Adhere to the “Spirit of the SBA” in Taking Residences for “All Available Collateral” 

March 19, 2025

Bob Coleman
Founder & Publisher

Adhere to the “Spirit of the SBA” in Taking Residences for “All Available Collateral” 

In a recent Coleman webinar moderated by Leslie Tripp, the Doeren Mayhew portfolio review team discussed SBA 7(a) loan compliance exceptions they had found in lender portfolios.

One exception was particularly noteworthy. The lender had a collateral shortfall but chose not to take a lien on the borrower’s home as it did not have more than 25% equity in the property.

To review, the SOP states: “The Lender must obtain all required collateral with evidence of proper lien priority and must meet all other required terms and conditions as applicable before or at the time of disbursement, including obtaining valid and enforceable security interests in any loan collateral.”

The loan in question concerns a lender with a residential property worth a million dollars and $750,000 of debt. This particular property should have been available to take as collateral for the SBA loan.

However, in its analysis, the lender applied a 15% discount to the million-dollar value, resulting in an $850,000 value. They then calculated the equity ratio on $850,000, for equity of 12%, which is less than the 25% equity threshold.

Despite an overall collateral shortfall, the lender did not file a lien on the residence.

The reviewer criticized the lender as the SOP states that you should use the market value, not the liquidated value, when determining if a property has available equity.  

The reviewer also noted:

“I often see in the credit memo that an underwriter estimates a property’s value at a certain amount. When the appraisal comes in, the underwriter who approved the loan doesn’t get a chance to review it and make adjustments. From our perspective, we may realize that the appraised value of the real estate is less than expected, resulting in the loan not being fully secured. However, there may have been other collateral in the guarantor’s personal assets that could have been taken.

“This creates a problem where you’re not taking all available collateral because you weren’t addressing the change in valuation expectation from the beginning of the process. Always try to modify or review any conditions you had and ensure they are met and satisfactory in your credit memo through modification or amendment.”