Recently my colleague, Norman E. Greenspan, wrote an article about the newly enhanced role of the Office of Credit Risk Management (“OCRM”) when it comes to evaluating lenders’ conduct in complying with the Standard Operating Procedures (“SOP”) and other Small Business Administration (“SBA”) rules, regulations and guidelines. The purpose of this article to expand on that point in connection with the Fee Disclosure and Compensation Agreement, also known as SBA Form 159.
In 13 CFR § 120.221, SBA provides specific guidance on the fees that lenders may collect from applicants in connection with the SBA-guaranteed loan. The newly effective SOP 50 10 5(K) further explains what fees lenders may charge the applicants and when said fees must be disclosed. As part of prudent lending and compliance with the SOP, lenders must use the SBA Form 159 to disclose the fees paid by the applicant to any broker, consulting agent or referral agent, and itemize all services provided by said agent(s).
One common mistake lenders make is the use of a single SBA Form 159 to disclose multiple agents that have or will receive compensation as part of the transaction. The SOP 50 10 5(K) specifically dictates that “[a] separate SBA Form 159 must be executed for each [a]gent.” Furthermore, the SOP goes on to state that the information included on the SBA Form 159 will be used to monitor fees charged by said agents and their relationships with participating lenders. Although the SOP does not specifically address how or who will monitor said fees, the newly enhanced role of OCRM gives the authority to OCRM to do so in order to evaluate lenders’ compliance with the SOP.
Another common mistake is the failure by lenders to inform applicants of the fees paid, or to be paid, by the lender to referral agents. According to 13 CFR § 103.1(f), a “referral agent” is any person or entity who refers the lender to the applicant or vice-versa. The SBA expects lenders to disclose all fees paid by either the applicant or the lender in order to create better transparency for borrowers in the program. Additionally, the SOP provides that participating lenders must inform the applicant in writing that they do not have to employ an agent or representative (including the lender) to assist the applicant with the loan application process. Moreover, the instructions for SBA Form 159 expand on the concept of transparency by specifically instructing participating lenders to identify and disclose any fee paid to the referral agent along with a description of the services performed and identifying the party that is paying said fee.
With OCRM’s newly enhanced role in evaluating lenders’ conduct, OCRM has authority to monitor lenders for systemic issues and recommend enforcement actions for repeated noncompliance with the SBA’s rules, regulations and guidelines. Special attention will be paid to matters that compromise the integrity of the program and cloud the transparency mandated by SBA. As such, as a matter of best practice, in order to avoid any potential enforcement actions by OCRM in connection with noncompliance pertaining to SBA Form 159, participating lenders should implement a set of internal controls for ensuring that all applicable fees have been properly disclosed to the applicant.
For assistance with SBA compliance matters, contact the attorneys at Starfield & Smith at 215.542.7070 or visit our website at www.starfieldsmith.com.