SBA
U p d at e
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COMMUNITY BANKS
SBA Lending
By: Peter Shand, President, Business Development Corporation
AN APPEALING OPPORTUNITY The last ten years have been filled with many challenges for the banking industry in South Carolina and the Southeast, but also with many opportunities. The survivors of the banking crisis found themselves with little loan demand, weakened borrowers, and very low interest rates when the lending environment was the riskiest in a generation. As banks began to search for ways to make more commercial loans while lowering their risk, many naturally gravitated toward offering Small Business Administration – SBA 7(a) – guaranteed loans. The concept of SBA lending is certainly appealing; a lender would just need to obtain an SBA license, make sure that all program guidelines are met, and obtain the insurance afforded by a 75% guarantee from SBA and the US Government. On the surface this sounds like a simple way to grow the loan portfolio and bank earnings, and to provide financing for borrowers that otherwise would not qualify. In reality, there are a number of pitfalls and risks for banks to consider when taking on this line of business.
WHAT ARE THE RISKS? Compliance As lenders, we are frequently asked to
make loans with exceptions to our loan policy. Consideration is given to the strengths of the credit and a determination is made as to whether it makes sense to approve the loan with an exception. In SBA lending, we do not have such exception approval authority as lenders. If a loan does not comply with SBA’s most – current SOP – Standard Operating Procedures – the lender risks having its insurance claim denied or reduced (repaired). This is a hot topic in the lending industry, as numerous insured guarantees have been denied by SBA for improper underwriting, closing, servicing, or collection compliance. Even more concerning is the realization that some insured loan loss payments may be demanded to be sent back to SBA up to six years after the lender receives payment from SBA. Such insured loan claims are regularly audited by the SBA Office of Inspector General – OIG –, and any payments deemed in error after review by OIG can be required to be returned. In fairness to the lender, it is not an easy task to remember each and every program requirement, as the current Program SOP is 410 pages long and the current Servicing SOP is 162 pages long. However, as the law will tell you, ignorance is no excuse, and lenders are expected to comply with all program provisions if coverage is to be maintained on guaranteed loans. As part of the compliance consideration, it is important to understand that SBA
lenders are subject to an annual audit by SBA, at the lender’s expense and typically lasting one week. The bank’s appetite for yet another on-site examination by regulators must be evaluated as part of the decision making process.
Fraud It surprises many to learn that fraud is a big issue in SBA lending, both lender fraud and fraud committed by the borrower. Most lenders believe that the heavy amount of underwriting and borrower due diligence would prevent borrower fraud, but we have learned this is not true. We know of cases in which falsified financial documents were produced by the borrower and filed with the IRS, documents which falsely indicated they were qualified for SBA financing when they were in fact not qualified. The fraud is typically uncovered after the loan goes south and the lender begins to realize the facts used to approve the loan were not accurate. It is unclear for now how SBA will handle these cases, whether the guaranty will be honored or whether the burden of loss will be borne by the lender.
Merger The day may come when a bank decides that its best option is to be acquired by a larger institution. The acquiring bank will almost certainly perform due diligence to determine the quality of the loan portfolio, including the SBA portfolio. More often we are seeing that experts
S P R I N G 2 0 1 8 • PALMETTO BANKER
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