ABA Statement for the Record, House Small Business Committee, May 17, 2023
Summary
A Statement for the Record by the American Bankers Association (ABA) to the House Small Business Committee dated May 17, 2023, for the hearing "Taking on More Risk: Examining the SBA's Changes to the 7(a) Lending Program Part II." The ABA states serious concerns about two final SBA rules: the SBLC Rule, which lifted the moratorium on nondepository Small Business Lending Companies and created Community Advantage SBLCs, and the Affiliation Rule, which loosened 7(a) underwriting and removed a list of nine creditworthiness factors. It argues that SBA's OCRM lacks capacity to supervise new lenders and that the rules may raise borrower and lender fees. Citing a Select Subcommittee on the Coronavirus Crisis report on fintech fraud in the Paycheck Protection Program, the ABA urges Congress to consider potential legislative responses.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Cited in: American Bankers Association / BankPac
Archived web capture. Preserved source — captured from www.congress.gov; archived 2026-09-27.
Cite this document
“ABA Statement for the Record, House Small Business Committee, May 17, 2023.”
Original at www.congress.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/aba-statement-for-the-record-house-small-business-committee-may-17-202-feaa804969/
, SHA-256 91157a29fd45c72afe698bb8b310079314963eaf6e92949c7c7cc60bdb23e15c.Full text
Statement for the Record
On Behalf of the
American Bankers Association
Before the
House Small Business Committee
May 17, 2023
1
Statement for the Record
On Behalf of the
American Bankers Association
Before the
House Small Business Committee
May 17, 2023
The American Bankers Association (ABA) appreciates the opportunity to provide a Statement for the
Record for this hearing, Taking on More Risk: Examining the SBA’s Changes to the 7(a) Lending
Program Part II. ABA is the voice of the nation’s $23.6 trillion banking industry, which is composed
of small, regional and large banks that together employ more than 2 million people, safeguard $19.2
trillion in deposits and extend $12.2 trillion in loans.
On behalf of our member banks participating in the U.S. Small Business Administration (SBA) 7(a)
loan program, we write to make you aware of our serious concerns regarding SBA’s recently
finalized rules: Affiliation and Lending Criteria for the SBA Business Loan Programs (“Affiliation
Rule”) and Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the
Requirement for a Loan Authorization (“SBLC Rule”). In the SBLC Rule, SBA lifted the
moratorium on the number of nondepository institutions (called Small Business Lending Companies
or SBLCs) that can make loans under the 7(a) program and to create a new type of SBLC called
“Community Advantage SBLCs.” SBA stated that the purpose for removing the moratorium is to
expand capital opportunities for underserved businesses. In the Affiliation Rule, SBA loosened the
7(a) program’s requirements for how lenders underwrite loans and how borrowers may use loan
funds.
Together, these major regulatory changes lay out a detrimental shift in the 7(a) lending program.
Both final rules remove or modify long-existing prudent lending standards which have ensured
programmatic integrity for decades. It is into this framework of loosened lending standards that the
SBLC Rule also opens SBA’s flagship 7(a) program to a potentially unlimited number of SBLC
lenders, including non-bank financial technology (fintech) companies, which would be regulated at
the federal level solely by SBA. SBA’s stated intention for these sweeping changes is to aid
traditionally underserved borrowers, a laudable goal that our association supports. However, as
explained more fully below and in the comment we submitted in SBA’s rulemaking process, 1 these
changes may negatively impact the performance of loans made under the 7(a) Program, threaten the
integrity of the program, and lead to increased borrower and lender fees. Consequently, the changes
could unintentionally harm the very borrowers that SBA is trying to aid.
1
Comment of Am. Bankers Ass’n, Affiliation and Lending Criteria for the SBA Business Loan Programs; Small
Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a Loan
Authorization (filed Dec. 27, 2022), https://www.aba.com/advocacy/policy-analysis/sba-proposed-rules-to-lift-
moratorium-on-nondepository-lenders.
2
Because Congress has a vested interest and oversight responsibility in ensuring the integrity of
SBA’s cornerstone loan program, we urge Congress to consider potential legislative and
Appropriations responses to the final rules.
Specifically, our concerns include, but are not limited to, the following list:
• We are concerned that the rules will not actually promote mission lending. The new SBLCs, like
the existing SBLCs, are not subject to any requirements to serve underserved borrowers or to
make small-dollar loans. While the rule creates a new category of Community Advantage SBLCs
to focus on mission lending, it fails to present any clear set of defined or consistent mission-
lending requirements for these entities. In fact, the final rule removed the requirement, present in
SBA’s proposal, that would have required Community Advantage SBLCs to make a certain
percentage of its loans in an identified capital market gap. Instead, SBA stated in the final rule
that the Administrator “will determine the specific market requirements, if any, that apply to
Community Advantage SBLCs . . . .” 2
• In lifting the moratorium, SBA has assumed supervisory responsibilities over the new non-
federally regulated lenders that SBA will accept into the 7(a) program. OCRM will serve as the
primary regulator for every new SBLC, and SBA states that it has adequate staffing and funding
to supervise three additional “regular” SBLCs, or non-mission lending entities, at this time.
However, SBA’s belief in its supervisory capacity is not in line with SBA lenders’ experience
that OCRM is operating at its maximum capacity, given its existing responsibilities, low staffing,
and limited resources. As evidence, SBA’s Office of Inspector General (OIG) found that
nondepository lenders in SBA’s loan programs currently are subject to “limited SBA oversight”
until a loan default occurs. 3 A separate SBA OIG audit “identified additional significant issues
regarding internal control weaknesses for lender oversight.” 4 As described in detail in the next
section, we are concerned about the potential for imprudent lending behavior that presents risk to
both borrowers and the performance of SBA’s 7(a) portfolio.
• We are concerned that SBA failed to promulgate any regulatory requirements that would attempt
to mirror, for the new SBLCs, the federal regulatory and compliance requirements imposed on
depository institutions that are supervised by a Federal banking agency. Hallmarks of prudent
lending – including compliance with Bank Secrecy Act and Anti-Money Laundering
requirements, concentration caps, safety and soundness parameters, stress test parameters, and
other regulatory criteria to promote prudent lending – apply to every 7(a) lending decision made
by a federally-regulated bank. However, none of those requirements are set out by SBA. Rather,
SBA states that a lender should follow its federal regulator’s requirements. And while SBA does
review and monitor lenders’ SBA loan practices and performance, it does not attempt to replicate
the extensive supervisory framework that the federal banking agencies have in place which
governs all federally-regulated lender behavior, including a federally-regulated lender’s SBA
lending behavior. A complete absence of any federal regulatory standards for new unregulated
entities is deeply worrisome.
2
Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a Loan
Authorization, 88 Fed. Reg. 21,890, 21,894 (Apr. 12, 2023).
3
U.S. Small Bus. Admin., Report on the Most Serious Management and Performance Challenges Facing the Small
Business Administration in Fiscal Year 2020, at 8 (2019), https://www.sba.gov/sites/default/files/2019-10/SBA-
OIG-Report-20-01_0.pdf.
4
Id.
3
• While the rule includes supplementary information indicating that SBA intends to approve only
three new “regular” SBLCs right now, the actual regulatory language does not limit SBA’s ability
to add an unlimited number of SBLC licenses at any time in the agency’s sole discretion. The
final rule also does not limit the number of 7(a) loans each new SBLC may make nor establish a
lower maximum loan size appropriate for entities new to 7(a) lending. The absence of a limit on
the number of new entrants to the 7(a) program or loans these institutions could make is
imprudent, in light of SBA’s existing challenges with providing effective oversight to
nondepository lenders, as described above.
• Our concern over the lack of regulatory requirements for SBLCs in the SBLC Rule is deepened
by the Affiliation Rule’s sweeping changes to long-held prudent lending standards in the 7(a)
program. The Affiliation Rule would largely remove these prudent lending guardrails.
Specifically, the Affiliation Rule removes the detailed list of nine factors that lenders were
required to consider when determining whether a loan applicant is creditworthy. As a substitute
for the existing credit analysis factors, SBA amended the regulations to require lenders to use
“appropriate and prudent generally acceptable commercial credit analysis processes and
procedures consistent with those used for their similarly-sized, non-SBA guaranteed, commercial
loans.” SBA also allows a lender to use a “business credit scoring model” and may consider the
applicant’s credit score or credit history, the applicant’s earnings or cash flow, or the applicant’s
equity or collateral. 5
The underwriting standards in place prior to the Affiliation Rule preserve the integrity of the 7(a)
Program and the performance of the 7(a) portfolio by ensuring that only creditworthy applicants
receive 7(a) loans. As stated above, these standards are particularly important for ensuring
nondepository institutions, which are not federally supervised, follow prudent underwriting
standards. If a lender is directed to follow underwriting procedures that it would use for its
similarly sized, non-SBA-guaranteed loans, as SBA has proposed, federally-supervised
depository lenders will continue to make 7(a) loans based on the requirements imposed on them
by their prudential regulator, while non-federally supervised lenders—i.e., nondepository fintech
lenders—will have no such guardrails to ensure sound lending. No borrower benefits when it
receives a loan for which it cannot make repayment. SBA’s current underwriting standards help
the agency maintain the performance of the 7(a) portfolio and the integrity of the 7(a) Program. If
portfolio performance is not maintained because of relaxed lending requirements, SBA may need
to increase fees for borrowers and lenders to cover the rising costs of the portfolio. This would
harm the underserved small business borrowers that SBA and ABA’s member banks seek to
serve through the 7(a) Program.
• We are also concerned that SBA is expanding the number of SBLCs and loosening underwriting standards
when recent reports indicate SBA did not identify and stop widespread fraud by nondepository fintech
companies in the Paycheck Protection Program. The report issued by Congress’ Select Subcommittee on
the Coronavirus Crisis last December found that fintech lenders participating in the PPP “approved a high
5
Affiliation and Lending Criteria for the SBA Business Loan Programs, 88 Fed. Reg. 21,074, 21,085 (Apr. 10,
2023), https://www.govinfo.gov/content/pkg/FR-2023-04-10/pdf/2023-07173.pdf. By a procedural notice issued on
May 9, 2023, SBA is requiring more robust underwriting criteria for 7(a) loans greater than $500,000 – i.e., criteria
that are similar, but not identical, to the nine-factor test that the 7(a) final rules removed. U.S. Small Bus. Admin.,
SBA Procedural Notice, No. 5000-846607 (May 9, 2023). But this enhanced underwriting requirement does not
apply to loans of $500,000 or less. These smaller loans may be riskier because they are typically provided to smaller
businesses.
4
volume of fraudulent PPP loan applications” in part because of relaxed SBA protocols and procedures. 6
The report cautions, “Congress and the SBA should consider carefully whether unregulated businesses
such as fintechs, many of which are not subject to the same regulations as financial institutions, should be
permitted to play a leading role in future federal lending programs.” 7 We agree.
We urge Congress to consider potential legislative responses to the SBLC and Affiliation Final Rule
that would limit the risk that these rules pose to the solvency and integrity of the 7(a) program. ABA
stands ready to work with Congress to achieve this aim.
6
Select Subcommittee on the Coronavirus Crisis, “We Are Not the Fraud Police”: How Fintechs Facilitated Fraud
in the Paycheck Protection Program 1 & 7 (2022),
https://coronavirus.house.gov/sites/democrats.coronavirus.house.gov/files/2022.12.01%20How%20Fintechs%20Fac
ilitated%20Fraud%20in%20the%20Paycheck%20Protection%20Program.pdf [hereinafter, Select Subcommittee
Report]. In addition, a Bloomberg analysis of Department of Justice data found that 75% of loans made under the
PPP that were associated with fraud were connected to a fintech lender even though those companies arranged only
15% of PPP loans overall. See Michelle F. Davis, PPP Scammers Made Fintech Companies Their Lenders of
Choice, Bloomberg (Oct. 7, 2020), https://www.bloomberg.com/news/articles/2020-10-07/ppp-loans-scammers-
used-fintech-companies-to-carry-out-fraud?leadSource=uverify%20wall.
7
Select Subcommittee Report, supra note 6, at 7.
5
File and source
- File
- hhrg-118-sm00-20230517-sd004_3ae967c2140aa172.pdf
- Size
- 195,778 bytes
- SHA-256
- 91157a29fd45c72afe698bb8b310079314963eaf6e92949c7c7cc60bdb23e15c
- Original
- www.congress.gov