Lawmakers are looking to significantly increase oversight and regulation of the Small Business Administration’s flagship 7(a) program.
A bill introduced in by Rep. Steve Chabot, R-Ohio, would codify the SBA’s Office of Credit Risk Management and require the agency to conduct an annual risk analysis of the 7(a) portfolio. The bill would also require the SBA to submit an annual justification for the Office of Credit Risk Management’s budget.
Those caveats are part of a measure that would give Administrator Linda McMahon authority to increase the 7(a) program’s funding authority by 15% once every fiscal year to avoid interruptions.
The effort comes at a time when deregulation has been the mantra in Washington. Meanwhile, chargeoffs in the 7(a) program ended fiscal year 2017 at the lowest levels in five years.
During the fiscal year that ended Sept. 30, the agency charged off $690 million of 7(a) loans, or just 0.8% of the program’s $86.2 billion in unpaid principal balances. The last time the chargeoff rate fell below 1% was in fiscal year 2013.
“The SBA portfolio continues to perform well into 2018 with no noticeable change in credit quality,” agency spokeswoman Shannon Giles said by email Thursday. “Defaults remain at their lowest levels in years.”
The low chargeoff rate is a sign that SBA lenders have improved underwriting by “using more empirical data and common sense,” said Jay Lucas, director of credit services at the Atlanta accounting and consulting firm Porter Keadle Moore.
“I think bankers inherently are doing a much better job on the front end,” Lucas said. “They’re doing their due diligence, talking with their borrowers, helping them with those business plans to make sure they’re realistic [and] they’re working on them with their projections.”
In spite of more rigorous underwriting, the 7(a) program continues to grow. Through the first three weeks of January, lending activity is up more than 27% over the same period in fiscal 2017. As of Jan. 19, the program had approved guarantees for loans totaling $8.4 billion, compared with $6.9 billion a year earlier.
The federal government’s fiscal year begins Oct. 1.
Giving the SBA the ability to increase the lending limit addresses uncertainty that has plagued 7(a) in recent years.
SBA officials and lenders have lobbied for more autonomy to avert the type of shutdown that took place in July 2015, when the program had to halt operations for nearly a week as it hit a legally mandated funding cap of roughly $18.8 billion. Congress rushed to add nearly $5 billion of emergency funding authority.
The SBA requested authority to guarantee $29 billion of 7(a) loans in its fiscal year 2018 budget.
Allowing the administrator to expand the program “is a good thing,” said Arne Monson, president of Holtmeyer & Monson, the nation’s largest SBA servicing firm. “It avoids a potential crisis as you get toward the end of the year.”
Lenders, who have been vocal advocates for less regulation elsewhere, broadly support the bill, even though it includes the credit-review mandate, the potential for tougher audits and stricter language defining a key test each loan faces to certify that it can’t be made under conventional terms.
“It seems to me bankers are very responsive in a positive manner,” Lucas said.
“The program is doing well, you’re not seeing any significant fraud or losses or things of that nature,” Lucas added. “I think [the bill’s intent is] just to protect the 7(a)’s integrity. … I haven’t seen any negative feedback.”
Credit union support
The bill has garnered support from the credit union community.
Sonya McDonald, EVP and chief lending officer at Randolph-Brooks Federal Credit Union testified in support of the bill recently on behalf of the National Association of Federally-Insured Credit Unions.
Last fall, NAFCU signed a partnership with the SBA aimed at improving access to small-dollar loans for small businesses nationwide.
McDonald told the House Small Business Subcommittee NAFCU was pleased to see the work done by H.R. 4743, including that the Credit Elsewhere Test was better defined for lenders and that SBA was given the authority to increase the budget amount, rather than having a hard cap on SBA loans.
McDonald also said NAFCU believes the legislation could be improved by defining penalties more clearly.
“For example, what constitutes a small penalty versus a $250,000 penalty?” McDonald said. “Adding clarity that requires the director to distinguish between minor compliance errors and willful or negligent violations would be helpful. Also, will the budget to be submitted each fiscal year include estimated penalties? If so, how will the office ensure correct fees are being charged?”
McDonald also urged the committee to reintroduce the Credit Union Small Business Lending Act.
“The bill would amend the Federal Credit Union Act to exclude any SBA loan from the meaning of ‘member business loan’ of a credit union,” she said. “These loans would thereby be exempted from the arbitrary credit union member business lending cap.” NAFCU hopes that this revision would encourage the already increasing amount of credit unions participating in SBA programs.
McDonald also asked for greater clarity from SBA in answering questions about standard operating procedures, and said NAFCU supports efforts to temporarily increase the guarantee on SBA loans.