House Chairman, SBA IG Raise Red Flags Over Expanded Loan Program

Extension of program has been criticized by credit union trade groups, citing regulatory concerns.

A key House Republican and the Small Business Administration’s Inspector General are questioning the agency’s ability to properly police the expansion of its most popular loan program.

“Even with the agency’s abysmal record, the SBA is charging forward with reckless changes to its flagship 7(a) lending program,” House Small Business Committee Chairman Rep. Roger Williams, R-Texas, said this week. “Plain and simple, the agency does not have the ability to take on additional responsibilities laid forth in these rules.”

While a Republican committee chairman might be expected to oppose a Biden Administration program, the agency’s own Office of the Inspector General also is warning that the program may be open to abuse.

“OIG has identified oversight of high-risk lending participants, and improper payments in the 7(a) loan programs as top management challenges,” Sheldon Shoemaker, the SBA’s deputy IG said, in testimony prepared for a Senate Small Business Committee hearing on Wednesday.

Backstory and Context

The SBA last week announced that it was expanding the number of Small Business Loan Company licenses to allow up to three non-depository institutions to participate in the 7(a) program.

The agency has had a moratorium on issuing SBLC licenses; that moratorium is being lifted effective May 12. In announcing the decision, the SBA said it had conducted an in-depth assessment to determine that it had the capacity to administer the expansion of the program.

“Today, SBA is a modern, technology-forward agency that has the capacity to undertake these reforms by leveraging the talented agency staff along with private sector contracts to ensure appropriate oversight for all lenders,” the agency’s associate administrator for the office of capital access Patrick Kelley said, in testimony prepared for Wednesday’s hearing.

He added that SBA Administrator Isabella Guzman “has made clear that SBA’s objective is to increase the number of lenders serving the hardest-to-reach small businesses, including women, minorities, veterans, and rural firms, at no cost to the taxpayer.”

Pushback From Credit Union Groups

Credit union trade groups have criticized the expansion, contending that new lenders would not be traditional financial institutions regulated by a prudential regulator. Instead, the SBA would supervise the loan companies.

That could be a problem, Shoemaker noted in his testimony, citing the agency’s oversight of the pandemic Paycheck Protection Program as evidence of a poor management record.

“SBA’s lack of internal controls in PPP led to significant fraud risk and vulnerabilities,” he stated. “Additionally, we found that SBA did not have an organizational structure with clearly defined roles, responsibilities, and processes to manage and handle potentially fraudulent PPP loans.”

He explained that in examining the 7(a) program, the IG found that loans were made to borrowers who did not have the ability to repay, as well as loans that were not properly closed, resulting in improper payments. And he questioned whether the SBA has the necessary staff to oversee the program.

“SBA must take intentional steps to design, implement, and operate an effective internal control system as it lifts the moratorium on new Small Business Lending Company participation and adds the Community Advantage lending companies into the 7(a) loan program,” he said.

Shoemaker added further that Congress must provide the IG’s office with sufficient funding to oversee the expanded program.