Try as we might, we can never sit and dedicate eight hours to just one puzzling loan. At 8 a.m. we tell ourselves, “Today I’ll get the ABC Company loan repurchase package fully put together and submitted.” Yet by 8:30 a.m. we’re fielding our second loan modification call, swigging our second cup of coffee and praying the phone won’t ring.
Enter the Squirrels. At noon the first file is about 20% pulled together. And those pesky Squirrels are picking away at the timeline. What are Squirrels? They’re the surprises … those unexpected items that pop up and can trip up processing the package. A few examples:
- Surprise #1. A Post Default UCC search was pulled and reflects no filings. Wait! What!? How can that be? I’m looking at a filing for the borrower in Kentucky, where the company was formed. A second look shows that whoever pulled the search pulled it for Ohio, where the lender and business reside.
Avoiding the Squirrel. At origination and liquidation, it’s critically important to have processes in place that make sure you’re searching and filing in the correct state for the applicant. In this case the search was wrong, but what if the filing had been? Your guaranty would be in jeopardy because you aren’t in the proper lien position.
- Surprise #2. Authorization calls for a UCC Filing on all business assets, and the lender perfected the filing on all business assets. The most recent balance sheet from the borrower prior to default reflects three titled vehicles, yet no vehicle titles can be found. That’s OK because the Authorization did not require us to take specific vehicles, right?
Right. If the loan was approved GP, you’re OK because the SBA prepared the Authorization and did not require them. Yet in early default this can be an issue for a PLP lender.
Avoiding the Squirrel. To avoid the squirrel, your credit memo should include justification for excluding the vehicles since you’re required to take all available collateral up to the loan amount. In addition to the narrative justifying the exclusion your collateral calculations should also exclude them. If not, you could be looking at a possible repair if SBA feels the vehicles should have been required and were not.
- Surprise #3. A Trust Guarantee dated November 23, 2017 is in the file for the property pledged by Smith Trust. A recorded mortgage for the property is in the file and you have begun the foreclosure process. Now, your post default title search comes back: Mr. Smith no longer holds title in his trust but he does hold title with his spouse. His spouse is not a guarantor. Foreclosure just got a little more complicated. More so, when you look back over the Trust documents you see that Mrs. Smith was a Trustee and the Trust is revocable. SBA would have expected the Limited Guaranty of Mrs. Smith as Trustee and Individually secured by the property.
Avoiding the Squirrel. Will this affect your guaranty? Only if it prevents you from foreclosure. What it might do is contribute to a little lengthier process and you could incur more fees.
Bottom Line: Squirrels will happen. No loan is perfect. Yet you can reduce how much time you spend on Squirrels when you have the proper procedures, training, and checks and balances in place.