SBA has issued Policy Notice 5000-879464, Prior Loss Rule: Non-Controlling Ownership Update, (dated May 28 and effective June 1, 2026). The notice provides “new guidance for small business borrowers for purposes of SBA 7(a) and 504 (“Agency”) loans”. Under the new requirements, SBA may, on a case-by-case basis, allow an otherwise eligible small business applicant to receive an SBA loan even when there is a prior loss to the government related to an individual or entity owner as long as that entity or individual’s ownership interest in the applicant concern is non-controlling and represents less than 20% of the total ownership.
In considering these situations, SBA is relying on the authority contained in SBA regulations which allows SBA to waive for good cause the prior loss requirement. Per 13 CFR 120.110(q):
“Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and businesses owned or controlled by an applicant or any of its Associates which previously owned, operated, or controlled a business which defaulted on a Federal loan (or guaranteed a loan which was defaulted) and caused the Federal government or any of its agencies or Departments to sustain a loss in any of its programs. For purposes of this section, a compromise agreement shall also be considered a loss”
Per the notice, to be considered for this waiver, the affected owner of the applicant concern must:
(i) Have had an ownership interest of less than 20% in the business that caused the prior loss;
(ii) Not have been a co-borrower or guarantor on the defaulted SBA loan; and,
(iii) Not had any control over the business with the prior loss.
An owner of an applicant that meets all of the waiver eligibility criteria will be known as a “Non-controlling Minority Equity Investor”.
It is important to note that the waiver process will be triggered when, subject to submission by the lender, SBA’s Fraud Risk Framework identifies a potential prior loss situation. Lenders will not need to separately request waivers. Under the new process, when all three of the waiver eligibility criteria are met, SBA, using its Fraud Risk Framework, will, on a case-by-case basis, “evaluate the full circumstances surrounding the prior loss and will use its discretion to determine whether granting the waiver is consistent with the purposes of the 7(a) and 504 programs”.
In making the waiver determination, SBA will consider, among other factors:
(i) The prior 7(a) or 504 loan(s) involving the Non-controlling Minority Equity Investor;
(ii) The number and percentage of defaulted SBA loans involving the Non-controlling Minority Equity Investor;
(iii) The timing of defaults (including whether a loan would have been considered an early default); and
(iv) The Non-controlling Minority Equity Investor capital investment relative to the total SBA loan amounts.
The notice makes clear that SBA’s waiver authority applies only to prior losses relating to SBA loans. It does not apply to applicants or owners that defaulted on non-SBA loans or federally assisted financing or to losses involving the SBA Paycheck Protection Program (PPP) loans or to SBA COVID-19 Economic Injury Disaster Loans (EIDLs). In addition, the waiver requirements do not apply if the applicant, or any guarantor (excluding a Supplemental Guarantor), holds an outstanding nontax debt to the Federal Government that is delinquent (i.e., unpaid 90 days beyond the payment due date).
The prior loss waiver consideration will apply to loans receiving SBA loan numbers on or after June 1, 2026. This short implementation date will provide greater opportunities for potential loan applicants to be found eligible for new financing even when there is a Non-Controlling Minority Equity Investor associated with a prior loss to the government.
Please see the policy notice for additional information.
