Small Business Administration (SBA) Business Loan Program Rule Changes in the 118th Congress: Background and Summary

January 29, 2024 R47909

Small Business Administration (SBA) Business
January 29, 2024
Loan Program Rule Changes in the 118th
Anthony A. Cilluffo
Congress
Analyst in Public Finance

In April 2023, the Small Business Administration (SBA) finalized two major rules revising
regulations related to its business loan programs. The new rules made significant changes to the

7(a) loan guarantee program, under which the SBA provides partial loan guarantees to approved
private lenders to facilitate loans to small businesses that cannot otherwise access credit. Some changes made by the new
rules would also affect the SBA’s organization and other programs. Major changes to SBA programs made by these rules
include the following:
• Reopening applications for new Small Business Lending Companies (SBLCs) for the first time since
1982. Most 7(a) lenders are federally regulated depository institutions (banks and credit unions). The SBA
licenses a small number of nondepository loan funds to participate in the 7(a) program as SBLCs.
Supporters argue that SBLCs have expanded the program’s reach and serve disadvantaged borrowers better
than some traditional lenders. Opponents are concerned that permitting new SBLCs into the program could
increase program risk, especially if financial technology (fintech) lenders are allowed to participate.
• Creating of a new type of entity—Community Advantage Small Business Lending Companies (CA
SBLCs)—to make the Community Advantage Pilot Program (CA pilot) permanent. The CA pilot
started in 2011 as a temporary pilot program, and has since been extended multiple times. The CA pilot
allows nontraditional lenders (such as nonprofit organizations) to participate in the 7(a) program, and also
eases some loan requirements (e.g., it allows more flexible collateral). Congress has not provided statutory
authorization for the CA pilot. The SBA sunset the CA pilot on October 31, 2023, and transitioned CA pilot
lenders to become CA SBLCs. Supporters say this change made the CA pilot permanent and provides
certainty to previously active and prospective lenders. Opponents criticize the new rules for not including
other key features of the CA pilot, such as the underserved market lending requirement, and prefer that the
CA pilot be made permanent through an act of Congress.
• Increasing the workload of the SBA’s Office of Credit Risk Management (OCRM) by expanding the
number of SBA-supervised lenders. For banks and credit unions that participate in the SBA’s programs,
the OCRM only supervises their participation in SBA programs, while other federal regulators conduct
overall supervision. For entities without a federal regulator (such as SBLCs and CA pilot lenders), the
OCRM supervises both their participation in SBA programs and their overall safety and soundness.
Supporters say there are benefits to having more nontraditional lenders in the SBA’s programs and that the
OCRM has the resources to supervise them. Opponents argue that the OCRM is already understaffed and
giving it more work without expanding the office will result in lower-quality supervision, which may
increase program risk.
• Changes to certain business loan program requirements, including the removal of the requirement
for a loan authorization and changes to underwriting standards and borrower affiliation rules.
Supporters argue that these requirements were unnecessary, duplicative, and difficult to implement.
Opponents are concerned that changes in the loan authorization and underwriting standards may increase
program risk and that the changes to affiliation rules may allow large businesses to benefit from programs
meant for small businesses.
These changes have generated substantial feedback from Members of Congress. The House and Senate small business
committees both held oversight hearings on the rule changes, and Members have sent multiple letters to the SBA, including a
letter from Senate Committee on Small Business and Entrepreneurship leadership and a “four corners” letter from House and
Senate small business committee leadership.
Partly in reaction to the SBA’s final rules, the Senate Committee on Small Business and Entrepreneurship reported legislation
related to SBA business loan programs. A section-by-section summary of S. 2482 is in the table below. A comparable House
bill has yet to be introduced. The House rejected an appropriations bill amendment (H.Amdt. 672) that would have blocked
the SBA from implementing the CA SBLC program.
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Section-By-Section Summary of Key Provisions in S. 2482
Section
Summary
Community Advantage Loan
This section would provide permanent statutory authorization to a Community Advantage Loan
Program
Program that is broadly similar to the Community Advantage Pilot Program (which was temporary and
Section 101
has expired).
Similar to CA pilot: maximum loan amount for most lenders would be $350,000; provides a path for
nontraditional, mission-oriented lenders to participate; CA program lenders must make 60% of their
loans in underserved markets; higher threshold for requiring col ateral; CA program lenders must
maintain a loan loss reserve account.
Different from CA pilot: higher loan guarantee rate for loans of $350,000 or less (80%-90%); al ows up
to eight “experienced lenders” to make CA program loans of up to $750,000; the SBA must conduct
training and outreach to current and prospective CA program lenders.
Lending Criteria
This section would codify the simplified lending criteria from the rulemaking for 7(a) loans of $350,000
Section 203
or less and for all 504 loans. It would codify lending criteria similar to those in effect before the
rulemaking for 7(a) loans of more than $350,000. It would also prevent the SBA from requiring a
lender to consider an applicant’s “character and reputation,” which may include an applicant’s criminal
record. Lenders may consider an applicant’s character and reputation if they choose to do so.
Affiliation and Franchise
This section would codify the previous affiliation standards, including the principle of control, for the
Directory
7(a) program. For the 504 program, it would codify affiliation standards similar to the SBA’s revised
Section 204
affiliation standards. This section would also require the SBA to publish a franchise directory to assist
lenders in determining the eligibility of franchisees.
Loan Authorization
This section would codify the requirement that the SBA issue a loan authorization prior to a lender
Section 205
making a guaranteed loan. This requirement was removed by the SBA rulemaking.
Oversight of Small Business
This section would codify the maximum number of SBLC licenses at 17 (3 more than before the
Lending Companies
rulemaking). This section would also codify several authorities and duties related to SBLCs for the
Section 206
OCRM: (1) the OCRM may revoke an SBLC license for certain causes; (2) the OCRM must conduct
annual stress tests of each SBLC’s loan portfolio, including for interest rate risk; (3) SBLCs must
comply with Bank Secrecy Act, Know Your Customer, and Anti-Money Laundering laws.
Office of Credit Risk
This section would make two changes to the OCRM: (1) It would reorganize the SBA to have the
Management
director of OCRM report directly to the SBA Administrator, removing it from the Office of Capital
Section 207
Access; and (2) It would require the OCRM to report certain data on early defaults of 7(a) loans in its
annual report to Congress.
Denied Loan or Loan
This section would return the SBA’s loan denial reconsideration process to the process in effect
Modification Request
before the rulemaking, in which the director of the Office of Financial Assistance makes the final
Section 208
decision for SBA, and the SBA Administrator may not intervene in any decision on a reconsideration.
Direct Lending
This section would require the SBA to notify Congress at least 60 days before starting any direct
Section 209
lending (where the SBA itself is the lender) business loan program or pilot program.
Restriction on Refinancing
This section would prevent 7(a) lenders from processing any 7(a) loan that would refinance debt held
Debt
by that lender using delegated authority. It would stil be possible to use a 7(a) loan to refinance debt
Section 210
held by the lender, but the section would require those loans to be completed through regular
processing, where the SBA makes the final credit decision.
GAO Study
This section would require three GAO studies: (1) on the effectiveness and fraud prevention
Section 211
strategies for using alternative credit models for smaller 7(a) loans; (2) an audit of the OCRM; and (3)
a survey of 7(a) lender practices regarding borrower criminal history for underwriting private loans.
Source: CRS analysis of S. 2482 (as reported).
Notes: Please see ful report for a detailed description of each section. CA=Community Advantage; GAO=U.S. Government
Accountability Office; OCRM=Office of Credit Risk Management; SBA=Small Business Administration; SBLC=Small Business Lending
company.
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SBA Business Loan Program Rule Changes in the 118th Congress

he Small Business Administration (SBA) provides a variety of programs to assist
entrepreneurs with starting, operating, and expanding small businesses. Several SBA
T programs support small business formation and expansion by helping businesses access
capital. The agency’s largest capital-access program is the 7(a) loan guarantee program. The
program derives its name from Section 7(a) of the Small Business Act (P.L. 85-536, as amended),
which authorizes the SBA to provide and guarantee business loans to American small businesses.
The 7(a) program operates through loan guarantees. The SBA approves private lenders to
participate in the program, and these lenders make loans to qualifying small businesses. If a
lender and a loan meet SBA requirements, then the loan may qualify for an SBA loan guarantee,
which ensures that the agency will purchase the unpaid guaranteed portion of the loan if the
borrower defaults. This reduces the lender’s risk, thereby potentially making lending to risky
borrowers more appealing to private lenders.1
Within the 7(a) program, the Community Advantage Pilot Program provided SBA-guaranteed
loans through nontraditional lenders to assist small businesses in underserved markets.
Separately, Small Business Lending Companies are nondepository lenders that are licensed to
make 7(a) loans. Within the SBA, the Office of Credit Risk Management supervises SBA lenders
and analyzes overall risk within the 7(a) program.
In April 2023, the SBA finalized two major rules revising regulations related to its business loan
programs. The new rules made significant changes to the 7(a) loan guarantee program, including
changes affecting the Community Advantage Pilot Program, Small Business Lending Companies,
and the Office of Credit Risk Management.
This report first provides a more detailed overview of these programs, followed by a summary of
the recent rules changes that would modify aspects of the programs. It then concludes with a
summary of the legislative response, including a section-by-section summary of S. 2482.
Background on Select SBA Business Lending
Programs
To provide context to the SBA final rules and introduced legislation, this section provides
background on some features of the Community Advantage Pilot Program, Small Business
Lending Companies, and the Office of Credit Risk Management.
Community Advantage Pilot Program (CA Pilot)
The Community Advantage Pilot Program (CA pilot) was a subprogram within the 7(a) loan
guarantee program. It was intended “to meet the credit, management, and technical assistance
needs of small businesses in underserved markets.”2 The CA pilot’s goals were to
• increase access to credit for small businesses located in underserved markets;
• expand points of access to the SBA 7(a) loan program by allowing nontraditional,
mission-oriented lenders to participate;

1 For more about the 7(a) program, see CRS Report R41146, Small Business Administration 7(a) Loan Guaranty
Program, by Robert Jay Dilger and Anthony A. Cilluffo.
2 Small Business Administration (SBA), Community Advantage Participant Guide, May 31, 2022, p. 6,
https://www.sba.gov/document/support-community-advantage-participant-guide.
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• provide management and technical assistance to small businesses as needed; and
• manage portfolio risk.3
The SBA created the CA pilot in 2011 using its authority to create temporary pilot programs.4 The
CA pilot was originally set to expire on March 15, 2014, but the agency subsequently extended
and modified the program. The CA pilot was last extended by SBA through September 30, 2024,5
but the SBA sunset the program on October 31, 2023.6 To date, Congress has not provided
permanent statutory authorization for the CA pilot.
Requirements for CA pilot lenders differed from those for 7(a) program lenders. Whereas 7(a)
program lenders are generally federally regulated depository institutions (banks or credit unions),
CA pilot lenders were often nonprofit community development organizations. Four types of
entities could apply to be CA pilot lenders:
• SBA-authorized Certified Development Companies (CDCs);
• SBA-authorized Microloan Program Intermediaries;
• SBA-authorized Intermediary Lending Pilot Program Intermediaries; and
• non-federally regulated Community Development Financial Institutions (CDFIs)
certified by the Department of the Treasury.7
As of April 2022, there were 108 approved CA pilot lenders, 96 of which had at least one
outstanding CA pilot loan.8
The SBA was the primary federal regulator for CA pilot lenders. The Office of Credit Risk
Management (OCRM) supervised CA pilot lenders. OCRM supervision included both the CA
pilot lenders’ participation in SBA programs, as well as their overall financial conditions and
capitalization levels. This level of OCRM supervision differed from the 7(a) loan program, in
which lenders are supervised by the office only for their participation in the 7(a) program while
another federal regulator supervises their overall financial conditions.
Unlike most 7(a) lenders, CA pilot lenders were required to maintain a loan loss reserve account
(LLRA). Given the expected greater risk of CA pilot loans, the LLRA was intended to cover
losses from defaulted loans. For CA pilot loans approved on or after October 1, 2018, the LLRA
had to contain a minimum of 5% of the unguaranteed portion of the lender’s CA pilot loan
portfolio, plus 5% of the guaranteed portion of any CA pilot loans that the lender sold on the
secondary market.9

3 Ibid.
4 SBA, “Community Advantage Pilot Program,” 76 Federal Register 9626, February 18, 2011. In identifying this
authority, SBA referenced 15 U.S.C. §636(a)(25) and 13 C.F.R. §120.3.
5 SBA, “Community Advantage Pilot Program,” 87 Federal Register 19165, April 1, 2022.
6 SBA, “Community Advantage Pilot Program,” 88 Federal Register 69003, October 5, 2023.
7 SBA, Community Advantage Participant Guide, p. 6.
8 SBA, “Community Advantage Pilot Program,” 87 Federal Register 19165, April 1, 2022.
9 SBA, “Community Advantage Pilot Program,” 83 Federal Register 46237, September 12, 2018.
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Lenders were required to make 60% of their CA pilot loans to borrowers in underserved markets.
For the CA pilot, the SBA defined businesses in underserved markets as
• businesses located in Low-to-Moderate Income (LMI) communities,
Empowerment Zones and Enterprise Communities (EZ/EC), Historically
Underutilized Business Zones (HUBZones), Promise Zones, Opportunity Zones,
or Rural Areas;
• new businesses (those in operation for less than two years);
• businesses that are 51% or more owned and controlled by one or more veterans;
and
• businesses where more than 50% of the full-time workforce is low income or
resides in an LMI census tract.10
CA pilot loans were 7(a) loans and were therefore subject to all general 7(a) program
requirements, except for specific exceptions.11 Loan terms, interest rates, and guarantee
percentages were generally similar to those of similar 7(a) loans. However, the maximum amount
for a CA pilot loan was $350,000, compared with $5 million for standard 7(a) loans.
During the life of the CA pilot, 8,553 CA pilot loans were approved, totaling $1.2 billion.12 In
FY2023, 800 CA pilot loans were approved, with a total amount of $141 million and average size
of about $177,000.13
Small Business Lending Companies (SBLCs)
Most lenders approved to participate in the SBA’s 7(a) program are federally regulated depository
institutions, either banks or credit unions. The SBA supervises depository institutions’
participation in the 7(a) program, but those institutions’ overall financial conditions and
capitalization requirements continue to be supervised by their primary federal regulators, such as
the Office of the Comptroller of the Currency (OCC) or the Federal Deposit Insurance
Corporation (FDIC).14
The SBA allows a limited number of nondepository institutions, called Small Business Lending
Companies (SBLCs), to participate in the 7(a) program. The SBA is the primary federal regulator
for SBLCs’ overall financial conditions and capitalizations,15 in addition to their participation in
the 7(a) program. The OCRM is the lead office for lender supervision and enforcement.16
The number of SBLCs participating in the 7(a) program has stayed at 14 since January 1982. At
that time, the SBA determined that it “should no longer authorize the participation of additional
[SBLCs] since SBA does not have adequate resources to service and supervise effectively

10 SBA, Community Advantage Participant Guide, p. 7.
11 SBA, Community Advantage Participant Guide, p. 7.
12 Data for FY2011 through FY2016 from CRS Report R41146, Small Business Administration 7(a) Loan Guaranty
Program. Data for FY2017 through the program’s end in early FY2024 (all data are as of December 10, 2023) are from
SBA, “7(a) and 504 Summary Report,” accessed December 11, 2023, https://careports.sba.gov/views/7a504Summary/
Report.
13 This includes five Community Advantage Revolving Lines of Credit. SBA, “7(a) and 504 Summary Report.”
14 For more on federal bank supervision generally, see CRS Report R46648, Bank Supervision by Federal Regulators:
Overview and Policy Issues, by David W. Perkins.
15 15 U.S.C. §650.
16 SBA, “Supervision and Enforcement,” SOP 50 53 (2), January 1, 2021, p. 10.
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additional [SBLCs].”17 To participate in the 7(a) program as an SBLC, an entity must acquire one
of the 14 SBLC licenses from an existing SBLC. Since the moratorium on accepting additional
SBLC applications took effect in January 1982, there have been more than 60 transfers of the
existing 14 SBLC licenses.18
Although the 14 SBLCs constitute a small share of all active 7(a) lenders, SBLCs are often active
in the program. According to SBA data, there were 1,601 lenders who made at least one loan with
an SBA 7(a) guarantee during FY2022. Combined, the 14 SBLCs made 3,097 loans with a 7(a)
guarantee (6% of the 47,678 total 7(a) loans) for a total of $2.1 billion (8% of the $25.7 billion
total). There were 2 SBLCs among the 10 lenders with the largest 7(a) loan approval amounts
during FY2022.19
SBA’s Office of Credit Risk Management (OCRM)
The Office of Credit Risk Management (OCRM) is the lead SBA office for supervision and
enforcement of entities in all SBA business loan programs, including the 7(a) and 504 loan
guarantee and Microloan programs.20 The OCRM is part of the Office of Capital Access (OCA),
and the director of OCRM reports to the Associate Administrator for Capital Access.
The SBA describes its general approach to credit risk management as follows:
The Agency initially seeks to educate and work with Participants using graduated processes
for the Participant to reduce risk and come into compliance before taking any enforcement
action. Specifically, SBA educates Participants on SBA Loan Program Requirements
through SOPs, notices, webinar/teleconference training, and at conferences. In addition,
when SBA identifies risk or noncompliance through monitoring or reviews, SBA generally
seeks to work with the Participant through a corrective action process or Increased
Supervision to address SBA concerns. As a result, most Participants come into compliance,
reduce risk, and avoid facing enforcement actions. SBA generally takes enforcement action
only when the Participant cannot sufficiently reduce risk, cannot correct serious
noncompliance, or does not have the willingness or ability to correct.21
The OCRM is authorized by the Small Business Act.22 The act specifies that the office will
supervise lenders in the SBA’s business loan programs, but imposes relatively few specific
requirements for that supervision. The OCRM must conduct an annual risk analysis of the SBA’s
7(a) loan portfolio and submit the report to Congress.23 More specific provisions related to the
OCRM’s risk management strategy are provided in regulation and SBA standard operating
procedures.24

17 SBA, “Business Loan Policy; Small Business Lending Companies,” 46 Federal Register 41523, August 17, 1981.
18 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 88 Federal Register 21890, April 12, 2023.
19 CRS analysis of SBA, “7(a) and 504 Lender Report,” accessed June 5, 2023, https://careports.sba.gov/views/
7a504LenderReport/LenderReport?%3Aembed=yes&%3Atoolbar=no.
20 SBA, “Supervision and Enforcement,” SOP 50 53 (2), January 1, 2021, p. 10. A separate office, the Office of SBIC
Examinations within the SBA’s Investment Division, supervises Small Business Investment Companies. See SBA,
“Oversight and Regulations of SBICs Investment Division,” SOP 10 06, May 8, 2007.
21 SBA, “Supervision and Enforcement,” SOP 50 53 (2), January 1, 2021, pp. 5-6.
22 15 U.S.C. §657t.
23 15 U.S.C. §657t(h).
24 SBA, “Supervision and Enforcement,” SOP 50 53 (2), January 1, 2021. For regulatory provisions specific to lender
oversight, see 13 C.F.R. §120.1000 et seq. and 13 C.F.R. §120.460 et seq.
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The OCRM uses a risk-based strategy to monitor and manage risk within the SBA’s business loan
programs. The office determines the frequency and intensity of its reviews and examinations of
SBA lenders by considering several factors. Among those factors, it considers the results of
monitoring, the sizes of lenders’ SBA loan portfolios, the results of previous reviews or
examinations, and lenders’ responsiveness in addressing deficiencies raised in previous reviews
and examinations.25 The SBA describes its oversight process as being “risk-based to best utilize
resources” and using “graduated processes” to move from routine monitoring to intensive
monitoring to enforcement actions.26
Once the OCRM has selected a lender for review, it examines the lender’s portfolio performance,
operations within SBA programs, credit administration, and compliance with loan program
requirements.27 For 7(a) lenders, OCRM uses its “PARRiS” methodology. PARRiS components
are
• P—Portfolio performance;
• A—Asset management;
• R—Regulatory compliance;
• Ri—Risk management; and
• S—Special items.
The components each include several qualitative and quantitative subcomponents. Each
component is scored on a scale from 1 (lower risk) to 5 (higher risk).28
The SBA is the primary federal regulator for SBA-supervised lenders, including SBLCs and CA
pilot lenders. The OCRM conducts safety and soundness examinations of SBA-supervised
lenders, considering factors such as capital adequacy, asset quality, management quality (such as
internal controls and loan portfolio management), earnings, liquidity, and compliance with loan
program requirements.29 This is broader than the office’s standard PARRiS review, because it also
includes the lender’s non-SBA operations.
Lenders are required to pay fees to the SBA for the cost of OCRM examinations and reviews.30
Those fees may cover the costs of reviewing SBA lenders and additional expenses the SBA incurs
in carrying out other lender oversight activities. Each lender is billed for the exact cost of actions
particular to it, as well as a share of 7(a) portfolio-wide monitoring costs (prorated by the lender’s
share of the total outstanding 7(a) portfolio).
The SBA’s reported costs of its credit risk management program were $35 million in FY2022. It
expects those costs to rise to $40 million in FY2023 and $47 million in FY2024. In FY2022, the
OCRM received $19 million in fee income. The SBA expected OCRM fee income to decrease to
$15 million for FY2023 and FY2024. Those fees fund 9 full-time equivalent (FTE) OCRM
employees conducting lender oversight.31 As of November 2022, the office had a total of 29 FTE
employees (including the 9 fee-supported positions).32 In FY2022, the OCRM conducted 810

25 13 C.F.R. §120.1051.
26 SBA, “Supervision and Enforcement,” SOP 50 53 (2), January 1, 2021, pp. 6.
27 13 C.F.R. §120.1050(a), https://www.ecfr.gov/current/title-13/section-120.1051.
28 SBA, “Supervision and Enforcement,” SOP 50 53 (2), January 1, 2021, pp. 10.
29 13 C.F.R. §120.1050(b).
30 13 C.F.R. §120.1070.
31 SBA, FY 2024 Congressional Budget Justification [and] FY 2022 Annual Performance Report, March 13, 2023,
https://www.sba.gov/document/report-congressional-budget-justification-annual-performance-report.
32 SBA Office of Congressional and Legislative Affairs, correspondence with the author.
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risk-based reviews of 7(a) lenders and Certified Development Companies (CDCs, operating in the
Section 504 loan guarantee program). About half (420, 52%) of those were “mid-level” targeted
risk-based reviews, requiring “examination of loan files and analysis of specific components of
the loan lifecycle.”33
Some observers believe the OCRM should be an independent office within the SBA. They argue
that having the OCRM within the OCA may create a conflict of interest.34 The OCA “actively
recruits” additional 7(a) lenders. However, the number of 7(a) lenders fell by 17% from FY2017
to FY2022, and the SBA missed its performance target for the number of 7(a) lenders in every
year from FY2017 to FY2022.35 The OCRM supervises and, if necessary, undertakes enforcement
actions against SBA lenders. One enforcement measure at the office’s disposal is removal of a
lender from SBA programs. Supporters of the current organizational structure may argue that
locating the OCRM within the OCA allows for greater knowledge sharing and centralization of
program expertise.
The U.S. Government Accountability Office (GAO) examined certain SBA lender oversight
functions in a 2002 report and recommended that the SBA Administrator “separate lender
oversight functions and responsibilities from OCA.” GAO said that the change “would provide an
oversight office with greater autonomy within SBA to match the growing importance of lender
oversight” to certain SBA activities. The SBA did not separate the lender oversight office, but
took other actions (such as establishing a Lender Oversight Committee) that increased the
independence of the lender oversight office.36
SBA Rules Finalized in April 2023
While the major rules that the SBA finalized in April 2023 relate to its access-to-capital programs,
the most direct effects are on the 7(a) loan guarantee program, including on the CA pilot and
SBLCs. Other changes in the final rules, such as changes to affiliation standards and removal of
the requirement for a loan authorization, would affect SBA business loan programs broadly and
are discussed in this report’s section on “Affiliation and Lending Criteria.”
SBLC Licenses and Loan Authorization Requirement
On April 12, 2023, the SBA finalized a rule (88 Federal Register 21890; effective May 12, 2023)
that made several changes to its business loan programs.37 The final rule allows the SBA to add
additional SBLC licenses; creates a new type of entity—Community Advantage SBLCs—to
provide a path to permanency for the CA pilot; and removes the requirement for a loan

33 SBA, FY 2024 Congressional Budget Justification [and] FY 2022 Annual Performance Report, March 13, 2023, pp.
43-44.
34 For instance, see U.S. Government Accountability Office, Small Business Administration: Progress Made but
Improvements Needed in Lender Oversight, GAO-03-90, December 9, 2022, https://www.gao.gov/products/gao-03-90.
35 The SBA states this is because of “the trend toward continual bank mergers,” which “negatively impact[s] the
number of active lending partners providing 7(a) loans.” SBA, FY 2024 Congressional Budget Justification [and] FY
2022 Annual Performance Report, March 13, 2023, pp. 37.
36 U.S. Government Accountability Office, Small Business Administration: Progress Made but Improvements Needed
in Lender Oversight, GAO-03-90, December 9, 2022, https://www.gao.gov/products/gao-03-90.
37 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 88 Federal Register 21890, April 12, 2023, https://www.federalregister.gov/documents/2023/04/
12/2023-07181/small-business-lending-company-sblc-moratorium-rescission-and-removal-of-the-requirement-for-a-
loan.
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authorization when processing a 7(a) or 504 loan. The SBA issued the corresponding proposed
rule on November 7, 2022 (87 Federal Register 66963).38
SBLC Moratorium Rescission
The final rule lifted the moratorium on licensing new SBLCs, allowing new SBLCs into the
program. The SBA stated that it “determined that certain markets where there are capital market
gaps continue to struggle to obtain financing on non-predatory terms.” The agency anticipates
licensing and approving 3 additional SBLCs, bringing the total to 17.39 There is no limit in
regulation on the number of additional SBLC licenses the SBA can create in the future.
The final rule allows the SBA to accept new SBLCs from time to time when it determines that
there is a market need and it has the capacity to supervise additional SBLCs. The SBA can do this
by issuing a Federal Register notice announcing an application period.40 The SBA stated that this
will enable it to respond to market conditions and oversight capacity while providing public
notice.41 On May 22, 2023, the SBA announced an application period for new SBLC licenses
from June 1, 2023, to July 31, 2023.42 It issued three new SBLC licenses on November 1, 2023.43
A variety of observers have expressed concern that licensing additional SBLCs will allow
financial technology firms (fintechs) to participate as 7(a) program lenders.44 In the proposed rule,
the SBA stated that
[M]any non-traditional lenders participated in SBA’s Paycheck Protection Program (PPP),
which provided billions of dollars to small businesses during the economic upheaval
caused by the COVID-19 pandemic. Based on the success of the PPP, removing the
moratorium on licensing new SBLCs and [Community Advantage] SBLCs opens
opportunities for more non-traditional lenders to participate in the 7(a) Loan Program,
providing additional sources of capital to America’s small businesses and targeting gaps in
the credit market.45
Granting additional SBLC licenses will increase the OCRM’s lender oversight costs. The SBA
has stated that each OCRM risk management analyst position can supervise seven SBLCs (either
standard SBLCs or Community Advantage SBLCs). The SBA prices each risk management

38 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 87 Federal Register 66963, November 7, 2022, https://www.federalregister.gov/documents/2022/
11/07/2022-23597/small-business-lending-company-sblc-moratorium-rescission-and-removal-of-the-requirement-for-
a-loan.
39 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 87 Federal Register 66963, November 7, 2022.
40 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 88 Federal Register 21890, April 12, 2023.
41 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 87 Federal Register 66963, November 7, 2022.
42 SBA, “Small Business Lending Company Application Process,” 88 Federal Register 32623, May 22, 2023.
43 SBA, “Biden-Harris Administration Takes Historic Step in Expanding Access to Capital and Filling Lending Gaps in
Underserved Communities,” press release 23-86, November 1, 2023, https://www.sba.gov/article/2023/11/01/biden-
harris-administration-takes-historic-step-expanding-access-capital-filling-lending-gaps.
44 See, for instance, Chairman Benjamin Cardin and Ranking Member Joni Ernst, “Letter to the Honorable Isabella
Casillas Guzman, SBA Administrator,” March 6, 2023, https://www.ernst.senate.gov/imo/media/doc/
cardin_and_ernst_letter_to_sba_re_proposed_rulespdf.pdf.; John Reosti, “SBA finalizes rule to open flagship 7(a)
program to fintechs,” American Banker, April 16, 2023, https://www.americanbanker.com/news/sba-finalizes-rule-to-
open-flagship-7a-program-to-fintechs.
45 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 87 Federal Register 66963, November 7, 2022.
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analyst at the federal pay rate for full-time employees at GS-14, Step 10 ($164,102 per employee
per year in the Washington, DC, area) plus 100% of that cost for benefits and additional costs, for
an annual cost of $328,204 per employee per year to supervise seven SBLCs.46
Community Advantage SBLCs47
The SBA’s final rule made the CA pilot permanent by transitioning previously active CA pilot
lenders to a new type of entity, Community Advantage SBLCs (CA SBLCs). Responding to
“many comments” on the proposed rule that it should make the CA pilot permanent instead of
creating CA SBLCs, the SBA stated that “the nature of a pilot program is that it is a temporary
program.”48 The final rule sunset the CA pilot and transitioned previously active CA pilot lenders
to become CA SBLCs.
Generally, CA SBLCs are subject to the same regulations and SBA supervision as regular SBLCs.
Whereas CA pilot lenders were subject to a loan maximum of $350,000, there is no maximum
loan amount in regulation for loans made by CA SBLCs. However, the SBA stated that CA
SBLCs will still be subject to the administrative requirements49 that were in effect during the CA
pilot, including the $350,000 loan maximum.50
There are several differences between CA SBLCs and the general 7(a) program:
• CA SBLCs must either be nonprofit organizations or, if not nonprofit
organizations, former CA pilot lenders.
• CA SBLCs are exempt from the requirement for SBLCs to maintain certain types
of fidelity insurance of at least $2 million. Instead, the SBA Administrator will
set fidelity insurance requirement for CA SBLCs.
• CA SBLCs are exempt from minimum capital requirements for SBLCs in
regulation. Instead, the SBA Administrator will set minimum capital
requirements at the Administrator’s discretion.
• CA SBLCs must maintain an LLRA. A CA SBLC will need to deposit a share of
its outstanding loan principal balance into its account to cover potential loan
losses. CA pilot lenders were subject to a similar requirement, but no other 7(a)
lender must maintain an LLRA. The amount CA SBLCs must deposit in the
accounts will be determined by the SBA Administrator at the SBA
Administrator’s discretion.
• CA SBLCs may be affiliated with a CDC. CDCs are SBA-supervised entities that
participate in the SBA Section 504 loan guarantee program. The CA pilot also
allowed CDCs to affiliate with CA pilot lenders.
There is no requirement in regulation for a CA SBLC’s share of lending to underserved markets.
In the CA pilot, lenders were required to make 60% of their loans in underserved markets.

46 Ibid.
47 In the proposed rule, Community Advantage SBLCs were called Mission-Based SBLCs.
48 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 88 Federal Register 21890, April 12, 2023.
49 Administrative requirements are SBA-imposed program requirements that lenders agree to follow as a condition of
participating in the program, such as standard operating procedures (SOPs). SBA can change administrative
requirements without needing the same process as with regulation changes.
50 SBA, “Community Advantage Small Business Lending Company Conversion,” SBA Information Notice 5000-
846918, May 1, 2023, https://www.sba.gov/sites/sbagov/files/2023-05/5000-846918.pdf.
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Instead, the SBA requires each CA SBLC to identify a capital market gap and the share of its total
loans it will devote to that gap when applying to be a CA SBLC. Then, “SBA will determine, in
its sole discretion, whether the proposed capital market gap is acceptable and the percentage of
loans made in that market on the basis of whether SBA agrees there is a need in the target
market.”51 The SBA told CA pilot lenders transitioning to become CA SBLCs that, as CA SBLCs,
they will continue to be required to make a minimum of 60% of their loans in underserved
markets.52
The final rule permits the SBA to accept new CA SBLCs from time to time when it determines
that there is a market need and it has the capacity to supervise additional CA SBLCs. It may do
this by issuing a Federal Register notice announcing an application period. The SBA stated that
this will enable it to respond to market conditions and its oversight capacity while providing
public notice.53
Pursuant to the final rule, the SBA issued a notice to CA pilot lenders on May 1, 2023, notifying
them that the SBA would automatically begin the process to transition them to CA SBLCs. The
SBA sent CA pilot lenders a form to complete and return to the agency to complete the transition.
The SBA sunset the CA pilot on September 30, 2023;54 any CA lenders that did not complete the
transition to be CA SBLCs by that date cannot continue to make 7(a) loans.55
Removal of the Requirement for a Loan Authorization
Under previous regulations, a loan authorization was “the written agreement between the SBA
and the Lender providing the terms and conditions under which SBA will guarantee a business
loan.”56 Loan authorization was typically the last step in approving a 7(a) or 504 loan, and the
written document included all relevant information about the loan, including loan conditions,
lender fees payable to the SBA, use of proceeds, loan collateral, guarantees, and additional
information. Loan authorization information was collected from data entered elsewhere in the
SBA’s loan systems and loan applications.
The SBA’s final rule removed the requirement that a lender receive an SBA loan authorization
document prior to disbursing a loan. In the proposed rule, the SBA stated that lenders said the
previous loan authorization process was “cumbersome, outdated, and duplicative” of information
entered elsewhere.57 The agency decided to remove the loan authorization requirement to reduce
administrative burdens on lenders.
In the final rule, the SBA stated that it received 80 public comments regarding the proposal to
remove the requirement for a loan authorization. Summarizing those comments, the agency said
The comments were nearly universally opposed to removing the word Authorization, with
three comments supporting the proposal and the rest opposing the proposal or requesting

51 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 87 Federal Register 66963, November 7, 2022.
52 SBA, “Community Advantage Small Business Lending Company Conversion,” SBA Information Notice 5000-
846918, May 1, 2023.
53 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 87 Federal Register 66963, November 7, 2022.
54 SBA, “Community Advantage Pilot Program,” 88 Federal Register 69003, October 5, 2023.
55 SBA, “Community Advantage Small Business Lending Company Conversion,” SBA Information Notice 5000-
846918, May 1, 2023.
56 SBA, “Lender and Development Company Loan Programs,” SOP 50 10 6, October 1, 2020, p. 433.
57 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 87 Federal Register 66963, November 7, 2022.
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modifications. Most comments that opposed the proposal expressed the concern that the
Authorization is the document that clearly defines the agreement between the lender and
SBA for each transaction and is beneficial in communicating requirements to the borrower,
lenders, and SBA. Other comments stated the Authorization serves as a reference document
for the life of the loan. Some comments stated borrowers will not know the terms they are
agreeing to without an Authorization. Several comments stated that lenders rely on the
Authorization as a template or checklist to ensure the lender’s compliance with Loan
Program Requirements, with one comment stating the Authorization is the gold standard
for commercial lending. Several comments stated the Authorization is a roadmap for all
closing processes and should not be eliminated without a cohesive and comprehensive
replacement. Many comments suggested that if SBA eliminates the Authorization, SBA
should develop an alternative document that serves the same purpose but is easier to use.58
Affiliation and Lending Criteria
On April 10, 2023, the SBA finalized a rule (88 Federal Register 21074; effective May 11, 2023)
that made several changes to the affiliation and lending criteria it uses in its business loan
programs.59 The final rule allows proceeds from a 7(a) loan to be used for a partial change in
business ownership; changes underwriting standards for certain 7(a) loans; modifies the borrower
affiliation standards used to determine a business’s size; and changes the SBA Administrator’s
powers related to certain loan action reconsiderations. The SBA issued the corresponding
proposed rule on October 26, 2022 (87 Federal Register 64724).60
Partial Changes of Ownership
The final rule allows the proceeds of a 7(a) loan to be used to finance a partial change in
ownership. This change allows a borrower to purchase a portion of a business, or a portion of an
individual owner’s interest in a business. The SBA stated that it identified a credit gap for
financing partial changes in ownership, wherein an existing owner or owners can stay on at a
business to assist with ownership and management transition. The agency has stated that this
problem is particularly acute now due to the “mass retirement of Baby Boomers” and the
expected number of businesses that will need to transfer ownership.61

58 SBA, “Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a
Loan Authorization,” 88 Federal Register 21890, April 12, 2023.
59 SBA, “Affiliation and Lending Criteria for the SBA Business Loan Programs,” 88 Federal Register 21074, April 10,
2023, https://www.federalregister.gov/documents/2023/04/10/2023-07173/affiliation-and-lending-criteria-for-the-sba-
business-loan-programs
60 SBA, “Affiliation and Lending Criteria for the SBA Business Loan Programs,” 87 Federal Register 64734, October
26, 2022, https://www.federalregister.gov/documents/2022/10/26/2022-23167/affiliation-and-lending-criteria-for-the-
sba-business-loan-programs.
SBA also issued a typographical correction to the final rule on April 21, 2023. SBA, “Affiliation and Lending Criteria
for the SBA Business Loan Programs; Correction,” 88 Federal Register 24474, April 21, 2023,
https://www.federalregister.gov/documents/2023/04/21/2023-08396/affiliation-and-lending-criteria-for-the-sba-
business-loan-programs-correction.
61 SBA, “Affiliation and Lending Criteria for the SBA Business Loan Programs,” 87 Federal Register 64734, October
26, 2022.
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Previously, the proceeds of a 7(a) loan could only be used for three types of ownership changes:
• a complete change in ownership wherein the new owners previously had no
interest in a business and acquired 100% of the business;
• a partial change in ownership, wherein existing owners purchased the entire stake
of one owner, who was not involved in ownership or management of the business
after the transaction; and
• an Employee Stock Ownership Plan (ESOP) purchasing a controlling interest
(51% or more) of a business.
The SBA explained the regulation change as an attempt to assist ESOPs and provide a path to
ownership for employees. Describing the past several fiscal years, the SBA stated that
Over the past 4 completed fiscal years (FY 2018 through FY 2021), SBA approved 31,940
7(a) loans where loan proceeds were used to affect a change of ownership. ESOP loans
(loans to assist an ESOP trust in acquiring 51 percent or more of the equity ownership in
the small business concern) accounted for only 17 of the 31,940 loans used for a change of
ownership in the four years between FY 2018 and FY 2021, or fewer than five loans per
year. Therefore, ESOP loans have not made the anticipated impact in transitioning small
businesses to employee ownership as originally intended by the Agency. For these reasons,
SBA is moving forward with lifting the prohibition on partial changes of ownership.62
Congress has shown interest in allowing the SBA to finance ESOP purchases. The John S.
McCain National Defense Authorization Act for Fiscal Year 2019 (FY2019 NDAA, P.L. 115-232)
included provisions related to promoting ESOPs through the SBA’s programs.63 Those provisions
included allowing 7(a) loan proceeds to be used to finance the purchase of 51% or more of a
business by an ESOP (the only allowable partial ownership transaction at that time), and allowing
a borrower to use loan proceeds to finance certain transaction costs.
The FY2019 NDAA also authorized the SBA Administrator to waive certain general requirements
for ESOP loans. Those requirements included securing personal guarantees from borrowers and
requiring a 10% equity injection when an SBA loan was used to finance a change in ownership.
The SBA had not previously implemented those authorities, and the final rule did not mention
them. However, the SBA implemented those waivers in its revision to the business loan
program’s standard operating procedures after the rules were finalized.64
Changes to Underwriting Standards
The SBA’s final rule made several changes to business loan underwriting standards, including
broad changes to lending criteria and modifications to requirements for hazard insurance for
certain types of loans. These changes affect 7(a) and 504 loans.

62 SBA, “Affiliation and Lending Criteria for the SBA Business Loan Programs,” 88 Federal Register 21074, April 10,
2023.
63 The provisions in P.L. 115-232 were similar to those in H.R. 5236 of the 115th Congress, the Main Street Employee
Ownership Act of 2018, which passed the House but did not receive significant action in the Senate. The related
provisions in P.L. 115-232 are sometimes referred to as the Main Street Employee Ownership Act.
64 SBA, “Lender and Development Company Loan Programs,” SOP 50 10 7, August 1, 2023.
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The final rule maintains the requirement that applicants be creditworthy, but changes the business
loan lending criteria used to evaluate creditworthiness. Under previous regulations, the SBA
considered eight factors:
• the character, reputation, and credit history of the applicant;
• experience and depth of management;
• strength of the business;
• past earnings, projected cash flow, and future prospects;
• ability to repay the loan with business earnings;
• sufficiency of invested equity;
• potential for long-term success; and
• nature and value of collateral.65
The new lending criteria require lenders and CDCs (operating in the 504 loan guarantee program)
to use “appropriate and prudent generally acceptable commercial credit analysis processes” that
they use for their “similarly-sized, non-SBA guaranteed commercial loans.” Lenders, CDCs, and
the SBA may use a business credit scoring model (a credit score). Additionally, the final rule
mentions three specific factors that lenders, CDCs, and the SBA may consider, as applicable:
• the applicant’s credit score or credit history;
• the applicant’s earnings or cashflow; and
• the applicant’s equity and collateral.66
The SBA identified several reasons for making these changes to the lending criteria. The agency
stated that the changes aim to simplify underwriting decisions and therefore encourage more
lenders to participate in the programs. In the 504 program, the changes may make it easier for
CDCs and private lenders to make similar underwriting decisions by allowing CDCs to make
their underwriting decisions using the same factors as private lenders. The SBA also stated that
the changes, by simplifying underwriting, may encourage lenders to make smaller loans by
lowering the up-front application cost.67
The changes remove the applicant’s character and reputation from the lending criteria. The SBA
stated that it removed this criterion because the “lending industry commonly uses the terms
character and credit history interchangeably,” and it is difficult for lenders to define and
operationalize a borrower’s reputation.68 The agency received public comments on the change.
Some commenters were concerned that removing character and reputation from the criteria may
not allow lenders to fully consider an applicant’s situation, including past bankruptcies, criminal
history, or factors that may mitigate negative marks on a credit report. The SBA replied that the
standards in regulation are the minimum standard, and lenders may make their own credit
decisions based on their own policies.69

65 13 C.F.R. §120.150, prior to changes effective on May 11, 2023.
66 SBA, “Affiliation and Lending Criteria for the SBA Business Loan Programs,” 88 Federal Register 21074, April 10,
2023.
67 SBA, “Affiliation and Lending Criteria for the SBA Business Loan Programs,” 87 Federal Register 64734, October
26, 2022.
68 Ibid.
69 SBA, “Affiliation and Lending Criteria for the SBA Business Loan Programs,” 88 Federal Register 21074, April 10,
2023.
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The SBA removed the requirement that 7(a) and 504 loans of $500,000 and less obtain hazard
insurance on all loan collateral. Prior to the change, the agency required hazard insurance on all
loan collateral, regardless of the loan amount, but it determined that the requirement may be
burdensome for businesses seeking loans for relatively small amounts.70
Borrower Affiliation Rules for Size Standards
The SBA’s final rule changed the rules for determining that two or more entities are affiliated for
purposes of applying the size standards to determine eligibility. The affiliation standards apply to
the 7(a), 504, and Microloan loan programs; the Intermediary Lending Pilot program; the Surety
Bond Guarantee program; and Business Disaster Loan programs. Broadly, the final rule removed
certain tests from being indicative of affiliation.
Before the regulation changes, affiliation could arise under several factors. The factors considered
were71
• affiliation based on ownership, including control of one entity over another;
• affiliation based on stock options, convertible securities, and agreements to
merge;
• affiliation based on management, including control of one entity over another;
• affiliation based on identity of interest between close relatives; and
• affiliation based on franchise and license agreements.
The SBA removed the concept of control of one entity over another as being indicative of
affiliation and stated that “the concept of control has proven particularly burdensome for
applicants and lenders to understand and implement.”72
The new regulations use an affiliation-based-on-ownership concept. The new affiliation factors
are
• affiliation based on ownership, based on the percentage of a business owned; and
• affiliation based on stock options, convertible securities, and agreements to
merge.
For affiliation based on ownership, the SBA considers any business that the applicant owns more
than 50% of as being affiliated. Any individual or business that owns more than 50% of the
applicant is affiliated. If the owning business owns additional businesses, those businesses are
also affiliated only if the other businesses operate in the same economic industry (3-digit North
American Industry Classification System [NAICS] code, such as “food services and drinking
places,” NAICS code 722). If the business does not have any single owner of more than 50% of
the business, then the same tests are applied to all owners of 20% or more of the business. In the
ownership tests, entities with stock options, convertible securities, and agreements to merge are
considered as if they have already exercised their options.
The changes to affiliation standards may be particularly important for businesses that either use a
management company or are franchisees. Under previous regulations, common control was

70 Ibid.
71 13 C.F.R. §121.301, prior to changes on May 11, 2023, and SBA, “Affiliation and Lending Criteria for the SBA
Business Loan Programs,” 87 Federal Register 64734, October 26, 2022.
72 SBA, “Affiliation and Lending Criteria for the SBA Business Loan Programs,” 87 Federal Register 64734, October
26, 2022.
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indicative of affiliated businesses. This required lenders to carefully evaluate the contractual
relationships between a small business and its management company or franchisor, if applicable.
For franchises specifically, the SBA published a franchise directory that listed thousands of
franchisors and any special considerations (such as collateral restrictions) that lenders must
consider when lending to franchisees.73 The agency stated that evaluating the specific contractual
control relationships required “understanding and expert consideration of business entity
relationships” that are “complex and require judgement calls,” resulting in “inconsistent
application” of the concept.74
Reconsideration of Loan Application or Modification Denial
In the final rule, the SBA reassigned the authority to rule on applicant or borrower requests for
reconsideration of denied loan applications or modification denials. To appeal a denial (unless the
denial was based on the size standards), an applicant or borrower must first request a
reconsideration from the office that made the decision.
If that office denies a first reconsideration, an applicant or borrower may request an additional
reconsideration. Under previous regulations, the director of the Office of Financial Assistance
ruled on additional reconsiderations. The final rule’s new regulations allow the director of the
Office of Financial Assistance to designate another official to rule on additional reconsiderations.
Although the regulations do not specify a designee, the SBA stated that the designees will be the
chief of 7(a) loan policy for 7(a) program reconsiderations and the chief of 504 loan policy for
504 program reconsiderations.75 The agency stated that this change will allow it to decide on
reconsiderations faster. The decision by the director of the Office of Financial Assistance or the
director’s designee is final.
The new regulations additionally allow the SBA Administrator, at the Administrator’s sole
discretion, to review decisions and issue final decisions. Applicants or borrowers cannot formally
appeal to the Administrator. Only the Administrator may choose to review a decision, and there is
no obligation for the Administrator to do so.
Congressional Reactions to the New Rules
Congress has expressed significant interest in both SBA final rules. Members from both parties
have expressed concerns about the changes, and the small business committees in both chambers
have held oversight hearings on the rules. Committee leadership has also sent several official
letters to SBA Administrator Isabella Casillas Guzman regarding the rules.76
On March 6, 2023, before the SBA finalized the rules, Senate Committee on Small Business and
Entrepreneurship then-Chairman Benjamin Cardin and Ranking Member Joni Ernst sent a letter
to SBA Administrator Guzman.77

73 SBA, “SBA Franchise Directory,” May 11, 2023, https://www.sba.gov/document/support-sba-franchise-directory.
74 SBA, “Affiliation and Lending Criteria for the SBA Business Loan Programs,” 88 Federal Register 21074, April 10,
2023.
75 SBA, “Affiliation and Lending Criteria for the SBA Business Loan Programs,” 87 Federal Register 64734, October
26, 2022.
76 The reactions mentioned and quoted in this section are not comprehensive of all reactions and comments by
Members of Congress on the rules.
77 Chairman Benjamin Cardin and Ranking Member Joni Ernst, “Letter to the Honorable Isabella Casillas Guzman,
SBA Administrator,” March 6, 2023, https://www.ernst.senate.gov/imo/media/doc/
cardin_and_ernst_letter_to_sba_re_proposed_rulespdf.pdf.
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In the letter, then-Chairman Cardin and Ranking Member Ernst expressed their support for
“expanding access to capital for small businesses and reaching underserved borrowers” while
expressing concerns about the rules. Specific concerns included that the final rules
• include “broad and sweeping changes that do not reflect congressional input or
authorization”;
• change the “current underwriting standards,” which has “the potential to make
the program more vulnerable to predatory lending practices”;
• remove from the 7(a) program “prudent lending guardrails” that protected small
businesses from “financially burdensome” loans and taxpayers from “the costs of
significant loan losses”;
• could “permit large businesses to exploit [SBA business loan] programs that are
intended only to serve small businesses”;
• lack “important details for mission-based lending or how [creating CA SBLCs]
will impact the Community Advantage program”;
• advance a “strategy aimed at granting more fintech entities access to the 7(a)
program without taking into account the risks these types of entities pose to
consumer protection or program integrity”; and
• could present oversight challenges for the SBA Office of Credit Risk
Management (OCRM), due to the expansion of the number of SBA-supervised
lenders (including SBLCs).
On April 20, 2023, House Committee on Small Business Chairman Roger Williams and Vice
Chairman Blaine Luetkemeyer, Oversight Subcommittee Chairman Beth Van Duyne, and
Economic Growth Subcommittee Chairman Dan Meuser sent a letter to then-SBA Associate
Administrator for Capital Access Patrick Kelley. The letter expressed that the “Committee is
gravely concerned that the SBA is unable to handle [the expanded responsibility from the
proposed rules] given their failures under the COVID lending programs.” In particular, the letter
cited and quoted SBA Inspector General Hannibal “Mike” Ware, who expressed concerns about
program integrity if the 7(a) program is expanded to nondepository lenders (such as fintech
companies); the SBA has a significantly expanded loan portfolio; and the SBA allows borrowers
to self-certify that they could not access credit elsewhere.78
On May 10, 2023, House Committee on Small Business Ranking Member Nydia Velázquez
issued a press release on the rule changes. Ranking Member Velázquez expressed that “increasing
access to capital for underserved entrepreneurs has been and will remain a priority for me.” She
also stated that she was “apprehensive about the SBA’s decision to remove many of the
longstanding guardrails and program requirements on loan criteria and affiliation standards that
have served the 7(a) program well while also lifting its moratorium on the licensing of new
SBLCs.” Going forward, she said that the House Committee on Small Business “must ensure [the
rule changes] are responsibly implemented and don’t negatively impact the 7(a) program and
individual borrowers.”79

78 Chairman Roger Williams, Vice Chairman Blaine Luetkemeyer, Subcommittee Chairman Beth Van Duyne, and
Subcommittee Chairman Dan Meuser, “Letter to Mr. Patrick Kelley, Associate Administrator for Capital Access,”
April 20, 2023, https://smallbusiness.house.gov/uploadedfiles/04.21.2023_-_hsbc_letter_to_sba_re._7a_programs.pdf.
79 Ranking Member Nydia M. Velázquez, “Velázquez Conducts Oversight of SBA 7(a) Rule Changes During
Committee Hearing,” press release, May 10, 2023, https://democrats-smallbusiness.house.gov/news/
documentsingle.aspx?DocumentID=4572.
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The Senate Committee on Small Business and Entrepreneurship held an oversight hearing on the
rule changes on April 26, 2023,80 and the House Committee on Small Business held two oversight
hearings on the rule changes on May 10 and 17, 2023.81
After the initial oversight hearings in the House and Senate, Associate Administrator for Capital
Access Patrick Kelley left the SBA on May 12, 2023. Kelley led the Office of Capital Access,
which will be largely responsible for implementing the rule changes. On May 16, 2023, Chairman
Cardin, Chairman Williams, Ranking Member Ernst, and Ranking Member Velázquez wrote a
letter to SBA Administrator Guzman requesting that the SBA “pause the proposed changes to the
lending programs” until a new Associate Administrator for Capital Access is appointed.82 The
Members said that Kelley’s “unexpected departure” left “a void in the leadership.” The Members
also said that the House and Senate small business committee oversight hearings raised
“legitimate bipartisan concerns” over “the effects that these new rules could have on the integrity
of SBA’s loan programs.” In addition, the Members raised concerns about late or missing
guidance to lenders on how to implement the new regulations, and that the vacancy of the
Associate Administrator for Capital Access may slow responses to implementation inquiries from
stakeholders and congressional oversight.
On July 19, 2023, the Senate Committee on Small Business and Entrepreneurship held a business
meeting to mark up several bills. Legislation to address the SBA’s business loan program rules
was included in the package of 11 bills that the committee advanced favorably by a vote of 18-1.
The bill became S. 2482, and is summarized below.
On the House side, Representative Aaron Bean offered an amendment (H.Amdt. 672) to the
FY2024 Financial Services and General Government appropriations bill (H.R. 4664) that would
have prevented the SBA from using any funds to “implement, administer, or enforce” the CA
SBLC program. The amendment failed by a vote of 205-220.83
Summary of S. 2482
The Community Advantage Program Act of 2023 (S. 2482) is partially in response to the SBA’s
final rules. The Senate Committee on Small Business and Entrepreneurship reported the bill on
July 25, 2023. The bill was placed on the Senate legislative calendar under general orders. The
Senate may or may not take further action on the bill before the end of the 118th Congress. This
section provides a section-by-section summary of S. 2482 as reported.

80 U.S. Senate, Committee on Small Business and Entrepreneurship, “Oversight of SBA’s Implementation of Final
Rules to Expand Access to Capital,” April 26, 2023, https://www.sbc.senate.gov/public/index.cfm/hearings?ID=
279CE4E4-5086-41B8-A5A2-C3391C626D07.
81 U.S. House of Representatives, Committee on Small Business, “Taking on More Risk: Examining the SBA’s
Changes to the 7(a) Lending Program Part I,” May 10, 2023, https://smallbusiness.house.gov/calendar/
eventsingle.aspx?EventID=405517, and Committee on Small Business, “Taking on More Risk: Examining the SBA’s
Changes to the 7(a) Lending Program Part II,” May 17, 2023, https://smallbusiness.house.gov/calendar/
eventsingle.aspx?EventID=405517.
82 Chairman Benjamin Cardin, Chairman Roger Williams, Ranking Member Joni Ernst, and Ranking Member Nydia
Velázquez, “Letter to the Honorable Isabella Casillas Guzman, SBA Administrator,” May 16, 2023,
https://smallbusiness.house.gov/uploadedfiles/05.16.2023_-_four_corners_letter_to_sba_re_oca.pdf.
83 U.S. House of Representatives, Office of the Clerk, “Roll Call 631 | Bill Number: H.R. 4664,” November 8, 2023,
https://clerk.house.gov/Votes/2023631.
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Community Advantage Program Act
Title I of the bill would provide permanent statutory authorization to the CA pilot through the
Community Advantage Loan Program (CA program).
Section 101: Community Advantage Loan Program (CA program)
Section 101 would provide permanent statutory authorization for the CA program, broadly
modeled on the CA pilot. Within the CA program, most lenders certified to participate would be
able to make 7(a) loans of up to $350,000 with higher SBA guarantee rates than similarly sized
standard 7(a) loans. CA program lenders would be required to lend to underserved markets and to
maintain a loan loss reserve.
This section would require CA program lenders to meet both organization and experience rules to
participate. It would require a CA program lender to be (1) a nonprofit CDC participating in the
504 program; (2) a nonprofit Microloan Intermediary; (3) a Community Development Financial
Institution (CDFI); or (4) an intermediary participating in the Intermediary Lending Program. The
section would also require CA program lenders to demonstrate that they have approved,
disbursed, and serviced at least 10 similarly sized loans to small businesses in the preceding 24-
month period. However, any lender that participated in the CA pilot and was in good standing on
the day before enactment would be automatically transferred to the CA program.
Section 101 would require CA program lenders to make at least 60% of their loans to small
businesses in underserved markets. For the CA program, the section would define a small
business in an underserved market as
• a small business located in a low- to moderate-income community, a HUBZone,
or a rural area;
• a small business with more than 50% of its employees residing in a low- to
moderate-income community;
• a new small business that has been in business for two or fewer years;
• a small business owned and controlled by economically disadvantaged
individuals, who are members of an identifiable group of individuals who lack
adequate access to credit on reasonable terms. The SBA shall conduct an
evidence- and literature-based analysis to identify groups of economically
disadvantaged individuals, and lenders may petition to add groups of
economically disadvantaged individuals; or
• a small business that is owned and controlled by veterans or spouses of veterans.
Loans made by CA program lenders would have special terms compared with standard 7(a) loans.
For most lenders, the maximum CA program loan amount would be $350,000, as it was in the CA
pilot, which is lower than the current maximum 7(a) loan of $5 million. CA program loans would
be eligible for a higher loan guarantee than standard 7(a) loans: 90% for CA program loans of
$150,000 or less and 80% for CA program loans greater than $150,000 and less than $350,000.
Section 101 would limit interest on CA program loans to the rates on similar standard 7(a) loans.
For CA program loans, the section would permit lenders to use the same collateral requirement
policies that they use for comparable non-SBA-guaranteed business loans. The section would not
require lenders to take collateral for CA program loans of $50,000 or less.
Section 101 would allow the SBA to designate up to eight CA program lenders that had
participated in CA pilot for at least five years as “experienced lenders.” The section would allow
experienced lenders to make CA program loans of up to $750,000. However, any CA program
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loan of more than $350,000 would have an SBA guarantee of 75%, the same guarantee rate as in
the general 7(a) program. Additionally, the section would require at least 60% of an experienced
lender’s loans to be of $350,000 or less.
Section 101 would require CA program lenders to maintain loan loss reserve accounts, as the
SBA required of CA pilot lenders. The SBA would calculate the amount it would require each CA
program lender to hold in its loan loss reserve based upon the lender’s tenure and previous
performance in the program, its outstanding lending, and its participation in the secondary
market.
Furthermore, Section 101 would require the SBA to conduct certain training and outreach to
current and prospective CA program lenders. The section would require the SBA to provide
ongoing training to educate CA program lenders on program requirements and guidance to
support mission-based lending. It would also require the SBA to train its employees who
regularly engage with CA program lenders and borrowers, and to conduct outreach to prospective
CA program lenders to promote the program and educate prospective lenders.
Section 101 would also create several CA program-related reporting requirements for the SBA
and GAO. The section would require the SBA to publish public weekly lending reports for the
CA program that would include information about the characteristics of small business borrowers
and loan sizes. It would also require the agency to provide an annual report on the CA program to
the congressional small business committees and to make that report available to the public. The
section would require the annual report to include information about the previous fiscal year’s CA
program lending, including demographic information on borrowers, the ages of participating
businesses, and businesses’ locations in urban or rural areas. The section would also require the
annual report to include information comparing CA program loans with standard 7(a) loans, a
breakdown of CA program loans by dollar amount, state-by-state data on lending and jobs created
or retained, and the contact information of all approved CA program lenders. GAO would have
five years to study the CA program and report on how well the program is meeting its purposes,
the performance of CA program lenders, and recommendations for improving the program.
Modernizing SBA’s Business Loan Programs Act of 2023
Title II of S. 2482 addresses some of the SBA’s recent changes to its business lending programs,
especially the 7(a) and 504 programs.
Section 201 provides the short title for Title II: the Modernizing SBA’s Business Loans Programs
Act of 2023.
Section 202 provides congressional findings related to the OCRM, SBLCs, and the CA pilot.
Section 203: Lending Criteria
Section 203 would codify underwriting requirements and lending criteria for the 7(a) and 504
programs. For both programs, and for loans of all sizes, the section would require all borrowers to
be creditworthy and all loans to be so sound as to reasonably assure repayment.
Lending criteria for 7(a) loans differ by the amount of the loan. For 7(a) loans of less than
$350,000, Section 203 would largely codify the revised lending criteria issued in the SBA’s final
rule. It would require lenders to use credit analysis policies similar to those of comparable non-
SBA-guaranteed loans. It would allow lenders to use a business credit scoring model, and would
require them to consider an applicant’s credit score and history, its earnings and cash flow, and its
equity and collateral, as well as the effects of the applicant’s affiliates.
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For 7(a) loans of $350,000 and more, Section 203 would largely retain the lending criteria from
the previous regulations. The lending criteria for these 7(a) loans would consider
• the applicant’s credit history;
• the applicant’s experience and depth of management;
• the applicant’s business strength;
• the applicant’s past earnings, projected cash flow, and future prospects;
• the applicant’s ability to repay the loan with business earnings;
• whether the applicant has sufficient invested equity;
• the applicant’s potential for long-term success;
• the nature and value of the applicant’s collateral; and
• the effect of the applicant’s affiliates.
The section would also codify a provision allowing a 7(a) lender to consider an applicant’s
“character and reputation” if the lender chooses to do so, and would prohibit the SBA
Administrator from requiring a 7(a) lender to consider the applicant’s character and reputation as
part of loan underwriting. The SBA defines “good character” as including a person’s “integrity,
candor, and criminal history, if any.”84
For 504 loans of all sizes, Section 203 would largely codify the revised lending criteria from the
SBA rule. It would continue to require lenders and CDCs to use credit analysis policies similar to
those of comparable non-SBA-guaranteed loans when evaluating 504 loans. It would also
continue to allow lenders and CDCs to use a business credit scoring model, and require them to
consider an applicant’s credit score and history, its earnings and cash flow, and its equity and
collateral, as well as the effect of the applicant’s affiliates.
Section 204: Affiliation and Franchise Directory
For 7(a) loans, Section 204 would largely codify the several factors that determined affiliation
before the final rule’s regulatory changes. The factors considered were
• affiliation based on ownership, including control of one entity over another;
• affiliation based on stock options, convertible securities, and agreements to
merge;
• affiliation based on management, including control of one entity over another;
• affiliation based on identity of interest between close relatives; and
• affiliation based on franchise and license agreements.
For 504 loans, this section would largely codify the revised affiliation standards, as they were
finalized by the SBA.
This section would also require the SBA to publish and maintain a franchise directory that lenders
may use in determining if a franchisee is eligible for SBA business loan programs. A franchise
directory published to meet this requirement would likely be similar to the existing SBA franchise
directory.85

84 SBA, “SBA 7(a) Borrower Information Form,” Form 1919, https://www.sba.gov/sites/sbagov/files/2022-06/
Form%201919_10-21-2020-rev%20508%20r2_0.pdf, p.11.
85 SBA, “SBA Franchise Directory,” May 11, 2023, https://www.sba.gov/document/support-sba-franchise-directory.
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Section 205: Loan Authorization
Section 205 would codify a requirement for a loan authorization for both the 7(a) and 504
programs. A loan authorization would be “a written agreement providing the terms and
conditions” of a loan and its guarantee.
Section 206: Oversight of Small Business Lending Companies
Section 206 would amend the definition of an SBLC to specify that an SBLC is a for-profit entity
that is authorized by the SBA solely to make 7(a) loans.
This section would limit the number of SBLC licenses to 17 and allow the SBA to approve the
transfer or sale of SBLC licenses between businesses. All CA SBLCs would lose their
authorizations as SBLCs on the date of enactment, but would be automatically designated as CA
program lenders under the permanent CA program created by Section 101.
This section would also give the OCRM new responsibilities and authorities related to SBLCs:
• it would give the OCRM authority to revoke an SBLC license for certain reasons
related to failure to comply with program requirements, excessive losses, or
predatory lending;
• it would require the OCRM to conduct an annual stress test of each SBLC’s
portfolio, including a “severely adverse” scenario and considering interest rate
risk; and
• it would also require SBLCs to comply with Bank Secrecy Act, Know Your
Customer, and Anti-Money Laundering requirements,86 and require the OCRM to
annually review SBLC compliance with these laws.
Section 207: Office of Credit Risk Management
Section 207 would reorganize the SBA to require the director of OCRM to report directly to the
SBA Administrator, thereby removing OCRM from the Office of Capital Access.
This section would also require the OCRM to include in its annual report to Congress about 7(a)
portfolio risk
• the number of 7(a) lenders with an early default rate (when a 7(a) loan defaults
within 18 months of the initial disbursement) of more than 3%; and
• an analysis of the median and average credit scores of borrowers relating to early
defaults, loan guarantee purchases, and charge offs.
Section 208: Denied Loan or Loan Modification Request
Section 208 would largely revert the procedures for reconsideration of 7(a) and 504 loan
decisions back to those that were in place before the final rule’s revisions. This section would
codify that only the director of the Office of Financial Assistance may make the SBA’s final
decision regarding a reconsideration request, and that the SBA Administrator may not intervene
or make a final decision in a reconsideration request.

86 For an overview of these policies broadly, see CRS In Focus IF11064, U.S. Efforts to Combat Money Laundering,
Terrorist Financing, and Other Illicit Financial Threats: An Overview, by Rena S. Miller and Liana W. Rosen.
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Section 209: Direct Lending
Section 209 would require the SBA to notify Congress at least 60 days before implementing any
program or pilot program to make direct loans under 7(a) to small businesses.
Section 210: Restriction on Refinancing Debt
Section 210 would prevent any 7(a) lender from using delegated authority to approve a 7(a) loan
that would refinance any debt held by that lender. In delegated authority programs, such as the
Preferred Lenders Program (PLP) and SBA Express, lenders receive permission from the SBA to
process, evaluate, and approve a 7(a) loan on the agency’s behalf. For standard processing loans,
the lender receives and assembles the borrower’s application, while the SBA evaluates and
approves the loan. This section would still allow borrowers to use 7(a) loans to refinance certain
debt, but it would require lenders to submit those loans to the SBA for final credit decisions.
Under existing program rules, a borrower may not use proceeds from a 7(a) loan to repay or
refinance any creditor (not limited to the SBA lender processing the application) who is set to
sustain a loss.87
Section 211: GAO Studies
Section 211 would require three GAO studies due to Congress within two years of enactment:
• an analysis of using alternative credit models for 7(a) loans of less than
$350,000, focusing on methods to prevent waste, fraud, and abuse and the
effectiveness of alternative credit models to reduce barriers to accessing capital
for underserved and rural communities;
• an audit of OCRM operations, staffing, and resources, including its activities to
implement SBLC oversight required in the bill; and
• a survey of 7(a) lender practices related to their use of applicants’ criminal
histories in underwriting their own, non-SBA guaranteed commercial loans.

Author Information

Anthony A. Cilluffo

Analyst in Public Finance

87 13 C.F.R. §120.201.
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