Best Practices: Small Business Lender Oversight Reform Act Proposed Rule

On June 21, 2018 Congress passed the Small Business 7(a) Lending Oversight Reform Act of 2018 (the “Act”).  The Act required the SBA to prepare and circulate regulations to implement its provisions.  On June 21, 2019 the SBA issued a proposed rule including the required regulations for comment.  All comments must be received by August 20, 2019.

This article touches upon a few of the proposed regulations that may be of interest to lenders who participate in the 7(a) SBA guaranteed lending program.

Lenders have consistently sought guidance from SBA on how to determine whether the applicant has availability to obtain “credit elsewhere.”  Congress recognized this desire for further guidance and provided a definition in the Act.  Proposed 13 CFR §120.101 requires lenders to analyze whether credit is available on reasonable terms and conditions from non-Federal, non-State, and non-local government sources without SBA assistance.  Lenders must take into consideration normal conventional lending practices, including, but not limited to, the applicable business industry, how long the applicant has been in operation, collateral adequacy, and  a loan term that is appropriate in relation to anticipated cash flow.  Other factors that can be considered include management experience, leverage ratio, global cash flow, loan size relative to the age of the business, and personal resources of the owners of the business.  Lenders would have to specifically explain in its credit documentation the basis for its determination that there is no credit available elsewhere and have documentation supporting the same to comply with this regulation.

The regulations also state the various informal and formal enforcement actions SBA can take against lenders and intermediaries, and the grounds for such actions.  Most of the actions were already included in the Lender Supervision and Enforcement Standard Operating Procedures (SOP 50 53), with some minor revisions.  One new enforcement action available is the SBA’s authority to assess civil monetary penalties against all 7(a) lenders up to $250,000.00, instead of only being able to assess such civil monetary penalties against SBA Supervised Lenders for reporting failures.

Finally, under the proposed rule, most enforcement actions will be appealable to Federal district court or SBA’s Office of Hearings and Appeals.  Lenders would have 20 calendar days from the date of the enforcement decision to appeal it.  Lenders should note that the enforcement action under appeal would remain in effect pending the appeal decision.

Lenders who will be subject to these regulations should review the proposed rule and share any comments with the SBA within the applicable comment period.

For more information on the proposed rule and SBA compliance matters contact the attorneys at Starfield & Smith at 215.542.7070 or email us at info@starfieldsmith.com.