On January 11, 2022, during the most recent SBA 7(a) Connect Quarterly Update, the Office of Credit Risk Management (OCRM) highlighted issues in all stages of the life of a loan – from origination through closing and servicing that resulted in findings during risk assessments reviews performed in fiscal year 2021. The most common deficiencies identified by OCRM related to life insurance, loan disbursements, liens, and collateral.
With respect to life insurance, Lenders must be aware that from origination to closing and even during servicing, failure to meet life insurance requirements can result in a finding during an audit. In this area, OCRM identified three areas of concern. First is the lender’s failure to address the need for life insurance. Per SOP, a lender “must address whether life insurance or other insurances will be required.” SOP 50 10 6, page 254. Second is a failure on the part of the lender to obtain evidence of life insurance required by the SBA Authorization. Last is a failure by lender to monitor life insurance policies so they do not lapse and remain in place for the term of the loan.
Lack of consistent loan disbursement documentation was another common finding in last year’s reviews, which can also arise at different stages of a loan. The use of proceeds requested during application may change many times during underwriting or even as a lender nears closing and is performing due diligence. Use of proceeds may even change post-closing for a multiple disbursement loan Documentation of the use of loan proceeds must be consistent throughout the life cycle of the loan. In order to do this, lenders must monitor these changes and document amendments to credit approvals and the authorization as needed to ensure that the bank demonstrates approval of the actual use of proceeds.
Lien and collateral issues were also among the common findings. During origination/closing, lenders must obtain a description sufficient to identify the collateral. Lenders were often cited for a lack of collateral schedules (eg. SBA Form 4), description of collateral and adequate itemization of the collateral. Lender must obtain a description of all collateral to be used as security for an SBA 7(a) loan from a borrower. These lists must have sufficient detail to be able to determine whether the collateral on site following a default is the same that was taken at closing. At closing, lenders must monitor how liens are filed as lien perfection can be complicated depending on the type of collateral. While liens on real property are relatively easy to secure by means of a mortgage or deed of trust, the instrument must be legally enforceable, recorded in the proper land record and in the correct lien position. Obtaining and perfecting a lien on other collateral, such as business personal assets like vehicles, liquor licenses, and intellectual property, can be more challenging. In order to ascertain if all required liens are obtained, it is recommended that lenders obtain post-closing searches when their liens are not otherwise insured.
Issues identified by OCRM during their reviews vary from year to year. For more information regarding risk findings, contact the attorneys at Starfield & Smith at 215-542-7070.