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April 8, 2015

Best Practices: Documenting Disbursements on Multi-Disbursement Loans

by Jennifer Borra

Documenting disbursement on a SBA 7a loan can be a monumental task for lenders on multi-disbursement loans. SBA cites failure to use loan proceeds as required by the loan authorization as one of the most common lender deficiencies noted in PLP audits and guaranty purchase reviews. SOP 50 10 5(G), Subpart B, Chapter IV, Paragraph C, Section 4 states that 7(a) lenders must have SBA Form 1050 (Settlement Sheet) executed at the time of first disbursement and must provide backup documentation for each and every disbursement of loan proceeds thereafter. Additionally, the SOP indicates the types of evidence and documentation required to prove compliance with the use of proceeds listed in the Loan Authorization.

Lenders can demonstrate evidence of disbursement in a variety of ways. Lenders should request copies of each disbursement check and wire confirmation from the closing attorney or escrow officer’s account at settlement. Additionally, lenders should collect any corresponding invoices or receipts to show the charges incurred by the borrower that were paid at the time of closing. Lenders must ensure that each disbursement check supports the use of proceeds categories listed in Section G. of the Loan Authorization. If the disbursement amounts do not match the use of proceeds as originally projected, then the lender may need to modify the use of proceeds in accordance with the SOP and 7(a) Servicing and Liquidation Actions Matrix.

Typically, multi-disbursement loans must be fully disbursed within 48 months of approval or any remaining undisbursed balance will be canceled by SBA. A loan may be considered fully disbursed only when the borrower has access to the loan proceeds and is able to use them in accordance with the SBA loan authorization. Lenders may utilize an escrow account to assist with making initial disbursements on a multi-disbursement loan, however, such accounts cannot be used for more than 5 business days to facilitate a loan closing. Any funds remaining the in the escrow account after the 5 day period are not considered disbursed and the lender may not charge interest on the undisbursed funds until they are released to or for the benefit of the borrower.

For multi disbursement loans, each disbursement must be supported by copies of checks, invoices, purchase orders, draw requests or other documentation sufficient to illustrate the proceeds were actually used for the purposes set forth in the Loan Authorization. Under no circumstances should loan proceeds be disbursed directly to the borrower, unless it is for working capital or reimbursement for an authorized use that has been fully documented by the lender. Notwithstanding the foregoing, lenders may not reimburse expenses incurred by a borrower that is designated as equity injection.

Through careful documentation and review of all disbursements made at closing and post-closing, lenders can confirm compliance with the Loan Authorization’s allocated use of proceeds and minimize the risk of any repair or denial of the guaranty arising from insufficient documentation of loan disbursements.

For more information regarding closing and disbursement matters, please contact Jen at jborra@starfieldsmith.com or at 267-470-1206