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FOS Blog

14 Apr

Is Your Bank at Risk of Jeopardizing Your SBA Guarantee?

Is Your Bank at Risk of Jeopardizing Your SBA Guarantee?

Written by Rachelle Gordon

Many banks have considered participating in SBA 7(a) lending to increase their earnings since the guaranteed portion of these loans can augment earnings through the sale to the investor market.  Banks can be successful in this type of lending.  However, they need to implement adequate systems in originating, booking, and monitoring eligible SBA loans in compliance with SBA guidance.

What some banks may not consider is that the SBA generally will only pay the remaining guaranteed portion of a loan balance after the bank performs liquidation procedures when a loan defaults.  Many risks arise in SBA lending and if not identified and handled properly can lead to the SBA rejecting or decreasing the guarantee on loans which the Bank tries to collect on.  Banks involved in SBA lending or planning to get involved in SBA lending should assess the risks of participating in this market.  Some risks to consider are the efforts performed by employees or third party vendors that are not in compliance with the SBA SOP; Bank experiencing higher default rates due to a concentration of variable rate loans in their SBA portfolio; and loan originations for SBA loans are performed under less stringent guidelines due to the bank’s reliance of the SBA guarantee.

Banks also should perform reviews to determine their SBA loan processes do not include issues that could result in a rejection or reduction in the payment of the SBA guarantee in the event of loan default, such as:

  • Loan proceed disbursement was ineligible for guaranty or there was an ineligible borrower;
  • Lack of evidence of verification of borrower’s funds for equity injection;
  • Lack of securing all available collateral resulting in a loan not fully collateralized;
  • Servicing efforts of the loan is not adequately documented to meet SBA requirements;
  • Bank did not meet other requirements that were outlined in the SBA Loan Authorization; or
  • Not all required legal documents were obtained in origination process.

In order to reduce the risk of not receiving the guarantee amount on defaulted loans, a bank should ensure some of the following controls are in place: adequate training of employees performing SBA duties, SBA specific loan policies exist and audits are performed of SBA lending.