May 28, 2013
By Karen McHugh
The SBA Loan Authorization is SBA’s written agreement between the SBA and the lender providing the conditions under which SBA will guarantee the loan. SBA is basically establishing the terms and conditions for it’s loan guaranty, and therefore, this document defines what is required to protect the integrity of the guaranty.
Lenders should view the Loan Authorization as the lead document in closing and documenting the SBA loan. It is also the most up to date document SBA publishes as guidance to lenders on ever changing program requirements. The SBA Loan Authorization boilerplate can be found on SBA’s website at www.sba.gov/for-lenders.com. (Click on “Sacramento Processing Center”, and then on “Loan Authorization” for most current version). The boilerplate reflects current SBA policy and supersedes the SOP and prior notices.
The Loan Authorization is a two-party agreement between the lender and SBA. The borrower does not sign this document, but it is important that they be somehow tied into the requirements with a loan agreement that references all the SBA required covenants. It is a good practice to utilize SBA’s Appendix D to the Loan Authorization boilerplate as the standard Loan Agreement for a SBA borrower. (It is simple, straight-forward, and directly ties the borrower to all SBA/lender conditions).
The document includes the following sections:
Guaranty Fee: Keep in mind that the SBA guaranty fee is actually a lender fee, and even though your lending institution may pass this fee onto the borrower, SBA requires that the paper trails show that the fee was paid first by the lender and THEN is passed onto the borrower. If the fee is to be paid from loan proceeds, the first disbursement must be substantially more than the amount of the guaranty fee and closing costs. In other words, SBA requires that the borrower have some benefit from loan disbursements, regardless of fees paid. Also remember the guaranty fee must be paid within 90 days of SBA loan approval.
Annual Servicing Fee: SBA requires the lender to pay an on-going servicing fee and this fee may NOT be passed onto the borrower, it is a cost of doing business with the SBA. The amount is set at time of loan approval and based on the outstanding balance of the guaranteed portion of each loan. The fee is legislated and set at the beginning of the U.S. Government fiscal year (October 1).
Lender Requirements: The SBA does not instruct the lender how to specifically meet the requirements listed in this section of the LA, but SBA does expect the lender to follow SBA regulations and they are held to a prudent lender standard. Basically, the lender is responsible for knowing how to properly close loans, secure collateral, and to obtain and perfect the required lien positions.
Required SBA Forms: If a SBA form is listed in Section D of the LA, the lender is required to use that form (not a conventional form). However, lenders may use computer-generated versions of the mandatory SBA forms, as long as these versions are exact reproductions. Lenders may use their own lien instruments, which must comply with State law and prudent lending practices.
Lender Contingencies: SBA relies on representations in the loan application and supporting documents. Also, the SBA guaranty is contingent upon the lender complying with the SBA Form 750, SBA Loan Guarantee Agreement (the general contract between SBA and the lender— – not loan specific), and any supplemental guaranty agreements (CLP, PLP, Express).
Note: SBA requires the use of SBA Form 147 (Note) for the standard 7(a) program (GP, CLP, PLP). SBA does not require the SBA form for SBA Express loans. (The lender can use their conventional note.) The repayment terms provided in the LA boilerplate must be the exact terms provided in the SBA Note (just cut and paste).
Use of Proceeds: SBA loan proceeds may ONLY be payable to a business; therefore, never wire money or write a check directly to the business owner. (This would be a violation of SBA’s “associate” rule.) Also remember that an Eligible Passive Company (EPC) may not receive working capital proceeds. (Be sure to include the Operating Company (OC) as a co-borrower if working capital proceeds are needed in an EPC transaction).
Collateral: It is critical that the lender obtain a lien on 100% of the interests in pledged collateral with the proper lien positions. The lender must be in a first lien position on all assets purchased with loan proceeds. SBA provides detailed, state-specific instructions, of what is expected for title insurance, types of lien documents (Deeds vs. Mortgages), etc., in Appendix A of the LA boilerplate.
Additional Conditions: There are two parts of “additional conditions” in the LA boilerplate. Part I covers required insurance, environmental investigations, company legal documentation, and operating information. Part II covers equity documentation, standby agreements, appraisals, construction requirements and borrower certifications.
Keep in mind, if it is required in the Loan Authorization (a form, a document, a condition, etc.), the lender is expected to obtain a loan closing for it, or require it as an ongoing condition while servicing the loan.
We want to be your “go to” team for whatever needs you may have in the SBA lending world. 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.