So What Exactly does SBA mean by being a “Prudent Lender?”
SBA Guaranty Fees
By Karen McHugh
It is not a surprise that SBA requires the lender to determine creditworthiness at time of the loan application to show evidence of all the important credit factors:
• Repayment ability
• Collateral coverage
• Existing capitalization or New equity
• Guarantor strength
• Historical trends and comparisons to industry peers
Nor should it be a surprise that SBA requires the lender to monitor ongoing creditworthiness as the loan seasons. Updated business and personal financial statements should be required at least annually. The lender should establish a process in which to analyze that information as it is collected (don’t just throw the financials in the file and forget about them). If the lender has difficulty in obtaining financial information from the borrower ongoing, it is still responsible for determining how the business is doing over time. Therefore, servicing actions should include not only trying to collect financial statements but also other methods to determine creditworthiness such as site visits, updated credit reports or obtaining sales tax information to determine trends.
Some loans may involve complicating factors such as affiliates, refinancing, acquiring existing businesses and co-borrowers. This will require even more information and possible ongoing discussion of how the credit evolves over time.
The lender is required to use appropriate, prudent and generally accepted industry credit analysis processes. This may include a business credit-scoring model as long as the lender is using the business credit-scoring model for its similarly sized non-SBA loans. The credit scoring results should be documented in the loan file, but it should not be used as a substitute for a thorough credit analysis that must be documented at time of loan application approval and throughout the life of the loan (credit scoring is just one tool).
SBA’s review of the lender’s credit analysis must conclude that the lender identified through its credit underwriting that there is a reasonable expectation that the borrower will repay the loan in a timely manner. For Standard 7(a), SBA reviews the lender’s credit analysis at time of loan processing and may ask for and receive additional information beyond initial submission requirements. This is because SBA is making the final credit determination on non-PLP loans. However, SBA has authorized PLP and Express lenders to make the credit decision without SBA review prior to the loan approval. Any credit analysis conducted under a delegated authority IS subject to SBA review and determination of adequacy when the lender requests SBA to purchase its guaranty.