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By Stephen Keen
Despite strong ICBA and community bank opposition, the Small Business Administration is moving ahead with a rule that could significantly harm its guaranteed lending programs. The SBA recently issued an interim final rule adjusting affiliation rules for its 7(a) and other loan programs that, if finalized, will inhibit small-business and agricultural lending.
Specifically, the rule includes an ICBA-opposed provision tightening the SBA's standard that determines whether borrowers are affiliates of larger companies. Under the rule's revised "affiliation" standard, borrowers that receive 85 percent or more of their revenue from larger firms for three straight years would be considered affiliates and, therefore, ineligible for SBA loans.
As ICBA and community bankers noted in a 2018 grassroots letter-writing campaign on what was then a proposed rule, this change to the affiliation standard could cause many Main Street small businesses and agricultural enterprises to be deemed ineligible for SBA loans.
ICBA noted in its December 2018 comment letter that the update could particularly harm contractors, subcontractors, and farmers that do business with larger companies. "Farmers selling corn to a single ethanol producer in their marketplace or dairy farmers selling milk to their dairy cooperative could also fall victim to SBA’s 85 percent test," ICBA wrote.
Revisions to this policy in the interim final rule exempt borrowers that sell to a larger firm by choice rather than necessity. And the SBA is establishing a review process for borrowers that are contractually required to sell most or all of their products to a single entity. Nevertheless, this policy continues to raise concerns about continued access to SBA loans and increased complexity in the lending process.
ICBA also expressed concerns with a provision requiring borrowers to use more of their own capital before accessing SBA loans. ICBA noted this would effectively remove any buffer that borrowers' have for unexpected expenses. ICBA also opposes a provision to cap fees on loans up to $350,000, which could hurt community banks that rely on agents and other third parties.
The SBA made some modest updates to these provisions in its interim final rule issued last month, but ICBA and community banks remain concerned. And we're not alone.
Senate Small Business and Entrepreneurship Committee Chairman Marco Rubio (R-Fla.) told SBA Administrator Jovita Carranza that his committee would pursue all available legislative remedies to offset the rule's harm to small businesses. And House Small Business Committee members expressed their concerns directly to Administrator Carranza in a recent committee hearing.
The rule is set to take effect March 11, but the agency is accepting comments through April 10 and could make further changes. ICBA has always been there to enhance and defend the valuable SBA lending programs important to so many community banks nationwide. We’ll continue working with the SBA and other policymakers to mitigate the negative impact of this rule on community banks and the small businesses, farmers, and ranchers they serve.
Stephen Keen is ICBA vice president of congressional relations.