[House Report 118-99]
[From the U.S. Government Publishing Office]


118th Congress    }                                      {      Report
                        HOUSE OF REPRESENTATIVES
 1st Session      }                                      {      118-99

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



 
                     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\
---------------------------------------------------------------------------
    \1\U.S. Small Bus. Admin., FY 2024 Cong, Budget Justification 
FY2022 Annual Performance Report, 33 (Mar. 11, 2023).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.).
---------------------------------------------------------------------------
    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
----------------------------------------------------------------------------------------------------------------
                                                           By fiscal year, millions of dollars--
                                          ----------------------------------------------------------------------
                                             2023      2024      2025      2026      2027      2028    2023-2028
----------------------------------------------------------------------------------------------------------------
Estimated Authorization..................         *        10        10        10        10        10         50
Estimated Outlays........................         *         9         9        10        10        10         48
----------------------------------------------------------------------------------------------------------------
* = 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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