On October 1, 2010, SBA issued Procedural Notice 5000-1177 which enunciated the new SBA policy for tracking data for loans involving Agents.  Some in the industry would argue that the SBA's focus on the activities of Agents is long overdue.  The new policy on reporting the activities of Agents appears to echo the sentiment from the famous line from Shakespeare quoted above, but make no mistake - the SBA policy is not "much ado about nothing" - Lenders should be mindful of their compliance obligations under the new policy.

The new policy requires lenders to submit SBA form 159 7(a) on all loans that involve the payment of fees to a loan Agent.  An Agent is defined by the SBA as "an authorized representative... representing an applicant, or participant by conducting business with the SBA."  13 CFR 103.1(a); SOP 50 10 5(C), p.179.  This includes, but is not limited to, loan Packagers, Lender Service Providers and Referral Agents.  Submission of the 159 7(a) is required regardless of whether the Agent is compensated by the borrower/applicant or by the lender/participant - in either case, lenders are required to submit a copy of the original the form to Colson Services Corporation for all loans approved on or after December 1, 2010, either by fax to: 718-315-5170, or as a pdf or tif  file attachment to an email sent to Form159@colsonservices.com.  The original forms must be retained by the lender in its file.

Why the new focus on Agents?  According to an SBA Office of Inspector General report, over the past decade, loans involving the fraudulent activities of Agents have run into the hundreds of millions of dollars.  The SBA has taken notice of this trend and is now looking to compile data on the performance of loans originated by Agents as part of their regulatory and oversight responsibility.  Additionally, the SOP 50-53, issued on October 1, 2010, specifically reserves to the Director of the office of Credit Risk Management ("OCRM") the power: "...to suspend or revoke the privilege of any Agent to conduct business with SBA under 13 C.F.R. Part 103."  Clearly, the SBA intends to address this issue rigorously on the Agent side, but lenders must be cautious that they do not become exposed to liability from the new SBA requirements.

So, what should lenders do in response to this new policy?  First, obtain a 159 7(a) from each Agent involved in your loans, whether compensated by the borrower or by the lender; Second, make sure that the Agent is not being compensated by both the borrower and the lender for the same service (the "two-master rule"); Third, if the Agent is charging the borrower more than $2,500, make sure that the Agent provides a detailed, itemized invoice (setting forth the date, hours and hourly rate for each task performed); and, Fourth, submit a copy of the 159 7(a) to Colson with the first 1502 report for the loan.  Finally, all lenders should carefully read the certification on page 3 of the 159 7(a).  This certifies that the information contained in the form is accurate, that the fees charged are reasonable, that the lender has no knowledge of any other Agents involved in the loan and that there are no other fees paid to the Agent other than what is set forth in the form.  False certifications can subject both the lender and the person signing the certification to liability for both civil and criminal penalties, so a diligent and rigorous process is critical for lenders to avoid liability and maintain their good standing with the SBA.

For more information on the new SBA policy regarding agents and other SBA compliance issues, contact Ethan at 215-542-7070, or esmith@starfieldsmith.com.