We often perform annual or post-closing file reviews for our clients.
Perfecting and protecting collateral is an important part of these reviews – and there are five common errors that we frequently uncover. Here are our best-practice recommendations for preventing them.
1. Failure to obtain the proper lien position on Business Personal Property
How to prevent it:
Pull a Pre-Filing and Post-Filing search. Review it and note each UCC (i.e., specific filing, or all business assets). Have the reviewer initial and date their review.
We also recommend the Pre-Filing search be pulled prior to underwriting, so any necessary narrative on senior liens can be addressed in your credit memo.
2. Failure to obtain the proper lien position on Commercial or Residential Real Estate
How to prevent it:
Thoroughly review the Preliminary Report and Final Title Policy / Search.
Make sure the vesting, lien amounts, title insurance amount, address, and title policy number are all correct.
(You’d be surprised how many times we find errors in an address or title policy number!)
Make sure the reviewer initials and dates their review. This should be common practice for all reviews; the accountability helps ensure the review is thorough.
3. Inconsistency in the Credit Memo, SBA Authorization, 1920, and / or Modifications
How to prevent it:
Use checks and balances to ensure the person preparing your Authorization has drafted it in accordance with the Credit Memo and Form 1920.
If it’s SBA that drafted your Authorization, don’t assume it's correct. They’re human too, and can make mistakes.
Clean up any discrepancies with a Corrective Memo, and obtain the proper level of Authority. Don’t document and close your file until this review is complete, as it can lead to errors in perfecting collateral.
4. Missing Landlord’s Consent / Waivers
How to prevent it:
Don’t leave this up to your Borrowers to obtain. You’ll get the best results when you communicate directly with the Landlord. Oftentimes the Borrower will accept NO for an answer, when in fact the Landlord is willing to negotiate terms.
Document your file with any refusal of the Landlord to sign the document.
5. Inappropriate or incorrect insurance coverage
How to prevent it:
Review prior to closing – and again at annual renewal time – for correct addresses, insured parties, coverage amounts, and the proper Lender's Loss Payee or Mortgagee endorsements.
Endorsements are especially likely to be incorrect when the annual renewal comes in, and annual renewal is also a good time to catch new locations or addresses that the Borrower has failed to tell you about.
Adding these checkpoints to your procedures, along with some training, will help safeguard your collateral position, insurance coverage, and SBA guarantee.
Need some help with accurately perfecting collateral, or ensuring you’ve collected the required insurance coverage? We have extensive experience and can help you make sure collateral perfection and insurance coverage adheres to SBA’s requirements. Let’s talk about how we can help: schedule your initial consultation here. We look forward to the conversation!
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