On August 16th at the Great Lakes Small-Business Lenders Conference in Detroit, MI, three expert SBA Lender Service Provider (LSP) panelists were assembled to speak on the topic of “How to Best Engage LSPs”. The Q&A session was focused on increasing awareness of the services provided by LSPs and how to establish a favorable relationship with these organizations.
Will McClain, Managing Director of Windsor Advantage, had the privilege of representing the company as one of the panelists. Windsor has provided a summary of some of his key responses to questions from the audience in this blog:
Question: When is it required for a Lender to have a fully executed Lender Service Provider Agreement (LSPA) on file with the SBA?
Will McClain: Anytime a Lender is utilizing a third party to assist with SBA lending functions that they would typically do on their own. Examples are processing, closing, secondary market sales, documentation review and/or liquidations. In each of these instances, a Lender should insist on having an agreement on file with the SBA.
Question: From an outside audit and regulatory compliance perspective, what kind of support do LSPs provide Lenders?
Will McClain: A full service LSP should provide the support needed to Lenders for both internal and external audits. However, there is no substitute for having an experienced individual in-house that understands not just the process, but the credits. An LSP cannot replace strong controls, but rather supplement a strong process. For example, the Office of Credit Risk Management (OCRM) expects a Lender to be able to provide credit and process knowledge to their auditors without LSP interaction. The Lender is ultimately responsible for ensuring SBA compliance.
Question: Under what circumstances should a Lender consider engaging an LSP?
Will McClain: Whether Lenders are trying to grow assets, increase non-interest income or simply expand their product offering, an LSP can be an effective partner in achieving that goal. A typical prospect will be starting a new department or looking to materially increase loan volume. Often times, Lenders may have individuals with limited experience and need support to grow. LSPs can help provide scale, consistent processes and added expertise for Lenders. Some institutions may want to utilize an LSP early on and eventually bring the process in-house or operate under a limited capacity LSP relationship. We’ve seen Lenders be successful using either strategy.
Question: What is an appropriate LSP fee structure that is reasonable and economical for Lenders?
Will McClain: This will depend on the Lender’s SBA program goals and objectives. Some Lenders may only need support in specific areas, such as loan processing, and there are LSP’s in the market that will charge based on specified services, agreed upon up-front. This could be hourly or per loan file. A full service LSP might charge on a “percentage of loan” basis for all services. Generally speaking, fee structures should be per transaction and on a variable cost basis.
Question: What happens if a loan receives a “repair” or “denial” from the SBA and who is ultimately responsible?
Will McClain: In the eyes of the SBA, the Lender is always responsible in the event a repair or denial occurs. LSP Agreements typically include language outlining the responsibilities agreed upon by the Lender and their Service Provider in the event of monetary loss. Lenders should always understand these clauses and ensure that they are aware of the consequences.
Question: What are some key points that Lenders should consider when evaluating LSPs?
Will McClain: The first thing a Lender should consider is the scope of services offered by the LSP. Companies will provide a variety of services and finding the right fit is the most important step. The LSP’s culture, differentiators and core values should be aligned with the Lender’s strategy for SBA and USDA Program participation.
Second, Lenders should understand the experience level of each LSP, such as the number of loans they have processed, serviced and liquidated. An LSP is expected to provide expert support in all of the services they provide. Since the SBA landscape changes regularly, experience and repetition help to ensure these organizations remain cutting edge in the industry.
Third, Lenders should confirm an LSP maintains a robust information security program which is tested and validated through third party audits, such as SOC I Type II, Disaster and Business Continuity Planning and Network vulnerability testing. Larger LSPs, such as Windsor, may undergo additional regulatory scrutiny from agencies outside of the SBA, such as the FDIC, OCC, NCUA and state regulatory bodies.
About Windsor Advantage, LLC
Windsor Advantage is a Lender Service Provider that provides banks and credit unions with a comprehensive outsourced SBA 7(a) and USDA lending platform.
Since 2010, Windsor has processed more than $2.0 billion in government guaranteed loans and currently services a portfolio in excess of $1.1 billion (as of July 31, 2018) for over 80 lenders nationwide. With over 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 28 professionals with offices in Chicago, Illinois; Indianapolis, Indiana; and Charleston, South Carolina. For more information, please contact Andrew Sheaffer at (312) 248-8530.