By Bill Alpert

Government-backed small business loans may become harder to get, starting Wednesday. The U.S. Small Business Administration is reviving lending standards that were dropped by the Biden-era SBA.

"The SBA is restoring robust rules to end the era of reckless lending," said SBA administrator Kelly Loeffler, in announcing the tightened standards.

The agency's flagship loan program, known as 7(a), suffered nearly $400 million in negative cash flow last year, after the last administration loosened loan approval standards and stopped charging fees for government guarantees of the loans. The SBA at time said the changes were designed to increase access to the program's loans.

As Barron's reported earlier this year, those policies and rising interest rates caused delinquencies to jump in the $116 billion SBA program. Loans defaulting in their first 18 months nearly tripled.

Righting the 7(a) program was a priority when former U.S. Sen. Loeffler took charge in February. She restarted the agency's collections activities, which she said had been dormant.

In March, the SBA restored the upfront fees it had charged lenders since the 1950s to guarantee their loans. The fees are supposed to make the 7(a) program self-funding. Kelly's crew estimates that the SBA missed out on $460 million in income after it waived those fees in 2023.

And effective April 30, the agency will revive its historical loan underwriting standards. When it relaxed standards in 2023, the Biden administration let lenders approve SBA loans without verifying a borrower's own investment in a business, for example, or securing collateral.

"The last administration inherited a thriving 7(a) loan program but left it in critical condition," said Loeffler last week. "From slashing lender fees to destroying underwriting standards, Biden's reckless policies have triggered a surge in defaults which now threatens the viability of the program along with its risk to taxpayers."

A Barron's data analysis showed that bad loans bought from banks by the SBA under its guarantee had doubled in the agency's two fiscal years ended September 2024, leading to $1.6 billion in charge-offs. At a Senate hearing in February, Sen. Joni Ernst (R-Iowa) blamed the losses on Biden SBA lending policies and the decision to add nonbank "fintech" lenders to the 7(a) program.

Agency data for the March quarter show that 7(a) loan charge-offs continued at an elevated pace: totaling $129 million. The SBA didn't immediately respond to Barron's queries.

Like other Trump-appointed administrators, Loeffler will downsize her agency. In March, she said the SBA will reduce its workforce by 43%. "Just like the small business owners we support, we must do more with less," Loeffler said.

SBA loans have been a growth business for several midsize banks, including Huntington Bancshares and Live Oak Bancshares.

On its March quarter earnings call, last week, Live Oak CEO James Mahan III said the SBA's revived lending standards will discourage sloppy lending by "charlatan" fintech firms.

Live Oak had never relaxed its standards for SBA lending, said Mahan. "We did what we always do."

Write to Bill Alpert at william.alpert@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 29, 2025 14:44 ET (18:44 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.