The federal government points to default rates to justify new restrictions on the SBA’s Community Advantage loan program. The numbers tell a different story.
The Trump administration wants to limit yet another program with a proven track record of expanding access to capital for communities that other financial institutions can’t or don’t want to serve.
Last week, the administration announced a moratorium on adding new lenders to the Small Business Administration’s Community Advantage small business loan program, which supports small business loans through a current network of 141 lenders, located in 44 states.
Nearly all Community Advantage lenders are nonprofits. None are deposit-taking banks or credit unions, but nearly all of them are certified by the U.S. Treasury Department as community development financial institutions, or CDFIs. Each Community Advantage lender specializes in supporting low-income communities, communities of color, women business owners, rural areas or some combination of all the above that aren’t well-served by banks or credit unions.
Created as a pilot program in 2011, Community Advantage became permanent under the Biden administration in 2023. The program subsequently had its largest lending volume year yet in fiscal year 2024, supporting $196 million in small business loans, up from $141 million in fiscal year 2023 and beating the previous record of $157 million set in fiscal year 2018.
The moratorium announcement also came with program tweaks that require existing Community Advantage program lenders to hold deeper cash reserves as a cushion against potential losses. As justification for the changes, the administration cited a 7% default rate over the past 12 months, even though that figure is in line with the Community Advantage program’s historical performance going back to when it first started in 2011.
What is the Community Advantage program, how does it serve small businesses, and is its default rate actually problematic? Let’s dig in.
Bridging the gaps
Community Advantage is actually an extension of the SBA’s 7(a) program, which supports small business loans originated by a network of 3,205 private lenders across the country — 80% of which are banks or credit unions.
By guaranteeing to cover anywhere from 50% to 90% of each loan in case the business fails, the 7(a) program reduces the risk of small business lending to private lenders, allowing them to make loans that they might otherwise deem too risky to make because of lack of collateral or not enough previous years in business.
Across the country, the 7(a) program supported a record 70,000 small business loans in fiscal year 2024. There are active 7(a) loans in all 50 states, nearly every congressional district, 60% of counties and 60% of zip codes, according to Next City’s analysis of SBA lending data. Restaurants were the most popular business category in fiscal year 2024, accounting for more than 5,500 7(a) loans. Other popular 7(a) categories included residential remodeling, landscaping, plumbers, heating and air conditioning contractors, independent truckers, beauty salons and car repair shops.
But the 7(a) program has long had trouble reaching everyone. According to publicly available SBA data, in fiscal year 2021, Black business owners received just 4.9% of federally-guaranteed small business loans through the 7(a) program, while Hispanic business owners got 8.4%, and majority women-owned businesses got 17.5%.
Those numbers have improved somewhat since 2021, due at least in part to 7(a) lenders that started out in the Community Advantage program. Over fiscal years 2021-2023, 19% of Community Advantage 7(a) loans went to Black-owned businesses and 16% went to Hispanic-owned businesses, while majority-women owned businesses got 35%.
Some Community Advantage lenders are now among the most active non-depository lenders in the overall 7(a) program — such as the Black-led Lendistry and CDC Small Business Finance, both of which are still certified CDFIs.
There’s still a long way to go. Along with making the Community Advantage program permanent in 2023, the Biden administration added dozens of new Community Advantage lenders. But even as it’s grown, it’s still just a tiny fraction of the overall 7(a) program. Out of $31 billion in 7(a) small business loans for fiscal year 2024, Community Advantage 7(a) loans accounted for just 0.6% of that amount. Counting by number of loans, just one in 70 7(a) loans were Community Advantage 7(a) loans in fiscal year 2024.
The bigger picture
The overall 7(a) program is recently seeing an unusually high number of loans going bad, as reported by Barron’s earlier this year. The Community Advantage program makes for an easy target to blame, given it includes newer lenders who serve historically disenfranchised populations.
It is true that Community Advantage 7(a) loans do default at higher rates than the 7(a) program overall. Historically, around 8% of loans in the Community Advantage program never get fully repaid, compared to 4% for the 7(a) program overall. Part of the reason for that is Community Advantage lenders do target borrowers in communities that are economically more vulnerable. That’s the whole point of the program.
But Community Advantage loans are also smaller — around $176,000 on average, compared to $393,ooo on average for the 7(a) program overall. Combine that with the fact that Community Advantage loans are still just a tiny fraction of overall 7(a) program loans, and the higher Community Advantage default rate means even less in overall dollar terms. If the Community Advantage program never existed, overall SBA 7(a) program loan losses since 2011 would be 1.37% instead of 1.39%.
Besides all this, the 7(a) program, including Community Advantage, is required to operate on a zero-subsidy basis. That means it’s not funded through taxpayer dollars but through fees charged to borrowers.
The Trump administration is also claiming that multiple Community Advantage lenders have reported early problem loan rates above 30%, “disproportionately” higher compared to other 7(a) lenders.If that is indeed true, it may not have anything to do with lax lending practices but instead may be a leading indicator for something else: a looming recession.
Communities of color and low-income communities are consistently hit first and hit hardest when a recession happens. It’s possible that Community Advantage loans in distress are a symptom of broader economic troubles, and cracking down on the program now is a knee-jerk reaction that needlessly undermines its long-term impact.
Of course, it’s also possible that undermining it is the point.
Notice the pattern
The Community Advantage moratorium is the latest in a string of announcements and actions concerning access to capital for low-income and predominantly Black, Hispanic or immigrant urban neighborhoods, as well as rural areas of all demographics.
The announcements started back in early March with major staff cuts and regional office closures at the SBA, as well as changes to small business lending program rules that cut off access to small business owners residing lawfully in the U.S. While the immediate impact of those cuts and closures may be limited, lenders with extensive experience using SBA programs to support their borrowers did tell Next City their worries about the long-term effects of such changes at SBA.
Then came a March 14 executive order targeting the CDFI Fund. The Department of the Treasury itself rebuffed that threat. But now the current battle over the federal budget has the administration and its allies in Congress trying to defund the agency that provides hundreds of grants and tax credit allocations every year in support of financing community development work across the country.
Then there was a March 25 executive order targeting special purpose credit programs. While the order itself was limited in its immediate reach and impact, as Next City reported previously, it did have fair housing advocates up in arms to defend a financial tool they see as vital for achieving the long-term goals of closing racial disparities in homeownership and wealth.
That was followed up by the April 16 firing of two Democratic Party members serving as board members at the National Credit Union Administration, the independent federal agency that regulates and insures credit unions across the country. Just a single Republican Party member remains on the agency’s board. Under the Federal Credit Union Act, the National Credit Union Board must consist of three members, nominated by the President and confirmed by Congress, and no more than two members may come from the same political party. The firings have effectively paralyzed the agency while the erstwhile board members sue the administration to reinstate them.
And amid all the above, the Trump administration announced plans to rescind the rules changes approved under the Biden administration to update enforcement of the Community Reinvestment Act, which requires banks to prove to regulators they are meeting credit needs for low-to-moderate income communities and households. The regulations under the act haven’t been updated since 1995, long before online and mobile banking became prevalent.
In lieu of federal Community Reinvestment Act reform, Californians are now asking their state legislators to step up with a proposed state-based Community Reinvestment Act, following in the footsteps of seven other states plus the District of Columbia.
Oscar is Next City’s senior economic justice correspondent and author of “The Banks We Deserve: Reclaiming Community Banking for a Just Economy“ (Island Press). Since 2011, Oscar has covered community development finance, impact investing, economic development, housing and more for media outlets such as Shelterforce, Impact Alpha, Yes! Magazine, City & State New York, The Philadelphia Inquirer, B Magazine and Fast Company. Oscar is a child of immigrants descended from the former colonial subjects of the Spanish and U.S. imperial regimes in the Philippines. He was born in New York City and raised in the inner-ring suburbs of Philadelphia. Reach Oscar anytime at oscar@nextcity.org or follow him on your favorite social media platform at @oscarthinks.
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