Best Practices: Re-evaluating Policies and Procedures Regarding Site Visits

It is well established that the Small Business Administration (SBA) currently requires lenders to conduct a site visit when a loan is in default. However, lenders often have questions and obstacles related to how and when to obtain a site visit. Here, we will discuss best practices as well as options for lenders to consider mitigating the risks related to borrowers moving their collateral and business locations.

Pursuant to SOP 50 57 3.1, lenders must conduct a site visit either (i) within 60 calendar days of an uncured default, or even sooner if the collateral may be removed, lost, or dissipated, or (ii) within 15 days of a technical default that results in the loan being classified as in liquidation status, or sooner if the collateral can be removed, lost, or dissipated.

Lenders should keep in mind that, if the borrower is operating at a leased location, the lender may need to contact the landlord to determine whether the rent is current. Additionally, if the borrower is unresponsive, the lender may need to contact the landlord just to access the premises. However, what happens if a borrower moves the collateral or changes the business location prior to the default? Unfortunately, this does come up often. In such a situation, the lender is left scrambling to locate the new business or storage facility and conduct the site visit. A lender may ultimately find themselves dealing with a disagreeable or unresponsive borrower exhibiting a “catch me if you can” attitude.

If a borrower moves locations, relocates collateral, or changes its business name without notifying or obtaining approval from the lender, it would constitute a technical default under the loan documents. The problem is that a lender may not find out about these changes until it is too late.

Lenders may want to consider, as a part of their standard reporting requirements, to have the borrowers periodically confirm in writing that they have not moved locations, relocated collateral, or changed their business name. Or alternatively, if any of those things have occurred, to disclose what changes have been made so that the lender has an opportunity to assess what other steps it might need to take in order to protect itself. For example, if the borrower indicated that it had moved to a new leased location, lender would need to obtain a new landlord consent.

Of course, for the non-responsive borrowers who are not regularly providing tax and financial documentation, it is likely a lender also would not receive any confirmation of changes to the location of the business or collateral. Accordingly, if a lender is struggling with a non-responsive borrower who refuses to provide ongoing financial data, the lender may want to consider whether, at a certain point, a site visit would be merited. This could reduce the risk of losing access to collateral, which ultimately can impact the guaranty. Although conducting more site visits could be more onerous for the lender, it can prevent the lender from being put in an unwanted position in the future.

For questions regarding site visits and inspections, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.