The 2021 SBA lending program enhancements and payment subsidies have changed how many lending institutions are approaching traditional SBA lending. If your institution is new to the space or has many years of SBA experience, there are numerous benefits of the program that could lead to large increases in SBA lending activity:
- 90% guarantee until September 30, 2021
- No upfront guarantee fee for borrowers
- No ongoing guarantee fee for lenders
- Up to 6-months of covered P&I payments for borrowers
Whether it is unfamiliarity with the Small Business Administration’s requirements or simply the time and staff it takes to manage SBA portfolios effectively, building an SBA lending department is difficult and can require a large upfront investment. As a result, many lenders may look for outside assistance to execute an effective and profitable SBA lending strategy. A popular option for many institutions is to utilize the services of a Lender Service Provider.
What is a “Lender Service Provider”?
Per the SBA, a “Lender Service Provider” (LSP) is defined as an Agent who carries out Lender functions in originating, disbursing, servicing, or liquidating a specific SBA business loan or loan portfolio for compensation from the Lender.
13 CFR §103.1(d) and SOP 50 10 5(J), Subp. B, Ch. 3, Para. IX.A.3.
As a lender, navigating the rules and regulations outlined in the SBA’s latest Standard Operating Procedure (SOP) can be difficult. This is especially true in a year with procedural notices and regulations evolving more frequently. In this article, we’ll explore why lenders should consider SBA loan outsourcing to manage increased volume in 2021.
Short-Term Staffing Needs
There is an immediate need in a highly competitive environment to find experienced SBA underwriters.. If internal resources are not readily available, it can be difficult to train employees on the intricacies of SBA lending before September 30, 2021 when the 90% guarantee on 7(a) loans expires. Prepared lenders can take immediate advantage of processing more loans as the requests begin to come through the door.
Without adequate staffing even seasoned employees can become overwhelmed with the volume of new applications. Shifting employee roles can help temporarily fill the gap, but can expose lenders to bigger risks when it is time to request that the SBA honor their guarantee. Slowdowns in the process can also cause a serious reputational risk to the lender as pipelines become heavily backlogged. An experienced LSP has the SBA subject matter experts needed to take on immediate volume. This can limit the risks to an institution now and in the future.
Increased SBA Compliance
With the increased public awareness of the SBA’s lending programs and the anticipated higher volume, expect congress to keep a close eye on managing the risks that may come from the fervor. Frequently changing policies and increased funding allocations ($75 billion in FY2021 v. $30 billion in FY2020) for the Program will make keeping up with the rules a tough task for banks with limited experience in the space. Expect much of this oversight to come from the Office of Credit Risk Management (OCRM), the organization responsible for overseeing SBA lending. Through periodic lender reviews and regular portfolio oversight, OCRM can penalize lenders, even stripping them of their Delegated (or PLP designation) Authority for processing SBA loans. Taking the time to ensure existing procedures are in accordance with the SBA’s requirements, completing file reviews, updating internal folder organization, and training your department are all excellent ways to ensure SBA 7(a) Loan Program compliance. An LSP should always keep processes and procedures up to date with the most recent guidance provided.
As information becomes increasingly digital, the importance of the security and confidentiality of borrower information becomes elevated. Seasoned LSPs maintain a modern and robust Information Security Program to ensure the protection of all data they may handle. It is wise for lenders to evaluate other controls such as third-party SOC audits (if available) and other regulatory body reports.
Long-Term Continuity
Decisions to hire and build an in-house SBA team can incur significant upfront costs to institutions. Meanwhile, loan volume after September 30, 2021 remains uncertain and many lenders could find themselves in a difficult situation when it comes to managing resources after some program benefits expire.
Partnering with a Lender Service Provider in times of economic uncertainty can provide stability for lending institutions with an eye towards the future. Often, there are no upfront costs to engage LSPs, so the startup cost is minimal. An experienced LSP can work with lenders across the country to develop an innovative and sustainable SBA platform without the need for significant investments in personnel and systems. Some institutions may want to utilize an LSP to start their department while others may choose to limit their engagement. Lenders should expect an LSP to provide a wide range of options for a lender to be successful with either strategy.
A lender must take the time to ensure that the LSP is fully qualified and has the experience and capacity to fully support your institution’s anticipated volume. When interviewing LSPs, look at the quality of the LSP’s policies and procedures for each vertical of the SBA process. This will ensure the LSP is thoughtful in the implementation of their process and capable to scale as their partners’ SBA volume grows. For further discussion of what to look for when assessing an LSP, see How to Choose a Lender Service Provider in 5 Easy Steps.
Windsor Advantage provides a comprehensive SBA lending platform on a variable cost basis with no minimum volume, no minimum loan size, and no fixed fees. Windsor also offers continuing training and technical assistance to lenders at no upfront cost. These benefits ensure financial institutions can build an efficient and profitable SBA initiative without any of the quantitative or qualitative risks associated with scaling up in-house.
Contact us today if you are interested in learning more about how Windsor Advantage can support your institution with SBA loan outsourcing in 2021 and beyond.
About Windsor Advantage, LLC
Windsor Advantage provides banks, credit unions and CDFIs with a comprehensive outsourced SBA 7(a) and USDA lending platform.
Since 2010, Windsor has processed more than $2.8 billion in government guaranteed loans and currently services a portfolio in excess of $1.8 billion (as of December 31, 2020) for over 100 lender clients nationwide. With more than 150 years of cumulative SBA lending experience, cutting edge technology, rigid controls and consistent processes, Windsor is uniquely qualified to assist any size lender with implementing a thoughtful and profitable government guaranteed lending initiative.
The Company is headquartered in Chicago, IL with offices in Indianapolis, IN and Charleston, SC. For more information, call (317) 602.6648 or visit windsoradvantage.com.
About the Author: James Tibert is responsible for Windsor’s marketing and sales operations functions. Prior to joining Windsor, James worked for Meridian Loan Partners, a FinTech platform (Acquired by Windsor in January of 2020) specializing in SBA loan intake and processing.