Selling loans on the SBA 7(a) Loan Secondary Market is a critical part of some SBA Lenders’ business strategy. An important step to understanding the conditions upon which a loan may be sold on the Secondary Market is to review the Lender certifications in SBA Form 1086 – Secondary Participation Guaranty Agreement.
In addition to representing specific facts about the loan, such as Borrower name, amount, term, interest rate and monthly payment amount, under section 2.1 of the Agreement a Lender must make certain certifications regarding the loan to be sold. The first certification is that to the best of its knowledge, the Lender has underwritten, closed and serviced the loan in a prudent manner and in accordance with all SBA Loan Program Requirements as that term is defined in 13 C.F.R §120.10. SBA Loan Program Requirements is defined as: requirements imposed upon Lenders by statute; SBA and applicable government-wide regulations; any agreement the Lender has executed with SBA or to which the Lender is subject; SBA Standard Operating Procedures (SOPs); Federal Register notices; and official SBA notices and forms applicable to the 7(a) Loan Program, as such requirements are issued and revised by SBA from time to time.
SBA has interpreted this certification to mean all conditions required to be compliant with SBA Loan Program Requirements have been met at or prior to the date the loan is sold. For example, the expectation is that the Lender has evidence in its possession that all liens against collateral securing the loan have been perfected and/or recorded. Evidence of perfected liens may not simply mean recorded financing statements and mortgages, but also include post-closing searches and final title policies to reflect correct lien priority. Further, the Lender should have evidence in its file of its perfected liens against all unique collateral, such as vehicle certificates of titles, possession of issued stock and acknowledgement of assignment of life insurance.
Lender must also certify that the Borrower has all licenses necessary to operate its business at the time the loan is sold on the secondary market. SOP 50 10 7.1 provides that, if necessary, a Lender may allow the Borrower up to 90 days post-closing to acquire all necessary operating licenses. It’s important that there is communication between Lender’s internal teams between those responsible for documenting and closing loans and those selling loans to be clear on what if any conditions to closing, including post-closing conditions remain outstanding, and confirm that those conditions have been satisfied prior to selling the loan.
Another Lender certification is that the loan is fully disbursed at the time of sale. SBA does not allow loans to be disbursed and held in escrow in order to satisfy the requirement that the loan is fully disbursed. If the use of loan proceeds includes leasehold improvements or construction the loan should be considered a multi-advance loan and loan proceeds should be held back at closing instead of disbursed into an escrow account. Only once all loan funds are disbursed, construction is completed and a Certificate of Occupancy is issued should the loan be considered fully disbursed and all conditions satisfied. Lender should also confirm that the loan is not in default and the guaranty fee is paid.
One of the newer certifications added to the SBA Form 1086 that the Lender must make is that as of the Warranty Date, which is the date of settlement of the loan sale, neither Lender nor any of its directors, officers, employees, or agents has or should have through the exercise of reasonable diligence, any actual or constructive knowledge of any information indicating the likelihood of prepayment or accelerated principal paydown of the Loan by Borrower by refinancing or otherwise. In addition, if any proceeds from the loan are to be utilized to pay down an existing SBA guaranteed loan, Lender must certify that it has explored all possible means, including working with the existing lender, investors, and the SBA to accomplish the Borrower needs without triggering such paydown or prepayment of loan. Further, Lender affirms it has acted prudently and verified with Borrower that Borrower has no intention to either pay down or prepay Loan.
This certification requires the Lender to have conducted due diligence into the intention of the Borrower regarding refinancing its SBA loan(s). The second part of the Section 2.1(j) requires the Lender to represent that it has “explored all possible means, including working with the existing lender, investor and the SBA to accomplish what the Borrower needs without triggering paydown or prepayment of the Loan.” This standard is beyond the requirement in SOP 50 10 7.1, which says any new loan that refinances an existing SBA 7(a) loan must meet the 10% improvement to installment payment amount and pay any applicable subsidy recoupment fees.
Any Lender who relies on Secondary Market sales should consider creating an internal procedure for vetting Loan to make sure all conditions for secondary market sales are satisfied prior to offering loans for sale.
For more information regarding SBA Form 1086 and secondary market sales requirements, please contact Kim Rayer at krayer@starfieldsmith.com.
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