Getting all parties of a transaction to the closing table may seem like the final hurdle in closing an SBA loan, but one of the most important steps to properly closing the loan happens at closing: disbursement of loan proceeds. The SBA cites failure to use loan proceeds as required by the loan authorization as one of the most common lender deficiencies noted in PLP audits and guaranty purchase reviews. SOP 50 10 5(E), Subpart B, Chapter IV, Paragraph C, Section 4 states that 7(a) lenders must have SBA Form 1050 (Settlement Sheet) executed at the time of first disbursement and must provide backup documentation for each and ever disbursement of loan proceeds. Additionally, the SOP indicates the types of evidence and documentation required to prove compliance with the use of proceeds listed in the Loan Authorization.

While the 1050 requires supporting documentation , as a practical matter, how does the lender demonstrate where the funds actually went? Lenders should request copies of each disbursement check from the closing attorney or escrow officer's account at settlement. Additionally, lenders should collect any corresponding invoices or receipts to show the charges incurred by the borrower that were paid at the time of closing. Lenders must ensure that each disbursement check supports the use of proceeds categories listed in the Loan Authorization. If the disbursement amounts do not match the use of proceeds as originally projected, then the lender may need to modify the use of proceeds in accordance with the SOP and 7(a) Servicing and Liquidation Matrix.

In the case of refinances, creating a settlement statement illustrating the disbursement of funds is relatively straightforward. There is the credit of loan proceeds and line item debits for the use of proceeds categories all payoffs and any vendor invoices and lender charges. In a business acquisition or real estate transaction, preparing a settlement statement may be more complex. In most cases, the parties will prepare a separate settlement statement, aside from the lender's form 1050 to account for all of the debits and credits. There are typically buyer/seller adjustments that will affect the bottom line for the borrower. For instance, rent adjustments, tax adjustments, costs advanced for goods, lease adjustments, recording taxes, transfer taxes, and similar prorated items. The lender must carefully review the charges and insure that the use of proceeds are applied correctly. For multi disbursement loans, each disbursement must be supported by copies of checks, invoices, purchase orders, draw requests or other documentation sufficient to illustrate the proceeds were actually used for the purposes set forth in the Loan Authorization. Under no circumstances should loan proceeds be disbursed directly to the borrower, unless it is working capital or reimbursement for an authorized use that has been fully documented by the lender.

Through careful documentation and review of all disbursements made at closing, lenders can confirm compliance with the authorization's use of proceeds and minimize the risk of any repairs to the guaranty arising from documentation of the loan disbursement.

For more information regarding closing and disbursement matters, please contact Jen at (215) 542-7070 or at JBorra@StarfieldSmith.com.

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