Underwriting SBA loans requires attention to details, skill, and experience.
As part of our lender consulting services, we routinely help clients submit their SBA loan packages to SBA for approval; we assist with guaranty purchases; and we perform annual loan reviews. In the process, we review the lender’s Credit Memo for adherence to SBA requirements as found in the most-recent SOP.
Over the years we’ve been doing this, we’ve seen three common underwriting issues. Fortunately, they’re fairly easy to remedy.
The loan is under-collateralized, and not all available collateral has been taken or addressed.
Sometimes Lenders use liquidation value percentages that are inconsistent with SBA’s. This makes a loan appear more secured than it is, and it often leaves available collateral on the table.
In other cases, Lenders may discover that a personal residence has less than 25% equity available – so they don’t take it. This is allowed. But if it’s not addressed in the Credit Memo, SBA will conclude that the analysis wasn’t done. Instead, provide a statement that the analysis was performed, the property had less than 25% equity, and therefore it was not taken.
Insurance requirements are missing, or specialized insurance wasn’t obtained.
SBA’s SOPs are clear: your insurance requirements must be listed in the Credit Memo, and must include Business Personal Property, General Liability, and Real Estate Insurance (if Real Estate is securing the loan).
However, if the business has a specialty, determine if relevant special insurance is needed. For example, a physician should carry malpractice; a restaurant serving alcoholic beverages should carry liquor liability; or workers compensation.
To cover this, ask if there’s something provided in services, products, or business operations that could lead to legal action that might put your Borrower out of business. If the answer is yes, then make sure there’s insurance to cover it.
Is credit available elsewhere, and has it been met?
SBA requires Lender Certification that credit available elsewhere has been met, which is done when you answer yes to the first question on the Eligibility screen in ETran. However, oftentimes the lender fails to list eligible reasons in their analysis in their Credit Memo.
It’s a simple fix: just copy-and-paste the exact determination language from the SOP into the Credit Elsewhere Analysis section of the Credit Memo as a checklist then check the appropriate box.
This way you’ll be sure to not miss it in the future and you know the reasons cited are eligible as they came directly from the SOP.
Underwriting is obviously a crucial part of building a successful SBA Portfolio that’s in full SBA Compliance. Avoiding these three missteps will go a long way toward keeping SBA happy with your work.
As SBA Consultants, our lender consulting services include loan reviews to verify compliance – and SBA Lender training to help bring your team up to speed on all the latest SOPs. Give us a call at 877-576-0819, or drop us a line through our contact form, and we’ll set a time to talk!
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