House panel criticizes SBA over proposed affiliation rule

Jovita Carranza has been running the Small Business Administration for less than two months, but she’s already finding herself at odds with a growing number of lenders and lawmakers.

Bankers and their supporters in Congress continue to press the SBA over a proposed rule, issued in interim form on Feb. 10, that they claim will limit the ability of poultry and other livestock producers to obtain government-backed loans under the agency’s flagship 7(a) program.

Rep. Dan Bishop, R-N.C., expressed his concerns during a Wednesday hearing of the House Small Business Committee. Carranza, who was confirmed by the Senate only last month, testified at the hearing.

“I’m concerned this controversy has created so much uncertainty and vagueness it will be untenable for lenders” to make 7(a) poultry loans," Bishop said, describing poultry producers as “hard-pressed small businesses that need to have access to capital.”

Rep. Kevin Hern, R-Okla., criticized the SBA for letting the interim final rule take effect before its comment period ends. The rule is scheduled to take effect March 11, though the agency will accept comment letters through April 10.

“That’s kind of a problem,” Hern said. “It would indicate SBA doesn’t care what the comments are.”

The initial version of the rule, made public in September 2018, included a provision that deemed applicants economically dependent — thus affiliated — if they received 85% or more of their revenue from another business over a three-year period.

In its current form, the rule softens the economic dependence standard by exempting producers that opt to work with a single, larger client. It allows for a review process in instances where contracts restrict applicants from selling to other purchasers.

But even in cases where the SBA finds no economic dependence or other obvious connections, the interim final rule lets the agency conclude an affiliation exists based on a “totality of circumstances” standard that critics argue is vague and could produce a chilling effect among lenders.

For her part, Carranza said on Wednesday that the proposed affiliation standard is intended to give cover to small chicken farmers.

“It’s about protecting chicken farmers and [ensuring] that as they access capital they have the independence and ability to repay; that the industry is not demanding or having more control than necessary,” Carranza said.

Earlier this month, Sen. Marco Rubio, R-Fla., who chairs the Senate Committee on Small Business and Entrepreneurship, wrote in a letter to Carranza that the interim final rule “will have a detrimental impact on America’s 30 million small businesses and their ability to raise needed capital.” Rubio promised to “pursue all legislative remedies available” to counter the rule if it takes effect.

Lenders are also concerned.

“The '`totality of the circumstances' rule remains very vague and can include anything SBA wants it to include as it pertains to affiliation, subjecting the SBA Lender to greater risk when being audited or when attempting to get SBA to honor its guaranty on a failed SBA loan,” Scott McKennon, an agricultural lender at the $1.4 billion-asset First Financial Bank in El Dorado, Ark., wrote Tuesday in a comment letter.

The conflict started when the SBA’s inspector general issued a report in March 2018 that found most chicken farmers are linked so closely to larger poultry companies they’re essentially subsidiaries.