On May 28, 2026, the Small Business Administration (“SBA”) issued Policy Notice 5000-879464, Prior Loss Rule: Non-Controlling Ownership Update (the “Notice”), which provided guidance for SBA eligibility questions related to prior losses on SBA loans involving non-controlling minority investors. The Notice applies to all SBA 7(a) and 504 loans approved by SBA on or after June 1, 2026, creating an important update for lenders to review during underwriting and preparation for SBA loan closing.

Under current regulations at 13 CFR 120.110(q) and foundational SBA law, businesses that have defaulted on a federal loan or federally assisted financing which has resulted in a loss to the federal government or its agencies or departments, and businesses owned or controlled by an applicant or any of its Associates, who owned, operated or controlled a business that defaulted on a federal loan, or guaranteed a federal loan which defaulted, and resulted in a loss to the federal government or its agencies or departments are ineligible for SBA financing unless SBA waives the same for good cause. This is known as the Prior Loss rule.

SBA’s current requirement of disclosure of 100% of the ownership of an applicant has resulted in more applicants receiving eligibility screen-outs due to an owner of the applicant having a small non-controlling interest in a business that incurred a Prior Loss to the government.

In order to support SBA’s mission of providing capital to small businesses, SBA has clarified that it will consider granting an eligibility waiver for certain Prior Loss cases.  SBA will consider granting a waiver if the following criteria is met by the applicant owner responsible for the Prior Loss screen-out: (1) owned less than 20% of the business with the Prior Loss; (2) was not a guarantor or co-borrower on the defaulted SBA loan to that business; and (3) did not have any control over the business with the Prior Loss.  SBA refers to these candidates as a “Non-controlling Minority Equity Investor.”

If the above criteria is met, SBA will automatically evaluate the circumstances on a case-by-case basis through its Fraud Risk Framework during the application phase.  In considering whether to grant a waiver, SBA will look at several factors, including (i) the prior SBA loans involving the Non-controlling Minority Equity Investor, (ii) the number and percentage of SBA defaulted loans involving the Non-controlling Minority Equity Investor, (iii) the timing of the defaults, including whether any were early defaults, and (iv) the capital investment of the Non-controlling Minority Equity Investor relative to the total SBA loan amounts.

The waiver is only available for prior losses resulting from SBA loans.  However, the waiver does not apply to prior losses from SBA Paycheck Protection Program loans or SBA COVID-19 Economic Injury Disaster Loans.  The waiver will also not apply to prior losses resulting from non-SBA federal loans or federally assisted financing.  Moreover, a waiver will not be considered, and an applicant will remain ineligible for an SBA loan, if the applicant, or any guarantors other than Supplemental Guarantors, owe an outstanding non-tax debt to the federal government, which debt is delinquent due to non-payment for 90 days beyond the payment due date.

For more information regarding SBA compliance and Non-Controlling Minority Investor Waivers and Prior Losses, please contact the attorneys at Starfield & Smith, PC at info@starfieldsmith.com or (215) 542-7070.