Over bankers' protests, SBA pushes ahead with lending rule rewrite

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Despite warnings from lawmakers, the Small Business Administration is moving forward with several measures some fear would curtail volume in its widely popular lending programs.

The agency plans to finalize a sweeping regulation to cap fees charged by lenders and third-party agents and to reinstate a personal resources test that would require borrowers to self-finance more of their credit needs before using SBA loans.

The rule, which was issued in interim form last week, would also tighten the affiliation standard meant to keep large borrowers from accessing government-backed loans.

The SBA has received more than 4,200 comment letters since it began requesting feedback in September 2018. The rule is set to take effect March 11, but the agency said Wednesday statement that it would accept comments through April 10 and could make eleventh-hour changes.

The plan has been criticized by a number of legislators.

Sen. Marco Rubio, R-Fla., wrote in a Feb. 6 letter to recently confirmed Administrator Jovita Carranza that the rule “will have a detrimental impact on America’s 30 million small businesses and their ability to raise needed capital.”

Rubio, who had urged the SBA to continue delaying implementation, warned Carranza that the Senate’s Small Business and Entrepreneurship Committee, which he chairs, will “pursue all legislative remedies available” to counter the rule’s presumed ill effects.

The SBA, for its part, claims the rule will provide “clear regulatory guidance and bright-line tests” that could save lenders and borrowers up to $20 million in its first year.

The affiliation standard, which has caused anxiety for farmers, was slammed in the comment letters.

The SBA originally said a small business would be considered economically dependent if it received 85% or more of its revenue from a larger firm for three straight years.

Critics claimed the standard would destroy a business practice used by numerous agricultural producers, most notably poultry farmers, that tend to sell their products to one or two buyers.

The agency made two revisions after more than a quarter of the comment letters criticized the original affiliation plan. First, the SBA will exempt borrowers who sell to a single integrator by choice rather than necessity. The agency also designed a review process for loan applicants with contracts requiring them to sell most or all of their production to one integrator.

The SBA established a website dedicated to explaining the guidelines it will use to evaluate review requests.

Sherrill Stockton, executive vice president of credit at the $4.8 billion-asset Live Oak Bank in Wilmington, N.C., a major poultry lender, said the regulation is workable, though it adds a significant level of complexity.

“We believe this further complicates how affiliation is determined and clarification is needed,” Stockton said. “Live Oak would prefer that the SBA write a rule that is clear and easy to navigate to avoid the need to have a subsequent determination by the agency at any time during the process that the lender’s determination may or may not be reasonable.”

Stockton said Live Oak plans to submit a comment letter to the SBA. The American Bankers Association is also considering submitting a letter.

The SBA received hundreds of comments objecting to the regulation’s fee and personal resources provisions. In response, the agency modified the rule to let borrowers seeking $350,000 or less maintain a higher level of liquid cash before becoming subject to the personal-resources test. It also agreed to let lenders charge up to $3,000 for loans of $350,000 or less, up from $2,500.

While the regulation sets a $5,000 cap for the fees lenders can charge for loans greater than $350,000, it allows third-party agents that broker deals to charge up to $30,000 for loans of $1 million or more. Currently, agents can charge 2% of the loan amount.

Critics have called on the SBA to let market forces dictate fees, though not everyone is opposed to the caps.

The fee structure isn’t “outside the realm of what’s reasonable, compared to some lender fees,” Bill Phelan, general manager at PayNet, a Skokie, Ill., unit of Equifax that rates privately held businesses, said Wednesday.

"There are business-practice rules in all parts of the market,” Phelan added. “I don't think it's a bad thing to have some form of awareness” of fees.

Still, Phelan said the SBA might run into trouble with the personal-resources provision, given the wide variety of businesses it serves and applicants’ differing cash needs.

“It’s hard to manage that across all the different business needs,” Phelan said.

Stronger underwriting, rather than a one-size-fits-all rule, would be a better way to make sure borrowers put enough of their cash in deals, Phelan said, adding that every commercial lender should be focused on automating lending processes.

“There's always someone in Silicon Valley looking for a better way” to speed up the application and approval process, Phelan said. Lenders that lag with technology "are going to wake up and find their business has been disrupted."

As with the affiliation standard, the personal resources provision will add new layers of complexity to SBA’s lending procedures, Marianne Byrne, managing principal at CAPCO, a London-based technology consulting firm, said Wednesday.

“Traditionally business owners don’t want to inject their own cash,” Byrne said. “The impact to process will require effective and efficient processes throughout while gathering information from application through post-loan.”

During its 2019 fiscal year, which closed Sept. 31, the SBA approved more than 58,000 loans for more than $28 billion. It's running slightly ahead of that pace through the first four months of the 2020 fiscal year, with 17,649 loan approvals totaling more than $9.2 billion.

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