Leveraging the SBA guarantee is an outstanding way for your financial institution to achieve their small business lending goals. SBA loan programs foster job creation and economic development. And when you support small business owners, you grow as well–expanding your institutional opportunity, revenue and clientele.
Certainly, though, lending to businesses that don’t meet traditional bank loan criteria means you may take on more risk of default. That’s why the SBA provides a credit enhancement in the form of a guarantee.
To protect SBA loan guarantees, lenders must follow precise requirements throughout the life of each loan. These requirements can be complicated, detailed and time consuming. Without following them exactly, loan guarantees may be jeopardized or even denied.
When things change
Like most aspects of life, your borrower’s loan is subject to change. From collateral releases to changes in guarantors, there will be times when a client may request a post-approval loan modification.
What is a loan modification?
Any changes to original loan documents are considered loan modifications, including changes to the interest rates, repayment terms or other items related to the loan authorization. Modifications can be made to any loan, though there may be varying requirements for eligibility.
For example, Prudent Lenders requires a loan’s file is up-to-date – including business insurances, proof of tax payments and business financials (with interim financials) – before a modification is made. This ensures everyone involved, including your institution, the SBA, your borrower and the lender service provider, are operating from uniform information when considering a loan modification.
Loan modification procedural guides
The following highlights the SBA’s requirements for obtaining a loan modification:
- The SBA’s Standard Operating Procedures (SOP) Manual: This comprehensive guide details the procedures that SBA participants must follow. While the SBA SOP is periodically updated, in modifying a loan lenders should use the SOP that governed at the time the loan was approved (note: this may not necessarily be the most current version of the SOP).
- 7(a) Matrix: A table that details the actions and modifications requiring SBA notification and approval; and whether said updates need to be made through E-Tran (the SBA’s electronic transaction and documentation platform).While the 7(a) matrix is an excellent reference tool, lenders should always refer to SOP instructions, referencing the version that governed when the loan closed.
Common loan modification errors
When lenders follow guidelines from the SBA SOP and the 7(a) matrix it’s more likely loan modifications will go smoothly. But even when working with the best possible information, mistakes can be made.
We commonly see these errors during the loan modification process:
- SBA approval was required, but not obtained.
- E-Tran updates were required, but not made.
- Required documentation wasn’t obtained. (For example: a sale agreement and final closing statement must be submitted when property has been sold. Without these documents, the modification is not properly documented, potentially jeopardizing a lender’s guarantee).
While some of these mistakes are correctable, the best course of action is prevention. With proper servicing, these errors and others can be avoided.
Prudent Lenders can help
If you don’t know how to properly modify an SBA loan, we’re here to help. Our staff of more than 200 SBA lending experts will offer you unparalleled mastery of demanding SBA requirements. When it comes to modifications, we’ll oversee the process so you can enjoy the peace of mind that comes when your guarantee remains intact.
Contact us today to learn how we can help modify your loans and keep your guarantees.