The central question at last week’s House Small Business Committee hearing was this: Who does the Small Business Administration’s (SBA) 7(a) program really help, and does that comport with the program’s stated intent? SBA’s 7(a) program has come under fire recently, following the release of an SBA Inspector General’s (IG) report that found SBA had wrongly made at least $1.7 billion in loans for contract poultry facilities.

In response to the report, as well as cries from the National Sustainable Agriculture Coalition (NSAC) and many other food and farm organizations, Senator Cory Booker (D-NJ) offered, and the Committee passed, an amendment to an SBA oversight bill (S. 2283) requiring SBA to report on how it plans to address the issues highlighted in the IG’s report. Subsequently, the House Small Business Committee also called for this congressional hearing, which gave SBA its first opportunity to respond to directly to Congress. The Committee heard from SBA Inspector General Hannibal Ware and the Associate Administrator for Capitol Access at SBA, William Manger (who is responsible for the 7(a) program).

The following post includes a recap and analysis from the House Small Business Committee, as well as forecasted next steps. To learn more about the findings of the IG’s report, see NSAC’s previous post: New Report Exposes Over $1 Billion in Bad Loan-making at SBA.

Contentious from the Beginning

The battle lines were drawn early on in the hearing as Associate Administrator Manger immediately went on the defensive when asked whether the contract poultry loans were made in compliance with SBA’s regulations. IG Ware, however, stuck behind the findings of his report and reasserted to the Committee that the loans were contrary to SBA regulations. Ware also stood behind his assessment that the loans were made to the near exclusive benefit of large, multinational corporations – not the “small businesses” SBA is tasked to support.

Committee Chairman Steve Chabot (R-OH) and Ranking Member Nydia Velázquez (D-NY) put tough questions to Manger, pointedly asking if SBA should even be in the poultry loan business. The default rate for contract poultry loans is incredibly low, just 0.37 percent, which makes it unclear why SBA would need to step in as an additional source for poultry loans. Manger’s answer, which seemed not to satisfy the Chair and Ranking Member, was that since many loans involve land acquisitions and borrowers with sub-par credit, the borrowers cannot always qualify for a private loan and therefore need help from SBA. It is interesting to note, however, that later in the hearing Manger also stated that SBA would no longer allow loans that include ancillary property.

Response to Reform and a Revelation

Responding to the Committee’s questions about what reforms SBA had made or would be making following the IG report, Manger highlighted the following SBA actions:

• Limiting contract poultry production loans to 15 years. This is apparently based on SBA’s estimation of the “useful life” of a poultry facility; however, many farmers would disagree with their estimates. Contract farmers indicate that integrators begin to require facility upgrades as early as years 7-8 into the contract, which then requires the farmer to seek further loan support and take on additional debt.
• Implementing a limitation on loans to land used for the actual poultry operation. Though Manger did not state this explicitly, it appears that some poultry loans included other land, possibly associated farmland or homesteads located on the same property as the facility.
• Requiring that start-up operations, and those having a change in ownership, have at least 10 percent equity.

While these actions seem designed to show that SBA is being responsive to the IG’s report, there is little in the announced changes that would provide any additional protection for the farmer borrowers struggling under highly restrictive and short-lived contracts with poultry integrators.

During the conversations about SBA’s recent reforms, Associate Administrator Manger revealed to the Committee that SBA had loosened the affiliate rules in 2016 to eliminate the economic dependence test. This test, which was in place during the period reviewed by the IG’s report, classified any business that was economically dependent on another business (even if it had separate ownership) to be an “affiliate” of that latter business. The economic dependence test was an important safeguard against SBA making loans to large businesses.

Ranking member Velasquez hammered Manger on this point, demanding further clarification and identification of who made the decision to loosen the rules. Not only does allowing loans to affiliates open the door to SBA serving large businesses; it also enables SBA to prop up and exacerbate a flawed contracting system in which poultry integrators exploit chicken farmers, who often become dependent on unsustainable, government-backed loans.

Credit Tests and Loan Contract Practices

Among the many other important issues that the Committee dug into during this hearing were inquiries into SBA’s credit testing practices and loan term setting for poultry-specific lending.

Unlike the instant cash loans at gdayloans.com.au one can acquire, SBA’s lending practices generally require a credit test, which must show that the borrower is not able to obtain credit elsewhere in order to secure an SBA loan. This test is in place in order to ensure that SBA is not crowding out the private market or disrupting commercial markets; however, the Committee questioned whether or not the test was being applied correctly for contract poultry facility loans.

Although Manger defended SBA’s practices regarding credit testing for poultry facility loans, he also admitted that SBA relies on the private lenders that write the SBA-backed loans to make the final determination and to include certification in the loan file.

Unfortunately, Ware could not provide any additional insights into whether the poultry facilities receiving SBA loans are meeting the “no credit elsewhere” test; however, he did reveal that a separate investigation of 7(a) programs’ compliance with the test is underway.

Chairman Chabot also asked Manger to explain to the Committee why SBA was making poultry loans of 15-20+ years when the contracts typically only last around three years. Manger attempted to evade the question, simply noting that several of the loans reviewed by the IG were for such long lengths because they included additional land not directly related to the poultry facility. In the end, Manger failed to address the disconnect or to explain why SBA would back long-term loans for short-term contracts when there is no assurance of cash flow.

What Comes Next?

The House Small Business Committee held this oversight hearing as a result of the IG report, but they are not alone in taking action. Senator Booker offered an amendment to S. 2283, the Small Business 7(a) Lending Oversight Reform Act of 2018, that would require SBA to inform Congress on what it does in response to the IG report. This hearing provided an initial, albeit partial, response.

Following the House Small Business Committee hearing, NSAC will be looking to see if S. 2283 and its House companion H.R. 4743 are passed into law. While not specifically targeted at resolving the issues with the SBA poultry lending, the bipartisan House and Senate bills are both aimed at addressing similar underlying issues across the 7(a) loan portfolio.

NSAC will also be watching for additional reports and revelations that may come from the Office of the IG following the completion of related investigations. We applaud IG Ware and his office for this important work and for helping to ensure that SBA has the best interests of small business borrowers as its top priority – not the interests of large, multinational corporations.