(and what to do about them)
Your SBA loan guarantee may be at risk during the eligibility, closing and funding stages if not documented properly. You knew that.
But then come the servicing requests and tasks. And errors made in processing Borrower servicing requests or regular servicing tasks can lead to repairs to or denials of your guarantee.
These are the most common errors we see, with tips to help you avoid them.
Release and recordation of mortgage/deed of trust documents
We typically see this when the Guarantor is attempting to refinance a home on which the Lender holds a junior lien position. It’s reasonable and expected that Guarantors will want to refinance for better terms. However, the release and recordation of the mortgage/deed of trust can lead to a loss of proper lien position.
Tip: Push for a subordination to the new senior lender or require a release and recordation concurrent with the new first.
New site visits
Most servicing requests should include a current site visit. If you don’t check to be sure your collateral hasn’t been moved to a new location or been sold during a business restructure, your ability to maximize recovery in liquidation may be impacted.
Tip: Your standard procedures should spell out the situations in which a current site
visit must happen when considering servicing requests. Record those site visits in writing and with pictures.
Changes to insurance coverage
Annual insurance certificates often have subtle changes that change protection to SBA and the Lender.
For example, a change in an endorsement from Lender Loss Payee to Loss Payee creates a significant risk in the event the Borrower/Guarantor does something that negates their coverage. The new insurance certificate may also be the only way you become aware that a sole proprietor has incorporated, or that the business has relocated. Both instances would require your immediate attention and action.
Tip: Review insurance coverage changes carefully to verify the Borrower name,
location address, coverage type, coverage amounts, and endorsements.
Whether you’re swapping collateral, adding a Guarantor, or changing an address, consider what searches are required for the servicing action. Do you need new flood searches, updated insurance, or new environmental or appraisal reports?
Tip: As always, we look to documented procedures and processes to provide guidance
to staff on any extra searches needed – even with what appears to be a cut-and-dried servicing request.
Updated financial statements and tax returns
You already know to request annual financial statements and tax returns on your SBA loans. However, if you miss changes to the financial condition of your Borrower or Guarantor, you may end up with repairs or denials of your guarantee.
Tip: In addition to your annual spread and analysis of the Borrower/Guarantor
condition, watch for changes of address, paydown of debt that was placed on full standby at origination, or any dramatic change in the value of fixed assets. Any of these would be cause for additional action on your part as the Lender to protect both the Bank and SBA.
As with your regular commercial portfolio, servicing your SBA loans isn’t rocket science – it’s just common sense. However, SBA lending requires a few additional steps and proper procedures to ensure your guarantee remains intact.
Not sure if your operating procedures are up to date? Want to be sure they cover everything fully? Let’s talk; we can help! Contact us today to set up a call.