December 12, 2022
Dear Senator Cardin, Senator Paul, Representative Velázquez, and Representative Luetkemeyer:
As the leading organization representing state-licensed and regulated non-depository online small business lenders that provide more than one-third of capital to America’s small businesses, we write in support of the SBA’s recently released Proposed Rules: Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a Loan Authorization, 87 FR 66963 (“SBLC Proposed Rule”) and Affiliation and Lending Criteria for the SBA Business Loan Programs, 87 FR 64724 (“Affiliation Proposed Rule”).
Nearly 70 years after the Small Business Act established the 7(a) program; small businesses continue to struggle to receive adequate and equal access to capital. The 7(a) program has relied on state, and federally chartered banks and credit unions , as well as a limited number of state and SBA, licensed and regulated SBLCs and Community Development Financial Institutions (CDFI) to distribute 7(a) loans. Unfortunately, there are significant gaps in access to capital for underserved communities.
According to the Federal Reserve’s 2022 Small Business Credit Survey, 59% of American small businesses have unmet funding needs.[1] 50% of Black-owned firms reported unmet funding needs, compared to 45% of Asian-owned firms, 44% of Hispanic-owned firms, and 34% of white-owned businesses.[2]
Fortunately, state-licensed and regulated non-depository online small business lenders are filling the gap. Research conducted by the Bank for International Settlements (BIS) and the Federal Reserve Bank of Philadelphia found that our lenders are:
“increasing access to capital at a lower cost for borrowers who are less likely to receive credit from traditional banks…” and “predicting future loan performance more accurately than the conventional method to credit scoring, leading to better loan performance”.[3]
While the Paycheck Protection Program (PPP) is not the same as the SBA 7(a) program or non-government guaranteed lending programs, it is worth noting the types of lending institutions that participated in the PPP program, who our lenders served and the distribution of the loans to better understand small businesses access to capital. In 2020, the average loan made by state regulated lenders was $24,132 compared to the program average of $101,000. In 2021, it was $18,113 compared to $42,000. According to the Federal Reserve Bank of New York:
“Fintech lenders likely served borrowers who would not have received loans otherwise. Applicants who approached fintech lenders for PPP loans were more likely to lack banking relationships, be minority owned, and have fewer employees.[4]”
In other words, state regulated lenders (Fintech & CDFIs) disproportionately served the smallest of small businesses and minority owned businesses. The conclusion reached by the Federal Reserve Bank of New York is supported by an increasing volume of academic research. We believe that our members were able to do this in large part due to their superior digital platforms and technology, to which depository financial institutions were slower to adapt.
State licensed and regulated non-depository online small business lenders and Community Development Financial Institutions (CDFI) are subject to state licensing and regulation as well as numerous Federal laws governing commercial lending including but not limited to:
- Section 5 of the Federal Trade Commission Act
- Section 1071 of the Dodd-Frank Act
- Equal Credit Opportunity Act and Regulation B
- Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, and Regulation V
- The Telephone Consumer Protection Act
- The Can-SPAM Act of 2003
- Holder Rule and equivalent state laws
- Section 101 a-b of the Electronic Signatures in Global and National Commerce Act
- Servicemembers Civil Relief Act
- The Coronavirus Aid, Relief, and Economic Security Act
In short, the attempt by certain industry groups to characterize state licensed and regulated non-depository online small business lenders as “unregulated” or “regulated solely by the SBA” is demonstrably false.
Additionally, and for the sole purposes of the 7(a) program, the SBA’s Office of Credit Risk Management (OCRM) provides additional oversight by managing program credit risk, monitoring lender performance, and enforcing lending program requirements. For the last forty years, the SBA OCRM has licensed state-regulated non-depository lenders to participate in the 7(a) program to much success and without significant issues. Three of the top ten 7(a) lenders by volume in 2022 are state-licensed and regulated non-depository lenders.[5] Three other SBLC license holders are Community Development Financial Institutions.
However, there has been a limit of fourteen licenses since 1982, meaning a lender would need to purchase a license from an existing license holder and likely acquire an existing lender’s business and portfolio to offer 7(a) loans nationally. This has effectively created the “taxi-cab medallion” of 7(a) lending licenses adding only value to the holder of the license and creating a virtual monopoly over the $36 billion a year government-guaranteed lending market for the last forty years.
For the SBA to expand access to 7(a) loans for businesses in underserved communities, it must increase distribution by leveraging state-licensed and regulated non-depository online small business lenders that are proven to reach these communities. It must also streamline and modernize the program to make it less costly and more efficient, which these two proposed rules seek to do.
Our support for these rules should not be interpreted as advocating for the weakening or lessening of regulatory requirements regarding the oversight of new licensees, which we believe neither proposed rule does. In fact, we believe new SBLC licensees should be held to the same regulatory and compliance requirements that have governed all SBA non-federally regulated lenders (NFRL) and the existing fourteen SBLC licensees for the last 40+ years.
Some are pointing to recent reports regarding fraud in the PPP as a reason to restrict SBA from issuing more SBLC licenses. However, we believe it is important to further emphasize that any comparisons of PPP to 7(a) are “apples to oranges” comparisons. PPP was enacted by Congress to be emergency triage in the darkest days of the pandemic. To ensure that funds would be readily available to prevent a collapse of the small business economy, policymakers designed the program with relaxed standards and procedures. In contrast, 7(a)’s well-established and robust Standard Operating Procedures (SOPs) have proven successful at protecting the integrity of the program and ensuring approved lenders’ underwriting is sound and effectively measures a borrower’s creditworthiness.
Now that the SBA is proposing to license and oversee additional state-licensed and regulated non-depository small business lenders, others in the industry are now advocating that all new 7(a) lenders should only be federally regulated depository institutions and that such a requirement would guarantee programmatic integrity. Opponents have failed to provide evidence or rationale for what, if any, systemic problems existing 7(a) lending standards or state-regulated lenders pose to the 7(a) program or how OCRM has failed to fulfill its responsibility to oversee lender practices and portfolio performance to date. Congress should view such conjecture with skepticism and determine the appropriate oversight necessary relative to the risk versus a one size fits all approach. If Congress and the SBA determine that OCRM is under-resourced to adequately fulfill its oversight responsibilities, then it should be resourced appropriately.
Congress should not let a few bad apples interfere with the opportunity to greatly expand access to capital for America’s small businesses by responsible state and SBA-licensed and regulated lenders with a track record of doing so. Congress has a responsibility to ensure that the SBA has the resources necessary to adequately fulfill its mission and that it remains responsible stewards of taxpayer dollars. We must increase distribution, encourage competition, ensure practical lending standards, conduct adequate oversight, streamline processes, increase efficiencies, lower costs, and modernize the SBA so it can aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.
It is for these reasons that we support the SBA’s proposed rules and believe it is taking a long overdue yet measured approach to these changes. We hope you will join us in supporting the SBA and its efforts to modernize the agency and its programs to better support America’s small businesses. We stand ready to help.
Sincerely,
Innovative Lending Platform Association
[1] https://www.fedsmallbusiness.org/survey/2022/report-on-employer-firms
[2] https://www.fedsmallbusiness.org/survey/2022/2022-report-on-firms-owned-by-people-of-color
[3] https://www.bis.org/publ/work1041.pdf
[4] https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders/
[5] https://www.sbalenders.com/most-active-sba-lenders/