When SBA’s Denial of Liability on a 7(a) Guaranty is Justified: Introduction to Eligibility
With the exception of PLP loans deemed to be ineligible under applicable federal law or SBA policies and regulations, generally, the Agency does not deny liability on a 7(a) Loan guaranty unless a lender’s noncompliance with program guidelines caused (or could cause) a material loss to the government on the loan. Nonetheless, the SBA retains the right to deny liability on a guaranty in the absence of an actual or potential material loss if a lender’s noncompliance, or a deficiency in originating, underwriting, servicing or liquidating an SBA loan, is deemed material to the soundness and integrity of the 7(a) Program. For example, as mentioned above, if a loan was ineligible for SBA financing, if a lender failed to disclose or misrepresented a material fact to Agency, or if a lender breached SBA’s conflict of interest regulations, a denial of liability is deemed appropriate.
In defining a material loss which would warrant a full or partial denial of liability, it is important to note that such a denial would also include a “repair” to the guaranty. A repair, or partial denial of liability, is an agreement between SBA and a 7(a) Lender as to a specific dollar amount to be deducted from the funds SBA has paid, or has been requested to pay, on the loan. Such a repair is meant to compensate SBA for an actual or anticipated loss caused by the lender’s noncompliance. The SBA defines a material loss: any loss “(a) with regard to personal property collateral—a single loss or the aggregate amount of multiple losses totaling $2,500 or more; and (b) with regard to real property collateral—a loss in the amount of $5,000 or more.” Therefore, even seemingly small financial losses caused by a lender’s failure to properly document a lien position, take available collateral, conduct a timely site visit upon default, or properly liquidate a loan can justify a partial denial of liability by the SBA.
However, in other instances, a full denial of the guaranty, under SBA regulations, is appropriate even in the absence of a quantifiable loss. A full denial of liability, according to the SOP 50 51 3, is appropriate if 1) a lender’s actions or omissions caused a total or near total loss; 2) if a lender’s noncompliance is deemed material to the integrity and soundness of the 7(a) Program; 3) if a lender’s act or omission caused resulted in the Agency guarantying an ineligible loan; 4) if a lender failed to disclose or misrepresented a material fact to Agency; or 5) if a lender breached SBA’s conflict of interest regulations.
Ineligibility: A Black and White Issue
Only small business concerns which meet SBA’s eligibility requirements can obtain SBA-guaranteed financing. While SBA’s eligibility guidelines are complex and often involve interpretations of existing SBA policy and relevant law, the fundamental requirements are relatively straight-forward. In order to be eligible for SBA financing, a small business must:
1. Be an operating business;
2. Be organized for profit;
3. Be located in theUnited States(includes territories and possessions);
4. Be small (as defined by SBA); and
5. Demonstrate a need for the desired credit.
Eligibility is determined at the time the loan was approved. In instances in which a lender cannot provide documentation to demonstrate that loan proceeds were used for eligible purposes, the loan will be subject to a repair representing the SBA’s portion of the proceeds used for ineligible purposes.
Stay tuned for more articles on eligibility!