Ethan W. Smith, Esq.

The life-cycle of an SBA loan can be divided into four main sections: 1) Underwriting/Origination; 2) Documentation/Closing; 3) Servicing; and 4) Liquidation. SBA lenders often find themselves focusing on one or two of these areas in their efforts to preserve and protect the SBA guaranty. However, SBA lenders should be mindful that the guaranty can be jeopardized in any one of the four stages of a loan.

In the Underwriting/Origination phase of an SBA loan, mistakes can be made which imperil the guaranty regardless of subsequent actions taken by the lender. For instance, determinations regarding loan structure and eligibility, if incorrectly made, will often result in a recommendation for denial of the guaranty by the SBA National Guaranty Purchase Center ("NGPC"). Issues such as franchise eligibility, credit elsewhere, size standards and loan purpose must be correctly made or the guaranty will not be honored. Additionally, lenders' credit decisions must be sound and well documented - early default loans will have their credit decisions reviewed by the agency. Although the SBA will not "second-guess" credit, the burden is on the lender to ensure that it has sufficiently documented its credit as a prudent lender.

The Documentation/Closing phase of an SBA loan is an area that results in many repairs and denials of the SBA guaranty. Often, lenders will miss items in their due diligence such as intervening liens, missing tax transcripts, insufficient payoff letters, etc., that can give rise to repairs or denials of the SBA guaranty. SBA reports that the most frequent reason for a repair of the SBA guaranty is the failure to obtain the correct lien position on collateral as set forth in the Loan Authorization. Lenders' failure to perform the correct searches and/or to resolve issues shown by the searches properly and thoroughly is often to blame. Additionally, failure to obtain a commitment from a creditor to release the lien being paid off also creates problems for lenders. Finally, lenders sometimes fail to properly document and/or perfect their liens which can also risk the guaranty.

In the Servicing phase of the loan, lenders can endanger the guaranty by making servicing decisions that are imprudent or by failing to seek the approval of the agency when required. The SBA has made this process easier for lenders by issuing the Servicing and Liquidation Actions 7(a) Lender Matrix, which sets forth when SBA approval is required. However, it is important to remember that even if an action is delegated to the lender as a unilateral action, the lender must still document its file as to the reasoning and justification for each significant servicing action that it takes. Failure to do so can leave the SBA no choice but to recommend a repair if it cannot determine why the lender did what it did, and why it made sense.

Finally, in the liquidation phase of the loan, lenders often make simple mistakes that have big consequences for the guaranty. For instance, lenders often fail to perform site visits within the mandated 60 days following a payment default. Although seemingly innocuous, the failure to perform the site visit in a timely manner shifts the burden to the lender to prove to the SBA that the failure to timely visit the site did not contribute to any loss. This can be a difficult, if not impossible, argument to make, especially if collateral is missing.

SBA lenders need to be vigilant about guaranty protection throughout the entire life of an SBA loan. The four phases of an SBA loan, these "four pillars" of guaranty protection, are like the legs of a table - the loss of any one will likely make the "table" collapse and will expose the guaranty to repairs and denials.

For more information on preserving the SBA guaranty throughout all phases of an SBA loan, contact Ethan at ESmith@starfieldsmith.com or (215) 542-7070.

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