Guilt by Portfolio: Why a Senator Wants the SBA to Probe Lenders the USDA Just Barred

Sen. Joni Ernst is pressing the SBA to probe lenders that the USDA expelled last month. It’s a fair demand for accountability, and a preview of how fast a government guarantee can turn from privilege to liability.

Ken Hale runs the fifth-generation family bank his ancestors built in Natchitoches, Louisiana. For eighteen years, he told American Banker, his $1.5 billion-asset institution lent under the USDA’s rural guarantee program without a single derogatory comment from the agency, and with an annualized loss rate, by the government’s own February accounting, of 0.25%. The bank won awards as Louisiana’s rural lender of the year. Then, last month, the USDA permanently revoked its approved-lender status. “I was the most shocked I’ve been in my entire life,” Hale said.

That whiplash, from rural lender of the year to barred operator, is the uncomfortable backdrop to a letter that landed on SBA Administrator Kelly Loeffler’s desk last week. And it should have every government-guaranteed lender in the country paying attention.

As John Reosti reported in American Banker, Sen. Joni Ernst, the Iowa Republican who chairs the Senate Small Business and Entrepreneurship Committee, is urging the SBA to “urgently review” the loans those same lenders originated under the agency’s flagship 7(a) program, and to “consider similar corrective action” of its own. Eight of the ten lenders the USDA threw out of its OneRD program are also active 7(a) participants. Ernst’s logic is clean: if these institutions ran troubled books at one federal guarantee program, the agency backstopping their other government loans ought to look hard at what it’s holding.

It is, on its face, a reasonable thing for an oversight chair to ask. It is also the moment a regional regulatory action threatens to become a systemic one.

Follow the Money and the Mandate

To understand why this is happening now, follow the money and the mandate. The 7(a) program is required by statute to run at “zero subsidy”, funded by lender fees, not taxpayers. That math broke in fiscal 2024, when the program posted a negative cash flow of roughly $397 million, its first in more than a decade, after the previous administration waived lender fees and loosened underwriting through the now-infamous “Do What You Do” standard. Defaults and delinquencies roughly doubled; early defaults tripled. Loeffler’s SBA has spent the past year reversing all of it, restoring fees, reinstating stricter underwriting under SOP 50 10 8, raising minimum credit scores, and tightening collateral rules.

In that context, the USDA’s May 12 action reads less like a one-off and more like a template. The department barred ten lenders it said were responsible for roughly $620 million in delinquent loans, about 47% of its program’s total, with Agriculture Secretary Brooke Rollins declaring “no tolerance” for noncompliance. Dave Bohrman of Tax Guard, which services both SBA and USDA loans, told American Banker the moves signal a broader shift toward accountability and portfolio quality across all government-backed lending. The political appeal is obvious: after the PPP fraud era and a default surge, “protect the taxpayer” is the rare cause with no organized opposition.

The Part That Should Make Lenders Nervous

Here’s where it gets complicated. The lenders on the USDA’s list are not a rogues’ gallery of fly-by-night shops. They include a $9.9 billion-asset bank in Chicago (Byline Bancorp), a $4.8 billion Salt Lake City institution that ranks among the country’s top ten SBA lenders (Celtic Bank, the same bank, as it happens, that recently partnered with an AI platform to speed its 7(a) origination), and multigenerational community banks like Hale’s. Several are appealing. Byline says its OneRD involvement has been “limited” for years and that it is “actively engaging with agency leadership.”

And then there’s the 0.25% problem. If the government’s own data showed BOM Bank losing a quarter of a percent over eighteen years, what exactly is the standard that got it barred? The USDA points to “significant findings of noncompliance”, language that may describe process and documentation as much as credit losses. That distinction matters enormously. A lender can be sanctioned for sloppy paperwork, for concentration, for servicing lapses, not only for losing money. When the operative metric is “noncompliance” rather than “losses,” the universe of lenders potentially in the crosshairs gets much larger and far less predictable.

That’s the quiet warning in Ernst’s letter for the 7(a) world. The trait that flagged these lenders wasn’t necessarily catastrophic performance. In at least one case, it was the shape of a portfolio, what Ernst described as the spectacle of a bank that “becomes a top SBA lender one year and fails the next.” She was referring to Community Bank & Trust of West Georgia, which ramped up 7(a) volume in 2025, watched its noncurrent-loan ratio climb past 10%, and was shut down on May 1. Rapid growth in a guaranteed program, it turns out, now reads as a flashing light rather than a success story.

What to Watch

The throughline is one we keep returning to: in government-backed lending, the rules don’t just change, the enforcement posture does, and faster than most balance sheets can adjust. (We covered the USDA expulsions when they landed; consider Ernst’s letter the second shoe.) The winners in this environment will be lenders who treated compliance and servicing as core functions rather than overhead, clean files, defensible underwriting, and documented decisions. The losers will be the ones who confused a government guarantee with a margin of safety.

Whether the SBA actually follows the USDA’s lead is still unknown; Loeffler has not said. But the direction of travel is hard to miss, and it leaves a question worth sitting with. Accountability in taxpayer-backed lending is overdue and entirely legitimate. The harder question, the one Ken Hale is asking from Natchitoches with a lawyer now at his side, is whether a system moving this fast can reliably tell the difference between a bad actor and an unlucky one. How the agencies answer it will shape who is willing to make a government-guaranteed loan at all.

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Reporting by John Reosti first published in American Banker; additional context from USDA and SBA announcements and public filings. Quotations are attributed to their original speakers as reported by American Banker. — Funder Intel | funderintel.com