Best Practices: SBA Guaranty Denials and the New Process for the Final Notice

Any lender that has received a recommendation for a guaranty denial from the SBA is familiar with the process involved.  A lender submits its guaranty purchase package to the Agency. In most cases, SBA honors the guaranty and will purchase the guaranteed portion of the loan.  However, if it does not, a back and forth ensues in which the SBA frequently requests additional documents.  The lender then has a set period of time to provide the information and, if the data addresses the Agency’s concerns, SBA reverses any preliminary recommended denial.

However, in some cases, the lender is unable to convince SBA to reconsider its position. In that case, the lender will receive a notice that the SBA still recommends that the guaranty be denied for a reason or reasons and the lender has a set period of time to produce additional documents to contest the recommended guaranty denial.  That process could go back and forth for several months.  Once a lender has received a final recommendation for a full denial from the National Guaranty Purchase Center (“NGPC”) in Herndon, the loan file would then transfer to Headquarters (HQ) in Washington for another file review.  That review could lead to a formal denial.

In the past, lenders often used the time the file was sitting at HQ to collect additional documentation in order to bolster its response, which was often prepared by the lender or its counsel.  This supplemental analysis helped SBA arrive at the correct decision based on all of the relevant facts and the law.

At the beginning of this year, SBA abruptly changed its review policy.  Prior to a loan file being sent to HQ, NGPC provided a so-called “FINAL NOTICE – NEW PROCESS.”  In that communication, SBA began advising lenders that they had ten (10) days to provide any additional documentation in response to the recommended denial as HQ will NOT be requesting additional information since the lender has had more than enough opportunities to produce information prior to that point.  Expanding on this process further, the NGPC has indicated that the Center will not forward any additional information to HQ that is not received within the ten (10) days following that Final Notice from the NGPC.  We suspect that this means that HQ, including the OGC, will not entertain any new and relevant information.

This significant change to the process seems at odds with SBA’s brand promise and would seem to deny a lender due process of law.  Accordingly, it is strongly recommended that lenders request assistance from legal counsel upon the first recommendation for a denial of a guaranty from the NGPC.  In some cases, legal counsel may review the file and note additional items needing a response or legal issues not previously raised which bear on the final outcome.  However, in 10 days, it is doubtful that the research and analysis required to promote a fair outcome would be possible.

This also means that it is more important than ever for lenders to be conducting post-closing loan reviews.  Catching and correcting items needed for the SBA loan file is much easier right after the closing when the borrower is cooperative and information is readily available.  This is especially true with supporting documentation for equity injection, including such items as bank statements that may have been overlooked.

Lenders needing assistance with a response to a guaranty denial recommendation, or with a post-closing loan review, should reach out to its counsel or to us as early as possible to protect their SBA guaranties.