It’s starting: SBA’s new regulatory changes kick in this month.

One of the first changes out of the gate came in SBA’s May 1 Information Notice 5000-846918, with the regulatory change effective May 12.*

This change lifts the 40+ year moratorium on licensing new Small Business Lending Companies (SBLCs). It terminates the Community Advantage loan program, creates a new kind of SBA lender: a Community Advantage SBLC with a mission component – and details the transition process from Community Advantage Lender to CA SBLC. Importantly, it grandfathers in current CA Pilot lenders to be licensed as CA SBLCs.

Hold on. This doesn’t mean that the flood gates are open, and after a moratorium of more than 40 years SBA will be inundated with applications for SBLC licenses from new and unproven lenders to start making 7(a) loans.

There are requirements. A lender must first become a CA SBLC and as one might suspect, there is a process to achieve that status:

  • First, SBA will send current CA lenders a new 750 Agreement to be executed.
  • If the signed new 750 is returned to SBA by September 30, 2023, the Agency will transition the current CA lender to its new status as a CA SBLC.
  • The CA program sunsets September 30, 2023. If the signed 750 isn’t returned to SBA by then, there will be no transition and the lender’s ability to participate in the program will be terminated.

SBA also requires a Loan Loss Reserve Account (LLRA) to be established for each CA SBLC. If the CA SBLC was in the CA Pilot Program for five or fewer years, they must maintain a LLRA of 5% of the outstanding amount of the unguaranteed portion of their CA SBLC Loan Portfolio. If they have more than five years of participation, their LLRA  must equal the average repurchase rate of their CA loans over the preceding 36-month period.

What about this mission component for CA SBLCs? Currently, Community Advantage  lenders must meet certain underserved market requirements. This requirement also will apply to newly minted SBLCs: At least 60% of their total CA loans must be in underserved markets, defined as:

  • Businesses located in Low-to-Moderate Income (LMI) communities; Empowerment Zones and Enterprise Communities (EZ/EC); Historically Underutilized Business Zones (HUB Zones); Promise Zones; Opportunity Zones; or Rural Areas;
  • New businesses (in operation for less than two years);
  • Businesses that are 51 % or more owned and controlled by one or more veterans; and
  • Businesses where more than 50% of the full time workforce is low-income or resides in LMI census tracts.

At JRB, we assist our clients in identifying underserved markets, but the final determination is made by SBA.

I hope this clarifies questions you may have about this regulation and CA SBLCs. Of course, you can always give me a call.

Richard Jeffrey
Senior Associate
Head Underwriter

* Published in the Federal Register on April 12, 2023. Covered in JRB’s April 19, 2023 eBulletin, “… SBA’s FINAL RULES KEEP POURING IN …”  on the SBA page of the JRB website.