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February 4, 2015

Best Practices: Amending Your Credit Approval

by Janet M. Dery

Loan structures, parties, and collateral often change between the time of the lender’s original write-up and approval of a loan and the time of the loan’s closing.  By performing a pre-closing review of its credit file, including its credit approval, its commitment letter, and the SBA Loan Authorization for the applicable loan, a lender can ensure that its final credit requirements are consistently reflected in the documents in the lender’s credit file.

A lender should amend its credit approval any time there is a change in the loan structure, parties, collateral, or other analysis (e.g., affiliation or cash flow analysis).  Such changes are usually necessitated by information uncovered by the lender during the due diligence review process, such as the discovery of additional affiliates, discrepancies between anticipated and actual collateral values, or the borrower’s decision to form an entity.  The credit approval amendment can be documented either by changing the actual credit approval, or by an amendment memorandum that is approved by the lender and retained with the credit approval.

The SBA Authorization, whether prepared by the lender under its delegated (PLP) authority or by the SBA through standard processing, must contain terms that are consistent with the lender’s final credit terms.  If the lender approved the loan under its delegated authority, then the lender can either amend the original Authorization it prepared or prepare an amendment memorandum which is kept with the Authorization.  If the loan was approved by the SBA, an amendment request must be submitted to and approved by the SBA prior to the closing of the loan.

A commitment letter should be amended any time there is a change in structure, parties, or collateral, as this document confirms the understanding between the lender and the borrower.  If the lender makes due diligence discoveries that require a change in the terms reflected in the commitment letter, then the change should be communicated to the borrower, so the borrower is aware of the terms that will be reflected in the closing documents and the possibility of a claim by the borrower with respect to these terms is reduced. The most prudent way for a lender to do this is to amend the commitment letter and obtain the borrower’s acknowledgement of the amendment, in writing, as soon as the credit terms are revised.

The SBA will expect the Loan Authorization to accurately reflect the credit terms of the loan. If the lender’s credit memorandum reflects additional or different terms or requirements than those reflected in the Loan Authorization and the closing documents, the SBA may question the lender’s decisions and loan documentation, which may result in heightened scrutiny of the file, as well as the lender’s other loan files, in connection with an on-site review or a guaranty purchase request.  By confirming that the terms of its credit documents are consistent, the lender can reduce the likelihood of repairs and denials in the guaranty purchase process, increased oversight by the SBA, and claims by borrowers that loan documents do not accurately reflect the agreed-upon terms.

For more information regarding pre-closing credit file reviews, please contact Janet at 267-470-1189 or at jdery@starfieldsmith.com.