After more than a year into the COVID-19 pandemic, demand for small business financing through SBA lending programs remains strong. SBA lending partners have approved a substantial number of loans since the start of the pandemic. With government subsidies in the form of guaranty fee and ongoing servicing fee waivers, along with continued covered monthly loan payment subsidies for certain applicants, SBA lenders face the daunting task of meeting the urgent requests for financing of America’s small businesses while maintaining compliance with SBA’s program requirements. Closing SBA loans during the pandemic has presented many challenges for lenders, a few of which will be discussed in this article.
Underwriting During Uncertain Times
SBA lenders must always evaluate any prospective SBA loan request in a commercially reasonable manner, consistent with prudent lending standards, based on the applicant’s ability to repay the loan. SBA has expanded the required credit analysis to include the impact of the COVID-19 pandemic on the applicant’s ability to operate the proposed business, cash flow, and ability to repay the loan. More specifically, SBA lenders should also include details concerning the status of other pandemic financing relief, including seller’s financing, in the case of an acquisition (i.e. PPP, EIDL loans/grants), how the applicant’s industry has been affected by pandemic restrictions and its ability to operate normally, the pandemic’s effect on COGS and other increased operational costs, and the impact on the applicant’s customer base, at a minimum. SBA has released several notices concerning underwriting requirements during the pandemic, which prudent lenders should strictly adhere to when completing their credit memos.
Conducting Remote Loan Closings
The quarantine requirements of many jurisdictions during the pandemic created a shift in the traditional loan closing from an in-person signing with a bank representative or closing agent to a remote closing often handled via electronic signature platforms, in accordance with SOP requirements, or in some cases with the borrower executing loan documents without a bank representative or agent present. SBA’s guidance concerning acceptable signatures on applications and loan documents, has been extended through July 31, 2021 (See SBA Procedural Notice 5000-808946). For any loans where a lender accepted scanned executed loan documents or application documents during the approved period, lenders MUST obtain the original executed loan documents and application documents from the borrower within six (6) months from the date the Note was executed.
Servicing and Liquidation
SBA lenders are expected to prudently monitor their SBA loan portfolio and mitigate the risk of loss of any potential adverse change to the applicant or its business. The pandemic presents a unique challenge in monitoring and servicing the SBA loan portfolio. Most small businesses were immediately impacted by COVID-19 restrictions. SBA has issued guidance concerning deferments for certain applicants, and the analysis a lender should include in its file. If via phone calls, video site visits, or other means a lender determines its borrower may require a workout, specific financial information must be obtained in order to process such a request. Keeping in contact with the borrower and obtaining financial data will remain a challenge as most small businesses are more focused on applying for and obtaining whatever pandemic relief is available to help them stay afloat.
Lenders are faced with a myriad of challenges in approving, closing, and servicing their SBA loans during the pandemic. Small businesses are requesting financing from all available sources. SBA lenders should ensure that they have proper policies and personnel in place to not only meet the growing demand, but to oversee and manage the ever changing rules and requirements. For assistance with SBA loan closings and servicing, contact the attorneys at Starfield & Smith, PC at 215.542.7070.