Discover how recent regulatory changes by the U.S. Small Business Administration and Consumer Financial Protection Bureau are reshaping small-business funding access. Learn about expanded lending options, transparent data disclosure, and the potential impact on borrowers and lenders.
Questions Answered in this Article
1. What changes have the U.S. Small Business Administration (SBA) and Consumer Financial Protection Bureau (CFPB) introduced to support small-business owners?
The SBA and CFPB have introduced new rules to enhance funding access for small-business owners, especially those in underserved communities.
2. What modifications did the SBA make to its rules and lending criteria?
The SBA’s updates from August 1, 2023, include allowing new nonbank lenders to offer SBA 7(a) loans and revising restrictive lending criteria. Lenders can now use credit history, earnings, cash flow, and equity for assessment.
3. How does the SBA’s expansion of nonbank lenders affect the lending landscape?
The SBA has authorized additional nonbank SBA lenders, such as financial technology companies and alternative lenders, to broaden SBA-backed loan availability. However, concerns arise about the potential entry of predatory lenders into the market.
4. What caution is advised for borrowers considering small-business lenders?
Borrowers are advised to be cautious of lenders that don’t provide an annual percentage rate, as predatory lenders often hide the cost of borrowing behind opaque terms.
5. What is the CFPB’s rule change goal regarding data disclosure for small-business credit applicants?
The CFPB’s rule mandates lenders to disclose demographic data for small business credit applicants, including ethnicity, race, sex, and ownership status. The goal is to expose disparities in capital access, particularly within underserved markets, ultimately benefiting entrepreneurs and lenders by expanding the eligible borrower market.
What New Lending Regulations Mean for Small-Business Owners
In a concerted effort to bolster financial support for small business proprietors, particularly those in historically underserved communities, the U.S. Small Business Administration (SBA) and the Consumer Financial Protection Bureau (CFPB) have ushered in novel regulations earlier this year. As of August 1, 2023, the SBA has ushered in a series of updates to its rules, including the allowance for new nonbank lenders to extend SBA 7(a) loans. Concurrently, restrictive lending criteria have undergone revisions. Subsequently, commencing in 2024, the CFPB will mandate lenders to offer transparent data on loan applications by small business owners. The implications of these regulatory shifts for entrepreneurs are substantial.
Broadened Landscape of Nonbank SBA Lenders
A pivotal facet of these alterations is expanding the landscape for nonbank SBA lenders. These lenders, known as Small Business Lending Companies (SBLCs), encompass a variety of entities, including fintech companies and alternative lenders, that are authorized to administer SBA loans. Historically, SBLC licenses have been capped at 14 since the early 1980s. However, in a progressive move, the SBA has introduced three additional permissions to foster an increased offering of SBA-backed loans, thereby reaching a broader spectrum of small business owners.
Yet, concerns have emerged regarding the regulatory capacity of the SBA to oversee these additional institutions effectively. The potential risk of predatory lenders entering the market under the SBA’s aegis has been raised. Ann Marie Mehlum, co-chair of the Bipartisan Policy Center’s Task Force on the Future of SBA and former associate administrator for capital access at the SBA, underscores these apprehensions. Joshua Miller, vice president of research and policy at Accion Opportunity Fund, a nonprofit community development financial institution, echoes these concerns, emphasizing that small business owners might face escalated risks if predatory lending practices can penetrate the market.
Miller advocates caution when dealing with small business lenders that do not provide an annual percentage rate. This recommendation is born from the observation that predatory lenders frequently obscure the genuine cost of borrowing behind opaque terms such as a factor rate.
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Inauguration of Community Advantage SBLCs and Lending Criteria Evolution
Alongside the expansion of licenses, the SBA has unveiled a novel licensing category known as the Community Advantage SBLC. These licenses will extend to pilot Community Advantage program participants and emerging nonprofit organizations. Establishing these licenses marks a permanent continuation of the CA program, which had previously supported mission-based lenders targeting underserved communities and was slated to expire in September.
The SBA has also refined its lending criteria. Departing from the previous array of nine factors for assessing creditworthiness, lenders are now empowered to employ any single factor or a combination of three: the applicant’s credit history and score, earnings and cash flow, and equity or collateral. Furthermore, lenders are now at liberty to employ underwriting methodologies akin to those utilized for their non-SBA business loans of comparable size. This flexibility is envisioned to enable lenders to tailor their criteria to their specific communities, thereby widening the net of viable borrowers. This transition is eagerly welcomed by industry experts like Miller, who envisions ending the one-size-fits-all underwriting approach that potentially hindered numerous borrowers’ access to capital.
Enhanced Data Disclosure and Equity Considerations
In parallel, the CFPB has introduced a finalized rule, amending the Equal Credit Opportunity Act, which mandates financial institutions to disclose demographic data for all minor business credit applicants. This data encompasses ethnicity, race, sex, and whether the business is minority-, woman-, or LGBTQ+-owned. The motivation behind this change lies in identifying disparities in capital accessibility, particularly within underserved markets. The directive applies to various lenders, encompassing merchant cash advance companies, banks, credit unions, and nondepository lending institutions. Notably, underwriters are precluded from accessing this demographic data.
According to Miller, these changes are poised to be highly advantageous for small business owners who have hitherto been invisible to the market due to limited access to capital. Moreover, Miller believes that this development benefits lenders, too, by furnishing them with insights into areas of disparity, thereby facilitating an expansion of the eligible borrower pool.
Furthermore, lenders must collect data beyond demographics, including credit type, loan purpose, loan amount, the business’s census tract, gross annual revenue, time in operation, number of employees, and number of owners. For some institutions, collecting this data becomes mandatory as early as October 1, 2024, contingent on their loan origination volume.
In summation, the dynamic changes the SBA and CFPB brought forth are geared toward revitalizing the landscape of small business financing. The increased participation of nonbank lenders, revised lending criteria, and comprehensive data disclosure are projected to generate new opportunities while addressing the challenges faced by entrepreneurs, especially those in underserved communities. As the regulatory framework evolves, the empowerment of small business proprietors and the expansion of inclusive lending practices emerge as shared aspirations.
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Summary
- The U.S. Small Business Administration (SBA) and Consumer Financial Protection Bureau (CFPB) introduced new rules to enhance funding access for small-business owners, particularly those in underserved communities.
- Starting August 1, 2023, SBA updates allow new nonbank lenders to offer SBA 7(a) loans and revise restrictive lending criteria.
- In 2024, the CFPB mandates lenders to provide transparent data on small-business owner loan applications.
- Additional nonbank SBA lenders, including financial technology companies and alternative lenders, are authorized to expand SBA-backed loan availability.
- Concerns arise about the SBA’s ability to regulate additional lenders, potentially allowing predatory lenders to enter the market.
- New nonbank lenders might bring risks if they offer unfair or expensive loan products under the SBA’s umbrella.
- Borrowers are cautioned against working with lenders that avoid disclosing an annual percentage rate, a tactic often used by predatory lenders.
- The SBA introduces the Community Advantage SBLC license for pilot program participants and new nonprofit organizations, continuing support for mission-based lenders targeting underserved communities.
- SBA’s lending criteria evolve, allowing lenders to use credit history, earnings, cash flow, and equity for assessment and use methodologies akin to their non-SBA business loans.
- The shift in lending criteria aims to tailor assessments to individual communities and eliminate the “one-size-fits-all” approach to underwriting.
- CFPB’s rule change mandates lenders to disclose demographic data for all minor business credit applicants, including ethnicity, race, sex, and ownership status.
- The rule aims to uncover disparities in capital access, particularly in underserved markets, applying to various lenders.
- Underwriters are barred from accessing the demographic data to maintain fairness.
- Due to data disclosure, small-business owners’ visibility is expected to improve, benefiting entrepreneurs and lenders by expanding the eligible borrower market.
- For some institutions, lenders must collect data beyond demographics, including credit type, loan purpose, amount, business details, and revenue, starting from October 1, 2024.
