After a loan is closed and disbursed, a Borrower may make a request or circumstances may arise which require a modification to the loan. For any commercial loan, a servicing action should be considered and documented carefully and consistently with the Lender’s internal lending practices. For SBA loans, the bar is higher since Lenders must do all of the above, plus consider the impact of the loan modification on the viability of the Borrower’s business and the SBA Guaranty. The step by step servicing request process is outlined in Chapter 6 of SOP 50 57 2.
The first step in documenting an SBA loan servicing request is for the Lender to research and document the request being made. These classic questions need to be answered: (i) who is making the servicing request, (ii) what is the servicing request, (iii) why is the request being made, and (iv) how will the servicing request impact the Borrower, the SBA Guaranty and the SBA’s ability to recover from the Borrower. The answers should be documented in a credit modification that is reviewed and approved internally by Lender, and in some cases, may require notice to or approval from SBA. In preparing the credit modification, the Lender should review the rules that were in effect at the time the original loan was closed. “The same SBA Loan Program Requirements that applied to the original loan with regard to Obligors and collateral apply to Servicing Requests on loans in regular servicing status that involve assumption of the loan or substitution of a Guarantor, co-Borrower, or collateral.” See SOP 50 57 2, page 46.
The key credit question to answer when analyzing a servicing request is whether the Borrower is and will remain viable. If a Lender cannot reasonably conclude that a Borrower will continue to make payments when due on the SBA loan, and continue to operate for the foreseeable future, it should not consider the servicing request further. In this case, liquidation is often the next step.
Determining whether a Borrower’s business is viable, requires collecting all relevant documentation necessary to perform the credit and collateral analysis. These may include securing current financials and the last two federal income tax returns for any servicing requests which would increase the loan amount or release collateral. For servicing requests involving collateral, consider obtaining current lien searches, appraisals and invoices. For change of ownership requests, obtain financials and tax returns from relevant parties, copies of resolutions, corporate documentation and purchase agreements.
If a Lender concludes that the Borrower is viable and the collateral securing the loan will not be significantly impaired, then the Lender should set forth these findings in its updated credit memo, and include a list of the terms and conditions upon which the Lender will require for the servicing action. This is also a great time to check the Lender’s loan file to look for deficiencies and collect any missing documentation. Next, Lenders should consult the SBA 7(a) Lender Servicing and Liquidation Action Matrix to determine whether SBA approval or notice is required for the servicing action contemplated. SBA suggests that Lenders should consider placing in the loan file a copy of the Matrix that they relied on at the time the Loan Action was taken.
When SBA’s prior written approval is required, a request to SBA’s CLSC should be undertaken. The request should include a letter outlining the justification for the servicing action, the credit modification, as well as all relevant supporting documentation. SBA can take up to 15 days to approve a servicing request.
Once approval is received, the final critical step is documenting the servicing action’s legal impact, if any, of the modification on the loan, and consider the best way to document the change in loan terms. For example if a loan amount is increasing, an allonge to the note should be prepared documenting the increase, which would include language that the loan is being amended and restated, and that it is not a new loan. This is important for confirming the current total outstanding obligation owed to the Lender, but it may also help to preserve lien priority on collateral. Waiver of any claims and acknowledgment by all guarantors of the modification to loan terms may be very helpful to guard against future defenses that may be raised if the loan were to end in liquidation.
The key take away is that servicing requests should be handled carefully and thoughtfully in order to best protect Borrower, Lender and SBA. For assistance with servicing and liquidation matters, please contact the attorneys at Starfield & Smith at 215.542.7070 or email us at email@example.com