Summary of Small Business Lending Oversight Act of 2016

Director of Office of Credit Risk Management and supervision of lenders in 7(a) program

  • Adds requirement that an SBA employee is present for & supervises all full reviews conducted by contractors used by the agency
  • Enforcement authority of OCRM Director is made clear and, in addition to other actions deemed inappropriate by SBA regulations, adds the ability “to impose penalties” on a 7(a) lender that “knowingly and repeatedly” does any of the following:
  • Fails to properly determine and document eligibility of loan based on promulgations of Small Business Act and SBA’s regulations, including failure to document that loan applicant is unable to obtain credit elsewhere
  • Sells the guaranteed portion when loan proceeds have not fully disbursed as is mandatory under program requirements
  • Imposes any fee on an applicant no specifically authorized by SBA
  • Re-amortizes loan “solely” to make it appear current
  • Penalties that may be imposed on lenders for ‘bad behavior’; based on the severity and frequency of behavior failing to comply with requirements include:
  • Denial of liability on loan (as is always true)
  • Warning and an order to comply
  • Suspending lender’s PLP status for 90 days up to 1 year (lender can appeal to Office of Hearings & Appeals)
  • Prohibiting lender from issuing 7(a) loans (lender can appeal to Office of Hearings & Appeals)
  • Any lender on which penalty above imposed (suspension of PLP status or ability to issue 7(a) loans) remains “obligated to maintain all servicing and liquidation activities delegated to the lender by the Administrator.”
  • Assessing civil money penalties from $5,000 up to $250,000 (lender can appeal to Office of Hearings & Appeals)
  • Prohibiting from selling in the secondary market
  • Any other penalty that the “Director determines to be appropriate after considering the severity and the frequency of the violations of the lender”
  • Includes deadlines by which SBA must publish final Regulation on penalties
  • Includes requirement that OCRM report to Congress annually on all actions taken during previous year

Portfolio Risk Analysis: SBA required to conduct annually risk analysis of 7(a) portfolio

  • Annual reports of results of risk analysis required beginning 4/1/2018 to include analysis of:
  • Overall program risk
  • Program risk by: industry concentration, geography, and loan interest rates
  • Consolidated analysis of risk posed by individual lenders that are responsible for “not less than” 1 percent of gross loan approvals for the year covered in the report (no lenders to be identified by name)
  • Summary of steps taken to mitigate risks identified in the report

Credit Elsewhere – Small Business Act amended by inserting amended definition of credit elsewhere

  • Availability of credit to individual loan applicant on reasonable terms and conditions from non-federal, non-State, or non-local-government sources, taking into consideration factors associated with conventional lending practices, including but not limited to:
  • Business/industry loan applicant operates in
  • Whether applicant has been in operation for less than 2 years (new start)
  • Adequacy of collateral to secure loan
  • Loan term needed to reasonably assure repayment ability from actual or projected business cash flow
  • For disaster loans only (Section 7(b)): No change to existing credit elsewhere definition

Oversight Fees

  • SBA will assess an additional ongoing fee of 0.03 percent per year of outstanding balance of deferred participation (SBA share). All proceeds of the fee go to support operations of OCRM.
  • SECONDARY MARKET Premium split at 108:
  • SBA will collect fee on sold loans in an amount equal to 50% of any sale that exceeds 108 percent of outstanding principal amount of portion of loan guaranteed by SBA

Reduction of Risk

  • Lender Portfolio Concentrations

Each year, by December 31, SBA must calculate concentrations for each participating lender for the fiscal year ending September 30 of that same year:

  • Concentration of loans made with no equity contribution when uses of proceeds were to establish a new business, a change of ownership or to purchase real estate limited to 15% of loans made in a fiscal year; if the SBA’s calculation shows a lender has passed the 15% threshold, any additional loans may not be approved under PLP authority. Applies ONLY to lenders whose aggregate loan originations equal more than 1 percent of gross loan approvals for fiscal year in which calculation is made. (So, for example, for FY 2015, only lenders having originated more than $235 million in 7(a) loans would be included.)
  • Industry concentrations as based on 6 digit NAICS code. If lender’s portfolio shows concentration of more than 20% in any single industry, any additional loans within that NAICS may not be approved under PLP authority. Applies ONLY to lenders whose aggregate loan originations equal more than 1 percent of gross loan approvals for fiscal year in which calculation is made.
  • Financing in excess of 100% applies to ALL 7(a) lenders. No 7(a) loan may provide financing in an amount more than 100% of project costs.
  • SBA must finalize regulations no later than 1 year after enactment & those regulations must include factors such as the balance sheet equity of the borrower that lenders may consider when determining whether and how much equity “will be required to ensure that a loan is creditworthy”.

Issues with respect to Small Business Concerns

  • Accuracy requirement: Lenders must ensure that information on Form 1502 (or its successor) is accurate and complete [Restatement in statute of longstanding policy requirement]
  • Use of Outside Agents: Lenders may use outside agents or LSPs to identify potential applicants, to process, disburse, service, liquidate loans, BUT this provision reiterates and reinforces the long-standing policy requirement that it is the LENDER that is WHOLLY responsible for: accuracy of information re the loan submitted to SBA; for all decisions re eligibility and creditworthiness of applicant; ANY action taken in respect to the loan
  • Retaining Ownership: 7(a) lenders cannot sell or pledge an amount that is MORE than the GREATER of:
  • 85% of the loan OR
  • The percentage guaranteed by SBA [so, allows a lender to sell up to90% of an international trade loan that receives a 90% guaranty]