Best Practices: Verification of Financial Information for SBA Loans

SOP 50 10 6 requires SBA Lenders to obtain and verify tax information on applicants, and on sellers in the case of a business acquisition, by obtaining tax transcripts and comparing them to the tax returns or financial information provided by the applicant and/or seller, as applicable.  The purpose of the verification of financial information is to confirm that the business filed tax returns and that the financial information that was provided and relied on in underwriting the loan is accurate – ultimately to ensure that the business has the capability to repay the SBA loan.  

Although the SOP sets forth exceptions for, among other things, some Express loans, businesses that have been operating for less than three years, the use of an alternative size standard and the sale of a division or segment of a business where tax returns may not be representative of that segment, the general process is that Lenders must obtain tax return transcripts on the borrower or the operating company (if the applicant is an EPC) and, in the case of a business acquisition, on the seller. Confirmation and verification for the past three years is generally required  through the IRS’s Income Verification Express Service (IVES) program using IRS Form 4506-C (use of IRS Form 4506-C was made mandatory effective May 1, 2021 by SBA Notice 5000-20068).  

In order to comply with Section 2202 of the Taxpayer First Act, Lenders must obtain written permission from the borrower and seller, as applicable, to use the tax transcripts for complying with the SBA program requirements, including discrepancy resolution, purchase reviews, and lender oversight activities.  For more information on complying with the Taxpayer First Act, see Kimberly Rayer’s article published on January 15, 2020 posted here: Best Practices: Complying with Section 2202 of the Taxpayer First Act | Starfield & Smith Attorneys at Law (starfieldsmith.com)

Generally speaking, the tax returns should be verified by comparing them to the tax transcripts. Any significant differences should be resolved prior to the initial disbursement, for 7a loans, or prior to submitting closing documents to SBA counsel, for 504 loans.  

When the tax transcripts are delayed, the SOP and recent notices from SBA offer some guidance before determining whether to proceed and close the SBA loan.  If a Lender has not received the tax transcripts or a response from IRS within 10 business days of submission, the Lender may close and disburse the loan, but must follow up with IRS by re-submitting the 4506-C with a “second request” designation, document the loan file with a dated copy of the second submission, and verify tax transcripts and resolve any discrepancies as soon as the tax transcripts or IRS response is received.   

On April 8, 2020, SBA Procedural Notice 5000-200016 (“Notice #1) went into effect to address IRS closures and tax transcript processing delays due to COVID. Notice #1 contained similar guidance as the SOP but did specify that the tax transcripts must be verified and discrepancies resolved as soon as the tax transcripts or IRS response is received, but in no event later than six months from the date of the Note.  Although Notice #1 was set to expire on April 1, 2021, SBA Procedural Notice 5000-810037 (“Notice #2) extended the guidance contained in Notice #1 through June 30, 2021.    

Despite the guidance in the SOP and the procedural notices, Lenders should exhibit significant caution when closing and disbursing loans prior to verifying financial information. Failure to verify the tax returns and maintain evidence of the same in the loan file creates a presumption, in the case of an early default, that the business did not have adequate assurance of repayment.  If the financial information is never obtained or verified, or there are significant differences that cannot be resolved, SBA may well recommend a denial of the SBA guaranty in such case.  Accordingly, Lenders should tread lightly and assess all risks before closing a loan in advance of verifying tax transcripts.   

For questions regarding SBA compliance issues when verifying financial information, contact the attorneys at Starfield & Smith at 215-542-7070.