In one of our recent articles, A Beginner’s Guide to SBA 7(a) Lending, we explored a few of the basic fundamentals of the SBA lending industry. Although this framework was geared to help guide novice SBA lenders, many of the key risks highlighted in the article predominantly occur when proper controls are not thoughtfully established and executed. All lenders – regardless of experience – must recognize that implementing proper controls is critical to a successful partnership with the SBA and the longevity of the institutions’ SBA strategy.
Whether lenders are new to the space, operate a seasoned SBA department or utilize a Lender Service Provider (LSP), these five (5) key controls should always be carefully considered:
1. Education (keeping up with the ever-changing rules)
Maintaining a successful SBA department starts with at least one expert that is well versed in the SBA program and understands that staying educated on the regulatory environment is key as program rules and regulations constantly evolve. These intricate rules must be understood, and there must be a system in place to: 1) identify rule changes and 2) systematically implement process updates to address these changing requirements regularly enforced by the SBA. Although notice of rule and requirement changes can appear elsewhere, they are primarily found in Procedural Notices and the issuance of new Standard Operating Procedures (SOP) (currently SOP 50 10 5 J and SOP 50 57 2).
2. Checklists and Automation
Not every relationship manager, loan officer, underwriter or internal operations employee will have extensive SBA experience. Several best practices for sharing expertise across the department include the utilization of initial eligibility checklists, loan closing documentation checklists and SBA liquidation checklists. Adding automation to trigger checkpoints and creating escalation events is a useful way to ensure lender personnel remain consistently on track.
3. Delegated (‘PLP’) vs. Non-Delegated
The SBA grants Delegated Authority to experienced SBA lenders. For lenders utilizing Delegated Authority, be sure to build and implement a strategy surrounding when to use and not use Delegated Authority, as not all loans must be (nor should be) authorized using a lender’s delegated authority. Any time a lender is exploring opportunities that involve unfamiliar industries, eligibility grey areas and borrower or guarantor background issues, submission through the General Program should be considered. Working jointly with the Loan Guaranty Processing Center (‘LGPC’) to authorize a loan through the General Program can ensure a lender receives proper guidance directly from an SBA specialist on their opportunity. Once a lender has become more familiar with an industry or loan structure, creating a specific Delegated Authority matrix that clearly defines when to (and when not to) close loans utilizing delegated status helps control risk and should bolster guaranty protection.
4. Closing Attorneys and Documentation Reviews
A common phrase in the SBA space is “Document, Document, Document!” SBA loans carry very specific requirements for application documents, closing documents and ancillary closing documents. Utilizing an SBA experienced closing attorney is a great way to ensure that an SBA loan is documented appropriately, giving further confidence to the protection of the loan guarantee. If not using a closing attorney, lenders should (at the very least) implement a control requiring the completion of a pre-close documentation review of SBA specific application and closing documents.
5. Audit Support
Lastly, the SBA’s oversight arm, the Office of Credit Risk Management (OCRM) performs several types of lender audits, both offsite and onsite. Lenders should not only dedicate staff to these audits when they are conducted, but also implement recurring internal audits focused on PARRiS review methodology. OCRM audits are an opportunity to strengthen a lender’s partnership with the SBA so it’s important to devote the proper time and resources for these events.
In closing, lenders do not want to be on the wrong end of a repair or denial that could have easily been avoided by adhering to proper controls well in advance. It’s not rocket science, but with negligence in any of these areas, headaches will be inevitable down the road. Management should have a strategy for sharing expertise and automation across the different functions, as well as strategy for loan submission types, closing attorneys and OCRM audit reviews.
About Windsor Advantage, LLC
Windsor Advantage provides banks and credit unions with a comprehensive outsourced SBA 7(a) and USDA lending platform.
Since 2010, Windsor has processed more than $2.1 billion in government guaranteed loans and currently services a portfolio in excess of $1.2 billion (as of September 30, 2018) for over 80 lenders nationwide. With more than 150 years of collective SBA experience, cutting-edge technology, rigid controls and consistent processes, Windsor Advantage is uniquely qualified to assist any sized lender with implementing a thoughtful and profitable government guaranteed lending initiative.
Windsor Advantage has a team of 26 professionals with offices in Chicago, Illinois; Indianapolis, Indiana; and Charleston, South Carolina. For more information, please contact Andrew Sheaffer at (312) 248-8530 or visit www.windsoradvantage.com.
About the Author: Jeff Nogle manages Windsor’s overall risk management process, with a focus on documentation and compliance. Prior to joining Windsor, Jeff was an associate at Charles River Associates where he gained extensive experience in business valuation and complex litigation.