New SBA rule lift small business lending company moratorium
The U.S. Small Business Administration (SBA) recently published new rules that lift the moratorium on licensing new Small Business Lending Companies (SBLCs) and add a new type of lending entity called a Community Advantage SBLC. This is a significant development for the small business lending industry as well as the companies they serve, with the potential to expand access to capital for underserved communities and entrepreneurs.
Under the new rules, the SBA began accepting applications for its 7(a) loan program on May 12, 2023, for new SBLCs, which are non-depository lending institutions that specialize in making loans to small businesses.
The SBA had previously imposed a long-standing moratorium on licensing new SBLCs as particpating lenders “because the Agency did not have adequate resources to effectively service and supervise additional SBLCs.” However, after conducting a comprehensive review of the industry, the SBA determined that it was appropriate to lift the 1982 moratorium imposed under Final Rule 47 FR 9 and begin licensing new lenders once again.
In addition to lifting the moratorium, the SBA also created a new type of lending entity called a Community Advantage SBLC. This type of lender will specialize in making loans to underserved communities and entrepreneurs who may have difficulty accessing capital through traditional lenders. Community Advantage SBLCs will be required to maintain a minimum amount of capital at the discretion of the Administrator, in consultation with SBA’s Associate Administrator for SBA’s Office of Capital Access (AA/OCA), or their designee(s) to ensure sufficient risk protection for the SBA and lenders while not burdening smaller lenders with large capital requirements.
The new rules have been met with mixed feedback. While some proponents, including small business advocates and the Financial Technology Association, have praised the rules, others, including the American Bankers Association, have raised concerns.
Small businesses, particularly those in underserved communities, have long struggled to access the capital they need to start and grow their businesses. By lifting the moratorium on new SBLCs and creating a new type of lender focused on serving underserved communities, the SBA aims to address this issue.
In addition to introducing more options for small businesses, the new rules will also create new opportunities for entrepreneurs and investors, including those in the fintech space, to enter the small business lending industry.
However, there are also concerns that come with expanding the small business lending industry. Some critics worry that new lenders may not be subject to the same regulatory oversight as traditional banks and lenders, which could put small businesses at risk. Others worry that new lenders may be more likely to charge higher interest rates or fees than traditional lenders, which could make it harder for small businesses to repay their loans.
The lifting of the moratorium on new SBLCs and the introduction of Community Advantage SBLCs is a significant development that could potentially benefit the small business lending industry and small businesses. It provides small businesses with more options for financing and could help level the playing field for entrepreneurs in underserved communities. As the small business landscape continues to evolve, it will be interesting to see how the industry responds to these new rules and how they shape the future of small business lending.
Contact me or another member of Kaufman Rossin’s Risk Advisory Services consulting team to learn more about how these rules may impact your financial institution.
Alexander Smith, CRCM, CFE, is a Risk Advisory Services Senior Manager at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.