Lawmakers are looking to significantly increase oversight and regulation of the Small Business Administration’s flagship 7(a) program.
A bill introduced 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.”
Cynthia Blankenship, president and vice chair of the $483 million-asset Bank of the West in Grapevine, Texas, told the House Small Business Committee last week that an enhanced Office of Credit Risk Management would “strengthen the integrity of all SBA guarantee programs.”
Patricia Husic, president and CEO of the $532 million-asset Centric Bank in Harrisburg, Pa., agreed, describing the requirement for an annual credit review as common sense reform.
“Similar to how we, as bankers, regularly review our loan portfolios for credit risk performance metrics — such as historical performance and concentration risks — it makes sense to formalize OCRM’s role in regularly conducting such analyses,” Husic told lawmakers during her testimony.
Enhanced oversight is a logical byproduct of the 7(a) program’s recent growth spurt, Monson said.
“It’s somewhat expected,” Monson added. “Anytime you’re involved in a government program and you go to Congress [asking] for more money, there are always strings attached. Those strings are generally more oversight. … Reasonable oversight is never a problem.”