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Small Business Administration Relaxes Lending Rules

The Small Business Administration is streamlining its lending process, according to The Wall Street Journal (subscription).

What’s going on: “The Small Business Administration is simplifying loan requirements, automating more of the process and expanding the pool of nonbank lenders licensed to issue SBA loans. The moves, many of which take effect Aug. 1, will make it easier for financial-technology firms to participate.”

  • The goal: to increase credit extended to small businesses that have typically struggled to get it.

The concern: “[T]he changes—and the decision to couple relaxed requirements with new lenders—have drawn criticism from the industry and members of Congress, who say the revisions could jeopardize the program by increasing loan defaults.”

  • Some worry that without “firm guardrails from the SBA” lenders will make risky loans, resulting in more defaults.
  • Even if defaults don’t increase, loans could get more expensive for borrowers, as lenders will now be able to charge flat fees.

Why it’s important: “The SBA is authorized by Congress to guarantee as much as $34 billion in loans annually through its main lending program” but qualifying for the funds requires adhering to a set of burdensome rules—and that’s led to underutilization of available funds, according to the Journal.  

The changes: “Under the new SBA rules, lenders can use their own standard credit policies to make SBA loans of as much as $500,000 instead of following government guidelines. Lenders are encouraged to check a box to indicate why borrowers can’t get credit elsewhere, a crucial program requirement, instead of providing a detailed written explanation.”

  • Revisions to the loan requirements include reduced or eliminated downpayments for some borrowers.
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