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The SBA’s Conditional Guaranty – Lessons Learned

Posted by Prudent Lenders in SBA 7(a) Lessons Learned – SBA Question? - Ask the Experts with No Comments

Participation in the SBA’s loan programs not only provides lenders with the necessary tools to support and empower business communities within lenders’ target markets – especially for mission-based lenders participating in the SBA’s Community Advantage program – but lenders with successful SBA programs can utilize government-guaranteed lending to increase liquidity, diversify revenue streams, and enhance asset portfolios.  For such lenders, compliance with SBA program guidelines must be a priority.

The SBA conditionally guarantees loans made through the 7(a) program and SBA will only honor its guaranty if a lender has complied with the terms of the loan authorization, SBA’s loan program guidelines, and basic standards of prudent lending.  Over the next two weeks, we will provide insights for current and prospective SBA lenders on issues which put the SBA guaranty at risk.

Program Fundamentals: Delegated Authority

Lenders may participate in the SBA’s basic 7(a) loan program with various levels of delegated authority and responsibility.  Lenders should be aware of the different degrees of responsibility which the lender undertakes when participating in the various 7(a) loan programs, especially if a lender elects to participate in the preferred lenders program (“PLP”), the certified lenders program (“CLP”), the PLP-Export Working Capital Program Authority, and other programs which provide lenders with different levels of delegated authority (“Delegated Authority”) when making eligibility determinations and underwriting loans.  In general, when operating under delegated authority, a lender has full responsibility to properly determine whether a proposed loan meets SBA’s eligibility requirements and make its own credit underwriting decision.  Failure to properly underwrite a loan or make an eligibility determination is almost certain to lead to a full denial of the guaranty if the loan was processed under a lender’s delegated authority.  However, even when submitting a loan through general processing, SBA lenders maintain the responsibility to properly underwrite, document, close, service, and, if necessary, liquidate its SBA loans.  Furthermore, SBA lenders are all subject to SBA’s lender oversight program and should be aware of all reporting requirements, the certifications contained within various SBA forms, and a lender’s obligations to disclose material facts to the SBA in various contexts. 

The Guaranty Purchase Package

When an SBA loan defaults, SBA will review a lender’s documentation through a centralized, streamlined guaranty purchase review process conducted in Herndon, Virginia at the SBA’s National Guaranty Purchase Center (the “NGPC”).  Lenders must submit a 10 Tab guaranty purchase package (a “10 Tab Package”) to the NGPC for review and a determination whether SBA should honor its conditional guaranty.  If a loan has been sold on the secondary market, a lender may choose to request that the SBA purchase the loan from the secondary market investor directly or may opt to buy back the guaranteed portion of the loan itself.  When SBA purchases the guaranteed portion of the loan directly from the investor, SBA requires that lenders submit the 10 Tab Package within 15 days, with the possibility of obtaining an additional 30 day extension.  For loans approved on or after May 15, 2007, if the lender has not sold the guaranteed portion of the loan on the secondary market or has elected to purchase the loan directly from the secondary market investor, a lender must generally liquidate all business personal property prior to submitting its 10 Tab Package.[1]  In addition, a lender must submit its 10 Tab Package within 180 days of the loan’s maturity date or completion of all liquidation and debt collection efforts.

Common Reasons for Repairs and Denials: the Basics

SBA lenders should familiarize themselves with all SBA loan program requirements and understand commons areas of concern which could lead to a repair or denial of the SBA guaranty.   The NGPC has provided lenders with an outline of the top reasons for repairs and denials, which can be found here:

http://www.sba.gov/content/top-reasons-repair-denial

In general, and as implied by the NGPC’s guide, a deficiency in a loan file which reflects a failure on the part of a lender to comply with prudent lending standards or SBA’s program guidelines may be quantifiable.  In such cases, the deficiency will likely lead to a repair representing the estimated loss resulting from the deficiency.  For example, if a lender fails to properly obtain or perfect a lien on collateral, a repair in the amount of SBA’s portion of lost recoveries would likely be deemed appropriate.  Alternatively, a lender’s failure to properly document a timely site visit may result in a repair of the guaranty if collateral is later found to be missing or damaged.  In such cases, a repair may be equal to the liquidation value of the property or the diminution in value to the collateral caused by the lender’s failure to properly care and preserve the collateral through proper site visits and monitoring.

In other instances, a full denial of the guaranty may be deemed appropriate regardless of any actual loss.  For example, a loan deemed ineligible due to franchise issues, affiliation, ineligible loan purpose, or ineligible loan recipient will likely lead to a full denial of the guaranty.  In addition, if a loan defaults within 18 months of disbursement, or is otherwise determined to be an early default or early problem loan, failure to properly verify financial information with IRS tax records, failure to properly document an equity injection requirement, or poor underwriting could likely lead to a full denial of the guaranty.  Please stay tuned as each week Prudent Lenders will provide for specific case studies regarding scenarios which could lead to a repair or denial of the SBA’s guaranty!

[1] Under certain circumstances, including borrower bankruptcy or in the event a lender has determined that liquidation of business personal is not feasible, the lender may submit its 10 Tab Package without first liquidating business personal property.

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