Lenders need to monitor some missteps that could mean a possible impairment to the SBA guaranty and should be taken seriously when making, closing, and servicing an SBA loan portfolio should the lender be audited by the SBA.
Examples of critical issues that are common in a loan review are as follows:
1. Form 1050 and disbursement documentation:
SBA requires that the lender disburse the loan proceeds in accordance with the uses of proceeds stated in the Loan Authorization. In order for a lender to demonstrate its adherence to this requirement, it must control disbursement by use of joint payee checks or other means of limiting payment, and it must document its files to show that the loan funds were used for the intended purposes (e.g., pay a vendor directly from loan proceeds based on an invoice in file showing the purchase of an item authorized for payment under the Loan Authorization). Lenders must document each disbursement on an SBA loan. The lender and borrower must complete and sign Form 1050 at the time of first disbursement. If there are subsequent disbursements, the lender must document each disbursement and attach the documentation to the original Form 1050.
Inadequate equity documentation effectively compromises the full viability of the guaranty. This is a significant issue when the loan becomes an early default. SBA has provided better guidance on how to properly document a loan file for the borrower’s equity contribution; it now defines the process in three areas (equity evidence, equity source, and equity use). It is important to document the equity exactly as it is depicted in the SBA loan authorization.
3. Verification of financial information:
SBA requires that lenders obtain and review IRS tax transcripts to verify borrowers’ financial information. Also, when loan proceeds will be used to purchase an existing business and prior income is being used to support the selling price, the lender must verify the sellers’ financial information by obtaining IRS tax transcripts. The lender should document that any issues found in the verification process should be explained and resolved before loan disbursement. If the issues are not resolved, the lender should not disburse until SBA approval has been provided.