In an effort to meet the “closing deadline” desired by the small business borrower, lenders may feel the need to rush the closing and overlook critical housekeeping steps. When implemented and adopted, these “steps” help to ensure that lenders’ SBA loan files are complete, accurate, and free from inconsistencies. When overlooked, file deficiencies arise which may be impossible to correct or, at best, take months or years to rectify. This article will discuss a few steps lenders may take to ensure their SBA loan files are SBA-compliant at the time of loan closing so that their SBA loan guaranties are protected.
Loans typically undergo underwriting changes from the initial credit approval of a loan to the day of loan closing. These updates often include changes to borrower(s), guarantor(s), collateral, use of proceeds, repayment terms, etc. While lenders diligently update E-Tran and the SBA Loan Authorization prior to closing, they often delay updating their credit memorandums until post-closing.
Lenders can avoid the need to re-create the wheel by contemporaneously preparing a change memo or amendment to the credit approval as changes occur during the diligence phase of a loan. Once final updates are made to the SBA Loan Authorization and E-Tran, a lender should similarly finalize its change memo/amendment and obtain credit approval signatures, if applicable, by the loan closing date. Lenders should take note that credit memorandums are now required diligence in the SBA 10 tab guaranty purchase submission.
A common issue when verifying injection for SBA loans is pinning down the borrower on the source of the injection funds. As many lenders can attest, the source of injection can change sometimes days before the scheduled loan closing date. Cited as one of the most common reasons for full denial of the SBA guaranty on early defaulting loans, this is an important and sometimes complicated area of the due diligence process for lenders to manage.
Lenders can overcome the challenges by communicating clearly their requirements at the application stage and drawing a connection between providing the necessary evidence and source of injection and the availability of loan proceeds. For lenders, this means that, when things change late in the process, they must slow down and take care to review, re-review, and confirm that they have all necessary documentation showing the source and use of injection funds prior to loan disbursement. As with credit memo changes, there is a temptation to allow for collection of final bank statements the day of closing or after closing but, to avoid any unexpected surprises (and/or risks to the loan guaranty), it is best practice to confirm all necessary items are organized and in file prior to loan closing.
General Due Diligence
Whether it is business insurance or a final title policy, there are certain types of loans (i.e. construction loans) where it may be necessary to accept proper due diligence after loan closing. While it may be justifiable for a lender to make an ordinarily pre-closing diligence requirement a post-closing item, it is important to explain any justifications for such decisions in the loan file. SBA expects its prudent lenders to document their actions contemporaneously.
Lenders should include a memo to the file or emails in the file to show what items lenders may accept post-closing, and prudent lenders need to ensure that there is a post-closing follow up system in place so that any post-closing diligence items do not fall through the cracks. Lenders can include a post-closing agreement as one of the loan documents included at closing, one that lists the various items the lender expects its borrower to provide within a specific time frame. It is key that a lender’s closing and post-closing teams are in communication and share information so the documentation that may be needed to submit for guaranty purchase is not forgotten or never collected.
With the proper tools and systems in place, SBA lenders can reduce errors in their loan files and ensure they have the documents needed if the time arises when a lender must submit a guaranty purchase request. For assistance with SBA compliance and SBA loan closings, contact us at 215-542-7070.