HOW TO PROTECT YOUR SBA GUARANTY

It's a Conditional Guaranty  

So you have an SBA guaranty on a loan. Does that mean when the loan defaults SBA will honor their guaranty upon request?  Maybe. 

The SBA guaranty is a conditional guaranty.  If lenders have followed all the proper steps to make sure the loan was eligible at the time of application, used the proper closing forms, obtained all necessary signatures, properly secured an interest in the collateral, properly documented the use of proceeds, serviced the loan in accordance with SBA's standards and followed proper liquidation requirements {sigh} then there is a very good chance your guaranty is valid. 

Protecting the SBA guaranty is just as critical as obtaining the guaranty.  By following the steps below you can increase the chances that SBA will honor their guaranty.

1.   Eligibility.  Make sure the loan is eligible. For non-PLP lenders this usually is not an issue since SBA reviews and signs off on a complete application.  For PLP lenders it is critical that they are well informed of SBA's policy and any changes to it. They must properly document the file to show they have determined the borrower eligible on all counts. 

2.   Closing/Funding.  This is one of the most common areas that a guaranty is lost or reduced.  A thorough review of the Authorization is the first step in the closing/funding process.  If any changes are necessary the lender must follow the proper steps to either document the file, notify SBA or obtain SBA approval.

Repayment terms in the note must match the repayment terms exactly as stated in the Authorization. 

The guaranty fee must be paid in a timely manner, prior to first disbursement and no later than 90 days of SBA loan approval.

Disburse the loan in accordance with the Authorization.  I suggest you create a spreadsheet with columns for each of the categories as stated in the Authorization and the allotted amount.  Whenever you make a disbursement, deduct it from that category and keep a running total.  The spreadsheet can also help you track the documentation needed for the file (ie. invoices, checks, statements, etc.) 

Document the equity injection.  Equity must be injected and verified prior to disbursing loan proceeds. Obtain a copy of a check showing funds have been deposited into the borrower's account or an escrow account. Bank statements from 2 months prior showing the source of the funds.  If equity was a gift, be sure you have a gift letter properly executed and verify funds were received. 

3.   Servicing.   Lenders must provide a monthly report to Colson on the SBA Form 1502.  In conjunction with the report, lender must pay the monthly on-going guaranty fee (this fee cannot be passed onto a borrower).  It's important to have a point person that understands this reporting function and carefully follows the reporting calendar.  Late reporting will result in a penalty.  This person must properly report the status of the loan.  

Collect annual financials for the business, owner and guarantors. If it's your conventional policy to monitor statements more frequently, follow that policy for your SBA loans as well. 

Do sites visits periodically and document your file for each visit. 

Make sure you have a copy of the most recent servicing/liquidation matrix.  If you make any changes to the loan, post closing you must following the matrix and the SOP 50 50 in terms of documenting your file, notifying SBA or obtaining SBA's approval prior to the servicing action. 

Keep insurance policies and notices in the file and make sure they are current.  

Keep UCC filing current. Be sure to do a post lien search to verify you are in the correct position. If there are any filings that should be released, follow-up to make sure that is taken care of.

4.   Liquidation/Purchase Request.   This process begins when the borrower defaults and you determine that a workout is not feasible and liquidation is necessary.  The lender must complete a site visit within 60 days of an uncured payment default.  If a payment default does not exist, but another event has occurred that would cause the loan to be placed into liquidation, a site visit must be conducted within 15 days.  Lender must document the site visit and include an inventory of collateral on site. This timing and documentation requirement is something many lenders miss. Next, begin compiling all the items you will need to submit to SBA using the Guaranty Purchase Package Tabs. SBA has recently reissued a "Quick Guide" which contains general liquidation guidelines and forms that you need to during this part of the process.