October 11, 2021
The Honorable Nancy Pelosi The Honorable Charles Schumer
Speaker Majority Leader
U.S. House of Representatives U.S. Senate
Washington, D.C. 20515 Washington, D.C. 20510
The Honorable Kevin McCarthy The Honorable Ben Cardin, Chair
Republican Leader U.S. Senate Committee on Small Business
U.S. House of Representatives Washington, D.C. 20515
Washington, D.C. 20515
The Honorable Nydia Velasquez, Chair
U.S. House Committee on Small Business
Washington, D.C. 20515
Dear Leader Schumer, Speaker Pelosi, Leader McCarthy, and Chairs Cardin and Velazquez:
Recent letters from the Republican members of the House Committee on Small Business (October 1, 2021) and Republican Senators (October 6, 2021) advocated against an important provision of the House Reconciliation bill that would benefit new small business startups and microbusinesses regarding access to capital.
The nation is at a 40-year low in new business startups. A significant contributor to this serious economic problem is the lack of capital to start businesses and grow microbusinesses.
The Republican letters fail to address this problem or offer any meaningful solutions.
As the House GOP letter recognizes, private lenders use “prudent underwriting” when making a loan. These private lenders, according to the letter, “are in the business of ensuring dollars are secure.”
This is not an entirely correct assessment. Private lenders are in the business to make a profit. That goal is appropriate and “prudent underwriting,” or being risk averse, is a vehicle to achieve that goal.
This is the underlying problem with access to capital for new business startups. They are most often too risky for private lenders. Additionally, the average startup loan is around $10,000, far too unprofitable for private lenders even if the loan is successful.
Further contributing to the problem of startups accessing capital from private lenders is the fact that there are at least 68% fewer commercial banks today compared to 1980, according to the SBA Office of Advocacy. The St. Louis Federal Reserve Bank found that in 2014 there were 1,132 banking deserts in the country, 734 in rural areas.
It is these rural and underserved communities that are starving for access to capital to fuel entrepreneurship.
In March of this year, a number of national, state, and local business organizations launched a campaign to make recommendations to address the 40-year low in new business startups. One of the key issues addressed is access to capital.
The issue demands a solution that is not just doing more of the same. Trying to encourage private lenders to make small business loans they do not want to make, even with generous loan guarantees, is destined to not solve the problem.
The Senate Republican letter advocates for “expanding the lending pool in the 7(a) program to more lenders” to increase options for small businesses. While including more financial technology companies (FinTechs) in the traditional 7(a) programs might mean more private lenders, it does not guarantee more startup and micro loans in the underserved communities, nor the training and technical assistance needed to successfully grow small businesses.
Our campaign recommends that the Small Business Administration (SBA) have the authority and resources to make direct loans of up to $20,000 to new business startups and microbusinesses with a priority given to our nation’s rural and underserved communities. In this way, the SBA would be addressing a critical access to capital need but would not be competing with private lenders, which have already shown their disinterest in this market.
The proposed House Reconciliation bill includes a section that authorizes the SBA to “originate and disburse direct loans, including through partnerships with third-parties, to small business concerns.” The cap would be $150,000. However, the legislative language does not direct the loans to specific demographics.
It is this section that inspired the Republican letters opposing SBA direct lending and claim, without explanation, that such a program “will harm the very businesses the programs are meant to help” and “will “hurt the United States economy as a whole.”
The letters’ argument against the SBA making direct loans centers on potential fraud because private lenders would not be making the loans.
The letters point to the reported potential fraud in the SBA’s Economic Injury Disaster Loan (EIDL), a program that is direct lending, as proof that the SBA’s “lack of oversight controls” puts taxpayer dollars at risk compared to loans from private lenders participating in the federal Paycheck Protection Program (PPP) and the traditional SBA7(a) loan guarantee program.
However, private lenders have also experienced fraud and potential fraud with the PPP loans they have originated.
A December 2020 report by an SBA independent financial auditor identified “more than two million PPP loans worth $189 billion—more than one third of all PPP loans issued in that period—that ‘are potentially not in conformance with the CARES Act and related legislation.’”
Just through April of this year the Justice Department had already criminally charged 209 individuals that were suspected of applying for about $445 million in PPP loans. Those charged had already received over half of these funds.
Earlier this year the House Select Committee on the Coronavirus Crisis launched an investigation into fraudulent PPP loans originated by FinTechs and their private lending partners. Committee Chairman James Clyburn wrote that he was “deeply troubled by recent reports alleging that financial technology lenders and their bank partners failed to adequately screen PPP loan application for fraud.”
Regarding the “potentially fraudulent EIDL loans processed and advanced” by the SBA, Congress holds significant blame. The Project on Government Oversight explains:
The CARES Act precluded the agency from exercising one important check on fraud in the Economic Injury Disaster Loan program. Normally, the agency can require loan applicants to fill out a form allowing the agency to verify their tax information with the Internal Revenue Service. “The disaster loan program’s strongest internal control is the ability to receive directly from the IRS recent tax transcripts,” wrote James Rivera, head of the SBA’s Office of Disaster Assistance, last fall. But, he added, “the CARES Act removed that control,” calling it a “pivotal change.”
The experience of the first nine months of the CARES Act led both Congress and the Administration to take measures to address fraud and abuse in both PPP and EIDL. Certainly, more preventative measures can be taken.
Preventing fraud in any government program should be a high priority. However, citing fraud in the SBA PPP lending program as being less and thus more acceptable than the fraud in the EIDL program to justify not initiating a completely different and critically needed SBA small business lending program is not good policymaking.
The proper response to fraud is to have better fraud prevention controls in all lending programs—private and public.
Our campaign recommendations for the new SBA direct lending program reduces potential fraud, the risk to taxpayer money, and private-lender competition while increasing access to capital for small business startups and microbusinesses:
- Cap the new SBA direct loans at $20,000 and use non-traditional underwriting criteria.
- Require all SBA direct loan recipients to first receive technical assistance and training from SBA partner organizations before and during the loan.
- Target the loans to small business startups and microbusiness.
- Prioritize the loans to rural and underserved communities.
The House Republicans on the Committee on Small Business insists that “Federal government programs must provide aid and resources in a responsible, efficient, and prudent manner.” Our recommendations meet these criteria for the new SBA direct lending program that is critical to addressing the nation’s 40-year low in new business startups.
We hope that both Republicans and Democrats will support these recommendations and we look forward to engaging members of Congress individually and in hearings on the matter.
Frank Knapp Jr.
Campaign Coordinator, Reform the SBA: BIGGER Mission, Authority and Resources
President & CEO, South Carolina Small Business Chamber of Commerce
American Independent Business Alliance
American Sustainable Business Council
Gullah Geechee Chamber of Commerce
Latin American Chamber of Commerce—Charlotte
Latino Communications Community Development Corporation
Local First Arizona
North Carolina Business Council
Sumter Black Chamber of Commerce
South Carolina Hispanic Chamber of Commerce
South Carolina Small Business Chamber of Commerce
Triad Local First
U.S. Green Chamber of Commerce