Best Practices: The Basics of Lender Service Provider Agreements

The recently revised Standard Operating Procedure 50 10 5(K) (“SOP”) defines the Lender Service Provider (“LSP”) Agreement as “a written contract between a Lender and an Agent who assists the lender with 7(a) loan program loan origination and servicing duties.” In assisting with loan origination and servicing duties, the LSP acts as an authorized representative of participating Lenders in connection with a specific Small Business Administration (“SBA”) loan or loan portfolio. The SBA views the LSP Agreements as a way for lenders to engage independent contractors rather than employing those same people directly. However, notwithstanding such contractual relationship between the Lender and the LSP, the Lender must demonstrate that it will continue to exercise all day-to-day responsibilities for “evaluating, processing, closing, servicing, liquidating and litigating” its SBA loan or loan portfolio. (SOP 50 10 5(K), Subpart B, Chapter 3, Section X(D)). The purpose of this article is to provide an abridged guide to participating lenders and prospective LSPs on the expectations of the SBA in connection with LSP Agreements.

It is important to note that the SBA does not provide a form LSP Agreement. One of the reasons for this is because the LSP Agreements must be tailored to the needs of each participating lender. As such, the SBA expects for lenders and LSPs to negotiate the terms of the LSP Agreements in order to address these specific needs. Although the SBA does not provide a form LSP Agreement, the SOP does identify specific requirements that must be included in the LSP Agreement.

The first requirement is identification. The LSP Agreement must identify both parties by their legal names (including any trade names), provide Lender’s Location ID, address, contract person’s name, phone number and email address. The second requirement is that the LSP Agreement must specifically identify the services that the LSP will perform. These services vary depending on the needs of the Lender, and may include advice regarding eligibility, structure requirements, closing cost estimates, credit analysis, completion of SBA 7(a) loan application forms, E-tran input, due diligence review, 10-Tab application packaging, etc. The third requirement is that the LSP Agreement must contain a statement that the LSP shall only offer assistance to the Lender and that the Lender shall bear “full responsibility for all aspects of its 7(a) loan operation, including, but not limited to, approvals, closings, disbursements, servicing actions, and due diligence.” (SOP 50 10 5(K), Subpart B, Chapter 3, Section X(D)(3)).

Although lenders do have reasonable discretion in setting compensation for the LSPs, the SOP does provide further guidance with respect to fees paid to the LSP. The fourth requirement is that the LSP Agreement must specify the compensation to the LSP, but only for services actually performed. Moreover, the LSP Agreement must further identify: (i)  that fees related to loan packaging, processing, or underwriting cannot be contingent on whether the loan is approved or closed; (ii) that all compensation fees must be paid by Lender; (iii) that LSPs are prohibited from charging the SBA Applicant for the same services; and (iv) that SBA Applicant’s name is properly identified pertaining to billing for loan packaging or other loan processing services. (SOP 50 10 5(K), Subpart B, Chapter 3, Section X(D)(4)(a-d)).

The fifth requirement is that the LSP Agreement must clearly identify the initial term of said contract, any subsequent renewal options, and termination requirements. The SBA will flag any unreasonable terms, but shall permit the Lender or LSP to terminate the LSP Agreement prior to its expiration by way of 60-day notice.

The sixth requirement is that the LSP Agreement must identify or disclose: (i) that Lender and the LSP cannot share any premium in the Secondary Market; (ii) that LSP shall not assume any unguaranteed portion of the any loan; (iii) LSP’s affiliations with other financial institutions, lenders, brokers, and other LSPs; (iv) any prior or existing relationship between the LSP and Lender (or a statement that no such relationship exists); (v) that LSP Agreement shall be subject to all laws, regulations, and policies including SBA Loan Program Requirements; and (vi) that terms of the LSP Agreement shall control Lender’s loan portfolio in the event of any other conflicting contracts or agreements between LSP and Lender. (SOP 50 10 5(K), Subpart B, Section X(D)(6)(a-f)).

Lastly, the SBA will scrutinize and shall not permit any actual or apparent conflicts of interest or self-dealing by any of the Lender’s officers, management or staff. Any evidence of same will yield a prompt rejection of the LSP Agreement by the SBA.

This article provides a general discussion of the SOP as it relates to the LSP Agreement, and is not intended to cover all issues and nuances.  For further assistance, please contact the attorneys at Starfield & Smith, PC at 215-542-7070 or email us at info@starfieldsmith.com