In a significant development for small business financing, the U.S. Small Business Administration (SBA) has reported a decline in loan defaults during the second quarter of 2025. This improvement follows the implementation of more stringent underwriting standards earlier this year, aimed at enhancing the financial integrity of the SBA’s 7(a) loan program.socrates | CRA Learning Center | findCRA+3Small Business Trends+3Small Business Administration+3
The Impact of Stricter Underwriting Standards
The SBA’s decision to tighten underwriting criteria was a response to rising default rates observed in previous years. Under the leadership of Administrator Kelly Loeffler, the agency eliminated the “Do What You Do” underwriting framework introduced in 2023, which had allowed lenders to apply their own commercial credit standards to SBA-backed loans. This approach had led to a surge in defaults and a $397 million deficit in the 7(a) loan program by fiscal year 2024. BizSugar+5SBG Funding+5Small Business Administration+5
The reinstated standards, detailed in the new Standard Operating Procedure (SOP) 50.10.8, emphasize rigorous credit evaluations and risk assessments, ensuring that only qualified borrowers receive SBA-backed loans. BizSugar+1Small Business Administration+1
Decline in Default Rates
The implementation of stricter underwriting has yielded positive results. According to recent data, the SBA 7(a) loan default rate for fiscal year 2024 was 3.69%, with a 12-month default rate rising from 1.32% in 2022 to 2.76% in June 2024. However, the percentage of “stressed loans” (more than 31 days past due, deferred, or delinquent) increased from 1.77% in October 2023 to 2.4% in June 2024. LinkedIn
These figures indicate a stabilization in loan performance metrics, suggesting that the tighter underwriting standards are effectively mitigating risk and enhancing the overall health of the SBA’s loan portfolio.
Industry-Specific Performance
Loan performance varies across different industries. Sectors such as professional services, healthcare, and essential retail have demonstrated lower default rates, while industries like restaurants, hospitality, and entertainment have experienced higher rates of default. This disparity underscores the importance of industry-specific risk assessments in the underwriting process. sb-fi.com
Restoring Financial Integrity
The SBA’s efforts to reinforce underwriting standards are part of a broader initiative to restore the financial integrity of its loan programs. By reinstating lender fees and eliminating policies that previously reduced underwriting rigor, the SBA aims to ensure the sustainability of the 7(a) loan program and protect taxpayer dollars. Small Business Administration+3Small Business Administration+3Small Business Trends+3socrates | CRA Learning Center | findCRA+3Small Business Trends+3Small Business Administration+3
The decline in SBA loan defaults in Q2 2025 highlights the effectiveness of the agency’s renewed focus on stringent underwriting practices. As the SBA continues to refine its lending criteria, small businesses can expect a more stable and reliable financing environment, fostering growth and resilience in the entrepreneurial sector.
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