Equity injection is a key component of many SBA 7(a) loans and, when it is required, it is imperative that every lender verify the source of injection. Not verifying the source of equity injection will likely cause a full denial of the SBA loan guaranty if the loan suffers an early default.
Per the SOP 50 10 6, lenders must verify the equity injection prior to disbursing any loan proceeds and must maintain evidence of such verification in their loan files. Per the SOP 50 10 6, when verifying cash injection, the following is required:
Unless expectations are carefully communicated with borrower, meeting these documentation standards can be cumbersome. It is not always easy to determine how much documentation is needed to satisfy SBA’s requirements. Some lenders run into problems when the documentation they have collected does not include clear references to the accounts used as the source of injection.
For example, when a cashier’s check is brought to closing, the check itself may not reference the account from which funds were drawn. While a lender may have collected two months of bank statements prior to closing, these documents alone would not establish a definitive connection between source and payment of equity injection. Down the road, when the file is being reviewed at the SBA’s guaranty purchase center, the Agency may recommend a full denial if the reviewers cannot connect the lender’s proof with the actual source of funds, as is the case here. SBA must not be in doubt about source because when source is not clearly demonstrated, then the cause of business failure may be attributed to a lack of funds for the project.
One way to resolve this particular problem would be for the lender to request a transaction summary from the source account. Such a summary would need to show that the funds actually being pulled out of the account went into the project. The connection must be established clearly so that every party can identify the source.
In conclusion, in order for the lender to protect its SBA guaranty for loans requiring equity injection, the lender must make sure to source all equity injection with proper documentation. Additionally, the lender must make sure the documentation shows a clear connection between the source of funds and the payment of equity injection.
Starfield & Smith, PC at (215) 542-7070 or visit us at www.starfieldsmith.com.
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