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March 16, 2016

Best Practices: Getting the SBA Fundamentals Right

by Ethan W. Smith

SBA lenders are often overwhelmed by the myriad rules, regulations and guidelines associated with SBA lending. However, by focusing on a handful of core concepts, Lenders can develop the tools which, when applied consistently to their SBA operations, will help them to understand SBA requirements in various situations and circumstances, and which will lead them to make correct decisions, even when the guidance from SBA might be murky.

In my opinion, one of the most important fundamental concepts of SBA lending that lenders must embrace to be successful, is the concept that, as an SBA lender in partnership with the agency in delivering its loan programs, a lender stands in a fiduciary relationship to the SBA and must protect the SBA’s interests no less vigorously than its own. A fiduciary relationship is characterized by the trust and confidence involved in it and the scrupulous good faith and candor which it requires. Thus, a person is a fiduciary who is invested with rights and powers to be exercised for the benefit of another person; in this case, the lender for the benefit of the SBA.

This fiduciary concept is expressed throughout the CFR, the SOP 50 10 and the 50 57 and covers concepts such as the prohibition against a lender conferring a preference to itself, the requirements that lenders take all available collateral when a loan is under-secured, and the requirement that the lender liquidate loans in a timely manner (within 2 years of guaranty purchase). Each of these requirements embodies the same fundamental concept at its core: protecting the interests of the SBA at least as stringently as the lender would protect its own interests in an unguaranteed loan, and not substituting prudent lending practices with the SBA guaranty.

This concept of having a fiduciary relationship with the SBA can also help lenders be sensitive to the types of program integrity issues that can sometimes arise in SBA lending. Issues such as restrictions on lenders’ ability to approve certain transactions under their delegated (PLP) authority (such as same institution debt refinance, financing OREO property, or financing a change of ownership transaction that includes more than $500,000 of goodwill with less than 25% equity into the transaction), avoiding conflicts of interest, seeking SBA approval for certain actions (such as a non-arm’s length sale of collateral or the release of a loan obligor), and reporting suspected fraud to the Office of Inspector General, can all be traced back to this fiduciary concept.

As these examples clearly demonstrate, many seemingly divergent and disparate SBA rules and guidelines can be distilled down into broad concepts which, if uniformly and consistently applied will bring order and logic to the numerous rules and regulations that SBA lenders are required to comply with. By integrating these broad fundamental concepts into their SBA lending activities, SBA lenders can help ensure that they are executing their SBA lending activities in as compliant a manner as possible.

For more information on SBA compliance issues, please contact Ethan at esmith@starfieldsmith.com or 267-470-1186.