SBA 7(a) loans can be a beneficial asset class for lenders, but it requires an intimate knowledge of the process and rules that govern the Program. There are many nuances to SBA loan servicing compared to conventional loans and certain areas can easily be overlooked, creating issues that can be complicated to unwind. When not properly addressed, many of these issues can become the focus of regulatory agency exams.
Through our experience servicing a portfolio of more than $1 billion in SBA 7(a) loans, Windsor has identified 5 recommended areas for lenders to apply minor changes that can make a big impact on process and oversight.
1. Payment Schedule
Set limited due date options for all borrowers. Using consistent due dates eases the administrative burden of tracking various due dates and accurately reporting data on the monthly 1502. SBA 1502 Reporting period includes the first calendar day through the last calendar day of the prior month. If there was to be an issue with a payment later in the month, it would be difficult to resolve in a timely manner prior to month-end wrap up.
2. Accrual Method for Sold Loans
This is a very simple step many lenders overlook when boarding the loan on their servicing system. If it is the lender’s intention to sell the loan in the secondary market, there are only two methods permitted – 30/360 or Actual Days/365. In order to avoid troublesome reconciliation issues, it is recommended to keep the main loan record and participation loan record on the same accrual method. It is very difficult to have the accrual method changed from what is entered on the 1086 Secondary Loan Participation Agreement after settlement.
3. Payment Method
ACH payments, or automatic bank withdrawals, can help to save time for both the borrower and bank. On the borrower side, there is no need for reminders to manually pay online or mail a check, which should help to avoid late fees or missed payments. On the lender side, ACH payments streamline the process often flowing though the bank core processing system without interference.
4. Investor Accounts
The SBA and USDA Office of Credit Risk Management (OCRM) Risk-Based Reviews (RBR) feature a composite risk measurement methodology and scoring guide known as “PARRiS” (Performance, Asset Liability Management, Regulatory Requirements, Risk Management, and Specialty Items). The SBA Form 1086 Secondary Market Participation Guaranty agreement states, “Lender agrees to deposit the pro rata share of borrower’s payment due to the FTA in a trust account with the name ‘Colson Services Corp., FTA, in trust for the individual security beneficiaries’.” OCRM will review the lender for compliance as part of their examination. It is recommended to establish a custodial account to retain the funds due to Colson monthly as part of the SBA Form 1502 remittance process.
5. Credit Bureau Reporting
OCRM also examines a lender’s policy on Credit Bureau Reporting as part of the audit. In the December 2015 SBA Information Notice 5000-1330, the SBA clarifies earlier SOP 50 57 7(a) statements regarding Credit Bureau Reporting of SBA 7(a) loans. All lenders are required to report information to the appropriate credit reporting agencies whenever they extend credit via an SBA loan.
Managing over 2,000 SBA loans, our team has learned to avoid common mistakes and helped more than 70 lenders to improve back office efficiencies. These key elements can strengthen a lender’s SBA loan servicing operation while helping to protect the loan guaranty.
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 $1.6 billion in government guaranteed loans and currently services a portfolio in excess of $1.2 billion (as of October 31, 2017) for more than 75 lenders nationwide. With over 150 years of collective government guaranteed lending experience, cutting-edge technology and rigid controls, Windsor Advantage is uniquely qualified to assist clients with implementing a thoughtful and profitable lending initiative.
Windsor Advantage has a team of 30 professionals with offices in Chicago, Illinois; Indianapolis, Indiana and Charleston, South Carolina. For more information, please contact (312) 248-8530.
About the Author: As Director of Servicing, Leonard manages the servicing of more than $1.0 Billion in SBA and USDA loans. Prior to joining Windsor, Leonard spent more than a decade working with a diverse mix of companies on financial and strategic projects as both a manager and consultant. He can be reached at (317) 808-5946.