After an SBA loan has been disbursed, a Borrower may request a loan action which may require a lender to submit a servicing request to the SBA. Such servicing requests can be very simple requests to update a mailing address to more complicated requests such as loan assumptions, substitution or release of collateral or obligor, or lien subordination or release. Chapter 6 of SOP 50 57 3 governs servicing requests, and it has been revised to incorporate the overarching premise seen throughout the SOP 50 57 3, which is that the onus is on the lender to review, analyze, and act in accordance with prudent servicing and liquidation practices.
Under SOP 50 57 3, SBA added a new provision that alters the perspective under which SBA will review a servicing request for assumptions and the substitution of collateral or obligors and requires lenders to comply with the loan program requirements of SOP 50 10 in effect at the time the assumption or substitution of collateral or obligors takes place, in accordance with 13 C.F.R. §120.180. Previously, SBA would only look at the SOP guidance in effect at the time when the loan was approved, so these types of servicing requests were reviewed in the context of the SOP 50 10 in effect at the time of loan origination, rather than the version in effect at the time of submission of a servicing action. For all other servicing actions, the SBA directs the lender to Chapters 7 through 12 of SOP 50 57 3 for guidance on documenting servicing requests for the more common loan actions.
Whether or not SBA notice or approval is required for a servicing request is set forth in Chapter 3 of the SOP 50 57, and summarized in the 7(a) Lender Servicing and Liquidation Action Matrix (the “Matrix”). SOP 50 57 3 includes a “Best Practice” recommendation that lenders place a copy of the Matrix in effect at the time the loan action is taken in the loan file. Interestingly, the current Matrix became effective February 2020 and includes a footnote that states “[c]apitalized words in this Matrix are defined in Ch 2 of SOP 50 57 2 *Please check the SBA Website for the most up to date version.” The Matrix has not been updated since SOP 50 57 3 was adopted, and it is unclear when this will occur. Therefore, it is important for lenders to reference the specific guidance in SOP 50 57 3, SOP 50 10 7 and their own internal guidance that they relied upon in making a servicing request.
In Chapter 6 of SOP 50 57 3 regarding servicing actions, the SBA specifically highlights the importance of the lender’s analysis of a borrower’s financial viability with the goal to meet the borrower’s short term and long term needs without impairing the integrity of the SBA loan program. The SBA places the focus on preserving the borrower’s ability to repay the SBA loan over time rather than the lender’s ability to recover on the SBA loan.
There are changes to the language in Chapter 6 which emphasize that: (i) lenders should require the borrower to submit its request to modify the terms or conditions of the SBA loan in writing; and (ii) if a loan action requires SBA approval, the lender also must submit the request in writing in the form of a clearly and concisely drafted letter or email. See SOP 50 57 3, page 68 for specific guidance on where to submit such servicing requests.
As always, lenders must justify and document their decision to approve any loan action in support of a servicing request and the SBA identifies the steps for the lender to follow. As part of this process, if the loan action requires a servicing action to be approved by the SBA, the lender shall obtain and submit the supporting documents that helped the lender to make an informed decision. Importantly, with respect to documentation of each servicing request, the words “should be supported” were replaced with the words “are supported” indicating the SBA wants the lender to provide factual evidence that supports approval of a servicing action.
If a lender determines additional information is necessary to provide a complete picture of a loan action, the lender must obtain the supplemental documentation and analyze it prior to submission of the servicing request. The SBA continues to stress the importance of conducting a complete analysis of repayment ability, which includes collecting current financial statements and tax returns for the most recent two years for all obligors of a loan, including the borrower and all guarantors, and not just the borrower. If a lender approves a loan action which would materially change the terms and conditions of the loan, the lender shall also obtain the written consent from each obligor in order to protect the legal ability to recover from the obligor in the event of a default. One way to obtain the obligors’ consent is to have all loan obligors sign a loan modification and document reaffirmation agreement which summarizes all changes to the terms and conditions of the loan.
As with all servicing matters, SBA lenders must act prudently and in a commercially reasonable manner in taking any loan action and submitting a servicing request pertaining to their SBA loans. For assistance with loan servicing, liquidation, and guaranty purchase, contact us at firstname.lastname@example.org or 215.542.7070.