April 15, 2023, update: Effective May 12, 2023, the SBA will begin accepting applications for new SBLCs. This may result in a large expansion in the number of non-depository lenders offering SBA loans.
If the White House has its way, in the future fintechs may be able to offer loans through the Small Business Administration (SBA) 7(a) and 504 lending programs that have been closed to new nonbank firms for nearly 40 years if a new proposal put forward by the SBA is approved. Citing a desired increase in small business lending in general and underserved lending markets in particular, the Biden administration announced on October 4, 2022, its proposed change allowing other fintechs and nonbank lenders to apply for Small Business Lending Company (SBLC) licenses.
Currently, over 1,000 SBA banks make at least one SBA loan a year. There are only 14 nonbank lenders participating in the SBA 7(a) program since 1982.Currently, for a nonbank to participate in SBA lending, the company must acquire one of the 14 Small Business Lending Company (SBLC) licenses or acquire or merge with nonbank lender that has an SBLC license.
The existing 14 nonbank lenders make an average 125 loans a year. Interestingly, in 1981 the SBA published a Final Rule (47 FR 9) repealing its authority to approve additional nonbank lenders, citing a lack of adequate resources to effectively manage new SBLCs. Even today, the SBA claims it may only be able to onboard up to three new SBLCs per year.
The SBA comment period on the proposed expansion of SBLC licenses is open until January 6th, 2023. Links to the comment portal and other information related to the proposed rule can be found at the Federal Register.
In addition to for-profit SBLC licenses, the SBA is adding “Mission-Based” SBLCs. The SBA proposes that Mission-Based SBLCs serve as nonprofit organizations that fill identified capital market gaps. As with regular SBLCs, these Mission-Based SBLCs will be licensed solely for the purpose of making 7(a) loans, but the capital requirements for Mission-Based SBLCs will not be as onerous as for-profit SBLCs.
The SBA’s SBLC expansion proposal could give the fintech sector another chance to demonstrate its effectiveness serving small businesses, as the sector did during the Paycheck Protection Program (PPP). Because of the huge small business demand for what was essentially free money via PPP, the SBA allowed approved fintech to participate in PPP, which resulted millions of nonbank PPP loans issued in a short period of time.
Fintechs will still need to consider costs of the program, including compliance, underwriting, servicing overhead, and capital requirements to participate. The SBA is proposing at least $5,000,000 in capital on the balance sheet of each participating fintech as well as the fintech’s agreeing to keep at a minimum 10% of each SBA-approved loan on their balance sheet. Given how the capital markets have eroded significantly in 2022 for fintechs, many otherwise willing participants may not apply given capital constraints.
While fintech companies were credited with helping more businesses access PPP loans, researchers found fraudulent PPP loans where skewed more heavily toward fintechs rather than traditional banks and credit unions. The taint of the fraudulent PPP loans may influence the decision to allow fintechs and other nonbank lenders into the 7(a) lending program. In December of 2022, the House Select Subcommittee on the Coronavirus Crisis issued blistering 130-page report titled “How Fintechs Facilitated Fraud in the Paycheck Protection Program,” evidencing that not everyone is onboard with SBLC expansion.
However, data indicates long-standing disparities in 7(a) loans based on race and income, which are designed to help business owners struggling to obtain financing. According to Harris’ announcement on October 4th, the White House hopes more nonbank lenders will make loans more accessible, ” The SBA’s objective for this policy change is to grow the number of lenders that receive its loan guarantee, thus increasing small business lending, particularly in smaller-dollar and underserved markets, where borrowers are most acutely shut out of current lending.