The prospects for making the Small Business Administration’s flagship loan program more equitable may be looking up.
The Senate Entrepreneurship Committee on Wednesday voted to advance 11 bills that aim to bolster small-business lending and modernize the SBA–particularly its ability to serve business owners from low-income and marginalized communities. For example, one bill would create an Office of Native American Affairs at the SBA that would work with Native American tribes. Of note is the Community Advantage Loan Program Act of 2023, a bill that seeks to codify the Community Advantage pilot loan program, which has been in pilot mode since its launch in 2011.
The Obama-era loan program currently extends small-dollar loans–those under $350,000–to female, minority, and veteran entrepreneurs operating in underserved communities, and is set to expire on Sept. 30 of this year. The new measure Congress is weighing would more than double that amount to $750,000 for experienced lenders.
The change would upend a previous proposal to morph Community Advantage lenders, which numbered around 100 in April 2023, into Mission-Based Lenders and give them Small Business Lending Company (SBLC) status. This group of lenders, specifically licensed to issue the SBA’s most popular working-capital loans, had been capped at 14 for around 40 years. The prior proposal lifted the cap, but offered no notion of what a new cap would be. The SBA said it only had enough resources to welcome three additional lenders into the SBLC paradigm at this time.
Under the new proposal, the Community Advantage program would be made permanent and the cap for SBLCs would stick at 17.
It’s a change that’s unwelcome by some lenders. “Effectively what this has done is remove the power from the SBA to admit additional lenders in the future, and they’re going to have to go through Congress to do it,” says Ryan Metcalf, the head of regulatory affairs at Funding Circle, a Denver-based lending platform for small businesses.
While Funding Circle already originates small-business loans and acts as a lending service provider to banks, it was poised to potentially join the ranks of SBLCs under the old proposal, so it makes sense that Metcalf wouldn’t favor the change. But he does present a valid critique.
As Metcalf sees it, the proposed bill would bump up regulatory costs on non-depository lenders like Funding Circle. SBLCs will have to conduct stress tests, which map out how financial services companies operate in adverse situations. Funding Circle estimates that the proposed bill would cut the amount of SBA-backed loans the fintech company makes by 26 percent over the next three years.
That’s because Congress has proposed to divide the underwriting process for loans below and above the $350,000 mark, which Metcalf says would require separate loan underwriting processes; previously the cutoff for the differing underwriting process was $500,000. “We already have a core loan product at Funding Circle. We’re not going to create two additional underwriting products and manage three different underwriting processes,” he explains.
One reason behind the strategy shift: Sen. Ben Cardin (D-MD.), chair of the Senate Small Business and Entrepreneurship Committee, said during Wednesday’s hearing that Congress wants to ensure there’s adequate oversight for the SBA while “responsibly enlarging the SBLC program, codifying sensible underwriting and affiliation standards, and incentivizing small-business lending.”
The Maryland Senator adds that the committee’s aim is to expand opportunities for both lenders and small businesses, while preserving accountability.
Codification of the program is also significant, as a future administration would not be able to give the Community Advantage program the ax without Congress signing off.
“We remove the ability of the administration to potentially politicize SBA lending programs by prohibiting the administrator from overturning loan decisions,” Sen. Joni Ernst (R-IA), said during Wednesday’s Congressional hearing. Sen. Ernst is the ranking member of the Senate Entrepreneurship Committee.
The package of bills is expected to get tacked on to something like the National Defense Authorization Act, the defense spending bill Congress is currently mulling over. Congress could also approve the bills on their own.
