Best Practices: Do What You Do… as Long as it is Prudent!

“Experience is what you get when you didn’t get what you wanted.”

• Randy Pausch, The Last Lecture

Since August 1, 2023, SBA lenders have been instructed by the SBA to follow the “policies and procedures the Lender uses for its similarly-sized non-SBA guaranteed commercial loans” for 76 different SBA loan requirements.  This new approach articulated by SBA in SOP 50 10 7 (followed shortly thereafter by 50 10 7.1) has been colloquially referred to as the “do what you do” standard.  On its face, “do what you do” seems as though it gives SBA lenders more latitude in how they meet SBA requirements – and it does.  However, SBA lenders should continue to be mindful of the fact that “do what you do” does not mean “do anything.”  SBA regulations still permit the agency to deny loan guarantees if SBA determines that “The Lender has failed to make, close, service, or liquidate a loan in a prudent manner” (13 CFR 120.524(a)(2), emphasis added).  This begs the question: what does it mean to be prudent?

At recent SBA conferences, SBA has answered the question of what it means to be prudent by referring to the Google definition of prudent (from Oxford Languages), meaning: “acting with or showing care and thought for the future.”  And herein lies the rub: a decision may be (or appear to be) prudent at the time it is made, but with the benefit of hindsight turns out to be otherwise.  We have all been in situations in life where upon further review and reflection, as well as having seen the consequences of our actions, we have reached the conclusion that a prior “prudent” decision turned out to be wrong, and in some cases, turned out to not seem very prudent at all in hindsight.  Pausch calls this experience, but for SBA lenders I call it guaranty repairs and/or denials.

The challenge for SBA lenders is that “Do What You Do” is only evaluated by SBA in the context of a guaranty purchase – when we know how the story ended – the business failed, the loan defaulted and there is a deficiency that the lender is looking to the SBA to share in.  The prudence of a particular decision by, or policy of, a lender when seen in the context of a failed financing is much more open to second-guessing once we know the outcome.  “Do what you do” quickly becomes “what did you do?” or “why did you do that?” or “you did what?” when you view it through the prism of prudence with the added benefit of hindsight and history.  Given that, how should SBA lenders successfully navigate this new, indeterminate risk landscape?

To mitigate the risk of loss from hindsight-based decisions, SBA lenders should ensure that they are documenting their files clearly and contemporaneously with their decision process with clear reference to their conventional policy in effect at the time that the decision was made.  In the event that the lender does not have a policy on point, lenders should consider referring to a previous version of the SOP to guide the Lender’s decision-making process and to provide a baseline for the reasonableness of the lender’s “do what you do” decision.  By proceeding in this manner, SBA lenders will produce the most defensible record in the event the decision becomes the basis for a recommended guaranty repair or denial.

For more information on prudent SBA lending in the era of “do what you do” and for avoiding getting the experience of recommended repairs or denials of your SBA guaranty, contact Ethan at esmith@starfieldsmith.com.