Two SBA Nonbank Lenders Drove Most Defaults as OIG Questions Years of Oversight
A new INC. report examining the Small Business Administration’s Office of Inspector General raises serious questions about the performance of nonbank SBA lenders, but the underlying story is more concentrated than the topline numbers initially suggest.
The OIG reviewed 11,068 SBA 7(a) loans totaling about $9.5 billion that were approved and disbursed by Small Business Lending Companies, or SBLCs, from fiscal 2016 through fiscal 2023. By March 31, 2025, 1,657 of those loans had defaulted, and approximately $1.3 billion had been transferred to liquidation.
At first glance, that looks like a broad problem across the SBLC sector. But the OIG found that most of the deterioration was concentrated in just two unnamed lenders, which accounted for 69% of SBLC originations during the period but 84% of defaults and 88% of early defaults.
That distinction matters. This is not simply a story about nonbank SBA lenders performing poorly as a group. It is also a story about concentration, repeated lender deficiencies, and whether SBA oversight was strong enough to respond when warning signs continued to appear.
The Default Gap Was Real
Across the full period studied, SBLC loans defaulted at a higher rate than loans made by other types of 7(a) lenders. The OIG reported an SBLC default rate of roughly 15%, compared with 9.79% for other lender types. Early defaults, defined as defaults within 18 months of disbursement, were also significantly higher at 5.38% for SBLCs versus 2.62% for other lenders.
Those numbers are meaningful, especially because the review stretched back to fiscal 2016 and therefore included years before the pandemic. The higher default rates cannot simply be explained away as a COVID-era distortion.
Still, SBA management pushed back on the idea that the entire SBLC population should be viewed as underperforming. In its response to the report, SBA argued that once the two large outlier lenders were removed, the remaining SBLCs performed better than traditional 7(a) lenders. That means the problem was not evenly distributed across the nonbank SBA lending market.
$1.3 Billion in Liquidation Is Not the Same as $1.3 Billion Lost
The $1.3 billion figure is likely to attract the most attention, but it should be described carefully.
The OIG said approximately $1.3 billion in SBLC loans had entered liquidation. That does not mean taxpayers have already lost $1.3 billion.
Liquidation begins after a borrower defaults and the lender determines the loan is unlikely to return to regular payment status. Recoveries can still come from collateral, guarantees, settlements and other collection efforts. SBA may also reduce or deny payment on the guaranteed portion of a loan if lender deficiencies are significant enough.
So the accurate takeaway is that $1.3 billion in loans had entered the liquidation process, not that the government had already absorbed $1.3 billion in final losses.
The More Important Question May Be What SBA Already Knew
The strongest part of the OIG report is not the default-rate comparison. It is the finding that SBA had repeatedly identified problems at the same lenders but did not always verify that corrective actions were actually implemented.
The OIG reviewed years of risk-based monitoring and found recurring deficiencies involving issues such as IRS transcript verification, required insurance, lien positions, prohibited fees, borrower eligibility, use of proceeds, and SBA documentation. It concluded that SBA’s Office of Credit Risk Management did not sufficiently assess the root causes of the underperformance and did not have strong enough procedures to ensure that lenders corrected repeated problems.
That is different from simply saying these lenders served riskier borrowers.
SBLCs may naturally reach businesses that have fewer conventional banking options, weaker banking relationships or more complicated credit profiles. Some additional credit risk may therefore be expected. But repeated compliance problems involving liens, eligibility or prohibited fees are operational and supervisory issues, not merely the result of lending to a tougher borrower population.
SBA Stopped Safety-and-Soundness Exams Just Before Expanding the Program
The timing of another oversight issue stands out.
According to the OIG, SBA stopped conducting safety-and-soundness examinations of SBLCs on April 4, 2023, because of contractual issues. Eight days later, SBA lifted its longstanding moratorium on issuing new SBLC licenses, a restriction that had existed for roughly four decades.
The OIG said those safety-and-soundness examinations had still not resumed during the period covered by the review. It warned that insufficient oversight could increase the risk of financial losses and weaken program integrity.
That sequence does not prove that expanding the SBLC program caused the defaults identified in the report. Most of the loans being analyzed were originated before the new licenses were issued. But it does raise a legitimate governance question: if SBA was preparing to expand the number of nonbank lenders in the program, why was one of its most comprehensive supervisory processes offline at the same time?
The “800% Increase” Needs More Context
The report also notes that early defaults increased from 20 loans in fiscal 2016 to 180 in fiscal 2023, an 800% increase in raw count.
That number is mathematically correct, but loan volume also increased significantly over the same period. SBLC originations rose from 719 loans in 2016 to 1,945 in 2023.
SBA objected to using the raw 800% figure without accounting for that growth and argued that the increase was closer to 112.5% when measured against annual disbursement activity. The adjusted number is still substantial, but it provides a more useful picture of how performance deteriorated as the portfolio expanded.
Both figures are worth knowing. The OIG is right that early defaults increased sharply, while SBA is also right that raw counts alone make the deterioration look even more dramatic than it was.
Newer Loans Still Show a Gap
The concern is not limited to older loan vintages.
The OIG also reviewed more recent lending and found that SBLC loans approved in fiscal 2024 and 2025 had already defaulted at a higher rate than loans made by other 7(a) lenders. The report cautioned that those newer portfolios are still young and will need more time before their ultimate performance can be evaluated.
That limitation is important, but the early data means SBA cannot dismiss the issue as something confined entirely to older loans that are slowly working through liquidation.
The performance of newer SBLC portfolios will be worth watching closely as they season.
The Two Lenders Remain Unnamed
The OIG did not identify the two SBLCs that drove most of the defaults, and Funder Intel is not going to name them based solely on inference.
The report does provide clues about at least one lender, including a footnote describing an SBLC that stopped originating under its nonbank license after its parent company acquired a bank. Public filings show at least one well-known SBA lender followed that exact path, but a factual match to an anonymous description is not the same as the OIG identifying the company.
Until SBA or the OIG names those lenders directly, the more responsible approach is to focus on what is confirmed: two companies accounted for the overwhelming majority of the deterioration identified in the report.
This Fits Into a Broader SBA Oversight Pattern
The SBLC report also arrives alongside other OIG findings that have raised questions about SBA’s oversight of the 7(a) program.
In August, the OIG found that SBA made final decisions on 16 of 32 guaranty purchase cases without sufficient supporting evidence, resulting in approximately $11.5 million in potential improper payments. The report also found that SBA failed to seek repair or denial on 13 loans totaling about $5.4 million before the statute of limitations expired.
Earlier this year, another OIG review found that SBA’s Risk Mitigation Framework did not fully screen borrowers for several eligibility requirements. In a sample of loans with error codes, SBA also lacked sufficient documentation to support a significant portion of the decisions clearing those errors.
Taken together, these reports suggest a broader issue that goes beyond any individual lender. SBA has to screen loans before approval, supervise lenders while portfolios are performing, verify corrective action when deficiencies are found and protect the guaranty when loans eventually fail.
Weakness at any one of those stages can increase financial risk.
Nonbank SBA Lending Is Not the Problem by Itself
There is an important counterargument that should not get lost.
Nonbank lenders can expand access to SBA credit for businesses that do not have strong relationships with traditional banks. Some may serve borrowers who are harder to underwrite, operate in underserved markets or simply fall outside a conventional bank’s credit box.
The OIG report does not establish that the SBLC model itself is fundamentally broken. In fact, SBA’s own response suggests the opposite: remove the two major outliers and the rest of the SBLC population performs comparatively well.
This may mean that expansion requires effective supervision.
The Real Story Is Concentration and Oversight
The headline number is $1.3 billion in liquidation, but the more revealing numbers may be 69%, 84% and 88%.
Two lenders generated 69% of SBLC originations but 84% of defaults and 88% of early defaults.
That is not a broad failure evenly distributed across an entire class of lenders. It is a concentrated performance problem.
The larger concern is that SBA had already identified repeated deficiencies at those lenders and, according to its own Inspector General, did not do enough to determine the root causes or verify that corrective action was working.
As nonbank SBA lending continues to expand, that may be the most important takeaway of all.
