Banks Warn on Looser Small Biz Lending Rules

New lenders entering the small business loans market may not be held to the same high standards as traditional banks following a recent rule change, according to the American Bankers Association (ABA).

Rob Nichols, president and CEO of the ABA, said in a statement that his organization was “disappointed” by the Small Business Administration’s (SBA) change to lending rules, announced last week.

The SBA has made changes to its 7(a) lending program designed to increase financing access for small businesses in underserved areas. One of the changes involved relaxing limits on the ability of “non-depository lenders” to offer small business loans.

Nichols questioned this change as it was made “without ensuring that those new participants will have to meet the same high regulatory compliance and underwriting requirements as banks”.

“It’s also not clear that SBA has the staff and resources to supervise these new lenders,” he added.

The SBA’s Isabella Casillas Guzman said in a statement that “modernizing and expanding SBA’s lending programs will open new opportunities to our highly entrepreneurial, yet underserved communities that have far too long been denied access to the funding they need to create jobs and grow our economy”.

The SBA said two thirds of business owners did not receive the credit they needed in 2022, while the number of lenders participating in the 7(a) Program fell by more than 40% over the past five to seven years for those providing loans of $50,000 or less. For those providing loans of up to $150,000, the fall was 25%.

However, the ABA’s Nichols argued: “Unlike banks, new fintech entrants to the program are not subject to federal prudential supervision, and are not required to comply with the Bank Secrecy Act and Anti-Money Laundering rules, safety and soundness requirements, stress testing, and other regulations that promote prudent lending.”

He called on Congress to “closely examine” the rule change in light of reports of fraud linked to non-bank lenders participating in the SBA’s Paycheck Protection Program.