Calling all JRB followers! If you’ve attended the J.R. Bruno Servicing Training sessions we hold for new clients, spoken with me at a conference, or read a past ebulletin on servicing you’ve heard me say “Play Dominos.” Many times. To me, the way dominos fall is exactly what a servicing action is: a quick game of dominos in your work week. Ask any servicing staff member. It’s never just one request/one action. Most simple servicing requests lead to a domino effect, prompting additional actions to analyze and document in the file to ensure the guaranty.
Those dominos just keep rolling along. Some examples:
Borrower Change of Address. SBA borrower makes a deposit and completes a Change of Address Form with a teller. The teller makes the change in the Core System and you’re done! Right? Not so fast!! Where is your collateral? Is this a second location or a new primary location? Is the new address in a flood zone? Here’s your course of action:
- Reach out to the borrower. Discuss the reasons behind the move to determine whether you’ve got a red flag or an opportunity. Did the borrower downsize because sales are dropping? Or are they moving in to a larger location because sales are booming – and if so, do they need additional financing?
- Perform a site visit within 15 days. Why 15 days? SBA requires it within 15 days of an adverse event. While the move might not be an adverse event, you won’t be sure until you visit with the business owner on site. It’s better to assume you’ve got an adverse event on your hands early on than to assume the opposite. You don’t want to learn about an adverse event outside the 15-day window.
- While you’re on site, obtain current financials, along with the documentation needed to clean up any deficiencies in the file. We’ve found that borrowers are more cooperative face-to-face.
- While you’re there, collect the new lease. The term of the new location should meet the remaining term of the loan. And remember to go after a new Landlord’s Waiver.
- A flood search will be needed as it was at origination. And of course, you’ll need Flood Insurance if the property is in a flood zone.
- Business Personal Property Insurance will need updating to reflect the new address, and make sure the business keeps the Lenders Loss Payee Endorsement.
- Analyze those financials to ensure that no dramatic changes in the business led to the address change. Then prepare that pesky Site Visit Memo to include all you learned and any additional actions you may need to take.
Request for Mortgage Release. Guarantor asks you to release the mortgage you hold on their home so they can refinance. Then they would sign a new mortgage for you to record after the new first is in place. Not a good idea. Anything can be filed against the property while you’re waiting for mortgage approval. This is risky business. While you wait, you’re out of position and the guaranty is in jeopardy of repair/denial. Better to subordinate to a new first. That said, the dominos begin:
- Have the borrower submit the request in writing and provide you with the term sheet or Commitment Letter that includes terms from the new lender.
- Collect current business and personal financials along with tax returns for analysis.
- Follow your lending policy for the required level of appraisal to determine the current value of the property.
- Pull current credit reports on the borrower and the guarantor making the offer.
- Analyze the current performance of the business to determine if there are any red flags that make you decide not to proceed.
- Prepare a Memo to File that includes a narrative of the request, the borrower analysis, changes to credit performance and any discussion. Then show justification for the action with a collateral breakdown at origination vs. after the subordination.
Critical: Memo to File. The key to these and any servicing actions is documentation with a Memo to File. This helps the people who will work on the loan later: the auditors/reviewers who will assess your actions, and the SBA, because the agency needs to understand your actions if discussion is required in your Repurchase Package during liquidation.
You know us by now: Play Dominos. Document, Document, Document.