” the two new regulations until Kelley’s replacement is in place.

Backstory

The Small Business Administration (SBA) recently finalized regulations to lift the embargo on the participation of non-depository lenders in the 7(a) program and to do away with the nine-factor underwriting requirement for 7(a) loans.

The SBA finalized the regulations in April, overhauling lending criteria and lifting a 40-year restriction on the maximum number of non-depository small-business lenders at 14. Improved financing access for underrepresented populations is the SBA’s ultimate goal in putting forth the new regulations. As it was revealed under the Biden Administration, three new Small Business loan Companies would be allowed access to the 7(a) loan program.

However, trade associations for credit unions have passionately opposed the idea, arguing that it exposes the program to fintech lenders who lack the same prudential oversight that credit unions and banks provide.

In his 40-year experience with this program, Tony Wilkinson, president/CEO of the National Association of Government Guaranteed Lenders (NAGGL), claims that he has “never seen such sweeping changes that provide more of a recipe for disaster.”

A larger level of loan losses is expected as a result of the new restrictions, according to Wilkinson and other opponents of them. The need for a subsidy from Congress may arise if there are further losses. The fees paid by borrowers and lenders currently more than cover the credit expenses associated with 7(a).

Further Concern

The resignation of Patrick Kelley from the SBA following his testimony before the Committee on Small Business is exceedingly worrying and has left a sizable leadership hole at a crucial time when the SBA is adopting new lending regulations. The Committee’s leaders express their concern in a joint letter about the risks that might result from hastily implementing the SBA’s planned changes to its lending programs without sufficient review.

Signing the letter were Senate Small Business and Entrepreneurship Committee Chairman Ben Cardin (D-Md.) and Ranking Member Joni Ernst (R-Iowa) and House Small Business Committee Chairman Roger Williams (R-Texas) and Ranking Member Nydia Velázquez (D-N.Y.).

Despite having different political philosophies, the signatories of this letter joined together to alert the SBA to the seriousness of the situation. The signatories have formally requested that the SBA temporarily postpone the proposed changes to the loan program, emphasizing the necessity for careful rather than hasty implementation. They have also emphasized the need for stable leadership to guarantee a seamless transition to the new lending regulation. It made note of the fact that there is still a lack of complete advice on these laws, making it more difficult for lenders to comprehend and adhere to the modifications.

Outlook

The need for stability and oversight at the SBA has been highlighted by the resignation of a key officer and the impending changes to the 7(a) Loan Program. In light of these worries, the small business leaders in Congress stressed the necessity of having a permanent successor for Kelley in place before the modifications to the SBA’s 7(a) Loan Program take effect.

The development of this scenario will surely be closely watched by small business owners and lenders who will be directly impacted by the modifications to the SBA’s lending programs. Successful implementation of these new regulations and the selection of a new Associate Administrator for the Office of finance Access with the requisite qualifications will determine their ability to obtain desperately needed finance.