For fintechs, the sweeping federal response to the coronavirus crisis could be a way to gain access to more lending opportunities.
Congress is poised to pass a stimulus package that will designate $349 billion in loans to small businesses. The effort, set to run through June 30, would be handled through the Small Business Administration's 7(a) program.
While roughly 1,700 lenders — virtually all banks or credit unions — already participate in 7(a), SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin have the authority to open the program to other lenders with “the necessary qualifications to process, close, disburse and service loans.”
That's where fintechs see an opening.
Fintech participation "makes sense" given the potential for massive loan demand and a tight time frame, said Sam Taussig, head of global policy at Kabbage.
“We’re ready to go,” Taussig said. “If there was ever a time for emergency guidance, this is it.”
Ryan Metcalf, head of regulatory affairs and social impact at Funding Circle, is making a similar argument. Banks and credit unions alone won’t be able to push money to impacted small businesses fast enough, he said.
“Capacity is a serious issue and speed is a serious issue,” Metcalf said. “For the sense of urgency that has to happen, we need the capacity of [fintech] lenders to get these funds out the door.”
With a warehouse facility from the Federal Reserve, Funding Circle could lend up to $80 million a month, Metcalf said.
No fintech lenders are authorized to participate in the SBA’s regular 7(a) program.
Funding Circle began the application process to become a 7(a) lender in April 2019, only to see its bid stall while the SBA reviewed the company’s selection of California’s Department of Business Oversight as its primary regulator. The issue remains unresolved nearly a year later, Metcalf said.
An SBA spokesman was unable to immediately comment.
The SBA recently proposed a rule to restrict nonfederally regulated 7(a) lenders, which would include fintechs, from lending outside the state in which its primary regulator was based. That rule would serve as a disincentive for companies like Funding Circle and Kabbage with national platforms.
Requiring so little from applicants and giving so little guidance to them is virtually begging for fraudulent loan applications to be submitted or for good faith errors to be made.
The private sector gained 428,000 jobs in August, especially within large companies, according to payroll giant ADP, a tentative sign of a continuing economic recovery despite the COVID-19 pandemic.
The move is part of the effort by banks and other companies to promote racial equity and be more sensitive to the stresses on front-line employees.
It makes sense for the SBA to look beyond its typical lenders to get funds to those in need, industry observers said.
The agency will struggle if it restricts participation in the emergency program, said Rebel Cole, a finance professor at Florida Atlantic University in Boca Raton.
“Asking the traditional brick-and-mortar bank branches to underwrite this sort of loan volume is simply not feasible in any sort of a reasonable time frame,” Cole said.
Though he declined to weigh in on fintech participation, Cole said those companies have the online lending platforms that could provide more underwriting capacity. For the same reason, he said, the SBA might need to lean heavily on credit card issuers such as Capital One and Discover to meet its aggressive volume target.
“If the SBA could bless some sort of 7(a) business credit card credit line then these banks could do the underwriting electronically using their existing platforms, which they should be able to scale up to the size needed for this rollout,” Cole said.
Banking groups have accepted the fact that the bill could allow fintechs to join in the emergency SBA program, though they also assert that the banking system is well equipped to shoulder the workload.
"If that's the way it passes into law, certainly that's something SBA will have to consider," said James Ballentine, executive vice president of congressional relations and public affairs at the American Bankers Association.
"There are 5,400 banks in this country," Ballentine added. "They can serve as a great delivery channel for these loans. We certainly believe they would be best to service them."
