SBA Tightens 7(a) Loan Criteria as Rising Defaults Spur Policy Reversal

In response to a significant rise in defaults within its flagship 7(a) loan program, the U.S. Small Business Administration (SBA) has announced a reversal of several policies implemented in recent years. Effective June 1, 2025, the SBA will enforce stricter underwriting standards and reinstate lender fees to restore the program’s financial integrity.Small Business Administration

Background: Rising Defaults and Financial Shortfalls

Between 2022 and 2024, early loan defaults in the 7(a) program tripled, with delinquencies more than doubling. This surge led to a negative cash flow of approximately $397 million in 2024—the first deficit in over a decade. Small Business Administration+4Rapid Business Plans+4Barron’s+4Barron’s+5Small Business Trends+5Small Business Administration+5

Analysts attribute these issues to policy changes that included the elimination of lender fees and the adoption of the “Do What You Do” underwriting standard, which allowed lenders greater discretion in evaluating loan applications. These adjustments, while aimed at increasing access to capital, inadvertently led to riskier lending practices and a higher rate of loan defaults.Small Business Administration

Key Changes Under SOP 50 10 8

The SBA’s new Standard Operating Procedure (SOP) 50 10 8 introduces several critical changes:

• Reinstatement of Lender Fees: Lender fees, previously waived, have been reinstated to ensure the program’s self-sufficiency and to cover potential losses from defaults. Small Business Administration+1Barron’s+1
• Stricter Underwriting Standards: The SBA has eliminated the “Do What You Do” approach, reverting to more rigorous pre-2021 underwriting criteria.
• Mandatory Cash Injection: Borrowers are now required to provide a minimum 10% equity injection for startup and acquisition loans, with seller financing on standby permitted to cover up to half of this amount. Starfield & Smith Attorneys at Law+2Live Oak Bank Resources+2Sigma Mergers+2
• Reduced Threshold for Small Loans: The definition of a “small loan” has been lowered from $500,000 to $350,000, subjecting more loans to comprehensive underwriting processes.
• Reinstatement of the Franchise Directory: The SBA has brought back the Franchise Directory to streamline the eligibility determination process for franchise businesses seeking SBA loans.

Implications for Borrowers and Lenders

For Borrowers: These changes mean increased scrutiny during the loan application process. Applicants should be prepared to provide detailed financial documentation and demonstrate a solid equity investment in their ventures.

For Lenders: Lenders will need to adjust their evaluation processes to align with the reinstated standards, ensuring thorough due diligence to mitigate risk and comply with the updated SOP.

Conclusion

The SBA’s policy reversal aims to strengthen the 7(a) loan program’s financial health and ensure its sustainability for future small business support. While these measures may introduce additional hurdles for borrowers, they are designed to promote responsible lending and protect both lenders and the broader economy from the repercussions of widespread loan defaults.

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