SBA Loan Servicing Pitfalls

Collateral Oversight and the Cost of Missed Recoveries

When a Borrower’s loan is in trouble, collateral is a whole lot more than a checkbox on your to-do list.

It’s a foundational element in SBA’s expectation that you, as a Lender, will take appropriate action to maximize recovery and minimize loss. If you’re not careful to safeguard collateral and manage liquidation, you risk losing out on expected financial recovery. And when SBA reviews your servicing practices and decides you didn’t act quickly enough, you risk ongoing enhanced scrutiny – and falling out of SBA compliance.

Not good. 

Let’s take a deeper look at what can happen.

• SBA repairs or denials. SBA requires Lenders to follow prudent, well-documented steps to recover collateral when a loan is in trouble. If you didn’t perform according to their expectation, they may reduce or even deny the guaranty, leaving you, the Lender, to absorb losses that would otherwise have been recovered. 

• Risk of borrower misbehavior. When the Lender delays action on collateral recovery, the Borrower may sell assets without approval, move them out of reach, or otherwise diminish their value.

• Reduced recoveries. Even without intentional action by the Borrower, assets can lose value if they’re not secured and liquidated with care, and in a timely fashion.

• SBA oversight. When Lenders have a track record of not managing collateral effectively, SBA takes note – and pays more attention, often raising questions on lender SBA compliance in the process.

How can you protect yourself? 

The primary, and most effective, way: site visits. 

They’re no one’s favorite thing to do, especially when a loan is in trouble because of default, bankruptcy, or some other financial decline. Nonetheless, they’re essential, because they’re your opportunity to preserve and protect your – and SBA’s – position before collateral disappears or depreciates.

• Be prompt. You want to be on site within 60 days of an uncured default. And you’d be wise to move more quickly if collateral is at risk.

• Within 15 days is better. You want to assess and secure collateral as soon as possible, especially if the problem goes beyond an uncured default.

• Resolve issues quickly. If equipment is missing, inventory is dwindling, or real property is neglected, you need to act quickly to preserve value. Evaluate your options, and document every step.

Be compassionate, but don’t delay

SBA Lenders care about their communities and the businesses they support, but don’t let that care and compassion create costly delay. It’s all well and good to work with your Borrower to get them through a rough patch, but stay aware of what’s at stake.

• Trust but verify. We hate to say this, but be aware that a Borrower’s promises of turnaround can make time for collateral to … disappear. Being proactive protects your bottom line and SBA’s guaranty.

• Collateral value may be at risk. Inventory gets sold, accounts receivable go stale, and equipment loses marketability.

• SBA scrutiny increases. During a guaranty purchase review, SBA will assess your actions to determine if you did in fact act promptly and appropriately to protect collateral. And you know what happens when SBA doesn’t like what they see!

Collateral is more than a checkbox; it’s an essential part of your loan servicing process, whether or not there’s ever a problem. When there is a problem, and collateral management is handled correctly, Lenders avoid costly SBA repairs, improve recovery rates, and remain in SBA’s good graces as sound risk managers.  Partnering with professionals who provide lender consulting services ensures your team stays aligned with best practices, while lender SBA training gives your staff the knowledge and confidence to act decisively.

As knowledgeable SBA consultants with many years of experience, we’re here to help, with process reviews, lender consulting services, and ongoing lender SBA Training to strengthen your compliance efforts.  Whether you need a process tune-up or in-the-moment advice on a troubled loan, we’ll help you safeguard recoveries and maintain lender SBA compliance.  Give us a call at 877-576-0819, or drop us a line through our contact form!