With year-end behind us, many of us are now able to find a moment of quiet following the hectic whirlwind that was 2021. The intensity of the past year was overwhelming at times, and unfortunately the volume and chaos may have led to loan documentation errors. Accordingly, prudent lenders should take advantage of the opportunity to look back and review their 2021 loan files to determine if any follow up is needed. If documentation is incomplete or items are missing, the sooner these issues are addressed, the better.
When reviewing a file, there are many different approaches that can be taken, but a common one would be to focus on any areas that could ultimately lead to a repair or denial of the SBA guaranty. While it would be impossible to summarize all areas of a file that could jeopardize an SBA guaranty, below are common areas of concern that lenders should be sure to pay attention to when performing a post-closing review.
Injection is such a critical area to focus on because, in the event of an early default, failure to properly document injection results in a rebuttable presumption that the default was caused by the lack of injection. This means that loans that lack proper equity injection documentation are very likely to result in a recommendation of a denial if they are presented as an early default.
Injection is also a critical area to focus on because it can be so complex. Everyone knows that, in order to prove source, you must show at least two months bank statements with the funds that are injected. However, the SOP 50 57 2 asks lenders to examine statements for the two months prior to application while the 50 10 6 requires lenders to examine statements prior to the loan closing. The situation becomes even more complicated when monies are transferred prior to the closing date. Here, lenders should ensure that they have obtained source documentation for the accounts from which the monies came, even if those accounts are not held by the borrower. For example, you may have a borrower with a minority owner investor that transfers funds immediately prior to closing to be used as injection. We have seen situations where such parties are hesitant to provide personal bank statements because they are not the primary operator of the business. However, this is not a sufficient reason to waive the documentation requirement. SBA expects that a bank will go back and verify that the funds actually originated from that investor as a source, which requires bank statements.
Failure to obtain the lien position required by an Authorization has always been an area of common repairs to the guaranty. These days, it is particularly important, given how overwhelmed title companies and recorders’ offices have been due to increased volume as well as intermittent closing of offices due to Covid-19. This means that prudent lenders should be following up and obtaining copies of all recorded documents, both for UCCs and for mortgages/deeds of trust. If the lien filed has not been insured, it would be ideal if lenders also obtained post-closing searches which confirm the lien position obtained.
For assistance with post-closing compliance reviews, please contact the attorneys at Starfield & Smith, PC at (215) 542-7070 or visit us at www.starfieldsmith.com.