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IN THE SPOTLIGHT
 | | Kristen G. Dickey, Esq. |
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Kristen is an associate in Starfield & Smith's Florida office and she concentrates her practice in the areas of commercial lending, real estate, contracts and corporate law. As closing counsel for various financial institutions (including banks, credit unions and certified development companies) that extend commercial credit facilities to small and mid-size businesses, she drafts, analyzes, and negotiates documents for government guaranteed loans through SBA 7(a) and 504 loan programs and conventional loans.
Kristen also reviews SBA guaranteed loan files and advises lenders on eligibility matters, due diligence documentation, and closing issues in order to preserve and protect their government guarantees. Kristen has closed many commercial finance transactions from start-up business transactions to complex real estate and business acquisitions. She has also worked on financings under the SBA CAPLine, Export Working Capital, and USDA Business and Industry loan programs.
ADMISSIONS:
* Florida
* District of Columbia
To read more about Kristen, click here.
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| FEATURED ARTICLE
Best Practices: Early Defaults Equal Extra Scrutiny from the SBA
By: Timothy D'Lauro, Esquire
 | | Timothy D'Lauro, Esquire |
While no Lender wants one of its loans to default, an Early Default loan creates extra anxiety for SBA Lenders and it's well justified. A loan that qualifies as an "Early Default" creates additional burdens upon the Lender to prove that its lending practices were commercially reasonable and prudent, and that it was justified in extending this loan to the Borrower, or risk a repair or outright denial of its Guaranty. For this reason alone, it is imperative that Lenders comply with all SBA loan program requirements and work diligently to ensure prudent lending practices because the Guaranty is conditional in nature.
To qualify as an Early Default loan under SOP 50 57, the SBA states that a loan is an Early Default loan if it defaults within 18 months of the initial disbursement of the proceeds, unless the Borrower cures the default and makes scheduled loan payments for 12 consecutive months after the initial 18 month period. If the final disbursement occurs more than 6 months after the initial disbursement, the 18 month early default period commences from the date of the final disbursement. Events that constitute an early default include payment default.
Upon the submission of the repurchase package for an Early Default loan, the SBA requires that the official reviewing the file is required to review the file with "the highest level of scrutiny." The Lender then must prove to the investigating official that its lending practices and actions, or inaction did not contribute to cause the loan's Early Default. This is not a position the Lender wants to find itself in, and it is therefore paramount that Lender is well-versed and knowledgeable about SBA loan program requirements and prudently underwriting its loans.
While each transaction is different, there are some areas that arise more often than others in Early Default reviews which the SBA examines very closely. For example, the Borrower's financial statements and IRS Transcripts are documentable methods of determining the Borrower's creditworthiness and repayment ability. Failure to verify the borrowers financials before lending funds will generally result in a complete denial of the Guaranty. In such circumstances, the Lender would then need to demonstrate to the SBA that the failure of the business was unrelated to any financial issues the Lender would have otherwise uncovered through the verification process.
Another example of deficiencies in documentation by a Lender which receive heightened security in an Early Default situation is the failure to properly document and prove equity injection. Failure to prove the equity injection leads to a rebuttable presumption that the business was under capitalized and this failure to prove injection caused the default. It is then the Lender's burden to demonstrate an unrelated cause of the default, which is not always easy in an early default situation.
As any SBA Lender knows, because of its conditional nature, there is always risk to the Guaranty if the Lender does not underwrite, close, service or liquidate its SBA loans properly. In an Early Default situation, that risk and the scrutiny involved are magnified significantly. Early Default loans cannot ever be 100% eliminated, but if the Lender diligently follows SBA's rules and requirements, it will be more likely to withstand this heightened scrutiny and have its Guaranty honored.
For more information regarding early default loans and the guaranty purchase process, please contact Tim at tdlauro@starfieldsmith.com or at 215.542.7070.
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EVENTS & SEMINARS
Date: February 5, 2014 For more information about this event and/or to register, click here. 2014 Southeastern Small Business Lenders Conference Dates: February 9 - 11, 2014 For more information about this event and/or to register, click here.
Date: March 12 - 14, 2014
For more information about this event and/or to register, click here.
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WHAT OUR CLIENTS SAY...
Linda K. Fernandez / V.P Credit Administration SBA Department / Monterey County Bank
Starfield & Smith have been integral with assisting the bank with one of our largest guaranty purchases from SBA. Their team was able to utilize their SBA expertise and work directly with contacts to offer guidance to address specific concerns. Without the help of Starfield & Smith, it is unlikely that our bank would have been able to collect on the full guaranty on this loan. In addition, our costs incurred with their services was reimbursed 75%. We highly suggest that if you need assistance with your SBA portfolio, do not hesitate to contact them.
We had a great experience with your team!
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