Best Practices: Working with Referral Agents

Referral Agents can be a valuable resource for Lenders looking to identify qualified small business applicants for SBA financing (each an “Applicant”). However, the rules governing a Referral Agent’s involvement in the SBA loan program impose obligations on both the Lender and the Referral Agent. This overview is designed to help Lenders build Referral Agent practices compliant with SBA Rules and Regulations.

Under 13 CFR § 103.1(f), a Referral Agent is any person or entity who identifies and refers an Applicant to a Lender, or a Lender to an Applicant. A Referral Agent may be engaged and paid by either the Applicant or the Lender.  What an Agent generally cannot do is collect from both sides on the same loan. The one narrow exception found in 13 CFR § 103.4(g), which allows an Agent to act as Packager (compensated by the Applicant) and as Referral Agent (compensated by the Lender) on the same loan, but only if the referral activities are disclosed to the Applicant and the packaging activities are disclosed to the Lender. Even then, the Lender may not charge its own packaging fee if the Applicant is already paying one to the Agent.

Whether a Referral Agent is paid by the Applicant or the Lender in connection with an SBA loan, a completed Form 159 (Fee Disclosure and Compensation Agreement) is required. If a Lender pays a referral fee to a Referral Agent, that cost cannot be passed through directly or indirectly to the Applicant. The Lender certifies this on Form 159. Total compensation paid to a Referral Agent over $2,500 must be supported by documentation, even if it is charged as a percentage. The maximum fee that may be charged to an Applicant on a percentage basis is $30,000 and cannot be a flat or contingent fee.  Also, the Lender must tell the Applicant, in writing, that using an Agent is not required to obtain an SBA Loan. The Lender should retain the original Form 159 in the loan file and submit a copy to the Fiscal Transfer Agent with the first Form 1502 report following initial disbursement of the SBA Loan. CDCs should include copies of all Form 159s from the fiscal year in their Annual Report.

The reasonableness of an Applicant-paid fee is not left entirely to the parties. If SBA later determines that the fee charged was unreasonable in relation to the services performed, the Agent must reduce the charge to an amount SBA deems reasonable, refund the excess to the Applicant, and refrain from charging or collecting, directly or indirectly, any further sums above that reasonable amount.

Diligence on the Agent itself is equally important. Before paying any Agent, the Lender should confirm on SAM.gov’s Excluded Parties List that the Agent has not been debarred, suspended, proposed for debarment, declared ineligible, or voluntarily excluded from doing business with the federal government. That check matters because, under 13 CFR § 103.3, SBA may for good cause suspend or revoke an Agent’s privilege to conduct business with SBA, and continued dealings with an excluded Agent quickly become the Lender’s problem, too.

“Good cause” includes, among other things:

• Attempting to influence an SBA or Lender employee through gifts, bribes, or other unlawful or unethical means.
• Referring an Applicant to another entity without disclosing an existing business relationship between the Agent and that entity.
• Violating the ethical guidelines of the Agent’s own profession, or any ethical guidance SBA publishes.
• Implying SBA affiliation, endorsement, or influence, including improper use of “SBA” or the SBA seal, or “guaranteeing” that an application will be approved.
• Charging a fee that isn’t reasonably related to services rendered, or that is materially inconsistent with the compensation agreement or Lender Service Provider agreement.
• Violating the “two masters” prohibition.
• A lack of business integrity, including a debarment, or a criminal conviction or civil judgment within the last seven years for fraud, embezzlement, theft, forgery, bribery, falsification of records, false statements, conspiracy, receiving stolen property, false claims, or obstruction of justice.
• Materially violating the terms of a compensation agreement or Lender Service Provider agreement.
• Violating, or helping someone else violate, SBA regulations, policies, or procedures the Applicant was made aware of.

Violations of these rules can result in suspension or revocation of the privilege of doing business with SBA. False certifications on Form 159 can also trigger criminal exposure under 18 U.S.C. § 1001. Given the stakes, Lenders should adopt a Referral Agreement that clearly memorializes the terms of their referral services and compensation with each Referral Agent. As part of their internal SBA compliance policies, they should have standards for onboarding and vetting Referral Agents.

For questions on Referral Agents and other compliance questions, please contact krayer@starfieldsmith.com.