Effective Rule: Community Advantage Pilot Program (87 FR 25398)
At the end of May 2022, changes to the Community Advantage program took effect. These changes followed a notice the agency had issued in April. That notice, among other things, extended the program through September 2024 and lifted the moratorium, in place since 2018, on letting new mission lenders into the program.
The effective rule:
- Allowed Community Advantage lenders to use the same credit criteria and collateral policies as they do with non-SBA loans.
- Removed restrictions on ineligibility relating to criminal records. Small businesses with “associates” who were incarcerated, on probation or parole, or have been indicted for a felony or a crime are now eligible for government-guaranteed loans, although lenders will evaluate loan applications from these borrowers according to their risk-based lending criteria.
- Increased the maximum loan size to $350,000 from $250,000.
- Authorized, for the first time, Community Advantage lenders to make revolving lines of credit. Doing so will still be subject to SBA review and approval.
- Raised the threshold for unsecured loans to $50,000, from $25,000.
- Modified the fee structure “to offset costs that may prevent [Community Advantage] lenders from making more loans, especially small loans under $50,000.” Previously, there was a cap of $2,500 on the fees that lenders could charge borrowers. The new graduated fee structure permits a fee of up to $8,750 on a $350,000 loan. For loans under $50,000, the maximum fee is $1,750.
- Updated allowable interest rates according to loan size. At today’s prime rate of 7.5%, the maximum interest rate on a Community Advantage loan under $50,000 would be 14%.
- Increased flexibility pertaining to hazard insurance, which SBA had previously required on all collateral, irrespective of loan size. SBA “determined that the hazard insurance requirement is particularly burdensome and costly for businesses seeking small dollar loans.” Now, lenders may follow the hazard insurance policies they have in place for similarly sized, non-SBA loans.
- Simplified affiliation rules, based on the “successful experience of affiliation streamlining under the temporary pandemic relief programs.”
What They’re Saying
Based on conversations BPC has held with lenders and stakeholders as well as comments submitted to SBA before the changes were finalized, these Community Advantage modifications were welcome. Lenders said they would ease credit underwriting and processing; the new affiliation rules are simpler and easier to understand, some said. Flexibility regarding hazard insurance would also be beneficial, better reflecting real-world circumstances: “So many times, there is little if any real practical liquidation collateral value in the small business personal property,” one Community Advantage lender told us.
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