Best Practices: How Community Advantage Pilot Lenders Can Become Community Advantage Small Business Lending Companies

The Final Rule: Small Business Lending Company (SBLC) Moratorium Recission and Removal of the Requirement for a Loan Authorization (88 FR 21890, commonly known as the “SBLC Rule”) becomes effective on May 12, 2023.  The purpose of the SBLC Rule is to: (1) lift the moratorium on licensing new Small Business Lending Companies (“SBLCs”) and (2) add a new type of lending entity called a Community Advantage SBLC (“CA SBLC”); and (3) remove the requirement for a Loan Authorization in the 7(a) and 504 Loan Programs.  Provisions were included in the SBLC Rule to allow lenders who are currently Community Advantage Pilot Lenders (“CA Pilot Lender”) to be grandfathered in as CA SBLCs.  If a Certified Development Company is also a CA Pilot Lender, it can be licensed as a CA SBLC under the SBLC Rule without requiring it to form a separate entity.

On May 1, 2023 the SBA released SBA Information Notice 5000-846918 (“CA SBLC Notice”), which describes the process for a CA Pilot Lender to become a CA SBLC.  As a CA SBLC, a lender can make regular 7(a) loans, instead of only being able to make 7(a) Community Advantage loans under the temporary CA Pilot Program.  Please note that the CA Pilot Program will sunset on September 30, 2023, so all CA Pilot Lenders interested in continuing to make SBA loans after that time will have to comply with the process to become transitioned to a CA SBLC by that date.

The SBA will be sending an unexecuted Form 750, Loan Guaranty Agreement, to all current CA Pilot Lenders using its CAloans@sba.gov email address.  Upon receipt, the Form should be reviewed, and if acceptable to the CA Pilot Lender, completed, executed and submitted to the same email address it was received from, as listed above.  If the SBA sees that the Form has been fully completed and executed by the CA Pilot Lender, it will sign the submitted  Form 750 and finalize the transition of the CA Pilot Lender to a CA SBLC.

CA Pilot Lenders who are transitioning to a CA SBLC will still be subject to the requirements contained in the Community Advantage Participant Guide, which can be found at https://www.sba.gov/document/support-community-advantage-participant-guide.   At a minimum, at least 60% of the Community Advantage loans that a CA SBLC closes must meet the underserved market requirements of the current CA Pilot Program.  Please note that no fidelity insurance coverage levels have been set yet by the SBA for CA SBLCs and there is a revised loan loss reserve requirement of: (i) 5% of outstanding amount of unguaranteed portion of loan portfolio under the program if the CA SBLC has participated in the program, including the CA Pilot Program, for 5 years or less, or (ii) the average repurchase rate of the CA SBLC over the preceding 36-month period if the CA SBLC has participated in the program, including the CA Pilot Program, for more than 5 years.

Please make sure that if you are a current CA Pilot Lender who would like to continue making SBA loans as a CA SBLC, you review and understand the CA SBLC Notice and SBA loan program requirements, before completing and submitting the Form 750 to the SBA.  For more information, contact the attorneys at Starfield & Smith, P.C. at 215-542-7070.