Worried about how to protect your SBA lending portfolio with frauds and defaults rising? Many others share your concern in today’s SBA lending environment, which is charged with change and complexity.
Also troubled by mounting default rates, financial fraud, bad loans, and charge-offs, the U.S. Small Business Administration (SBA) is prioritizing fraud prevention and risk management. This has triggered various new verification measures in the SBA loan application, making it an increasingly complicated process.
Impacted by the SBA’s evolving regulations and market pressures, lenders are feeling compelled to rethink their approach to risk.
Already, traditional SBA lenders such as banks have become more conservative and cautious in their approach because of multiple pressures in recent years. Now the onus is not just on the program administration but also lenders to ensure loans are extended only to eligible American small business owners. At the same time, they need speedy and accurate fraud detection and risk monitoring and assessment. These are becoming pivotal to also stay compliant from a regulatory standpoint and relevant in a highly competitive market by not closing off strategic growth avenues.
To maintain profitability and market relevance, SBA lenders must explore AI-based and advanced data and analytics solutions that help overcome these complexities and also tap into the right lending opportunities.
The reasons behind conservative and cautious lending
Historically, the loan approval strategy depends on the kind of lending institution involved. For example, banks have reined in approvals because of limitations on the interest rates they can charge. Various economic events, such as the mortgage crisis (2007—10) and the CFPB’s guideline change mandating lenders to share the demographic data of every entity applying for an SBA loan, have contributed to a conservative lending approach.
Now, the likelihood of defaults and fraud is increasing, further tightening the reins on lending. As reported by Moody’s, the average risk of default by public companies in the United States has been increasing in recent years and has more than doubled since 2021. Larger, bond-financed companies could bounce back with lower credit risk and default rates. In contrast, smaller businesses that depend on financing programs such as SBA loans still pose a greater default risk. Understandably, lenders want to minimize bad loans and reduce default rates.
Aside from having to undertake comprehensive due diligence, lenders must continuously evaluate and manage life-of-loan risks to improve the outcomes of their lending decisions and bring down the threat of defaults. Additionally, they must ensure Uniform Commercial Code (UCC) filings and monitoring to detect and prevent potential/accidental lapses.
In parallel, the SBA is also deeply concerned by reports showing the growing incidence of loan applicants turning out to be illegal or ineligible. For instance, in 2023, the Office of Inspector General (OIG) reviewed COVID-19 EIDLs, EIDL Targeted Advances, Supplemental Targeted Advances, and PPP loans to discover that more than 17% have been provided to potentially fraudulent applicants.
Therefore, the call for better fraud identification and credit risk assessments/management is becoming more pronounced with every passing day.
A zero tolerance attitude to fraud and resulting SBA actions
Adopting a zero-tolerance policy and the objective of arresting fraud in its programs, the SBA has recently introduced changes including:
- Mandatory citizenship verification in all SBA loan applications so that only legal, eligible applicants can access and benefit from them.
- Mandatory verification of the applicant’s age and date of birth to deter applicants from using fake identities such as that of children or deceased persons.
Factoring in these trends and restrictions, lenders must conduct even more rigorous due diligence and verifications on applicants – these translate to enhanced scrutiny and prolonged processing by lending institutions at the application stage itself. Traditional bankers are further compelled to demand higher equity requirements and credentials from loan applicants.
The impact of heightened scrutiny on the lending market
Naturally, these changes impact borrowers. Over the years, borrowers have increasingly turned to alternative lending platforms - – non-banking and Fintech players – who tend to offer more flexible options and faster loan processing, in contrast to traditional lending institutions. This is an important aspect to which traditional lenders must pay attention.
To retain a healthy borrower base and growth potential, lenders must ensure that the impact of these major changes to workflows is minimally felt by existing borrowers and prospective borrowers they find credit-worthy. To establish transparency and trust, they must also communicate any extra paperwork or fee that cannot be avoided in processing their loan applications.
Therefore, underneath these challenges, there is also scope for improvement. While becoming a more popular credit option, alternative lenders are also coming under the greater scrutiny that regulators are imposing on the financial sector in general. Therefore, lenders have greater reason and opportunity to differentiate themselves by staying compliant and in line with the emphasis by U.S. banking regulators on oversight and risk management.
Even now, SBA loans are a stable and popular funding choice for small business owners. By using solutions built on advanced data and analytics and technologies like AI, SBA lenders have the opportunity to proactively approach risks and complexities and stay competitive in the evolving lending landscape.
Also read our latest whitepaper capturing these critical changes in SBA lending, and how you can leverage technology and automation to streamline your loan approvals, manage risks, protect better against fraud, and enhance compliance.
Why choose Decimal Point Analytics (DPA) for Due Diligence, Compliance Excellence, and Fraud Prevention
Partner with DPA for Faster, Smarter, and More Compliant SBA Lending.
DPA offers end-to-end solutions across the SBA lending value chain. With DPA’s deep domain expertise, scalable resources, and automation-first approach, lenders can confidently navigate procedural shifts, manage risk proactively, conduct thorough due diligence, and unlock new profitability. As SBA lending transforms, lenders can keep pace by transforming to faster, smarter, and more resilient operations.
From automated pre-screening and compliance workflows to intelligent document management and real-time dashboards, DPA’s solutions help lenders reduce errors, and increase throughput with faster turnarounds. DPA’s record of success in delivering strategic value spans from doubling loan processing speeds to cutting compliance-related penalties by up to 90% and proactive fraud prevention.
Explore our success story of proactive fraud prevention here.
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