Changing rules affecting borrowers and lenders

Competition for Small Business Administration 7(a) loan originations has heated up in recent years due to eased standards enacted by former President Joe Biden..In 2023, the SBA lifted the moratorium on the number of small business lending companies eligible to make loans under the SBA’s flagship lending program while also loosening underwriting standards for such loans.The moratorium on nonbank participation was also lifted, allowing a half-dozen to originate 7(a) loans. Applicants’ personal financial resources were removed from the “credit elsewhere test.” Equity injections were waived, and insurance requirements were reduced.Detractors say those changes caused the 7(a) program to have a negative cash flow of more than $370 million in the 12 months ending in June 2024. In 2023, the default rate for SBA 7(a) loans exceeded 1 percent for early defaults and 2.5 percent for delinquent loans, both much higher than in 2022.In June, the SBA implemented stronger underwriting guidelines, requiring potential business owners to prove the viability of their organization through cash flow analysis and the ability to meet certain financial ratios. Lenders with delegated processing authority from the SBA must now use that for all loans through the program without SBA oversight or assistance.Those changes will likely reduce the number of borrowers who can access the program, said Grace Sinclair, an attorney in the Banking and Finance Practice at Reinhart Boerner Van Deuren, a law firm based in Milwaukee. Fintechs are now rethinking their involvement with the 7(a) program under the Trump administration, added Jeff Scott, small business lending president at Carmel, Ind.-based Merchants Bank.Despite the tightened standards, Platinum Bank Chief Credit Officer Jeff Bajek sees an opportunity for his bank to grow its 7(a) lending portfolio. “We have an opportunity to seize on that market share as banks and fintechs are exiting the business,” he said. “We can backfill some of that because we have the infrastructure and the people in place to continue to process loans, even with the rule changes that they’ve implemented.”