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January 27, 2016

Best Practices: Lender’s Responsibilities for Disbursing an SBA Loan

by Starfield & Smith

One of the most important conditions in underwriting, documenting and properly closing an SBA loan is making sure that the use of loan proceeds complies with, and is subsequently disbursed, in the manner dictated by the SBA in the Loan Authorization. It is the responsibility of the Lender to ensure that all conditions are met before, during and after closing takes place to make sure the loan is properly disbursed. If the Lender does not properly monitor ALL loan disbursements, it is possible that a Lender could be risking its guaranty.

In the time period before the loan closes, particularly at the underwriting stage and during the gathering of due diligence, the Lender must obtain the proper documentation to ensure that the Loan proceeds will be properly disbursed in accordance with the Loan Authorization. Some of this documentation may include notes, invoices, purchase orders and/or and payoff statements, among other things, depending on the type of transaction. These steps are crucial in ensuring that the use of proceeds for which the Lender is planning on disbursing will comply with the SBA’s eligibility and use of proceeds guidelines before any of the funds are disbursed.

During closing, the Lender must pay careful attention to how and where the loan proceeds are being disbursed. While loan closings may differ in who disburses the loan proceeds, such as a title agency, escrow agent, or counsel for buyer or seller, one element that must always remain the same is that the Lender must always take an active role in making sure the loan proceeds are disbursed properly by whomever the closing agent is. Along with the SBA Form 1050 which is required to be signed at the time of initial disbursement, the Lender must also request copies of other settlement documents, such as settlement statements, invoices and receipts corresponding to closing, showing that the funds disbursed were used for the intended purposes. In addition, the Lender should obtain copies of all disbursement checks and also disbursing wire information to confirm that the funds actually did go to the intended recipients and destinations. This information should be readily and immediately available to be provided to the Lender by the disbursement agent. This information is also valuable to Lenders when trying to provide evidence for debt payoffs to third parties that existing obligations were paid and liens should be satisfied.

If the transaction is a single disbursement transaction, most of the evidence and documentation will be obtained by the time of closing. However, if the loan is a multi-disbursement loan, such as a construction loan or a loan that will be multi-disbursed for future equipment purchases or working capital, there is still work to be done by the Lender post closing. For example, if the loan is a construction loan, the Lender will either need to monitor all future construction related payments itself, most likely through an in-house construction department, or employ an outside construction monitoring firm to oversee and approve the future disbursements. All future disbursements must be documented the same way as the disbursements from the initial closing, including invoices, receipts, draw requests, and other documentary evidence of disbursement, and attached to the SBA Form 1050 signed at closing. This information should be saved in the Lender’s file to be provided to the SBA at a future date if requested.

While in many circumstances, another party is tasked with disbursing loan funds at closing, it is always in the Lender’s best interest to be attentive and diligent in making sure the funds are disbursed in accordance with the SBA Loan Authorization and the SOP 50 10 5(H) in order to protect its guaranty.

For more information on disbursing an SBA loan, please contact Tim at tdlauro@starfieldsmith.com or at 267-470-1182.