[House Report 117-141]
[From the U.S. Government Publishing Office]


117th Congress    }                                  {         Report
                        HOUSE OF REPRESENTATIVES
 1st Session      }                                  {        117-141

======================================================================



 
            SMALL BUSINESS 7(A) LOAN AGENT TRANSPARENCY ACT

                                _______
                                

October 12, 2021.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

  Ms. Velazquez, from the Committee on Small Business, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 4481]

    The Committee on Small Business, to whom was referred the 
bill (H.R. 4481) to amend the Small Business Act to establish 
requirements for 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........................................1
  II. Background and Need for Legislation.............................2
 III. Hearings........................................................3
  IV. Committee Consideration.........................................3
   V. Committee Votes.................................................3
  VI. Section-by-Section Analysis for H.R. 4481.......................4
 VII. Congressional Budget Cost Estimate..............................4
VIII. New Budget Authority, Entitlement Authority, and Tax Expenditure4
  IX. Committee Oversight Findings and Recommendations................4
   X. Statement of General Performance Goals and Objectives...........5
  XI. Duplication of Federal Programs.................................5
 XII. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 
      Benefits........................................................5
XIII. Federal Mandates Statement......................................5
 XIV. Federal Advisory Committee Statement............................5
  XV. Applicability to Legislative Branch.............................5
 XVI. Constitutional Authority Statement..............................5
XVII. Changes in Existing Law Made by the Bill, as Reported...........5

                      I. Purpose and Bill Summary

    The purpose of H.R. 4481, the ``Small Business 7(a) Loan 
Agent Transparency Act'', is to establish a registration system 
with unique identifiers for 7(a) agents to help the Small 
Business Administration's (SBA) Office of Credit Risk 
Management (OCRM) track and evaluate the performance of 7(a) 
loans generated through loan agent activity. H.R. 4481 also 
enhances OCRM's and the SBA Lender Oversight Committee's (LOC) 
enforcements authority with respect to loan agents.

                II. Background and Need for Legislation

    H.R. 4481 was introduced by Rep. Dean Phillips (D-MN) and 
Rep. Dan Meuser (R-PA) on July 16, 2021 to improve SBA's 
oversight of loan agent and broker activity in the 7(a) Loan 
Guaranty Program (7(a) program). In February 2020, the 
Committee on Small Business held a hearing reviewing the 
management of SBA's Office of Credit Risk Management (OCRM),\1\ 
which is responsible for the oversight of SBA lenders and its 
$120 billion business loan portfolios. During the hearing, 
OCRM's director testified that approximately 11 percent of the 
7(a) loan portfolio was generated through loan agent activity, 
which in FY 2019, represented over 5,700 loans. The director 
also testified that SBA lacks a way to uniquely identify and 
systematically track loan agents, and instead relies on lender 
reviews to obtain information about each lender's agents and 
brokers.
---------------------------------------------------------------------------
    \1\SBA Management Review: Office of Credit Risk Management: Hearing 
Before the H. Comm. on Small Business, 116th Cong. (2020).
---------------------------------------------------------------------------
    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 FY2020, SBA approved 42,302 7(a) 
loans for a total of over $22.5 billion, with an average loan 
size of $533,076.
    Increased risk to SBA's business loan programs introduced 
by loan agents and brokers has been consistently cited by SBA's 
OIG as a top management and performance challenge facing the 
agency, most recently in FY 2021.\2\ In September 2015, OIG 
published an audit report which found though SBA strengthened 
some controls over loan agent participation in the business 
loan programs, further improvements were necessary to ensure 
program integrity and mitigate the risk of fraud and loss.\3\ 
For example, OCRM's loan agent oversight activities remain 
limited to lender on-site reviews, and according to OCRM 
officials cited in the September 2015 OIG audit report, the on-
site review process could not effectively evaluate loan agent 
activity and performance. The report included a recommendation 
that SBA implement a process using permissible information to 
uniquely identify loan agents involved with SBA lending 
programs for tracking purposes.
---------------------------------------------------------------------------
    \2\U.S. Small Bus. Admin. Office of Inspector Gen., Top Management 
and Performance Challenges Facing the Small Business Administration in 
Fiscal Year 2021, (Oct. 16, 2020),https://www.sba.gov/sites/default/
files/2020-10/SBA%20OIG%20Report%2021-01.508_0.pdf.
    \3\U.S. Small Bus. Admin. Office of Inspector Gen., Audit Report: 
SBA Needs to Improve Its Oversight of Loan Agents, Report, (Sep. 25, 
2015), https://www.sba.gov/sites/
default/files/oig/Report_15-
16_SBA_Needs_to_Improve_Its_Oversight_of_Loan_Agents.pdf.
---------------------------------------------------------------------------
    Since 2005, OIG has investigated at least 22 cases with 
confirmed loan agent fraud totaling at least $335 million. 
OIG's analysis determined that 7(a) loans made in which a 
lender paid a referral fee to a loan agent defaulted at a rate 
28 percent higher than loans where no referral fee was 
reported. Furthermore, OIG identified that agents have targeted 
multiple SBA lenders, who would be unaware of loan agents' past 
performance or activity with other lenders. OIG's analysis 
found that one loan agent that fraudulently originated $90 
million in SBA loans received compensation from at least 19 
different lenders. The Committee agrees with 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. 
Companion legislation (H.R. 4481, 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. 4531 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

    On February 5, 2020, the Committee on Small Business held a 
management review hearing on OCRM,\4\ which is responsible for 
conducting oversight of the agency's business loan programs. 
This hearing continued the Committee's interest in OCRM's 
activities and followed the enactment of the Small Business 
7(a) Lending Oversight Reform Act of 2018, which codified OCRM 
and strengthened its oversight and enforcement tools. During 
the hearing, OCRM's director testified that SBA lacks a way to 
uniquely identify and systematically track loan agents, and 
instead relies on lender reviews to obtain information about 
loan agents.
---------------------------------------------------------------------------
    \4\Supra note 1.
---------------------------------------------------------------------------

                      IV. Committee Consideration

    The Committee on Small Business met in open session, with a 
quorum being present, on July 29, 2021 and ordered H.R. 4481 
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 by voice vote to favorably report 
H.R. 4481 to the House of Representatives at 10:28 a.m.

             VI. Section-by-Section Analysis for H.R. 4481


Section 1. Short title

    This Act may be cited as the ``Small Business 7(a) Loan 
Agent Transparency Act''.

Section 2. Requirements for 7(a) agents

    This section adds 7(a) agents as entities against whom OCRM 
and LOC may take a formal or informal enforcement action, which 
improves SBA's ability to hold noncompliant agents accountable. 
This section also requires OCRM to establish a registration 
system for 7(a) agents that assigns each a unique identifier 
and collects data to help OCRM track and evaluate loan 
performance for loans generated through loan agent activity. It 
also requires OCRM to establish and maintain a database 
featuring the types of services provided by different 7(a) 
agents. This would improve SBA's ability to assess the role 
agents and brokers play in providing access to capital through 
the 7(a) program, as well as help it monitor risk associated 
with loan agent activity. Finally, this section requires 7(a) 
agents to register in the system before providing services to a 
lender or borrower, and to pay an annual registration fee to 
OCRM.

                VII. Congressional Budget Cost Estimate

    Pursuant to 3(c)(2) 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. The Committee has requested but not 
received from the Director of the Congressional Budget Office a 
cost estimate for the Committee's provisions.

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) 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. While 
the Committee has not received an estimate of new budget 
authority contained in the cost estimate prepared by the 
Director of the Congressional Budget Office pursuant to Sec. 
402 of the Congressional Budget Act of 1974, the Committee does 
not believe that there will be any additional costs 
attributable to this legislation. H.R. 4481 does not direct new 
spending, but instead reallocates funding independently 
authorized and appropriated.

          IX. Committee Oversight Findings and 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. 4481 are incorporated into the descriptive portions of 
this report.

        X. Statement of General 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. 4481 is to enhance 
OCRM's ability to monitor 7(a) loan agent activity and give 
OCRM enforcement authority against noncompliant agents.

                  XI. 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. 4481 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. Constitutional Authority Statement

    Pursuant to clause 7 of rule XII of the Rules of the House 
of Representatives, the Committee finds 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, as shown as follows: existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman:

         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 (existing law 
proposed to be omitted is enclosed in black brackets, 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[.];
          (4) any 7(a) agent.
  (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 or 7(a) agent if the Director finds that the 
        7(a) lender or 7(a) agent 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 or 
                7(a) agent if the Director finds that the 7(a) 
                lender or 7(a) agent 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 or 7(a) agent 
                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 or 
                7(a) agent in an amount that is not greater 
                than $250,000.
          (3) Appeal by lender.--A 7(a) lender or 7(a) agent 
        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) Registration System for 7(a) Agents.--
          (1) In general.--The Director shall establish a 
        registration system for 7(a) agents that assigns a 
        unique identifier to each 7(a) agent and collects data 
        necessary for the Director to submit the report 
        required under paragraph (4).
          (2) Requirements.--A 7(a) agent shall--
                  (A) register in the system established under 
                paragraph (1) before providing covered services 
                to a lender or applicant; and
                  (B) effective 1 year after the date of the 
                enactment of this subsection, submit an annual 
                fee for such registration to the Director.
          (3) Database.--The Director shall establish and 
        maintain an electronic database of the types of covered 
        services provided by each 7(a) agent.
  (k) Definitions.--In this section:
          (1) 7 7(a) agent.--The term ``7(a) agent'' means a 
        person who provides covered services on behalf of a 
        lender or applicant.
          (2) Covered services.--The term ``covered services'' 
        means--
                  (A) 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
                  (B) consulting, broker, or referral services 
                with respect to a loan under section 7(a).

SEC. 48. LENDER OVERSIGHT COMMITTEE.

  (a) Establishment.--There is established within the 
Administration the Lender Oversight Committee (in this section 
referred to as the ``Committee'').
  (b) Membership.--The Committee shall consist of at least 8 
members selected by the Administrator, of which--
          (1) 3 members shall be voting members, 2 of whom 
        shall be career appointees in the Senior Executive 
        Service (as defined in section 3132 of title 5, United 
        States Code); and
          (2) the remaining members shall be nonvoting members 
        who shall serve in an advisory capacity on the 
        Committee.
  (c) Duties.--The Committee shall--
          (1) review reports on lender oversight activities;
          (2) review formal enforcement action recommendations 
        of the Director of the Office of Credit Risk Management 
        with respect to any lender making loans under section 
        7(a) [and any Lending Partner or Intermediary 
        participant], any 7(a) agent (as defined in section 
        47), or any Lending Partner or Intermediary participant 
        of the Administration in a lending program of the 
        Office of Capital Access of the Administration;
          (3) in carrying out paragraph (2) with respect to 
        formal enforcement actions taken under subsection (d) 
        or (e) of section 23, vote to recommend or not 
        recommend action to the Administrator or a designee of 
        the Administrator;
          (4) in carrying out paragraph (2) with respect to any 
        formal enforcement action not specified under 
        subsection (d) or (e) of section 23, vote to approve, 
        disapprove, or modify the action;
          (5) review, in an advisory capacity, any lender 
        oversight, portfolio risk management, or program 
        integrity matters brought by the Director; and
          (6) take such other actions and perform such other 
        functions as may be delegated to the Committee by the 
        Administrator.
  (d) Meetings.--
          (1) In general.--The Committee shall meet as 
        necessary, but not less frequently than on a quarterly 
        basis.
          (2) Reports.--The Committee shall submit to the 
        Administrator a report detailing each meeting of the 
        Committee, including if the Committee does or does not 
        vote to approve a formal enforcement action of the 
        Director of the Office of Credit Risk Management with 
        respect to a lender.

           *       *       *       *       *       *       *


                                  [all]