Every SBA loan begins with high hopes. Nobody likes to think that servicing and liquidation could be lurking down the road. Then, well. It’s scramble time. So when should you begin to prepare for liquidation and your request to SBA to Repurchase the Guaranty? Easy: At Origination. We know it seems pointless and maybe a bit scary, but it’s true. Check out the Repurchase Tabs SBA requires for repurchase of a loan, and you’ll see that most of what you need (especially in early default) comes from Origination & Closing.
We’re not suggesting that you build your file in the Repurchase Tab format. Not at all. Yet many lenders do and say it helps a lot when they get to that point. We’re just saying: Know your product from Good to Bad to UGLY! It’s not so daunting if you know what’s required, plan for it –and prepare. That said, we’ll share a few areas we see our clients get hit with when repurchasing so you can see the correlation between origination and liquidation:
IRS Verifications. SBA SOP 50 10 5 (K) states clearly that they must be received and reviewed before closing. Yet in an early default we have seen some clients missing this item or missing one of the three years required. This is an eligibility issue that can give you a headache. So don’t overlook IRS Verifications as just review items you can do later. (Subpart B, Chapter 2, II, B, 1 e. pg. 91)
Equity Injection. Another early default issue that can lead to a repair or a denial. SBA can deny a guaranty if they believe the lack of equity injection contributed to the business failure. So, don’t forget to document your file with copies of checks/wires for the injected funds along with 2-3 months statements from the same accounts to show that funds were available.
UCC Search to Reflect/Title Policy. It’s imperative to review these post-closing items to ensure you have obtained the required lien position. If there’s an issue, jump on it, don’t wait. The longer it sits the harder it is to clean up.
Unauthorized Use of Proceeds. Lenders see this if they approve or fund a loan that is not allowed under SBA. Examples include working capital to an EPC, debt refinance of a loan for personal use, or purchase of a property that won’t meet the proper occupancy requirement. More often we see this issue come into play when funds are reallocated and the reallocation is for ineligible purposes or requires approval from SBA that was not obtained.
Insurance Coverage. Lapses in coverage or an improper amount of coverage can lead to a repair or a denial if collateral was destroyed and the lender cannot recover from insurance due to a lapse or amount of coverage.
As we can see, most of these items are collected at Origination. So from the beginning, prepare your file for liquidation and repurchase in case they occur. Do it well and protect your guaranty!