July 17, 2019

Cardin Introduces Legislation to Increase SBA Lending to Entrepreneurs in Underserved Communities

WASHINGTON – Senate Committee on Small Business & Entrepreneurship Ranking Member Ben Cardin (D-Md.) today introduced the Small-Dollar and Veterans Loans Enhancement Act—legislation to increase lending to underserved borrowers by eliminating or reducing fees on Small Business Administration (SBA) 7(a) small-dollar loans of $150,000 or less, the majority of which finance women-, minority- and veteran-owned and rural small businesses.

“The 7(a) Loan Program helps small businesses access capital, but for many entrepreneurs in underserved communities, the fee required to secure a 7(a) loan is one more barrier to financing their business,” said Ranking Member Cardin. “We already know that waiving fees on small-dollar loans helps borrowers in underserved communities, so I am proud to introduce this bill to ensure that entrepreneurs have one less roadblock on their way to operating a successful business.”

The majority of 7(a) loans that go to underserved communities are less than $150,000. In Fiscal Year 2018:

  • 62% of the loans that went to women-owned firms were for loans of $150,000 or less;
  • 55% of the loans that went to American Indian-owned firms were for loans of $150,000 or less;
  • 65% of the loans that went to Hispanic-owned firms were for loans of $150,000 or less; and
  • 65% of the loans that went to Black-owned firms were for loans of $150,000 or less.

Under current law, SBA must operate the 7(a) Loan program at “zero subsidy,” which requires the Administration to offset any projected costs for backing 7(a) loans with fees on borrowers and lenders. When the Administration projects that 7(a) will operate with a surplus, SBA is required to reduce fees “to the maximum extent possible” on 7(a) Express loans to veterans, as well as other borrowers. Since 2013, the agency has had sufficient surplus income to waive fees on loans to veterans in the Express Loan program, as well as on loans up to $150,000 for borrowers and sometimes lenders.

In its FY2020 Budget for SBA, the Trump Administration estimated a higher cost for operating the 7(a) program and asked Congress to increase fees on 7(a) borrowers and lenders. As a result of the Administration’s determination, SBA cannot waive fees for veterans in the Express Loan program, even if Congress were to appropriate the funds necessary to pay for the fees. The budget projection also means there will be no surplus fee income available to waive fees on small-dollar loans.

The fees required for small-dollar loans can be as high as $2,550 on a $150,000 loan, which for entrepreneurs in underserved communities can be a barrier to needed financing, considering the stark racial and gender wealth gaps. According to the Federal Reserve, Black families have $17,150 in wealth and Hispanic families have $20,720 in wealth, while White families have $171,000 in wealth. Similarly, a 2017 report found that women have $3 in wealth for every $10 men have.

SBA has lauded fee waivers as a tool to increase lending, writing last year that fee waivers on small-dollar loans “expanded small businesses’ ability to access capital.” The agency also wrote that “small-dollar loans greatly benefit emerging markets and startups.” 

The Small-Dollar and Veterans Loans Enhancement Act aims to eliminate or reduce fees on small-dollar loans to help underserved communities overcome these specific, historic roadblocks to business ownership. The bill would also amend the Small Business Act to treat veterans in the Express Loan program the same as all borrowers for the purpose of fee relief. Specifically, the bill would:

  • expand fee waivers on all small-dollar loans for borrowers and lenders in the 7(a) program, as well as all loans to veterans in the Express Loan program, when Congress provides appropriations;
  • prioritize veterans and small-dollar borrowers by requiring SBA to waive borrower fees first for 7(a) Express loans to veterans and their spouses, then small-dollar borrowers, then if funds allow, waive fees for lenders making small-dollar loans;
  • keep the 7(a) Loan Program operating at zero subsidy by only applying the provision in years when Congress provides appropriations for fee waivers, keeping zero subsidy as the legislative baseline and norm for the program; and
  • increase Congressional oversight of SBA’s fee waiver policies by requiring the Congressional Budget Office to provide Congress with a cost estimate for fee waivers for the subsequent fiscal year to guide the decisions of the authorizing committees. The estimate will be due within 30 days of the Administration’s budget submission.

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