It’s tough to explain why the Small Business Administration favors banks over non-banks in its flagship SBA 7(a) loan program. For the last 28 years, the SBA has refused to license a single new non-bank lender and has restricted the ability of existing non-bank 7(a) lenders to finance their portfolios.
Since 1982, the SBA has been working to solve its 1970s operational problems by limiting the number of non-bank 7(a) licenses at 14. This Reagan Administration era policy was adopted in response to perceived poor management and high losses of the SBA during the preceding Carter Administration. Oddly, the SBA and it’s Congressional overseers haven’t seriously considered whether a restricted access policy still makes sense.
So while non-banks can’t become licensed 7(a) lenders, literally thousands of banks only need to fill out a few forms to get into the program.
The SBA 7(a) program is the most popular source of SBA backed loans and liquidity and according to Karen Mills, the SBA Administrator, the most important program that the SBA runs. Through the 7(a) program, the SBA provides 90% loan guarantees on loans up to $5 million in size and delivers liquidity to thousands of businesses that might otherwise be frozen out of the lending markets.
The SBA 7(a) program is a great way for sick banks to be able to make loans but is only marginally useful for healthy banks. Healthy banks don’t need the SBA 7(a) program to lend money to small business because they don’t need the liquidity that the SBA guarantee provides and they have plenty of capital to support their loan portfolios.
On the other hand, unhealthy banks make a lot of SBA 7(a) loans because the program solves two problems for weak institutions, a lack of capital and liquidity. Banks can both reduce their equity requirement and raise liquidity by selling the government guaranteed portion of newly originated SBA 7(a) loans into the secondary markets.
The SBA 7(a) program should be generating massive interest from healthy non-bank lenders which could get a lot of liquidity in the hands of small business owners.
Non-bank lenders don’t have the advantage of funding through insured deposits and the SBA 7(a) program should largely eliminate that disadvantage.
But, instead of being able to manage funding without interference from the SBA, current non-bank lenders must get SBA permission before using their SBA 7(a) loans for liquidity. The SBA regulatory process for the 14 existing non-bank lenders is generally perceived to be cumbersome and slow and takes away most of the advantage of being a SBA 7(a) lender.
As a result, since 1982, the SBA has been hitting non-bank lenders with a one-two punch. They have refused to license new lenders and have rationed liquidity for existing lenders.
How could it possibly be a good idea for the SBA to continue to prevent healthy, well capitalized and well managed non-banks from participating in the 7(a) program while being the back door bailout of choice for weak and failing depository institutions? Especially in light of the Obama Administration emphasis on job creation through the growth of small business and bi-partisan support for the small business sector of our economy.
Now is the time for the SBA and its Congressional oversight committee to ditch the 28-year-old restricted access policy and instead bring all healthy lenders into its flagship 7(a) program.