The financial markets over the past year and half have been nothing short of volatile. Throughout 2022 and continuing into the first quarter of 2023, the Federal Reserve has been focused on controlling inflation by consistently and continuously increasing interest rates. In the past two weeks, the banking system has seen its own turmoil following the failure of Silicon Valley Bank and Signature Bank and the buyout of Credit Suisse.
Although the Small Business Administration (SBA) continues to be funded and lenders still look to finance loans to small businesses, it would not be surprising to see heightened scrutiny of bank policies and procedures by the SBA, federal regulators and boards of directors. As good program partners to SBA, lenders may want to proactively review their own portfolios for SBA compliance and take steps to address any potential issues.
In our practice, we have helped numerous lenders with internal and external audits of 7(a) loan portfolios and compliance reviews of guaranty purchase packages prior to submission to the SBA. Over the past two years, we have found the following issues most commonly arise during these reviews in the following areas:
- Verifying tax transcripts
- Documenting sources and uses of equity injection
- Including credit elsewhere determination in underwriting
- Complying with EPC/OC requirements
- Obtaining life insurance assignments
- Failing to obtain lien perfection and priority
- Unauthorized use of proceeds and disbursements
- Financing a complete change of ownership
In our experience, many of the above issues could be addressed if the loan file is reviewed for compliance prior to or promptly after closing.
Even when mistakes are discovered, lenders should not panic. We have also assisted lenders in guaranty purchase appeals. These appeals can vary in scope but also tend to be related to the above items. Because an appeal is retroactive the facts surrounding each file also become more important and need to be analyzed in detail. Where possible, it is generally better for lenders to complete a review and correct potential guaranty purchase issues before default by the borrower. However, if a loan is in workout or forbearance, lenders should prepare a draft guaranty purchase submission and work with the borrower to address any gaps in its file. This will put the lender in a better position to act quickly in case the borrower is unsuccessful in turning around its business.
Given the current economic climate, lenders will need to be creative and proactive to protect their institutions. It is important for lenders who wish to protect their SBA guarantees to take commercially reasonable and prudent actions now to successfully manage any future defaults that may occur. If you need us, we can help. For assistance with an audit or guaranty purchase submission or appeal, contact the attorneys at Starfield & Smith at 215-542-7070.