Do What You Do - Understanding the new SBA Lending Standard

The SBA’s "Do What You Do" standard, introduced in SOP 50 10 7.1, represents a pivotal shift in how SBA loans are approached by lenders. By allowing institutions to align their SBA lending practices with those used for similarly-sized, non-SBA guaranteed loans, the SBA has emphasized flexibility and practicality. However, this latitude comes with significant responsibility—lenders must act prudently and document their processes to avoid the risk of guaranty denials or repairs.

The "Do What You Do" standard was designed to simplify SBA lending by encouraging lenders to rely on their existing policies and procedures. This approach acknowledges the expertise of financial institutions while aiming to streamline SBA loan processes. As a result, lenders no longer need to adopt separate procedures for SBA loans, provided their existing practices meet SBA’s guidelines.

However, flexibility under this framework does not equate to a lack of oversight. The SBA still requires lenders to demonstrate prudence in their actions. Prudence, defined as "acting with care and thought for the future," is at the core of this standard. This principle ensures that lenders make decisions that are well-documented, deliberate, and consistent with their internal policies.

While the concept of prudence might seem subjective, its application in SBA lending is anything but. For example, lenders must:

• Ensure equity injection requirements for SBA loans match those for conventional loans of a similar size.
• Clearly document every decision, including the rationale behind it.
• Reference historical SBA SOPs if internal policies don’t explicitly address a scenario.

The SBA’s emphasis on documentation is particularly noteworthy. Decisions that may seem prudent at the time can be questioned in hindsight, especially when loans default. Comprehensive, contemporaneous documentation is essential to demonstrate that lenders acted thoughtfully and consistently within their policies.

A key aspect of "Do What You Do" is aligning SBA lending practices with those used for non-SBA loans. For example:

• Collateral Identification: Lenders must follow the same practices for SBA loans as they do for non-SBA loans of similar size and type.
• Closing Documentation: If your institution requires specific loan agreements for non-SBA loans, the same should apply to SBA loans.
• Equity Verification: Institutions must ensure their SBA equity injection requirements mirror those for conventional loans, while documenting these processes thoroughly.

Consistency not only simplifies processes but also minimizes risk. When practices are aligned across loan types, it becomes easier for institutions to defend their actions during SBA reviews.

The flexibility of the "Do What You Do" standard introduces unique challenges. For instance:

• Hindsight Bias: Decisions that seemed prudent initially may be criticized after a loan defaults.
• Policy Gaps: Lenders may encounter scenarios where no internal policy exists. In such cases, referencing past SOPs or creating new policies aligned with best practices is crucial.
• Training Needs: Teams must be trained to understand and apply the "Do What You Do" standard effectively. This includes ensuring they document their decisions thoroughly and align them with institutional policies.

To thrive under the "Do What You Do" standard, lenders should:

• Document Thoroughly: Every decision should be supported by clear, contemporaneous documentation. This includes referencing internal policies and justifying deviations when necessary.
• Train Teams: Ensure all staff understand the importance of prudence and consistency in SBA lending. Training programs should emphasize documentation and policy alignment.
• Leverage Technology: Use technology to automate documentation, track compliance, and streamline processes. This reduces the risk of human error and ensures consistency.
• Review Policies Regularly: Regularly update internal policies to align with evolving SBA guidelines and best practices.

The "Do What You Do" standard represents a significant opportunity for lenders to simplify their SBA processes while leveraging their existing expertise. However, with this opportunity comes the need for diligence, prudence, and meticulous documentation. By embedding these principles into their operations, lenders can ensure compliance, mitigate risk, and better serve their clients.