If a borrower defaults within 18 months of initial disbursement (or, if the final disbursement was made more than 6 months after the initial disbursement and the borrower defaults within 18 months after the final disbursement), the SBA considers the loan an “early default”. The date of default is generally determined by the first uncured payment default of 60 days or more. However, if a borrower, during the first 18 months, has significant problems making full principal and interest payments as scheduled or is granted a payment deferment of 3 months or more, the loan is considered an “early problem” loan. Early default and early problem loans are subject to heightened scrutiny. Under SBA regulations, a full denial of liability is justified if the loan involves an early default or early problem and the lender failed to provide credible evidence that it verified the borrower’s financial information by comparing it to relevant IRS tax return transcripts as required by the version of SOP 50 10 in effect at the time the loan was approved. Additionally, if there was an early default or early problem loan, the lender’s failure to verify and properly document a material portion of an injection of cash or non-cash assets required by the Loan Authorization raises a rebuttable presumption that the default was caused by the lack of the injection and a full denial of liability is almost always justified.
However, in both cases, a full denial may not be justified, however, if the lender provides credible evidence that the business failure was due to factors unrelated to any financial difficulties that the lender could have identified through the IRS verification process or which were caused by the lack of equity. To rebut the presumption, the lender must provide credible evidence that the primary cause of the default was something other than the lack of the required injection or information used in the repayment analysis, e.g., the death of an irreplaceable key employee or a natural disaster that destroyed the borrower’s business premises and customer-base. As a practical matter, the failure to adequately verify equity injection or obtain IRS tax transcripts is an automatic denial of the guaranty if the SBA considers the loan to be an early problem or early default loan. However, there are some limited circumstances in which a lender may be able to rebut the above-described presumption.
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