[House Report 117-144]
[From the U.S. Government Publishing Office]


117th Congress    }                                   {        Report
                        HOUSE OF REPRESENTATIVES
 1st Session      }                                   {       117-144

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



 
                     7(A) LOAN AGENT OVERSIGHT 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. 4531]

    The Committee on Small Business, to whom was referred the 
bill (H.R. 4531) 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........................................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. 4531.......................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...........4
  XI. Duplication of Federal Programs.................................4
 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. 4531, 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. Background and Need for Legislation

    H.R. 4531 was introduced by Rep. Dan Meuser (R-PA) and Rep. 
Dean Phillips (D-MN) on July 19, 2021 to improve SBA's 
reporting on 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. 
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.
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                      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. 4531 
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 approved by voice vote to favorably 
report H.R. 4531 to the House of Representatives at 10:33 a.m.

             VI. Section-by-Section Analysis for H.R. 4531


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 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. 4531 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. 4531 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. 4531 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. 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. 4531 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 (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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