Our Take
SBA's policy reversal validates critics who warned against loosening government-backed loan standards without adequate guardrails.
Why it matters
Regional banks expanding into SBA lending face heightened scrutiny as regulators tighten oversight following $97M taxpayer losses from lax underwriting standards.
Do this week
SBA lenders: Audit your 2023-2024 loan portfolios before March quarter-end to identify exposure from the relaxed underwriting period.
Georgia bank collapsed with $70M in problem SBA loans
Community Bank & Trust — West Georgia failed last week with 58 noncurrent SBA loans originally worth over $70 million (per SBA records). The $288 million bank's collapse will cost the FDIC's Deposit Insurance Fund $97 million.
The bank's problems stemmed from two lending periods. Variable-rate loans originated in 2020-2021 soured after interest rates spiked in 2022. A second wave of problem loans emerged after summer 2023, when the SBA launched its "Do What You Do" policy allowing lenders to use in-house underwriting standards instead of agency requirements.
Community aggressively expanded SBA lending through its Phoenix Lender Services subsidiary, facilitating over $200 million in SBA loans during fiscal 2025 (company-reported). The bank's noncurrent loan ratio jumped from 0.60% in 2022 to 10.15% by 2025 (per FDIC data).
Policy reversal came too late for taxpayers
The SBA reversed course in spring 2025 after disclosing substantial increases in delinquencies and credit costs. Tony Wilkinson, CEO of the National Association of Government Guaranteed Lenders, said "an unacceptable number of loans made during the 'Do-What-You-Do' era are just proving to be not that good."
Federal regulators imposed a cease-and-desist order requiring improved oversight and potential capital raises, but intervention came after the damage was done. The failure represents the second U.S. bank collapse of 2026.
Tighter standards now in effect
The SBA has restored stricter underwriting requirements following the policy failure. Banks that ramped up SBA lending during the relaxed period face heightened regulatory scrutiny and potential credit losses.
Community's deposits were assumed by Florida-based Anchor Bank, protecting depositors while taxpayers absorbed the $97 million loss through the deposit insurance fund. The episode highlights risks when government-backed lending programs prioritize volume over credit quality.