January 26, 2011
Firm News for January 2011: Servicing Your SBA Loan – Borrower Name Change
By: Kimberly A. Rayer, Esq.
Under 13 CFR 120.535(a), the SBA holds Lenders to a commercially reasonable lending standard that is no less prudent than their financial institution’s servicing requirements for non-SBA loans in their portfolio. In addition to collecting Borrower’s annual financial statements and tax returns, or other routine servicing actions, Lender should consider conducting annual site visits and audits to confirm that the Borrower is still in operation, taking an inventory of equipment and ensuring that the principals are still involved with the business.
One seemingly innocuous situation that can have a drastic consequences for the unsuspecting Lender is when your Borrower changes its name. Throughout the year, Lenders should pay attention to the Borrower’s name listed on its email signature, written correspondence or on the monthly loan payment checks to confirm it is the same name they have in their loan file. Under 9-507 of the Uniform Commercial Code, if a debtor changes its name, a lender only has four months from the date of the name change to amend its UCC-1 financing statement to reflect the debtor’s new name. If a Borrower were to legally change its name without Lender’s knowledge, the Lender’s lien on its collateral may become unperfected, and the Lender’s lien may lose priority on the collateral
Upon receiving evidence that a Borrower may have changed its name, the Lender should confirm the name change with the Borrower. However, it should also request a certified copy of the Borrower’s articles of incorporation amending its name and a good standing certificate from the Secretary of State reflecting the Borrower’s new name. Next, the Lender should file a UCC-3 financing statement amendment to its original financing statement showing the correct legal name of the Borrower, exactly as it appears on the Good Standing Certificate. Lender must also notify SBA of any change in Borrower’s legal or trade name or change of address.
If the name change occurred more than 4 months prior to Lender’s discovery, the Lender should perform a UCC search to check that no other financing statements have been filed since the Lender’s financing statement was originally filed. If so, and the other creditor has a lien on the same collateral that is securing the SBA loan, then Lender will have to get the other creditor to release or subordinate its lien or risk not being in the correct lien position. Further, it may also be prudent to enter into a short omnibus modification to the loan documents and allonge to the note whereby the borrower acknowledges the name change and reasserts its existing and continuous obligation to lender under the loan documents.
It is important to impress upon to your Borrower the necessity to share information about its growth and/or changes in its business, including relocations, changes in business operations and ownership. Not only may there be additional business opportunities for the Lender from maintaining such a close relationship with its Borrower, but it may also prevent the Borrower from inadvertently breaching the loan documents, impairing Lender’s lien position and, most importantly, causing a possible repair or denial of the SBA guaranty.
For more information on SBA-related servicing issues or maintaining perfection under the Uniform Commercial Code contact Kim at 215-542-7070 or firstname.lastname@example.org.