Rep. Nydia Velazquez, D-New York, questioned the Small Business Administration’s plan to eliminate a 40-year moratorium on new small business lending companies at a hearing Thursday. Senior members of Congress are taking issue with how the Small Business Administration plans its discretionary spending, as well as its plans to open its 7(a) lending program to fintechs.
The Biden Administration released its fiscal 2024 budget March 9. The plan allocates $987 million of discretionary spending authority to the SBA. That is enough to support $57.5 billion of activity by its three primary lending and investment vehicles — the 7(a), 504 and the Small Business Investment Company programs.
Lawmakers seemed satisfied with those funding levels. However, last week, senior members of the Senate Small Business Committee and its House of Representatives counterpart called on SBA Administrator Isabella Casillas Guzman to tap the brakes on plans to end a longstanding moratorium that has limited the number of nondepository small business lending companies (SBLCs) licensed to participate in 7(a), SBA’s largest lending program, to 14 since 1983.
In November, the SBA proposed a rule that would both eliminate the moratorium, allowing new for-profit SBLCs — including potentially fintechs — and creating a new category of nonprofit mission-based SBLCs that would focus on serving underserved markets and demographic groups. One of the most forceful calls for caution around the moratorium came from Rep. Nydia Velazquez, D-N.Y., the House Small Business Committee’s ranking Democrat. At Thursday’s House Small Business Committee hearing, Velazquez called on the SBA to deal first with growing concerns around borrower misappropriation of pandemic relief funds before embarking on Guzman’s ambitious plan to redesign 7(a).
“Put simply, the agency should slow down and address issues with fraud in the Paycheck Protection Program before moving forward with major policy changes to the 7(a) program,” Velazquez said.
Velazquez’ comments come little more than two weeks after Sen. Ben Cardin, D-Md., and Sen. Joni Ernst, R-Iowa, the chairman and ranking Republican on the Senate Small Business Committee, wrote Guzman warning that plans to open 7(a) to more SBLCs — which could also open the door to fintech participation — might hurt program performance and lead to increased loan losses.
Speaking last week during the Senate committee’s hearing, Ernst told Guzman to focus on fraud, not changes to 7(a). “Report after report has been released from the investigative community indicating tremendous levels of fraud, yet the vast majority of stolen funds remain unrecovered,” Ernst said.
For her part, Guzman insisted her team is working closely with SBA Inspector General Hannibal Ware to uncover as many illicit pandemic relief loans as possible. At the same time, Guzman said that the SBA is seeking to end the moratorium “so that we can allow for more competition and a broader distribution network.” The SBA’s 7(a) program, which any new SBIC would join, is the agency’s flagship program, regularly guaranteeing loans in excess of $25 billion to small businesses. The Biden Administration provided 7(a) with $35 billion of funding authority in its fiscal 2024 budget.
Guzman, who was sworn in as the SBA’s 27th administrator in March 2021, has made expanding capital access to minorities and other underserved groups a hallmark of her tenure. She told lawmakers that nonbank lenders, including fintechs, will help achieve that goal. “SBA’s objective is to increase the number of lenders serving the hardest-to-reach small businesses,” Guzman said before the Senate Small Business Committee. But overcoming lawmakers’ concerns about fintech, which were considered a major, if unwitting, contributor to fraud in the PPP by a congressional probe headed by Rep. John Clyburn, D-S.C., in December, is proving a tough nut to crack for SBA.
“The Inspector General identified 70,000 potentially fraudulent PPP loans … and a disproportionate share of these loans were made by fintechs,” Velazquez said. “Lifting the moratorium on SBLCs to allow nonregulated entities to participate in SBA’s flagship lending program may not be the best way to reach underbanked communities.” Texas Republican Roger Williams, the House Small Business Committee’s chairman, said the SBA is disregarding findings that could help root out additional PPP fraud.
“Unfortunately, it looks like the SBA is not taking these recommendations seriously,” Williams said. He \cited the agency’s recent decision to stop collection efforts on PPP loans of $100,000 or less that were referred to the agency by lenders for nonpayment. The move to cease collection efforts on small-dollar PPP loans “raises fundamental questions about the proper stewardship of American taxpayer dollars,” Williams said earlier this month in a press release.
The SBA’s Inspector General also questioned the decision, but the agency has argued the cost of collecting charged-off PPP loans would far exceed any dollars recouped. Many in both the Democratic and Republican camps also expressed dismay over the agency’s plans to provide its two-year-old community navigator pilot program with a robust $30 million appropriation while reducing overall spending on the SBA’s established training and technical assistance network, including small-business development centers, women’s business centers, veterans’ business outreach centers and the SCORE business mentoring program. “The most recent metrics that we have available to us demonstrate that the [small-business development centers] and SCORE are overperforming, they’re more than meeting their stated targets,” Rep. Jared Golden, D-Maine, said. “It’s almost as if they’re getting punished for succeeding.”
Williams is promising to scrutinize the community navigators more closely, noting it received more than $131 million of emergency pandemic relief funding in 2021 and 2022 but aided in the creation of just 422 new businesses. “We cannot continue funding another duplicative, ineffective SBA program on the taxpayer’s dime,” Williams said.