In a recent presentation by SBA on guaranty purchases and its 10 tab process, the Agency noted that lenders not infrequently provide inadequate documentation to support their debt refinancing “uses of proceeds.” Without proper documentation on debt refinance, purchase submissions will be “screened out,” meaning that the submission will be returned to the lender. In order to avoid a repair or denial to the guaranty, according to SBA, the following documentation, often missing from Tab 5, should be part of a lender’s 10 tab submission:
- Copies of all original notes – Without providing copies to the Agency, SBA cannot confirm the identity of the original borrowers on the debt.
- Copies of the original security agreements – Section A.1.c on page 228 of SOP 50 10 6 (the “SOP”) states that, in general, a loan must be secured with at least the same collateral and lien priority as the debt that is being refinanced. By providing to SBA copies of the security agreements and, when applicable, UCC filings in connection with the notes to be refinanced, SBA can confirm the collateral and lien positions of the debtors. These should align with the lender’s Credit Memo and Loan Authorization.
- Debt schedule – A proper debt schedule will include the name of each creditor, the original amount of the debt, the original date, the current balance, whether the payments were current or delinquent, the maturity date, payment amounts/balances and the collateral (how secured). The SOP indicates that SBA loan proceeds may not be used to pay a creditor in a position to sustain a loss or will shift all or part of a potential loss to the SBA. If the loan to be refinanced is not current on its payments or has already matured and not been paid off as required, the lender holding the debt is in a position to sustain a loss and such loss could be passed on to SBA. By obtaining the debt schedule, a lender can insure that the debt to be refinanced is current, and thereby help to justify repayment of the SBA loan.
- Payoff statements – Such statements identify the creditor and indicate the amount needed to make sure the loan is fully paid off. If there is any collateral securing the loan being refinanced, it is ideal to have the payoff letter specifically state that the lien on any collateral securing the loan being repaid will be satisfied/terminated upon receipt of the payoff. Such a statement will make the satisfaction/termination a written obligation of the lender receiving the payoff, thereby obligating the creditor to file the appropriate satisfaction/termination if a post-closing search still shows the lien of record.
- Proof of out-going wires for the payoffs of the debt being refinanced – While a settlement statement listing debt to be paid from closing is part of the proof required, it cannot be relied upon – by itself – to prove the payment was actually made. If the payoff was sent by wire, then a lender needs proof of the wire going out from the sender’s account to the debt holder listed on the payoff letter. The closing agent handling disbursements should be directed to provide such proof for a lender’s file.
In summary, if part or all of a lender’s SBA loan will be used for debt refinance, the lender should obtain the above documentation, as applicable, in order to protect the loan guaranty. For more information, contact the attorneys at Starfield & Smith, PC at 215-542-7070.