Best Practices: Meeting the Burden of Proof in SBA Guaranty Purchase Requests

In the American criminal justice system, defendants benefit from a presumption of innocence—a principle rooted in the Fifth and Fourteenth Amendments and cemented in public consciousness through media portrayals of courtroom proceedings. However, this standard of proof applies exclusively to criminal matters and does not extend to other interactions with the government, such as SBA loan guaranty purchase requests.

When a lender requests that the SBA honor its guaranty on a 7(a) loan by purchasing the deferred participation interest, the burden of proof lies squarely on the lender. According to 13 CFR § 120.520(b):

“SBA will not purchase its guaranteed portion of a loan from a Lender unless the Lender has submitted to SBA documentation that SBA deems sufficient to allow SBA to determine whether purchase of the guarantee is warranted under § 120.524.”

There is no presumption in the lender’s favor. In fact, the regulation makes it clear that the SBA is under no obligation to purchase unless the lender provides adequate documentation to justify the request. In the absence of such documentation, the SBA may presume the opposite—that the guaranty should not be honored.

1. What This Means for SBA Lenders

This regulatory burden has practical implications across the entire life cycle of an SBA loan. From origination to servicing to liquidation, lenders must act with the awareness that they bear the responsibility for proving compliance with all applicable SBA requirements. Simply put: if it’s not documented, it didn’t happen.

Lenders often face repairs or outright denials of their guaranty claims not because they failed to follow SBA rules, but because they failed to document their compliance. It’s a problem of omission, not commission.

2. Documentation is Your Defense

To mitigate this risk, lenders must adopt a rigorous approach to recordkeeping. At every stage of the loan, ask: Do we have sufficient documentation to prove SBA compliance? Embracing the mantra “document, document, document” will help ensure your files are audit-ready and able to support a guaranty purchase request if needed.

Remember, the SBA isn’t looking for perfection—but it is looking for a defensible paper trail. Compliance-minded lenders will treat documentation not as an afterthought, but as a critical part of the loan process.

For more guidance on SBA documentation best practices or to review your guaranty purchase procedures, contact Ethan at (267) 470-1186 or esmith@starfieldsmith.com.