Best Practices: All Available Collateral

Everything AND the kitchen sink? This question faces all SBA lenders who are attempting to comply with SBA’s policy concerning available collateral. Under SOP 50 10 5(I), Chapter 4, Paragraph II.A. SBA acknowledges that “one of the primary reasons lenders use the SBA program is for those Small Business Applicants that demonstrate repayment ability but lack adequate collateral to fully repay the loan in full in the event of default”. However, lenders should take caution that the SBA guaranty is not a substitute for taking available collateral.

For loans over $350,000, SBA’s policy of all available collateral means any assets owned by the business, or real estate owned by any of its principals, or jointly with the principals’ spouses. If the loan is not fully secured, lenders are required to a take a lien for the full amount of the loan on secondary collateral even if the shortfall is a small fraction of the loan. The SBA provides two exceptions where the lender can classify secondary collateral as unavailable. The first exception is in the case of a personal residence where the equity in the residence is less than 25% of the property’s fair market value. The second exception concerns real property that has deed restrictions, covenants, or engineering controls that restrict the use of the property and thus render it unmarketable. Lenders must thoroughly document its analysis concerning this second exception in its credit memorandum. Additionally, SBA provides that liens on a personal residence or investment property may be limited to 150% of the equity in the collateral if there will be significant tax liability associated with the lien amount in the locality where the lien is filed.

Lenders should also keep in mind that they are required to perform an environmental investigation on all commercial real estate securing the loan, even if it is secondary collateral. If a lender wishes to exclude any property as secondary collateral that does not fall under one of the exceptions noted above, it should document the file with adequate support showing the collateral does not have any value and contact SBA for waiver of that collateral condition. For instance, if secondary real estate collateral showed evidence of environmental contamination, then the SBA would likely waive that property as secondary collateral.

Lenders should take care in analyzing all available collateral and ensure they are complying with the current regulations to secure the SBA guaranty.

For more information regarding available collateral, please contact Jen at jborra@starfieldsmith.com or at (267) 470-1206.