The Sunshine Report

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.