[House Report 118-99]
[From the U.S. Government Publishing Office]
118th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 118-99
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7(A) LOAN AGENT OVERSIGHT ACT
_______
June 5, 2023.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Williams of Texas, from the Committee on Small Business, submitted
the following
R E P O R T
[To accompany H.R. 1644]
[Including cost estimate of the Congressional Budget Office]
The Committee on Small Business, to whom was referred the
bill (H.R. 1644) to amend the Small Business Act to require a
report on 7(a) agents, and for other purposes, having
considered the same, reports favorably thereon without
amendment and recommends that the bill do pass.
CONTENTS
Page
I. Purpose and Bill Summary........................................ 2
II. Need for Legislation............................................ 2
III. Hearings........................................................ 3
IV. Committee Consideration......................................... 3
V. Committee Votes................................................. 3
VI. Section-by-Section of H.R. 1644................................. 6
VII. Congressional Budget Office Cost Estimate....................... 6
VIII. New Budget Authority, Entitlement Authority, and Tax Expenditure 7
IX. Oversight Findings & Recommendations............................ 7
X. Performance Goals and Objectives................................ 7
XI. Statement of Duplication of Federal Programs.................... 8
XII. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits........................................................ 8
XIII. Federal Mandates Statement...................................... 8
XIV. Federal Advisory Committee Statement............................ 8
XV. Applicability to Legislative Branch............................. 8
XVI. Statement of Constitutional Authority........................... 8
XVII. Changes in Existing Law, Made by the Bill, as Reported.......... 8
I. Purpose and Bill Summary
The purpose of H.R. 1644, the ``7(a) Loan Agent Oversight
Act'' is to require the Small Business Administration's (SBA)
Office of Credit Risk Management (OCRM) to submit an annual
report to Congress regarding the performance of and risk
associated with 7(a) loans generated through loan agent
activity.
II. Need for Legislation
H.R. 1644 was introduced by Rep. Dan Meuser (R-PA) and Rep.
Dean Phillips (D-MN) on March 17, 2023 to improve SBA's
reporting on loan agent and broker activity in the 7(a) Loan
Guaranty Program (7(a) program). Authorized by section 7(a) of
the Small Business Act, the SBA's 7(a) program is the agency's
flagship loan program. Private sector lenders (mostly banks and
credit unions but also some non-depository lenders) originate
commercial and working capital loans of up to $5 million to
small businesses who cannot access credit elsewhere. SBA
guarantees 50 to 90 percent of each 7(a) loan made, depending
on loan characteristics, assuring the lender that if a borrower
defaults on the loan, SBA will purchase the loan and the lender
will receive an agreed-upon portion of the outstanding balance.
SBA also administers several subprograms within the 7(a)
program that offer streamlined and expedited loan procedures
for different groups of borrowers, including the SBA Express,
Export Express, and Community Advantage Pilot programs.
Although these subprograms have their own distinguishing
eligibility requirements, terms, and benefits, they operate
under the 7(a) program's authorization. For the majority of
7(a) loans, SBA relies on lenders with delegated authority to
process and service loans, and ensure borrowers meet the
program's eligibility requirements. In FY2022, SBA approved
47,678 7(a) loans for a total of more than $25.7 billion, with
an average loan size of $539,033.\1\
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\1\U.S. Small Bus. Admin., FY 2024 Cong, Budget Justification
FY2022 Annual Performance Report, 33 (Mar. 11, 2023).
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SBA loan agents and brokers act as intermediaries between
borrowers and SBA lenders. Oversight of these loan agents and
brokers is lacking, which creates an environment ripe for
fraud. This risk has been consistently cited by SBA's Office of
the Inspector General (OIG) as a top management and performance
challenge facing the agency, most recently in FY2023.\2\ In the
report, the OIG notes that SBA has taken steps to help mitigate
fraud and oversee high-risk lenders. However, OIG also notes
that further improvements are necessary to ensure program
integrity and to mitigate the risk of fraud and loss in the
loan programs.
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\2\U.S. Small Bus. Admin. Office of Inspector Gen., Top Management
and Performance Challenges Facing the Small Business Administration in
Fiscal Year 2023, 21-22 (Oct. 14, 2022).
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The Committee agrees with the OIG that though lenders bear
primary responsibility for monitoring their agents, only SBA is
positioned to aggregate loan agent portfolios, evaluate their
performance, and inform lenders and policymakers about
concerning program risks or trends. The SBA must conduct more
rigorous oversight and tracking of third-party agents.
Companion legislation (H.R. 1651, the ``Small Business 7(a)
Loan Agent Transparency Act'') would require OCRM to compile
loan agent data using a registration system that assigns each
agent a unique identifier. H.R. 1644 requires a report to
Congress regarding such data, including an analysis of the
performance, cost, and risk associated with loan agent activity
in the 7(a) program.
III. Hearings
In the 118th Congress, the Committee held three hearings
examining the issues covered in H.R. 1644. On April 19, 2023,
the Committee on Small Business' Subcommittee on Oversight
Investigations and Regulations held a hearing on the OIG's
investigations into SBA programs. The Inspector General
testified to the Subcommittee that one of the SBA's top
management and performance challenges for FY2023 remains risk
management and oversight of loan activities and that
improvement is necessary to ensure the integrity of the SBA's
loan programs.\3\
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\3\Office of Inspector General Reports to Congress on
Investigations of SBA Programs: Hearing Before H. Comm. on Small
Business Subcomm. on Oversight Investigations and Regulations, 118th
Cong., 4 (testimony of Hannibal ``Mike'' Ware, Inspector General, U.S.
Small Bus. Admin.).
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On May 10, 2023, during the Full Committee Hearing ``Taking
on More Risk: Examining the SBA's Changes to the 7(a) Lending
Program Part I'' both Republican and Democrat members of the
Committee expressed concerns with two recent SBA Final Rules
that would add significant risk to the integrity of the 7(a)
Program. Specifically, how lifting the licensing moratorium on
SBLCs and eliminating long-standing loan underwriting criteria
will create ripe conditions for an increase in defaulted loans.
Further, on May 17, 2023, during the Full Committee Hearing,
``Taking on More Risk: Examining the SBA's Changes to the 7(a)
Lending Program Part II'' one of the witnesses noted that
broadening access to capital is a worthy goal but that the
SBA's proposals change too much too soon in an uncontrolled
environment.
IV. Committee Consideration
The Committee on Small Business met in open session, with a
quorum being present, on May 23, 2023 and ordered H.R. 1644
favorably reported to the House of Representatives. During the
markup no amendments were offered.
V. Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the recorded
votes on the motion to report legislation and amendments
thereto. The Committee voted to favorably report H.R. 1644 to
the House of Representatives at 2:37 p.m.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
VI. Section-by-Section of H.R. 1644
Section 1. Short title
This Act may be cited as the ``7(a) Loan Agent Oversight
Act.''
Section 2. Requirements for 7(a) agents
This section requires OCRM to submit to Congress an annual
report regarding the performance, cost, and risk associated
with loans generated through loan agent activity.
VII. Congressional Budget Office Cost Estimate
Pursuant to 3(c)(3) of rule XIII of the Rules of the House
of Representatives, the Committee adopts as its as its own the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
H.R. 1644 would require the Small Business Administration
(SBA) to report annually to the Congress on agents that help
small businesses to secure loans of up to $5 million that are
guaranteed by the SBA under the 7(a) loan program. Agents
include attorneys, consultants, and accountants that assist
small businesses during the 7(a) loan application process. The
report would include the number of agents assisting 7(a) loan
applicants, the dollar amount of fees paid to agents, and the
risk created by agents.
The costs of the legislation, detailed in Table 1, fall
within budget function 370 (commerce and housing credit).
TABLE 1.--ESTIMATED INCREASES IN SPENDING SUBJECT TO APPROPRIATION UNDER H.R. 1644
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By fiscal year, millions of dollars--
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2023 2024 2025 2026 2027 2028 2023-2028
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Estimated Authorization.................. * 10 10 10 10 10 50
Estimated Outlays........................ * 9 9 10 10 10 48
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* = between zero and $500,000.
Using information from the SBA, CBO expects that the annual
report would cost about $1 million each year. However, the SBA
does not currently collect the information that it would need
to write the report specified in the legislation. Thus, CBO
expects that the SBA would need to establish and maintain a
registration system to track agents working on 7(a) loans in
order to complete a full and accurate report. On that basis,
CBO estimates that implementing H.R. 1644 would cost the agency
$48 million over the 2023-2028 period, assuming appropriation
of the estimated amounts.
Those estimated amounts include $20 million to establish
and maintain a system to register and track agents working on
7(a) loans, $23 million to hire contractors to administer the
registration program, and $5 million to report annually to the
Congress.
On May 26, 2023, CBO transmitted a cost estimate for H.R.
1651, the Small Business 7(a) Loan Agent Transparency Act, as
ordered reported by the House Committee on Small Business on
May 23, 2023. That legislation would require the SBA to
register such agents but would not require an annual report to
the Congress. Unlike H.R. 1644, H.R. 1651 also would require
the SBA to collect fees from agents, which may be spent without
further appropriation. CBO's estimated costs for registering
agents and keeping that information up to date are the same for
both estimates.
The CBO staff contact for this estimate is David Hughes.
The estimate was reviewed by Ann Futrell, Senior Adviser for
Budget Analysis.
Phillip L. Swagel,
Director, Congressional Budget Office.
VIII. New Budget Authority, Entitlement Authority,
and Tax Expenditures
Pursuant to clause 3(c)(2) of rule XIII of the Rules of the
House of Representatives and section 308(a)(I) of the
Congressional Budget Act of 1974, the Committee provides the
following opinion and estimate with respect to new budget
authority, entitlement authority, and tax expenditures. The
Committee does not believe that there will be any additional
costs attributable to this legislation. H.R. 1644 does not
direct new spending, but instead reallocates funding
independently authorized and appropriated.
IX. Oversight Findings & Recommendations
In accordance with clause 3(c)(1) of rule XIII and clause
2(b)(1) of rule X of the Rules of the House of Representatives,
the oversight findings and recommendations of the Committee on
Small Business with respect to the subject matter contained in
the H.R. 1644 are incorporated into the descriptive portions of
this report.
X. Performance Goals and Objectives
With respect to the requirements of clause 3(c)(4) of rule
XIII of the Rules of the House of Representatives, the
performance goals and objectives of H.R. 1644 is to require an
annual report from OCRM to Congress on the performance, cost,
and risk associated with 7(a) loans generated through loan
agent activity.
XI. Statement of Duplication of Federal Programs
Pursuant to clause 3(c)(5) of rule XIII of the Rules of the
House of Representatives, no provision of H.R. 1644 is known to
be duplicative of another Federal program, including any
program that was included in a report to Congress pursuant to
section 21 of Public Law 111-139 or the most recent Catalog of
Federal Domestic Assistance.
XII. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee finds that the bill
does not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits as defined in clause 9(e),
9(f), or 9(g) of rule XXI of the Rules of the House of
Representatives.
XIII. Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
XIV. Federal Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
XV. Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act.
XVI. Statement of Constitutional Authority
Pursuant to clause 7 of Rule XII of the Rules of the House,
the Committee finds that the authority for this legislation in
Art. I, Sec. 8, cl.1 of the Constitution of the United States.
XVII. Changes in Existing Law, Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italics and existing law in which no change is
proposed is shown in roman):
SMALL BUSINESS ACT
* * * * * * *
SEC. 47. OFFICE OF CREDIT RISK MANAGEMENT.
(a) Establishment.--There is established within the
Administration the Office of Credit Risk Management (in this
section referred to as the ``Office'').
(b) Duties.--The Office shall be responsible for
supervising--
(1) any lender making loans under section 7(a) (in
this section referred to as a ``7(a) lender'');
(2) any Lending Partner or Intermediary participant
of the Administration in a lending program of the
Office of Capital Access of the Administration; and
(3) any small business lending company or a non-
Federally regulated lender without regard to the
requirements of section 23.
(c) Director.--
(1) In general.--The Office shall be headed by the
Director of the Office of Credit Risk Management (in
this section referred to as the ``Director''), who
shall be a career appointee in the Senior Executive
Service (as defined in section 3132 of title 5, United
States Code).
(2) Duties.--The Director shall be responsible for
oversight of the lenders and participants described in
subsection (b), including by conducting periodic
reviews of the compliance and performance of such
lenders and participants.
(d) Supervision Duties for 7(a) Lenders.--
(1) Reviews.--With respect to 7(a) lenders, an
employee of the Office shall--
(A) be present for and supervise any such
review that is conducted by a contractor of the
Office on the premise of the 7(a) lender; and
(B) supervise any such review that is not
conducted on the premise of the 7(a) lender.
(2) Review report timeline.--
(A) In general.--Notwithstanding any other
requirements of the Office or the
Administrator, the Administrator shall develop
and implement a review report timeline which
shall--
(i) require the Administrator to--
(I) deliver a written report
of the review to the 7(a)
lender not later than 60
business days after the date on
which the review is concluded;
or
(II) if the Administrator
expects to submit the report
after the end of the 60-day
period described in clause (i),
notify the 7(a) lender of the
expected date of submission of
the report and the reason for
the delay; and
(ii) if a response by the 7(a) lender
is requested in a report submitted
under subparagraph (A), require the
7(a) lender to submit responses to the
Administrator not later than 45
business days after the date on which
the 7(a) lender receives the report.
(B) Extension.--The Administrator may extend
the time frame described in subparagraph
(A)(i)(II) with respect to a 7(a) lender as the
Administrator determines necessary.
(e) Enforcement Authority Against 7(a) Lenders.--
(1) Informal enforcement authority.--The Director may
take an informal enforcement action against a 7(a)
lender if the Director finds that the 7(a) lender has
violated a statutory or regulatory requirement under
section 7(a) or any requirement in a Standard Operating
Procedures Manual or Policy Notice related to a program
or function of the Office of Capital Access.
(2) Formal enforcement authority.--
(A) In general.--With the approval of the
Lender Oversight Committee established under
section 48, the Director may take a formal
enforcement action against any 7(a) lender if
the Director finds that the 7(a) lender has
violated--
(i) a statutory or regulatory
requirement under section 7(a),
including a requirement relating to
credit elsewhere; or
(ii) any requirement described in a
Standard Operating Procedures Manual or
Policy Notice, related to a program or
function of the Office of Capital
Access.
(B) Enforcement actions.--An enforcement
action imposed on a 7(a) lender by the Director
under subparagraph (A) shall be based on the
severity or frequency of the violation and may
include assessing a civil monetary penalty
against the 7(a) lender in an amount that is
not greater than $250,000.
(3) Appeal by lender.--A 7(a) lender may appeal an
enforcement action imposed by the Director described in
this subsection to the Office of Hearings and Appeals
established under section 5(i) or to an appropriate
district court of the United States.
(f) Regulations.--Not later than 1 year after the date of the
enactment of this section, the Administrator shall issue
regulations, after opportunity for notice and comment, to carry
out subsection (e).
(g) Servicing and Liquidation Responsibilities.--During any
period during which a 7(a) lender is suspended or otherwise
prohibited from making loans under section 7(a), the 7(a)
lender shall remain obligated to maintain all servicing and
liquidation activities delegated to the lender by the
Administrator, unless otherwise specified by the Director.
(h) Portfolio Risk Analysis of 7(a) Loans.--
(1) In general.--The Director shall annually conduct
a risk analysis of the portfolio of the Administration
with respect to all loans guaranteed under section
7(a).
(2) Report to congress.--On December 1, 2018, and
every December 1 thereafter, the Director shall submit
to Congress a report containing the results of each
portfolio risk analysis conducted under paragraph (1)
during the fiscal year preceding the submission of the
report, which shall include--
(A) an analysis of the overall program risk
of loans guaranteed under section 7(a);
(B) an analysis of the program risk, set
forth separately by industry concentration;
(C) without identifying individual 7(a)
lenders by name, a consolidated analysis of the
risk created by the individual 7(a) lenders
responsible for not less than 1 percent of the
gross loan approvals set forth separately for
the year covered by the report by--
(i) the dollar value of the loans
made by such 7(a) lenders; and
(ii) the number of loans made by such
7(a) lenders;
(D) steps taken by the Administrator to
mitigate the risks identified in subparagraphs
(A), (B), and (C);
(E) the number of 7(a) lenders, the number of
loans made, and the gross and net dollar amount
of loans made;
(F) the number and dollar amount of total
losses, the number and dollar amount of total
purchases, and the percentage and dollar amount
of recoveries at the Administration;
(G) the number and type of enforcement
actions recommended by the Director;
(H) the number and type of enforcement
actions approved by the Lender Oversight
Committee established under section 48;
(I) the number and type of enforcement
actions disapproved by the Lender Oversight
Committee; and
(J) the number and dollar amount of civil
monetary penalties assessed.
(i) Budget Submission and Justification.--The Director shall
annually provide, in writing, a fiscal year budget submission
for the Office and a justification for such submission to the
Administrator. Such submission and justification shall--
(1) include salaries and expenses of the Office and
the charge for the lender oversight fees;
(2) be submitted at or about the time of the budget
submission by the President under section 1105(a) of
title 31; and
(3) be maintained in an indexed form and made
available for public review for a period of not less
than 5 years beginning on the date of submission and
justification.
(j) Annual Report.--
(1) In general.--The Director shall submit to
Congress, in addition to the report required under
subsection (h)(2), an annual report including, for the
calendar year covered by the report--
(A) the number of 7(a) agents assisting
applicants for loans under section 7(a),
disaggregated by 7(a) agents who are attorneys,
accountants, consultants, packagers, and lender
service providers (as defined by section 103.1
of title 13, Code of Federal Regulations);
(B) the number of fraudulent loans made for
which an applicant used services of a 7(a)
agent;
(C) the purchase rate by the Administrator of
loans for which an applicant used services of a
7(a) agent;
(D) the number and aggregate dollar value of
referral fees paid to 7(a) agents,
disaggregated by whether the applicant or 7(a)
lender paid such fees;
(E) without identifying individual 7(a)
agents by name, a consolidated analysis of the
risk created by the individual 7(a) agents
responsible for not less than 1 percent of--
(i) the dollar value of loans made
with the assistance of 7(a) agents; and
(ii) the number of loans made with
the assistance of 7(a) agents;
(F) an analysis of interest rates on loans
for which an applicant or 7(a) lender used
services of an agent; and
(G) a description of how the Administrator
communicates with 7(a) agents.
(2) Definitions.--In this subsection:
(A) 7(a) agent.--The term ``7(a) agent''
means a person who provides covered services on
behalf of a lender or applicant.
(B) Covered services.--The term ``covered
services'' means--
(i) assistance with completing an
application for a loan under section
7(a) (including preparing a business
plan, cash flow projections, financial
statements, and related documents); or
(ii) consulting, broker, or referral
services with respect to a loan under
section 7(a).
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