SBA Compliance Best Practices for Lenders

SBA lending comes with regulatory obligations that differ significantly from conventional commercial lending. The SBA's guarantee comes with strings attached: detailed documentation requirements, ongoing reporting obligations, and the constant possibility of audit.

This guide covers the essential compliance practices that keep SBA lenders audit-ready and protect your institution's guarantee eligibility.

Understanding SBA Compliance Requirements

The SBA's Standard Operating Procedures (SOPs) govern every aspect of the lending relationship. Key areas include:

Eligibility verification: Confirming borrowers meet SBA size standards and program requirements
Credit analysis: Documenting the credit decision and repayment ability
Collateral assessment: Proper valuation and documentation of security
Loan authorization: Correct completion of SBA forms
Servicing: Ongoing monitoring and reporting requirements
Liquidation: Proper procedures when loans default

Guarantee at Risk: Non-compliance doesn't just result in audit findings—it can result in denial of your guarantee claim when you need it most. Repair orders on sold loans can also create significant liability.

Critical Compliance Areas

Eligibility Documentation

Every loan file must demonstrate SBA eligibility at origination:

Business size determination (revenue or employee count by NAICS code)
For-profit status verification
U.S. operations and ownership confirmation
No ineligible business activities (review SOP 50 10 for prohibited industries)
Character determination for all principals (20%+ owners)
Credit elsewhere test documentation

Credit Analysis Requirements

Your credit memo must address these elements:

Repayment ability analysis with cash flow projections
Equity injection verification (source of funds)
Historical financial analysis (typically 3 years)
Management capability assessment
Industry and market analysis
Collateral evaluation and coverage calculation

Collateral Documentation

Collateral requirements vary by loan size but always require:

Proper appraisals for real estate (by SBA-approved appraisers)
Equipment valuations with appropriate methodology
Personal guarantee from all 20%+ owners
UCC filings and title searches
Insurance requirements with proper endorsements
Documentation of life insurance assignments if required

Closing and Disbursement

Proper closing protects your guarantee:

All authorization conditions satisfied before disbursement
Equity injection verified and documented
Standby agreements executed if applicable
First disbursement within required timeframe
Proper use of proceeds verification
SBA guaranty fee collected and remitted

Servicing Compliance

Compliance doesn't end at closing. Ongoing servicing requirements include:

Annual Monitoring

Collect and review annual financial statements
Verify insurance coverage remains adequate
Monitor collateral values for material changes
Track real estate tax payments
Document any material adverse changes

Reporting Requirements

Submit required reports to SBA on time
Report material changes in borrower circumstances
File delinquency reports within required timeframes
Maintain accurate loan status in E-Tran

Modification Procedures

Obtain proper SBA concurrence for servicing actions
Document business justification for modifications
Follow correct procedures for deferrals and extensions
Properly execute modification agreements

                Documentation Standard: If it's not documented, it didn't happen. Every decision, verification, and action must be memorialized in the loan file with enough detail that a third party can understand what occurred and why.
            

Audit Preparation

SBA reviews and OIG audits examine both individual files and systematic practices. Prepare by:

Conducting internal quality reviews: Sample loan files regularly using SBA's review criteria
Maintaining current SOPs: Stay updated on SOP changes and train staff accordingly
Documenting training: Keep records of staff training on SBA requirements
Creating exception tracking: Monitor policy exceptions and their outcomes
Organizing loan files: Use consistent file organization that maps to SBA review checklists

Common Compliance Failures

Learn from others' mistakes. The most frequent audit findings include:

Insufficient credit analysis documentation
Missing or outdated eligibility verifications
Equity injection not properly verified
Collateral valuations not meeting SBA standards
Failure to obtain required SBA concurrence for servicing actions
Inadequate monitoring of insurance and tax obligations

Streamline Your SBA Compliance

Our platform includes built-in compliance checks and documentation requirements.

Learn More

Building a Compliance Culture

Compliance isn't a checkbox—it's a mindset. Successful SBA lenders build compliance into every stage of their process:

Make compliance everyone's responsibility, not just a compliance officer's job
Build compliance checks into workflows rather than after-the-fact reviews
Celebrate clean audits and address issues transparently
Invest in ongoing training as regulations evolve

The effort invested in compliance pays dividends: smoother audits, protected guarantees, and the confidence to grow your SBA portfolio without regulatory risk.