Effective Rule: Regulatory Reform Initiative (87 FR 38900)
At the beginning of August 2022, SBA’s “Regulatory Reform Initiative” rule, originally proposed in December 2020, took effect. The rule was intended to revise or remove regulations pertaining to SBA lending programs that were deemed “obsolete, unnecessary, ineffective, or burdensome.”
The most significant change was to raise allowable variable interest rates, according to loan size rather than loan maturity, in the 7(a) program.
- For loans under $50,000 the maximum rate is base rate plus 6.5 points (with the prime rate an allowable base rate).
- For loans between $50,000 and $250,000, the maximum is base plus six points.
- For loans between $250,000 and $350,000, it is base plus 4.5 points.
- For loans over $350,000, the maximum is base plus three points.
At today’s prime rate, a 7(a)-backed loan for $25,000 could have an interest rate of up to 14%. The new maximum variable rates apply to all types of 7(a) loans; previously, rates varied between different 7(a) programs. This standardization is part of SBA’s streamlining to reduce the administrative burden on lenders.
What They’re Saying
Small business lenders have for many years pointed to interest rate caps in the 7(a) program as a barrier to making more small-dollar loans. While the costs to a lender of processing and underwriting are the same for a $25,000 loan as for a $250,000 loan, inability to charge a higher rate on the smaller loan meant that the incentive for lenders was to make the larger loan. In its justification for the higher allowable rates, SBA nodded to this reality: “historically, smaller loans are riskier and have a higher default rate and, therefore, a higher maximum interest rate is warranted. … By basing the rates on loan amounts and allowing Lenders to charge higher rates for smaller loans, Lenders would have more incentive to make smaller loans.” One consequence, not addressed in the proposed or final rule, is that this erases the differential that previously existed between 7(a) and Community Advantage.
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