Best Practices: Collateral Changes to SBA Loans

So you’ve closed your SBA loan, hopefully in accordance with all SOP requirements, and now you have moved your loan to servicing. It is not uncommon to have borrowers make various servicing requests throughout the life of the loan including substituting, modifying or releasing collateral. What is a Lender to do about these requests?

The first thing a Lender should do is review the Servicing and Liquidation Actions 7(a) Lender Matrix. It is available on the SBA’s website and you should always pull the most current version of the matrix when reviewing a servicing action request. Additionally, you should retain a copy in your loan file from the time of the collateral modification as the matrix may change from time to time. The next step should be a review of the SOP 50 57(2), specifically Chapter 8 entitled Modification of Collateral Requirements.

There are certain scenarios in which a Lender may be able to substitute collateral for collateral that is different but equally as valuable or which adds more collateral value to the Loan. There may even be times that a borrower requests a Lender to release a piece of collateral. Again, this is something that may be done, and presently according to the Matrix can be done unilaterally. The SOP sets out all of the factors that must be reviewed and taken into consideration when a Lender is making a decision to substitute or release collateral.

The SOP requires that Lenders service SBA loans in a manner consistent with the way they would service similarly sized conventional loans in their portfolio. This means that the Lender should have a detailed credit memorandum or other Loan Action Record outlining their analysis of the borrower’s financial information as well as the collateral that is being substituted or released and the basis underlying why this is a prudent credit decision. The SOP 50 57(2) clearly sets forth the items that the SBA expects the Lender to analyze in each of the various situations involving substitutions, modifications or releases of collateral. The Lender should consult the SOP and analyze the SBA required items in any write up that should remain in the loan file. Additionally, the SBA expects that the Lender will take all necessary steps to ensure they have properly documented any collateral modification as well as perfected any liens in new collateral taken.

A Lender can close a loan in accordance with all SBA requirements, but Lenders should ensure that they are reviewing and servicing these loans in accordance with the SBA requirements as well. Failure to properly analyze and document a servicing action such as substitution of collateral can result in a recommended repair to a Lender’s SBA guaranty.

If you have questions about properly documenting a collateral modification, please contact Lyndsay at 267-470-1154 or via email at lrowland@starfieldsmith.com.