 | Tip of the Week Making your SBA Guaranty Pay Here’s more on this timely and important subject. Whether you’re a 7(a) bank lender, a CDC director, a lender in the 504 program, or a service provider to the industry like us, we believe it’s imperative that we all maintain a healthy perspective, especially in light of recent turbulence in the markets. First, let’s review a few “givens” in the SBA business: - SBA lending is not rocket science but it IS a disciplined, specialized niche requiring the right structure, systems, personnel (ideally dedicated) and integration within your institution.
- If you stick to prudent credit origination and servicing fundamentals, you should be able to weather economic firestorms.
- The SBA Guaranty is backed by the full faith and credit of the US Government and is still one of the best financial instruments money can buy.
- This is true despite recent (and hopefully short term) downturns in the premiums paid on the secondary market.
- Centralization and delegation of authority (PCLP and PLP) dramatically changed the SBA lending landscape in the past few years. Welcome to “lending without a net”.
- To realize the privileges of direct underwriting, lenders must assume more responsibilities. The need for specialization is greater than ever before in this niche.
So just how does the SBA guaranty pay? -
On the front end, the SBA guaranty on both 7(a) loans and 504 debentures provides credit enhancements and financial options (sell or hold) - Quality and flexibility are keys to success, especially in down markets.
- Both 7(a) and 504 loan structures have hold and sell options, depending on your approach – typically SBA loans are the most profitable type loans for your institution.
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In a workout scenario, the credit enhancement should mitigate net loss to your institution - 7(a) loans are direct guarantees and provide a backup source of repayment (secondary or tertiary source after collateral and personal guarantees are liquidated).
- The guarantee is contingent on you, the lender, doing your part right. Eligible loans only; originated, serviced and liquidated - prudently.
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Compare the relative benefits to your borrower and to your institution before you settle on the best SBA loan solution. - 7(a) loans should settle up quicker in a downside scenario – as the direct lender, you are in the driver’s seat but there may be credit exposure.
- 504 loans, properly underwritten, should equate to NO loss to the first mortgage lender – but will likely result in an extended non-accrual period.
Cliff Notes version of the 7(a) Guaranty Purchase process - Upon determination that liquidation is necessary (after minimum of 60 days monetary default), change the status code on the 1502 report to SBA and request file transfer from the SBA Commercial Loan Servicing Center (CLSC) – either Little Rock, AK or Fresno, CA – to the Guaranty Purchase Center for 7(a) loans in Herndon, VA
- Generally a loan is transferred to liquidation status when it becomes apparent that the borrower cannot repay or if insolvency proceedings have been initiate
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Know your options regarding liquidating collateral first or requesting (demanding) guaranty purchase by SBA - Loans originated by PLP lenders after May 14, 2007 MUST be liquidated first prior to guaranty purchase
- There may be extenuating circumstances such as extended legal proceedings including bankruptcy, inter pleadings between multiple creditors, etc.
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Follow SBA’s prescribed purchase process - 10 Tab guaranty purchase process for SBA 7(a) loans or the 22 Tab guaranty purchase process for SBAExpress loans - Provide complete, accurate, relevant information – SBA can’t pay you if they don’t have all the relevant information
- SBA prefers that you deliver the information in an electronic format (CD) or try out ETran – make it easier for them to pay you on your guaranty
- Retain originals, copies, and evidence of delivery to SBA. Packages often get misplaced or lost resulting in lost productivity and delays to payment
For more information on how to “Make your SBA Guaranty Pay”, please join Brian Burke for a NAGGL Web Express training session on October 16, 2008 at 2pm Eastern Time. For further details and to register, go to http://www.naggl.org/ Take the right approach. Karen McHugh and Brian Burke | |
