Best Practice: Understanding SOP 50 57 3: Denial of Liability on 7(a) Loan Guaranty

Effective August 1, 2023, all SBA 7(a) loans (regardless of when they were originated) are subject to SBA’s SOP 50 57 3. The new SOP includes changes and clarifications to Chapter 25: Denial of Liability on 7(a) Loan Guaranty.

When SBA May Deny Liability on a 7(a) Loan Guaranty

Pursuant to 13 C.F.R. §120.524(a), SBA is released from liability on its guaranty of a 7(a) loan if any one of ten conditions are met. Many of these conditions relate to a lender’s failure to comply with SBA loan program requirements or the lender’s failure to facilitate the loan in a prudent manner. The new SOP provides clarity around one such condition, which states that SBA, in its sole discretion, may release itself from liability on the loan guaranty if the lender failed to request that SBA purchase the guaranty within 180 days after maturity of the loan. The new SOP explains that if the lender is in the process of conducting liquidation and/or debt collection litigation in connection with a loan that has matured, the deadline to request purchase is extended to 180 days after the lender completes its prudent liquidation and/or debt collection actions.

The new SOP has also clarified that SBA may deny liability on a guaranty if a lender fails to use required SBA forms or exact electronic copies, except for those 7(a) loan program delivery methods that allow lenders to use their own forms, such as SBA Express.

When a Repair or Full or Partial Denial of Liability May Be Justified

The SOP 50 57 3 has also made changes regarding when a repair, full, or partial denial of liability is justified. Section G of Chapter 25 references the fact that the current closing SOP has a greater reliance upon originating in accordance with the standards for similarly-sized, non-SBA guaranteed commercial loans. It goes on to provide examples of how SBA will assess whether a lender adhered to such standards. SBA will also assess whether the loan was eligible. If a delegated lender made an ineligible loan prior to August 1, 2023, a full denial of a loan guaranty was justified. Importantly, the new SOP states that after August 1, 2023, SBA will not deny or repair a lender’s guaranty purchase request solely on the basis that an applicant’s eligibility certification is invalid. Despite this, a lender still must consider what it knows based upon its standard due diligence process. If a lender becomes aware that a loan is ineligible, we do not believe reliance upon a certification will overcome actual knowledge.

SBA has added, however, that it may deny liability in full if a lender uses the services of a suspended or debarred agent to administer the loan at any point during the life of the loan.

With regard to early defaults and a lender’s failure to verify a required equity injection, SBA has added a paragraph in SOP 50 57 3 providing examples of credible evidence of an asset injection. Examples include escrow settlement statements, receipts, canceled checks, and corroborating documentation such as a deed or certificate of title showing that the borrower owned or acquired the asset needed for the injection prior to disbursement of loan proceeds.

For questions regarding SBA’s new guidance on denial of 7(a) loan guarantees, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.