The U.S. Small Business Administration (SBA) has observed a decline in loan defaults, following the implementation of stricter underwriting policies aimed at enhancing the financial integrity of its 7(a) loan program.

Background: Addressing Rising Defaults
Between 2021 and 2024, the SBA’s 7(a) loan program experienced a surge in defaults, attributed to relaxed underwriting standards introduced in 2023. These standards, known as the “Do What You Do” approach, allowed lenders greater discretion, leading to increased approvals of underqualified borrowers. Consequently, the program faced its first negative cash flow in over a decade, with defaults rising from $570 million in 2021 to $1.6 billion in 2024. Barron’s
Reinstatement of Robust Underwriting Standards
In response, the SBA introduced Standard Operating Procedure (SOP) 50 10 8, effective June 1, 2025, reinstating stricter underwriting criteria that were in place before 2021. Key changes include:SBG Funding+1jsettleslaw.com+1
- Elimination of “Do What You Do” Standards: Reverting to pre-2021 underwriting criteria, requiring lenders to adhere strictly to SBA guidelines.
- Mandatory 10% Equity Injection: Borrowers must now provide a minimum 10% equity injection for startup ventures and business acquisitions.
- Restoration of the Franchise Directory: Reinstating the SBA Franchise Directory to assist lenders in determining franchise eligibility. ABA Banking Journal
- Enhanced Citizenship Verification: Businesses must be 100% owned by U.S. citizens or lawful permanent residents.
- Increased SBSS Score Threshold: The minimum Small Business Scoring Service (SBSS) score for small loans has been raised from 155 to 165. SBG Funding
Impact on Loan Defaults
These measures have led to a notable decrease in loan defaults. By reinstating rigorous underwriting standards, the SBA aims to ensure that only creditworthy borrowers receive financing, thereby reducing the risk of default and safeguarding taxpayer funds.Small Business Trends
Implications for Borrowers and Lenders
For borrowers, these changes mean a more stringent application process, necessitating comprehensive business plans, financial statements, and proof of equity contributions. Lenders, on the other hand, must adjust their underwriting processes to comply with the reinstated standards, potentially leading to longer processing times but more secure loan portfolios.
The SBA’s tightened documentation requirements reflect a commitment to responsible lending and the long-term sustainability of the 7(a) loan program. By reinstating robust underwriting standards and enhancing verification processes, the SBA aims to support small businesses while safeguarding public funds.
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