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Proposed Rule: Affiliation and Lending Criteria (87 FR 64724) 

In October 2022, to regulations governing its 7(a) loan guaranty and 504 loan programs, with the stated purpose of streamlining and modernizing them to “facilitate robust participation.” These changes, if finalized, will affect more than 1,500 lenders and tens of thousands of loans each year. SBA also hopes they will attract more lenders into the program.

What Might Change?

Lending Criteria | Government-guaranteed loans to small businesses are not intended to be “bad” or unwise. Lenders in the 7(a) and 504 programs have historically been required to consider specific factors in determining creditworthiness. SBA’s proposed streamlining changes would:

  • Align lenders’ 7(a) and 504 decisions with credit analysis processes used for their similarly sized non-SBA loans.
  • Allow lenders to use data and modeling techniques, or business credit scoring models such as the Small Business Scoring Service.
  • Reduce the number of factors for lenders to consider when determining creditworthiness. Required factors will be credit score or history, earnings or cashflow, and equity or collateral (if applicable).

These changes would, according to SBA, draw on the agency’s pandemic experience, when technology platforms were leveraged in new ways to facilitate loans. They would also acknowledge lenders’ increasing use of new technological tools in assessing creditworthiness.

Affiliation Requirements

SBA considers several factors to determine eligibility for its financial assistance programs. The proposed rule removes the “principal of control” from the list of factors used in determining affiliation.

Partial Changes of Ownership

Currently, 7(a) loans may be used to finance a complete change of business ownership. The proposed rule would expand the allowable uses of loan proceeds to include partial changes of ownership—something SBA says will help small businesses owned by retiring owners remain open and help more employees own a share of the business where they work.

Between FY2018 and FY2021, only 17 of 31,940 7(a) loan guarantees used to affect a change of business ownership involved Employee Stock Ownership Plans (ESOPs), a common form of employee ownership. The proposed changes are part of a larger bipartisan effort, including passage of the Main Street Employee Ownership Act in the FY19 NDAA, to make it easier for small businesses to use 7(a) loans to transition to employee ownership.

What They’re Saying

In its proposed rule, SBA states that it anticipates little to no additional cost to the loan subsidy because of its proposed changes. Nevertheless, many current 7(a) lenders expressed concern during the public comment period that loosening lending criteria could have detrimental effects on lending, due in part to differences in the quality of scoring models lenders use. These commenters said that allowing lenders to use their own models, which include and weigh data differently, could increase the number of SBA-backed loans that default.

Other commenters urged SBA to expand the proposed rule by eliminating the personal guarantee requirement for 7(a) loans. Doing so, they argued, would allow cooperatives and other multi-stakeholder businesses to access government-backed loans.

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