Last year, the President signed into law the Small Business 7(a) Lending Reform Act of 2018, Pub. L. 115-189 (“SBA Reform Act”) that amended the Small Business Act, 15 U.S.C. §651 et seq. The Small Business Act is the statute that created and governs the Small Business Administration. Initially, the focus of the guaranteed lending industry was on the SBA Reform Act’s clarification of the “Credit Elsewhere Test.” Somewhat overlooked are other provisions in the SBA Reform Act that are likely to have a much greater impact on participants in the SBA 7(a) lending program. What has not received the attention of the industry are those provisions of the SBA Reform Act that statutorily codify the existence and responsibilities of the Office of Credit Risk Management (“OCRM”) and the Lender Oversight Committee (the “Oversight Committee”), and assign the SBA Administrator the obligation to promulgate rules for the enforcement and appeal of the formal enforcement recommendations and actions taken by OCRM and the Oversight Committee.
As of the enactment of the SBA Reform Act, OCRM’s existence is based on the legal requirements of the Small Business Act, as amended, and not as the result of the SBA’s SOP 50 53. Consequently, the SBA does not have the legal authority to change OCRM’s mandate simply by modifying SOP 50 53. OCRM is now an independent office within the SBA regulatory scheme. As a practical matter, OCRM may now be viewed as being independent from the SBA Administrator similar to the SBA’s Office of Inspector General. OCRM must now annually report directly to Congress its analysis of the risks in SBA’s 7(a) loan portfolio.
As of the enactment of the SBA Reform Act, OCRM’s existence is based on the legal requirements of the Small Business Act, as amended, and not as the result of the SBA’s SOP 50 53. Consequently, the SBA does not have the legal authority to change OCRM’s mandate simply by modifying SOP 50 53. OCRM is now an independent office within the SBA regulatory scheme. As a practical matter, OCRM may now be viewed as being independent from the SBA Administrator similar to the SBA’s Office of Inspector General. OCRM must now annually report directly to Congress its analysis of the risks in SBA’s 7(a) loan portfolio.
Important to 7(a) program participants, OCRM now has the statutory obligation to evaluate participants’ conduct in complying with the SBA’s rules, including the SOPs. OCRM has the authority to recommend enforcement actions against 7(a) lenders who are not compliant with the SBA’s SOPs, or who are putting the program at risk. OCRM’s enforcement actions may be informal or formal. Informal enforcement actions are usually instructive in nature or with the cooperation of the program participant. Formal enforcement actions include imposition of a portfolio guaranteed dollar limit, suspension from selling into the secondary market, suspension or revocation of delegated authority, suspension of participation in SBA programs, or even debarment. The type of enforcement action recommended is to be based on the severity or frequency of the violation and may include a civil monetary penalty against the 7(a) lender in an amount not greater than $250,000. Initially, OCRM can only recommend a formal enforcement action to the Oversight Committee. OCRM can impose only those enforcement actions approved by the Oversight Committee.
Organizationally, the Oversight Committee is within the purview of the SBA Administrator. One of the functions of the Oversight Committee is to receive and review the formal enforcement recommendations of OCRM. The Oversight Committee is to consider the recommendation, and then vote to approve, disapprove or modify OCRM’s recommendation. The Oversight Committee’s conclusion is then reported to the Administrator of the SBA. With the approval of the Oversight Committee, ORCM can then take formal enforcement action against the lender.
The lender who is the subject of the formal enforcement action now has the right to appeal an enforcement action imposed by OCRM. The appeal is to go to the SBA’s Office of Hearings and Appeals or to an appropriate district court of the United States.
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