June 20, 2013
If and when it comes to pass that you need to call upon the SBA to pay under its guaranty, there are three responses that could occur:
• Full payment of the guaranty
• Reduced payment of the guaranty (as a result of a repair)
• Denial of payment
Obviously, the first option is the desirable one. If everything has been done properly (e.g., appropriately documented in accordance with the regulations, prudent lending standards, and program requirements, reasonable and appropriately documented) from the time of receiving the initial loan application through the workout or liquidation, payment of the full guaranty is the anticipated outcome.
If there are “defects or deficiencies” that have occurred along the way in the life of the loan, which that result in less recovery than would have been reasonably anticipated, a repair is likely. A repair is a reduction in the dollar amount of the guaranty payment (not a change in the percentage of the guaranty). Examples areinclude:
• Failure to obtain a lien or the proper lien position on collateral
• Unreasonable release of a piece of collateral
• Unauthorized use of loan proceeds
SBA is willing to negotiate on repair amount, so if you are proactive, it may be preferable to point out any deficiency and suggest what you reasonably believe to ben a justifiable repair amount (support your rationale). But, SBA may suggest a repair amount based on their perspective of the matter. Be logical and reasonably support your position.
In order for the SBA guaranty to be valid, lenders are required to originate, close, service, and liquate guaranteed loans in accordance with the regulations and program requirements, the terms of the Loan Authorization, consistent with prudent and reasonable commercial lending standards, etcand so on. If a lender fails to materially comply with these expectations, there is a strong possibility that SBA will deny liability under the guaranty. Examples areinclude:
• Making a loan that is ineligible
• Actions that confer a preference on the lender and to the detriment of SBA
• Material non-compliance with terms of the Loan Authorization
• Fraud or misrepresentation
If SBA suggests a denial of guaranty, but you staunchly disagree, you should present your case and evidence as to why you believe a denial is not appropriate. The lender must “make its case” convincingly and with good documentation to substantiate the decision. (And it is not a speedy process.).
Sooner or later, lenders are likely to encounter a situation in whichwhere there are some challenges to receiving payment of the full SBA guaranty. When that arises, be forthright in acknowledging any valid issues, but don’t “roll over” if you believe there are sound mitigating factors.
Think of us as your “go to” team for whatever needs you may have in the SBA lending world. We provide assistance at every SBA touch point, from loan structuring to loan liquidation. To learn more about the all-inclusive SBA lending services of SBA Complete, go to www.sbacomplete.com or call us at 800-801-2378.