The U.S. Small Business Administration and the Consumer Financial Protection Bureau each issued new rules earlier this year aimed at expanding financial access to small business owners, especially those in underserved areas. did.
Starting August 1, 2023, SBA rule updates will allow new nonbank lenders to offer SBA 7(a) loans and will also update restrictive lending standards. Starting in 2024, the CFPB will begin requiring lenders to provide the public with transparent data on small business owners' loan applications. Here's what this means for business owners.
Additional Nonbank SBA Lenders
Small business lending companies (SBLCs) are non-bank institutions that are authorized to provide funding, such as financial technology companies and alternative financial institutions. SBA loan. SBLC licenses have been limited to 14 since the early 1980s, but the SBA has now added three licenses.
The purpose of this change is to encourage more financial institutions to offer SBA-backed loans, thereby reaching more small business owners. However, there are concerns that the SBA does not have the ability to adequately regulate additional agencies. predatory lender Anne Marie Mehlum, co-chair of the Bipartisan Policy Center's Task Force on the Future of the SBA and former associate administrator for capital access at the SBA, said there is a need to get into the market.
Joshua Miller, vice president of research and policy at Axion Opportunity Fund, a nonprofit community development financial institution, said that when predatory lenders can offer unfair or overpriced loan products in the name of the SBA, says it could mean more risks for small business owners. Based in California.
He advises borrowers to be “cautious” about doing business with small business lenders, as predatory lenders often do not offer annual interest rates. the true cost of debt It's behind things like factor rates.
The SBA will also issue a new type of license, called a Community Advantage SBLC, to participants in the pilot Community Advantage program and new nonprofit organizations. These licenses represent a permanent continuation of the CA program, which supports non-deposit, mission-based lenders targeting underserved communities, and was previously scheduled to expire in September.
Updated financing standards
In addition to issuing new licenses, the SBA also updated its lending standards. Instead of the previous nine factors used to determine creditworthiness, lenders now consider any one of three factors: an applicant's credit score or credit history, income and cash flow, capital or collateral, or Any combination can now be used.
Lenders will also be allowed to underwrite SBA loans using the same methods they use for their own similarly sized non-SBA business loans. In theory, this change would allow lenders to apply the best standards to their communities, expanding the pool of creditworthy borrowers. Miller suspects the SBA's inflexible and long-term lending standards have left many borrowers unable to access capital, and the changes would eliminate a “one-size-fits-all” underwriting approach. I hope so.
More applicant data
The CFPB's final rule amending the Equal Credit Opportunity Act will require financial institutions to begin reporting demographic data for all small business credit applicants. This data includes ethnicity, race, and gender, as well as minority-, women-, or LGBTQ+-owned business status.
The changes are specifically aimed at highlighting gaps in capital access. Underserved markets — and applies to a wide range of lenders, including merchant cash advance companies, banks, credit unions, and non-deposit financial institutions. Some of the provisions also state that insurance companies cannot access this demographic data.
“We think this is going to be great for small business owners, because so many underserved small business owners currently don't have access to capital, and they're losing out on the market. Because we don't see it at all,” Miller said. That's a plus for lenders. By understanding where the gaps are, lenders can further expand their market of qualified borrowers, he says.
Lenders will also be required to collect data beyond demographics, such as the type of credit, purpose and amount applied for, as well as a company's census tract, annual gross revenue, hours of operation, number of employees and number of owners. . Some financial institutions will be required to collect data by October 1, 2024 at the earliest, depending on the number of loans they make.
