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May 3, 2017

Best Practices: The Burden of Proving Your Guaranty Purchase Case

by Ethan W. Smith

In the American criminal justice system, defendants are afforded a presumption of innocence which is derived from the fifth and fourteenth amendments to the Constitution. This standard, which has been enshrined through countless police procedurals and courtroom dramas, has become, in the minds of many people, the commonplace standard of proof in dealings with the government. However, this standard is typically only applicable to criminal liability and is generally not the standard to which the government is held in other situations, such as an SBA 7(a) loan guaranty purchase request.

When a lender requests that the SBA purchase its deferred participation interest in a 7(a) loan, the applicable standard of proof is found in 13 CFR §120.520(b), which provides:

SBA will not purchase its guaranteed portion of a loan from a Lender unless the Lender has submitted to SBA documentation that SBA deems sufficient to allow SBA to determine whether purchase of the guarantee is warranted under § 120.524 (emphasis added).

The clear and unambiguous language of the CFR clearly does not contain any “presumption of innocence” for the benefit of the lender, and, in fact, places the burden of proof on the lender (rather than the SBA) to demonstrate to the SBA that the purchase of the guarantee by the SBA is warranted. Any presumption in this context becomes a “presumption of guilt” in the absence of the lender submitting proof to the contrary. So, what should an SBA lender take away from this fact?

Ultimately, SBA lenders should keep this burden of proof in mind throughout all phases of their SBA loan. Since the lender has the burden to prove compliance, lenders should ask themselves if they have enough documentary evidence in their file to prove that they complied with all applicable material SBA requirements. The mantra of “document, document, document” is applicable here and cannot be emphasized enough. Often, SBA lenders find themselves on the receiving end of a recommendation for a repair or denial of the SBA guaranty, not because they necessarily failed to comply with the SBA Loan Program Requirements, but rather because they failed to document their SBA compliance in their loan file. The lender’s deficiency is often one of omission (failure to document), rather than commission (doing something wrong). By keeping the fact that the lender has the burden of proving its own compliance to the SBA throughout all phases of the life of an SBA loan, SBA lenders can make sure that they are documenting their files sufficiently to carry their burden of proof in a guaranty purchase scenario. Failure to adequately document an SBA loan file to the standards required by the CFR and the SOP will likely result in a recommendation for a repair or denial of the loan guaranty. Compliance minded lenders will keep this standard at the top of mind and will document their loan files accordingly.

For more information on documenting SBA compliance in your loan files, contact Ethan at 267-470-1186 or at esmith@starfieldsmith.com.