Best Practices: Proceed with Caution: Applicant’s Certifications

SOP 50 10 7.1 provides several situations where SBA lenders can rely upon borrower certifications to determine loan eligibility and/or for loan approval purposes.  Although this is a welcome change for SBA lenders, lenders should be cautious about replying upon these borrower certifications alone in making approval decisions and should continue to follow prudent lending standards.

Applicant Eligibility Certification

For 7(a) loans, the applicant must execute a borrower application form (SBA Form 1919) containing certifications regarding the applicant’s eligibility.  The applicant certifies that all information provided in the application and all information provided in all supporting documents and forms is true and accurate in all material respects and that the applicant understands that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law.

In the borrower application, the applicant certifies that, inter alia, it is an operating business (excluding EPC), organized for profit, located in the United States, small under SBA size requirements, able to demonstrate a need for the desired credit, at least 51 percent owned and controlled by citizens of the U.S. or lawful permanent residents and will use all SBA loan proceeds in accordance with loan program requirements. The applicant further certifies that it is not, inter alia, a non-profit business, a financial business primarily engaged in lending, a passive business owned by developers and landlords (excluding EPC), a life insurance company, a business located in a foreign country, a pyramid sale distribution plan, a business deriving more than one-third of gross annual revenue from legal gambling activities, a business engaged in any activity illegal under federal, state or local law, a private club, a business which limits memberships for reasons other than capacity, a government-owned entity, a loan packager earning more than one third of gross annual revenue from packaging SBA loans, a business with an associate who is incarcerated, on probation, on parole, or under indictment for a felony or any crime involving financial misconduct or a false statement, a business in which the lender, CDC or their associates own an equity interest, a business of a prurient sexual nature, a business that defaulted on a federal loan or federally assisted financing (unless waived by SBA for good cause), a business primarily engaged in political or lobbying activities or a speculative business.

Although many of the above items are self-explanatory and obvious, there are others that require some thought and possibly some investigation.  It is important for SBA lenders to fully explain the above items to the applicant to ensure accuracy in the applicant eligibility certification.  The SBA now allows SBA Lenders to accept as true the information provided by the applicant in the applicant eligibility certification.  “[I]f the Applicant eligibility information and certification of same is determined to be invalid at any time over the loan life cycle, for 7(a), SBA will not use this as the basis to deny or repair the guaranty purchase request.”   SOP 50 10 7.1 at page 13.  However, there is a huge caveat to this.  [I]n all cases, SBA Lenders must not submit an application that the SBA Lender knows is not eligible, regardless of the Applicant’s certification.”  SOP 50 10 7.1 at page 13.  This caveat requires SBA lenders to be prudent and confirms that SBA lenders cannot just blindly rely upon borrower certifications.  If an SBA lender sees something or hears something that raises red flags, seek more information, and ask questions.  For example, if the SBA lender is speaking with the applicant and the applicant mentions that they intend to use excess loan proceeds for purposes unrelated to the financed business, or if the SBA lender receives a site inspection that shows pictures of signs with marijuana leaves, the SBA lender cannot ignore those reg flags without further investigation.

Other Applicant Certifications

Two other examples of certifications that the SBA lender may rely upon involve credit card and a home equity line of credit (“HELOC”) refinancing.  When refinancing credit card debt used for business purposes, an SBA lender can rely on a borrower certification stating that the debt was not used for personal expenses or for any ineligible purpose as set forth in 13 CFR § 120.130.  When refinancing business debt incurred through a HELOC, an SBA lender can rely on a borrower certification stating that the debt was incurred exclusively for business purposes.  “If a Lender submits a loan with proceeds refinanced from credit card debt where the Applicant certified that the proceeds from the debt were used exclusively for the Applicant’s business, but the Applicant certification is determined to be invalid, SBA will not use this as a basis to deny or repair the guaranty purchase request. The Lender can rely on the Applicant certification.”  See SOP 50 10 7.1 at pages 33 and 34.

While reviewing the debt and the borrow certification, the SBA lender does need to remember that “in all cases, SBA Lenders must not submit an application that the SBA Lender knows is not eligible, regardless of the Applicant’s certification.”  SOP 50 10 7.1 at page 13.  For example, if an SBA lender receives a credit card statement from the applicant showing clearly ineligible charges, such as a dentist purchasing a hot tub, the SBA lender should not blindly accept the applicant’s certification.  If an SBA lender sees that the owner of an applicant was funding a personal expense with their credit card or HELOC funds and attempting to refinance that debt with SBA loan proceeds, the SBA lender would not be able to submit that for refinance regardless of the certification.  The SBA lender should ask questions and omit the ineligible charges from the debt refinance.

Reliance on borrower certifications is a welcome change for SBA lenders and increases lending opportunities.  However, Lenders still must adhere to SBA’s overarching principals of approving, servicing, and liquidating loans in a commercially reasonable and prudent manner.

For assistance with SBA lending matters, contact the attorneys at Starfield & Smith, PC at 215.542.7070 or visit us at www.starfieldsmith.com.