When a loan defaults, the lender’s first step should be to review the Loan Authorization to determine if it has complied with SBA requirements. Sometimes in the heat of battle, lender’s can lose sight of the fact the SBA Loan Authorization will dictate what requirements were mandated at time of SBA approval, and therefore, outline what should have been done to protect the guaranty.
This article from our friend and Coleman Webinar Expert Karen McHugh, is a good refresher on what constitutes a complete loan package, top reasons for a repair to the guaranty, and actions to take after a loan has defaulted:
“A lender may request payment on the guaranty following a 60-day uncured delinquency. However, SBA strongly encourages lenders to fully liquidate the loan prior to requesting purchase.
SBA requires that lenders use the National Guaranty Purchase Center (NGPC) provided TAB pages to separate their purchase package (the “10-TAB”). The submission of the 10-TAB to the NGPC and the request to have the file shipped from the applicable SBA Servicing Center to the NGPC should be done simultaneously to assure quicker processing of the request. A complete purchase package must be submitted to SBA no later than 180 days after the maturity date of the loan or the date the lender completes its liquidation or debt collection litigation in connection with a matured loan. SBA’s policy for guaranty purchases is to reach a fair decision based on a thorough review of the lender’s purchase request and all relevant documentation. If a lender has been deficient in its handling of a loan, a repair or denial is certainly possible.
A complete package is important (follow the 10-TAB outline provided by SBA) and the lender should “tell the story” of the borrower and why the loan went into default (make it easy to understand). However, the top reasons for a repair to the guaranty (reduction in guaranty amount) or a full denial include:
• Lien and collateral issues resulting in “missed recoveries”: such as the failure to obtain a required lien position or the failure to properly perfect a security interest
• Unauthorized use of proceeds: follow the loan authorization or subsequent modifications or a full denial could occur if improper use of proceeds caused the business failure
• Liquidation deficiencies: examples are the failure to conduct a site visit resulting in missed recoveries or the misapplication of recoveries to a lender’s loan when the SBA loan has lien priority
• Undocumented servicing actions: such as liens not properly renewed during servicing on worthwhile collateral or the lender releases collateral without documented business justification
• Early defaults: SBA places a higher scrutiny on loan defaults that occur within the first 18 months of loan approval. Important documentation includes verification of a required equity injection and verification of financial information used by the lender to determine repayment ability
• Loan Eligibility: Expect a full denial of the guaranty if the loan proceeds, type of business or size of business do not meet SBA program requirements.”