[House Report 117-144]
[From the U.S. Government Publishing Office]
117th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 117-144
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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.
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\1\SBA Management Review: Office of Credit Risk Management: Hearing
Before the H. Comm. on Small Business, 116th Cong. (2020).
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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.
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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 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.
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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.
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\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
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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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