New House Bill tackles $335M Lending Fraud Crisis

U.S. House of Representatives passed a bill targeting an estimated $335 million in fraud within small business lending programs. This legislative move comes amid growing concerns over widespread abuse of government-backed small business loans, particularly those administered by the Small Business Administration (SBA).

Key Provisions and Context

• The bill was introduced in response to documented cases where fraudulent actors exploited weaknesses in SBA lending programs, including instances where loans were approved for applicants who were either deceased, underage, or otherwise ineligible.

• Investigations revealed that, between 2020 and 2021, over 3,000 loans worth $333 million were issued to borrowers listed as over 115 years old, and more than 5,500 loans totaling about $300 million went to children under 11, according to Social Security Administration data.

• The crackdown includes enhanced verification measures, such as:

  • Citizenship Verification: Ensuring only legal, eligible applicants can access SBA loans.

  • Date of Birth Verification: Preventing the use of identities belonging to children or deceased individuals.

  • Automatic Fraud Alerts: Flagging suspicious applications based on age or other anomalies.

• The SBA, under Administrator Kelly Loeffler, has implemented a “zero-tolerance policy for fraud,” established a Fraud Working Group, and plans to appoint a Fraud Czar to identify and recover funds obtained through fraudulent means.

The 7(a) Loan Agent Oversight Act (H.R. 1804)

This Act, passed by the U.S. House on June 3, 2025, with a 405-3 vote and now in the Senate, aims to combat fraud and enhance oversight in the lending ecosystem.

Here's a breakdown of its key components and implications for our industry:

1. Addressing Significant Fraud and Enhancing Program Integrity

The primary purpose of H.R. 1804 is to mitigate fraud risks and improve the overall integrity of the 7(a) loan program. For years, the SBA's Office of Inspector General (OIG) has consistently cited the increased risk posed by loan agents and brokers as a top management and performance challenge for the agency.

• Scale of the Problem: Since 2005, OIG investigations have confirmed at least 22 cases of loan agent fraud totaling over $335 million. This highlights a substantial financial vulnerability within the program that necessitates robust countermeasures.

• Higher Default Rates: Loans where a referral fee was paid to a loan agent defaulted at a 28 percent higher rate compared to loans with no reported referral fee. This directly impacts the financial performance of lenders and the overall health of the SBA's guarantees, underscoring the need for more stringent agent oversight.

• Targeted Lender Exploitation: The OIG identified instances where fraudulent loan agents targeted multiple SBA lenders simultaneously, with individual lenders often unaware of the agent's past performance or activity with other institutions. One agent alone fraudulently originated $90 million in SBA loans from at least 19 different lenders. This points to a systemic information asymmetry that the Act aims to correct, allowing lenders to make more informed decisions about their third-party partnerships.

• SBA's Unique Position: The Committee on Small Business agrees with the OIG that only the SBA is uniquely positioned to aggregate loan agent portfolios, evaluate their collective performance, and effectively inform lenders and policymakers about concerning program risks or trends. This centralized oversight is critical for protecting the program's reputation and ensuring its long-term viability, providing a more stable environment for institutional and alternative lenders.

2. Mandated Reporting for Unprecedented Transparency

The Act specifically requires the SBA’s Office of Credit Risk Management (OCRM) to submit an annual report to Congress. This report will provide granular data regarding the performance and risks associated with 7(a) loans generated through loan agent activity.

• Comprehensive Data Points: The annual report will include critical information such as the number of 7(a) agents assisting applicants, disaggregated by type (e.g., attorneys, accountants, consultants, packagers, lender service providers); the number of fraudulent loans linked to agent involvement; the Administrator's loan purchase rate for loans facilitated by agents; and the aggregate dollar value of referral fees paid. This detailed breakdown will offer a comprehensive view of agent activity and its correlation with loan performance and fraud.

• Actionable Risk Analysis: A key component of the report is a consolidated analysis of the risk created by individual 7(a) agents responsible for at least one percent of the dollar value or number of loans made with agent assistance, importantly, without identifying individual agents by name. This aggregated, anonymized data will be invaluable for institutional lenders to identify common risk profiles, develop predictive models, and refine their internal due diligence processes for loan agent partnerships.

• Leveraging Existing Data: A significant advantage is that the SBA currently collects and tracks much of this information in its loan database E–TRAN. This means the reporting requirement leverages existing infrastructure, minimizing the burden of new data collection for the SBA and ensuring that the data provided to Congress is readily available.

• Enabling Congressional Oversight: This annual reporting mechanism empowers Congress to conduct proper oversight of the 7(a) loan program.

3. Implications for Loan Agents and the Broader Lending Ecosystem

The Act signals increased scrutiny of loan agents’ roles in the application process, compelling lenders to exercise greater due diligence in their partnerships. This move is seen as a "smart, targeted fix" for the 7(a) program.

• Enhanced Due Diligence for Lenders: Institutional and alternative lenders will need to reinforce their due diligence processes when engaging with 7(a) loan agents, ensuring compliance with ethical standards and regulatory requirements. This might involve more rigorous vetting, ongoing monitoring of agent performance, and potentially integrating data from the new SBA reports into their risk assessments.

• Leveling the Playing Field for Legitimate Agents: By targeting and exposing fraudulent actors, the Act aims to cleanse the pool of 7(a) agents, thereby benefiting "competent and honest agents" who genuinely help small businesses access capital. This provides an opportunity for reputable agents to distinguish themselves, potentially leading to stronger, more reliable partnerships for lenders.

• Fortifying Financial Infrastructure: The passage of the Act is described as a step toward fortifying the financial infrastructure that supports small businesses.

• Opportunities for Fintech Innovation: The continuous need to "adapt to evolving fraudulent tactics" and the emphasis on "implementing advanced verification technologies, fostering transparency, and promoting financial literacy" points to significant opportunities for fintech solutions.

What this means for alternative lenders?

When people say that stricter SBA rules create chances for alternative lenders, they're partly correct. We do see more business opportunities, but there's more to it than that.

The Good News: Market Size and Growth

The alternative lending market is exploding. The U.S. market is projected to grow from $255.39 billion in 2023 to $378.61 billion by 2028, representing a 7.4% CAGR. Globally, the market is expected to reach $1.03 trillion by 2028, with an 8.6% CAGR.

The digital lending segment is particularly hot, expected to reach $20.5 billion by 2026, nearly double its 2021 value. Embedded lending—where loans are offered through existing business platforms—is forecast to grow at a 20.4% CAGR, reaching $23.31 billion by 2031.

What Alternative Lenders Actually Getting

When SBA tightens up, lenders don't get the cream of the crop. They get the deals that banks and SBA lenders rejected. That means:

1. Higher Risk Profiles: These borrowers couldn't qualify for SBA's below-market rates for a reason

2. Pricing Pressure: They need to price for the additional risk, which means higher rates

3. Portfolio Quality: Default rates will be higher than traditional lenders experience

Current SBA 7(a) loan rates for 2025 range from 11.5% to 18% depending on loan size and term, with guarantee fees up to 3.75%. Alternative lenders typically pricing 5-15 points higher than that.

In FY 2024, the SBA supported 103,000 financings totaling $56 billion, the highest level since 2008. But here's the key: the most dramatic growth was in loans under $150,000, which is exactly their sweet spot.

The regulatory tightening isn't just affecting SBA lenders. Federal banking regulators finalized new reporting requirements for bank loans to nonbank financial entities in May 2024, applying to institutions with over $10 billion in assets.

Key compliance changes include:

• Enhanced citizenship verification requirements

• Strengthened fraud detection protocols

• Improved third-party risk management

• Greater transparency in lending practices

The money is flowing into alt lending infrastructure. LendingTree secured $175 million from Apollo Funds in 2024 to expand their platform. Strategic partnerships are forming between traditional banks and fintech companies, like BNY Mellon's expanded partnership with alternative credit specialist CIFC.

The Bottom Line

The SBA fraud crackdown creates real opportunities, but lenders need to be smart about how you approach them:

1. Focus on Technology: API-first lending solutions are forecasted to account for 40% of the market by 2026. Speed and user experience matter more than ever.

2. Target the Right Segments: Small-dollar loans (under $150,000) are where the growth is happening. Over half of SMBs with $1M+ revenue now use financing strategically, not just out of necessity.

3. Build Compliance Infrastructure: The regulatory environment is only getting tighter. Invest in fraud detection and risk management systems now.

4. Price Appropriately: Don't chase deals at below-market rates. The borrowers coming to alternative lenders after SBA rejection carry real risk that needs to be priced accordingly.

This isn't just about picking up SBA's scraps. The alternative lending market is fundamentally reshaping how small businesses access capital. But success requires understanding that alternative lenders are not just competing on speed and convenience—they are providing capital solutions for businesses that traditional lenders can't or won't serve.

The opportunity is real, but so are the risks. Price accordingly.

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