Best Practices: Recently Announced Changes to Community Advantage Pilot Loan Program

On April 29, 2022, the U.S. Small Business Administration announced important changes to the Community Advantage (CA) Pilot Program.  87 FR 25398.  The changes take effect on May 31, 2022.  They follow closely in the heels of changes announced on April 1, 2022, which extended the CA Pilot Program until September 30, 2024 and lifted the moratorium previously imposed on SBA accepting new CA Lender applications thereby expanding the pool of lenders able to provide access to capital in underserved markets and in small dollar loans.  Of particular interest are those changes removing restrictions making ineligible any business with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude, and changes modifying affiliation principles.

The published rule includes multiple changes to the CA Pilot Program, including changes to underwriting criteria, collateral, maximum allowable interest rates and hazard insurance requirements.  Additionally, all new CA lenders will be permitted to approve loans under their delegated authority.  The SBA will also authorize certain CA Lenders to make revolving lines of credit loans under the CA Pilot Program.  But, two of the temporary revisions are of particular interest and may give us a glimpse into future program-wide changes: (i) criminal background requirements; and (ii) affiliation requirements.

Criminal Backgrounds

According to the published rule, “[t]here are roughly as many Americans with criminal records as with college degrees, and the criminal justice system disproportionally entangles Americans of color.  Individuals with prior convictions often have difficulty finding jobs, many experience discrimination, others lack technical skillsets for the modern workforce, and all face 29,000 employment-related legal restrictions (e.g., inability to acquire licenses).  Entrepreneurship may offer this population a strong alternative, but many formerly incarcerated individuals have little access to the credit necessary to start a business.”  Going forward, CA Lenders can continue to conduct background checks and make risk-based lending decisions in accordance with their own policies, but the existing restrictions making ineligible loans to businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or crime of moral turpitude will cease.

Affiliation Principles

Under current size standards and affiliation rules, there are seven separate affiliation principles that must be applied to the applicant and other entities to determine whether the applicant is ‘‘small’’ for purposes of eligibility for SBA financial assistance and to ensure that maximum guaranty amount available is not exceeded.  13 CFR 121.301.  The new rule reduces the affiliation principles to three, and in particular, removes “the principle of control of one entity over another when determining affiliation because the concept of control has proven particularly burdensome for applicants and lenders to understand and implement.”  The simplified affiliation analysis require CA Lenders to look at: (i) Ownership (i.e., what the applicant owns and who owns the applicant); (ii) Stock options, convertible securities and agreements to merge (i.e., those with present effect, those open to continued negotiation, and those subject to conditions precedent unlikely to occur); and (iii) size determinations.

Look for some of these, or similar, changes to be rolled out by the SBA in connection with other SBA financial assistance programs and the agency’s continued efforts to facilitate access to capital to underserved markets.  For more information regarding SBA compliance matters, contact the attorneys at Starfield & Smith at 215.542.7070.