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Congresswoman Nydia Velazquez

Representing the 7th District of New York

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Velázquez, Gillibrand Want Change to Lending Rule for Employee-Owned Firms

Velázquez, Gillibrand Want Change to Lending Rule for Employee-Owned Firms
November 19, 2018
Press Release

Washington, DC – While Congress recently moved to help employee-owned firms utilize the Small Business Administration’s (SBA) lending programs, lawmakers are raising red flags that the way the rules are being drafted could create additional barriers.  Rep. Nydia M. Velázquez (D-NY), the top Democrat on the House Small Business Committee, and Senator Kirsten Gillibrand (D-NY) have written the Small Business Administration (SBA) expressing concerns over how the agency is implementing the new law.

As a part of the National Defense Authorization Act (NDAA) for Fiscal Year 2019, Congress enacted legislation authored by Velázquez and Gillibrand to assist employee-owned business models like Employee Stock Ownership Plans (ESOP) and cooperatives (co-op). Specifically, the NDAA includes provisions to help small firms transition into an employee-owned business, including streamlining the loan approval process for ESOPs within SBA flagship 7(a) lending program. 

However, the SBA’s proposed rule would prevent loans for employee-owned business models from being processed under “delegated authority” from SBA’s lenders. In the letter, Velázquez and Gillibrand press Administrator McMahon to reconsider the rule, which they argue runs counter to Congressional intent and would needlessly make it harder for employee-owned businesses to access SBA loans. 

“After witnessing the success of local co-operative businesses in Brooklyn and other parts of my district, I believe that we must ensure similar business models across the country have the tools they need to thrive,” said Velázquez. “For this reason, I was proud to join Senator Gillibrand in passing legislation to help employee-owned enterprises tap in to the SBA’s capital access programs. Unfortunately, as currently written, the SBA’s proposed rule would create another barrier by precluding loans for these entities from being considered under delegated lending authority. That simply means more red tape, fewer loans and slower processing times. It certainly wasn’t what Congress intended when creating the new law.” 

“Too many hardworking New Yorkers still struggle to get jobs that pay them enough to take care of their families and save for retirement. That is why I was proud that Congress passed into law this bipartisan bill I was proud to lead with Representative Velázquez to help companies reward work without sacrificing profit,” said Senator Gillibrand. “Employee-owned businesses have a strong track record of better pay and retirement benefits for workers and a commitment to creating local jobs. Putting another barrier on SBA loans through this new rule would further hamper the critical access to capital that so many New York companies rely on when transitioning to ESOPs. I am calling on SBA Administrator McMahon to amend this proposed rule to ensure that ESOPs can access the capital they need.”

ESOPs and co-ops have a known track record of success, with companies that transition to the employee-ownership model seeing an increase in productivity by 4 to 5 percent. As one in six workers nationwide work for a business owner who is at or near retirement age, Velázquez and Gillibrand are striving to empower workers by making it easier for business owners to transition their firms to an employee-owned structure. 

The full text of the letter is below. For a PDF, click here

November 16, 2018

The Honorable Linda McMahon
Administrator
United States Small Business Administration
409 3rd Street, SW
Washington, DC 20416

Administrator McMahon:

We write to express our strong objection to your proposed rule governing SBA-guaranteed loans to qualified employee trusts (employee stock ownership plans, or “ESOPs”), which you noticed on September 28, 2018.[1] Specifically, SBA is proposing to amend its regulation at 13 C.F.R. § 120.350 to prohibit applications for SBA-guaranteed loans to ESOPs for the purposes of either helping finance the growth of the business or to purchase ownership or voting control of the employer from being processed under a lender’s delegated authority.[2] If finalized in its proposed form, 13 C.F.R. § 120.350 would be in direct contravention of the policy enacted by Congress in Section 862 of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (NDAA),[3] which charges SBA with promoting enhanced employee ownership of ESOPs by maximizing the ability to affordably access capital. Therefore, we strongly object to the proposed regulation on the processing of ESOP loan applications, and urge that the final version of 13 C.F.R. § 120.350 be aligned with the policy embodied in Section 862 of the NDAA – allowing applications for these loans to be processed under a lender’s delegated authority.

As has been stressed to SBA recently, nearly half of all privately-held businesses in the U.S. are owned by individuals who are at or near retirement age, representing more than 2.3 million companies, and employing close to 25 million workers in total (one in six workers nationwide). Though more than half of these small business owners expect to retire within the next ten years, fewer than 15 percent have a formal exit plan in place. Only a small percentage of these businesses will be passed on to family members or bought by another local company. Instead, many of these businesses could be bought out by competitors or even close due to a lack of planning or inability to find a buyer; both of which result in damage to local communities from lost jobs and revenue.

This “baby boomer cliff” is a very real concern for the business owner who may not have enough money on which to retire, and employees of those businesses, who struggle with the uncertainty of their boss’ future retirement plans. As this trend accelerates in the coming years, it is crucial that those small business employees be empowered to transition the business to an employee-owned model, preserving the firm’s independence and protecting it from the risk of decline, buyout, or outright closure.

In order to address this issue, Congress included numerous provisions in the NDAA[4] seeking to ease a small firm’s transition to an employee-owned model. Notably, Section 862(b) expands the 7(a) loan guaranty program to ESOPs to align the program with current industry financing practices.[5] Most importantly, though, is the provision in Section 862(b)(2), which expressly adds loans to ESOPs to the group of loans guaranteed by SBA which may be processed under a lender’s delegated authority.[6] Thus, the Congressional intent of the legislation  authorizing SBA to allow for delegated authority clearly recognizes the ability of experienced lenders to process these transactions. However, the agency did not follow through with this intent and instead summarily denied such transactions from delegated authority based on the “complex nature of these transactions.”[7] Such revocation of delegated authority should be based on the lender’s ability to process a transaction, not solely on the type of transaction. In fact, many of the lenders delegated with partial or full authority to approve loans are some of the most technically savvy lenders to take on the “complex nature of these transactions.” Finally, with appropriate supporting documentation and requisite oversight currently in place, SBA has the necessary tools to ensure loan processing of ESOP transactions is performed properly. 

It is therefore our strong recommendation that SBA amend this section of the current proposed rule. The final rule should align with this clearly-articulated intent to allow the delegation of authority for these transactions. It is of the upmost importance and a simple policy goal to encourage more and quicker lending to ESOPs, so they may affordably access capital needed to transition their businesses to an employee-owned model. 

The new law was written with the intent to increase the availability of capital to ESOPs and other employee-owned models because it is clear SBA is not fulfilling its full potential in assisting new and transitioning companies. As a result, employee-owned businesses have been put at a disadvantage. It is our hope that we can work together over the coming months to ensure that SBA creates a rule that follows Congressional intent. 

Sincerely,

 

                                                                                                                                                            
Nydia M. Velázquez                                                               Kirsten Gillibrand
Member of Congress                                                              United States Senator
                                                

 

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