April 26, 2013
Patrick Kelley
Deputy Associate Administrator
Attention: Linda Reilly, Chief
504 Program Branch, Office of Capital Access
U.S. Small Business Administration
409 Third Street SW.
Washington, D.C. 20416
RE: Proposed Rule on 504 and 7(a) Program Updates
Dear Mr. Kelley:
On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents federal credit unions, I write to you regarding the U.S. Small Business Administration (SBA) proposed rule to update two important SBA programs – 7(a) and 504. See 78 Fed. Reg. 12663 (February 25, 2013).
Credit Union Member Business Lending Cap
Credit unions have seen unprecedented amount of regulations in recent years. Regulations that require significant changes to their lending operations have been especially costly and burdensome. As not-for-profit cooperative entities that do not have access to the capital markets, credit unions are finding it increasingly difficult to serve their 94 million members.
In order to ensure that credit unions continue to meet their members’ needs, NAFCU is working with Congress to implement a five-point plan for regulatory relief for credit unions. The five-point plan includes modifying the current arbitrary member business lending (MBL) cap of 12.25 percent of a credit union’s total assets. The matter is not novel for the U.S. Congress, as approximately 90 members of the House of Representatives and 22 Senators have co-sponsored legislation to increase the cap to 27.5 percent in the current or last Congress. NAFCU has also discussed this matter with the SBA on several occasions.
NAFCU requests that the SBA issue public support for legislation to modify credit unions’ MBL cap. We believe the SBA’s support would push legislation further down the process. As the SBA is aware, many credit unions have been lending to our nation’s small businesses for decades. Their ability to serve their member businesses, however, has been unnecessarily restricted for the past 15 years pursuant to an arbitrary cap on their business lending portfolio.
Program Updates
NAFCU would like to express our appreciation to the SBA for its efforts to address overly restrictive and complex provisions that govern both the 7(a) and 504 programs. The proposed actions, we believe, are a good step toward the goals of increasing access to capital for small business, providing clarity for lenders and borrowers, removing unnecessary obstacles, and, very importantly, achieving greater participation by credit unions. Still, as we discuss further below, the SBA should continue to make modifications to the programs through this rulemaking or other appropriate avenues.
First, NAFCU supports the proposal to revise the current standard that deems an ability to block votes to suffice for the control necessary for a person or entity to be considered an affiliate of the borrower. The removal of this test is especially important since it directly impacts the determination of whether a borrower is a “small business” and eligible for a SBA loan. However, the SBA requests comments on whether it should replace that rule with a “facts and circumstances” evaluation or a bright-line test.
NAFCU believes that a combination of the two approaches would provide the right solution. Specifically, the rule on affiliates should include a bright-line test that contemplates majority (over 50%) ownership of the borrowing entity to suffice for purposes of the “control” analysis. However, a borrower should be able to show that, despite the majority ownership, there is not adequate control. In such cases, the SBA should evaluate the facts and circumstances.
The remaining proposals with respect to the “affiliation rule” would remove three principles that are currently applicable and used to aggregate affiliates’ assets. NAFCU supports the removal of each of the three principles. Each of the principles reduce, rather than foster, SBA lending and eligibility without adequate and justifiable countervailing public policy reasons.
NAFCU also supports the elimination of the “personal resources” test from the two programs and the 9-month rule from the 504 program. Under the “personal resources” test, the amount for which a business is eligible is reduced by the liquid assets available to a person that owns 20 percent or more of the business. By removing this rule, the SBA has correctly recognized that access to liquid assets does not equate to access to credit and has appropriately expanded the pool of eligible borrowers.
Additional Comments
NAFCU would like to take this opportunity to encourage the SBA to take further actions that would facilitate credit union SBA lending, particularly in the 7(a) program. In particular, we strongly recommend that the SBA revise its policy of certifying the guarantee of a loan.
As the SBA is aware, in addition to cost of administering a SBA lending program and the rigidity of some of the rules, many potential credit union SBA lenders are discouraged from engaging in SBA lending because of the lack of certainty relative to the SBA guarantee. Currently, a lender is not provided certification of the guarantee after the loan has been consummated. This inaction has served to discourage entry to the SBA market.
NAFCU understands that the SBA must account for key challenges with respect to certification of the guarantee, including fraud, material defect in the loan documentation and a lender’s failure to perfect a lien. As such, we would support a certification of the SBA’s guarantee that is subject to particular exceptions (i.e., that the guarantee would not apply in cases of fraud, material defect, and failure to perfect a lien).
NAFCU appreciates the opportunity to comment. Should you have any questions or require additional information please feel free to contact me at ttefferi@nafcu.org or (703) 842-2268.
Sincerely,
Tessema Tefferi
Senior Regulatory Affairs Counsel