February 6, 2013
Best Practices: Guaranty Purchase Packages: Common Deficiencies
Amy R. Brownstein, Esquire
No lender wants to see a loan reach the point where a guaranty purchase package must be prepared and submitted. But it happens and, when it does, it’s best to make sure that the guaranty purchase package that is prepared and submitted – using the SBA’s 10 Tab system – meets all of the SBA’s requirements so that its review by the SBA will be completed within the SBA’s brand promise 45-day period, and so the SBA will not repair or deny the guaranty. To that end, the following are some tips based on errors that we commonly see in guaranty purchase packages:
Tab 2 calls for a list of “companion loans.” Companion loans are active SBA-guaranteed and conventional loans made by the same lender to the same borrower. It’s important to remember that the borrower is the entity or individual named as the borrower in the Loan Authorization, and not a principal of the entity who is also a guarantor; other entities owned by the same principal(s) are not the same borrower (although they may be affiliates for purposes of determining eligibility), so loans to other entities are not “companion loans” for this purpose.
There are special requirements for loans made pursuant to the Recovery Act. If the defaulted loan was a Recovery Act loan, both Tab 3 and Tab 5 require the inclusion of the certifications of compliance with immigration laws and restrictions on use of proceeds that were required to be obtained at closing. These certifications and related required documentation should be inserted in Tabs 3 and 5 where indicated.
If the collateral included a mortgage on real estate, but required only a title search and not a title policy, the title search that is included in Tab 4 must be performed after the recording of the lender’s mortgage. It is not sufficient to include the search that was obtained prior to closing and recording, because that search does not show that the lender obtained the required lien position for its mortgage.
On Tab 4, Paragraph “D” calls for the Statement of Personal History (SBA Form 912), which must be included with respect to all loans. Paragraph “E” asks whether the loan was part of a whole bank transfer from FDIC. Between these two paragraphs are “Yes” and “No” boxes to be checked. Those boxes relate to the question in Paragraph “E” – that is, if the loan was part of a whole bank transfer from FDIC, the “Yes” box should be checked, and the “No” box should be checked if it was not part of an FDIC whole bank transfer. While the location of these boxes is below the requirement for the Statement of Personal History, the boxes do not relate to that requirement, and checking the “Yes” box to indicate that the Statement of Personal History is attached will actually communicate to the SBA that the loan was part of an FDIC whole bank transfer which, more often than not, is not the case.
In the most recent version of the 10 Tabs, the SBA added to Tab 6 the requirement that the lender indicate whether the ending balance on its SBA Form 1149 loan transcript agrees with the lender’s 1502 reporting. However, the SBA did not add a statement addressing 1502 reporting to SBA Form 1149 itself. Therefore, the lender must insert its own statement regarding its 1502 reporting in Tab 6.
Tab 8 asks whether a reconciliation of business personal property collateral is required based on the lender’s Loan Authorization. While the loan authorization will never specifically call for a reconciliation of business personal property collateral, this documentation is required whenever the loan includes business personal property collateral. If business personal property is collateral for the loan, the lender must include (i) an itemization of the original collateral (including serial numbers for those items valued at $5000 or more), (ii) an inventory of the collateral performed at the time of default, and (iii) a reconciliation of the two lists.
Tab 9 requires a post-default site visit report. It is crucial that lenders perform site visits on a timely basis; as my colleague Ethan Smith pointed out in “Best Practices: Protecting the SBA Guaranty”, if the lender fails to perform a timely site visit the lender bears the burden of proving to the SBA that its failure to perform the site visit on a timely basis did not contribute to any loss, which can be a losing proposition for the lender if the two collateral lists do not match up exactly. Thus, it is very important for a lender to perform and document the site visit in accordance with the requirements of SOP 50 51 3, and, after March 1, 2013, SOP 50 57, including photographs if possible.
While the foregoing are examples of deficiencies that we have seen with some frequency, when preparing guaranty purchase packages it is important for lenders to address all of the SBA’s requirements with respect to the specific defaulted loan to minimize the likelihood of a repair or denial of the guaranty.
For more information regarding guaranty purchase requirements, contact Amy at (215) 542-7070 or at ABrownstein@StarfieldSmith.com.