Offering the U.S. Small Business Administration (SBA) loan programs provides lenders with a wide range of benefits. From expanded portfolios to increased customer retention and the SBA guarantee, lenders are rewarded for expanding their credit box.
How should you balance these benefits with the backend work SBA loans require? (The SBA standard operating procedure (SOP) alone is 400+ pages after all…)
Balance looks like this. When you partner with a lender service provider, or LSP, you can ramp up your SBA lending without incurring the fixed costs associated with hiring additional staff. Offering SBA loan programs doesn’t have to be a burden on your staff or your budget.
Here, we review the basics of the lender and LSP relationship and a few key points you’ll need to know when you enter into the Small Business Administration’s LSP agreements.
What are lender service providers?
By definition, LSPs are agents. This means LSPs act as liaisons between your institution and the SBA.
LSPs take on the day-to-day tasks associated with servicing SBA loans, completing the required monthly reports, and, when needed, loan liquidations. Other duties include, but aren’t limited to, the evaluation of pre-screen and application materials, loan origination, underwriting, closing, disbursement, servicing and workouts.
When you partner with an LSP, they do the heavy lifting associated with these exhaustive and detailed processes.
Benefits of partnering with an LSP
The costs associated with building and maintaining an in-house SBA team are often prohibitive for smaller lending institutions. For this reason, LSPs are an effective way to get an experienced SBA team working for you quickly and cost-effectively.
LSPs are particularly beneficial to institutions that:
- Are just starting to offer SBA loan products and don’t have staff members with SBA-specific experience
- Want to expand SBA offerings but don’t have the resources or scale to take on additional staff
- Have limited geographic or population reach, such as those in rural communities
LSPs help lenders to strengthen operations and client loyalty:
- With the SBA programs in place, you can leverage your existing small business clientele by offering a wider range of loan programs to meet their needs. Not only are you better able to maintain their business – and their loyalty – but you’re proactively mitigating a potential risk that they’ll take their business elsewhere.
- You can promote and expand SBA offerings with confidence, knowing you have the resources needed to effectively service your clients at every stage in the SBA process.
- You have the peace-of-mind that comes from working with an expert team who knows SBA rules and procedures and who will protect your SBA guarantee/s at every step.
Key points to know about LSP agreements
With so many benefits to lenders, it’s easy to see why many institutions decide to partner with an LSP. However, the SBA requires that lenders take full responsibility for the loans and their efficient and correct management.
The LSP agreement is a written contract that governs the lender and LSP relationship and is required by the SBA. The SBA has developed a set of guidelines to protect all parties who enter into a contractual LSP agreement, however there is no universal LSP contract. Consequently, every LSP has its own templated agreement and it’s essential that you fully understand it before signing.
Here are the key points every LSP agreement must address, per the SBA:
- It must state the functions the LSP will perform on behalf of the lender. These typically include the “trifecta” of underwriting, closing and servicing. In addition, lenders may use additional services that are available, such as assisting with special assets, loan-portfolio review and audits.
- It must demonstrate the lender maintains full responsibility for any and all SBA-related functions that it subcontracts to the LSP and that the LSP is acting only as an agent and providing assistance to the lender.
- It outlines agreed-upon compensation and fees, within the parameters of the SBA guidelines.
- The agreement clearly states the terms – including cancellation and renewal options, if applicable – for the SBA to review and approve.
- It includes specific, SBA-required statements and disclosures.
- It also enforces functions prohibited by the SBA, such as stipulating that LSPs can’t take on power of attorney for lenders.
You’ve found the right LSP and are ready to sign an agreement. Now what?
Once you choose an LSP that’s a good fit with your organization, you’ll review and sign your LSP agreement. From there, the agreement is sent to the SBA for final approval. This ensures all parties – lenders, LSPs and the SBA – are in alignment regarding requirements and responsibilities. With an LSP agreement in place, you’ve defined a system of roles and responsibilities to ensure your program gets the services it needs to grow.
If you have additional questions about LSPs and LSP agreements, please contact us. We’re happy to help and only a phone call away.