SBA lenders often include financial reporting provisions in their loan documentation, but may not realize the significance of this type of monitoring and the potential impact it can have on the ability of the lender to collect on the guaranty.
Pursuant to the Authorization Boilerplate, borrowers are required to “furnish year-end statements to Lender within ____ days of fiscal year end… [and] furnish additional financial statements or reports whenever Lender requests them.” This requirement sets the minimum standard and establishes that lenders are able to require more than what SBA has suggested, if they choose.
The SOP 50 57 2 continues to hone in on the importance of financial reporting, first by outlining the need for reporting again. It states, “The Borrower’s creditworthiness, i.e., financial and operational condition, should be monitored through the use of tools such as periodic submission of financial statements, contact with the Borrower via phone or site visits, or review of relevant financial data from sources such as credit reports, credit scores and tax returns. (Pg. 27). Later in the same SOP, SBA identifies specific guidelines for why or how regular reporting may be waived. It states:
“Loan Document provisions requiring Obligors to submit periodic financial statements, should not be modified (e.g., temporarily or permanently waived; changed from audited to compiled or reviewed; or required less frequently), unless a lender using Prudent Servicing actions would modify them based on the circumstances. For example, it may be prudent to modify the requirement if:
- The loan is Seasoned or the requirement would cause Financial Hardship for the Borrower;
- The waiver is temporary and limited to one year at a time; and
- The right to reinstate the requirement is reserved and exercised in the event of default. (Pg. 65).
Financial reporting is seen by SBA as a critical component of loan monitoring, and lenders should carefully consider making any decision to waive these requirements during the life of a loan.
Often when a loan defaults, borrowers are no longer willing to work with the lender. Some may even stop contacting the lender altogether. This is at a time when lenders are beginning their process of filing a guaranty purchase claim and may need to explain how the business deteriorated or what caused the default. SBA may inquire further beyond the documents initially provided in a guaranty purchase package to understand what events led to the business’ downfall. This investigative process can be very difficult when a borrower has cut off all contact. However, if the loan is somewhat seasoned, lenders may be able to look to financial statements to provide some answers.
Outside of the context of regular reporting, the SOP 50 57 2 also outlines the need for financial statements to make servicing decisions. Without these, lenders are typically not in a position to make the credit determinations needed to assess the servicing request. And if a lender takes actions in servicing and a loan ends up failing, SBA may review the servicing actions from a credit standpoint to determine if they believed that a lender’s decision was prudent. Again, failure to obtain the proper financial reporting documentation could create issues for a lender if they cannot justify their actions with the documentation required by the SOP.
While failure to obtain financial statements alone is unlikely to directly jeopardize the guaranty, their absence from a file can impact the lender’s ability to justify its actions in both servicing and guaranty purchase claims. Therefore lenders should be sure to keep up with their financial monitoring requirements and always follow SBA’s guidelines to avoid any possible issues in the future.
For questions regarding SBA financial reporting requirements or guaranty purchase matters, contact the attorneys at Starfield & Smith at 215-542-7070.