SBA Lifts Small Business Lending Company Moratorium, Creates New Small Business Lending Company Type, and Removes Loan Authorization Use | Practical Law

SBA Lifts Small Business Lending Company Moratorium, Creates New Small Business Lending Company Type, and Removes Loan Authorization Use | Practical Law

The US Small Business Administration (SBA) has revised the regulations for its 7(a) and 504 loan programs to lift an existing moratorium on new small business lending companies (SBLCs), create a new type of SBLC, and remove the use of loan authorizations.

SBA Lifts Small Business Lending Company Moratorium, Creates New Small Business Lending Company Type, and Removes Loan Authorization Use

by Practical Law Finance
Published on 12 Apr 2023USA (National/Federal)
The US Small Business Administration (SBA) has revised the regulations for its 7(a) and 504 loan programs to lift an existing moratorium on new small business lending companies (SBLCs), create a new type of SBLC, and remove the use of loan authorizations.
On April 11, 2023, the US Small Business Administration (SBA) issued a final rule (final rule) to revise certain of the regulations for its loan programs:
The final rule:
  • Lifts the SBA's existing moratorium on licensing additional small business lending companies (SBLCs) as participating lenders in the 7(a) loan program (SBLC moratorium) (see Lifting of SBLC Moratorium).
  • Creates a new type of SBLC, to be called a Community Advantage SBLC (CA SBLC) (see CA SBLCs).
  • Removes use of loan authorizations (see Removal of Loan Authorizations).
On November 7, 2022, the SBA published in the Federal Register a proposed rule (proposed rule) to lift the SBLC moratorium, create a new type of SBLC (which the SBA proposed calling a Mission-Based SBLC), and remove use of loan authorizations (see Legal Update, SBA Proposes Revisions to Its 7(a) and 504 Loan Programs).
The final rule is effective May 12, 2023.

Lifting of SBLC Moratorium

Background

SBLCs are:
  • Non-depository lending institutions licensed by the SBA who the SBA authorizes to make loans:
    • under the 7(a) loan program (7(a) loans); and
    • to lenders under the SBA's loan program under Section 7(m) of the Small Business Act (15 U.S.C. § 636(m)) (microloans program).
  • Subject to specific regulations about formation, capitalization, and enforcement actions.
  • Prohibited from affiliation with another lender under the SBA's loan programs (including lenders under the 7(a) loan program and certified development companies (CDCs) that make loans under the 504 loan program).
  • Regulated, supervised, and examined solely by the SBA.
The SBLC moratorium has been in effect since January 4, 1982 because the SBA did not have adequate resources to service and supervise more SBLCs than the 14 it currently supervises. Currently, if an entity wants to become an SBLC, it must acquire a license from an existing SBLC who is willing to sell its license.

Final Rule Revisions

Under the final rule, the SBA:
  • Lifts the SBLC moratorium.
  • Will accept applications for SBLCs from time to time as published in the Federal Register. The SBA will publish notices in the Federal Register with information about the SBLC licensing application process.
  • Will require a letter from an existing SBLC that the existing SBLC seeks to transfer its lending authority only for an applicant's acquisition of an existing SBLC license.

CA SBLCs

Under the final rule:
  • A CA SBLC:
    • must be either a nonprofit corporation or a participant in the SBA's Community Advantage pilot program (CA Lender) who the SBA determined to grandfather on May 11, 2023, whether it is a profit or nonprofit entity; and
    • may be affiliated with a CDC.
    A CA Lender who receives a CA SBLC license will transition from making 7(a) loans under a temporary pilot program to making 7(a) loans under a program without an expiration date.
  • A CDC that is a CA Lender as of May 11, 2023 may receive a CA SBLC license.
  • A CA SBLC:
    • may make 7(a) loans or loans to lenders under the microloans program; and
    • will be subject to all requirements applicable to SBLCs, except that it must maintain the amount or level set out below instead of the amount set out below applicable to an SBLC, and also must maintain a loan loss reserve account as determined by the SBA:
Requirement
CA SBLC Amount or Level
SBLC Amount
Minimum capital
Amount determined by the SBA to ensure sufficient risk protection for the SBA and lenders while not burdening smaller lenders with large capital requirements
Starting January 4, 2024, unencumbered paid-in capital and paid-in surplus of the greater of $5 million and 10% of the aggregate share of its outstanding loans
Fidelity insurance
Level determined by the SBA
Brokers Blanket Bond, Standard Form 14, Finance Companies Blanket Bond, Standard Form 15, or other form of coverage approved by the SBA for at least $2 million and executed by a surety holding a certificate of authority from the Secretary of the Treasury under 31 U.S.C. §§ 9304 to 9308
  • The SBA will determine the specific market requirements that will apply to a CA SBLC. This replaces the provision in the proposed rule that the SBA would determine a CA SBLC's:
    • minimum acceptable percentage of total loans to be made in the capital markets gap identified by the CA SBLC and to be individualized by the SBA based on the CA SBLC's target market, risk tolerance, financing needs, or other factors in its business plan;
    • maximum loan size; and
    • geographic area of operation.
  • The SBA will accept applications for Community Advantage SBLCs from time to time as published in the Federal Register.

Removal of Loan Authorizations

The SBA is removing use of loan authorizations because it agrees with lenders that the loan terms in a loan authorization duplicate information that lenders otherwise provide to the SBA with loan application data and conditions.
Under the final rule:
  • All references to a loan authorization are deleted from the SBA's regulations for its 7(a) loan program and 504 loan program.
  • The SBA will indicate loan approval by issuing a loan number.
  • Any timing based on issuance of a loan authorization (such as for payment of fees) will be based on issuance of the loan number.