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SBA Loan Sales Image

SBA Loan Sales

Posted by: Peter Stein

Why 7A’s may get sold or transferred. Under what circumstances does this happen?

Importance of:

  • Authorization
  • 10 Tabs

Importance of avoiding glitches with SBA, such as “Paid in Full”

Handling transfers properly covers the gamut of 7A lending, from cradle to grave, because to do it right requires thinking about every aspect, from

  • Closing, to
  • Amendments, to
  • Servicing, to
  • Liquidation,

of any given SBA 7A loan.

Please be sure to note: transfers can only be to qualified financial institutions.
Anything else Royce determines to cover.

Seller’s overall concerns:

  • Is this loan in saleable form? If not, can I get this loan into saleable form?
  • How and when will I get paid?
  • Can I get stuck with liability for anything going forward after the sale?

Buyer’s overall concerns:

  •  Do I want to buy this? Is this a desirable loan or relationship?
  • Will I get the Bank in trouble by buying this?

Answers to the above, for both Buyer and Seller, depend on:

  • Credit quality
  • Is the SBA Guaranty effective?
  • Both of those answers depend in part on results of
    • Doc review
    • History of what happened after closing
    • Absence of past preference issues

The Loan Sale transaction components (THE FOUR P’S???):

The PARTIES: Who am I dealing with?

  •  SBA requirements
  • Reputation risk

The PRELIMINARIES: What needs to be in place before I share or look at anything?

  • Borrower Consent
  • Confidentiality Agreement
  • LEGAL: Importance of Consent of Customer and Confidentiality Agreement between Buyer and Seller, both to Buyer and to Seller
    • Privacy laws, lender liability
    • Watch out for pirated forms that aren’t appropriate to the deal

The PROCESS: What do both parties need to do, and to be concerned with, as they go through the process of getting from mutual interest in doing a deal, to getting it done

  • Specific role of legal counsel in document review
    • Spot issues
    • Recommend solutions

What to show; what to ask for; what to say

  • Buyer and Seller must agree on what needs to be shown and seen. What of the loan file should be offered by Seller, and should be required by the Buyer, for review?
    • Operative legal documents
    • Financial information
    • Loan history
    • Use participation sales as a model for what to offer and what to require
  • Why the Seller should let the documents speak for themselves
    • Avoid editorializing, whether oral or written, that in effect makes representations upon which Buyer could later claim to have relied in pushback claim against Seller
    • Avoid making unintended disclosures about the customer that could later form the basis of a claim against the Seller by the customer
    • Allow the Buyer to make an independent credit decision not influenced by the Seller
  • Why the Buyer has to be comfortable letting the documents speak for itself
    • Buyer needs to make an independent credit decision as if it were originating the loan as of the time of the transfer? Is this a loan the Buyer would want to originate?
    • At the end of the day, the documents are all the Buyer will have to rely on going forward

What banker, and legal counsel, and/or other outside advisor respectively, (collectively “legal”), focus on in Document Review

  • As to Credit Quality:
    • Legal—what are the Bank’s sources of recovery in case of default?
    • Banker—is the deal “pass rated’?
    • Borrower past performance
  • Is the SBA Guaranty going to be enforceable?
    • It all starts with the Authorization
    • How about changes? Servicing Memos? Are all changes well-documented for the preservation of the SBA guaranty?
    • Special emphasis on:
      • Use of funds
      • Preference issues
      • Collateral position (security agreements; assignment of rents; mortgages; titled goods; life insurance assignments; stock; other less common collateral; proper recordation and/or perfection as to all collateral)
      • Personal guaranties
      • Corporate guaranties
      • 10 Tab system guides the entire review process. (10 Tab is what would need to be presented if a claim under the SBA is ever to be asserted)

The PAPER: Documenting the transfer deal

  • To meet SBA requirements: use the appropriate transfer SBA form; advance approval required
  • To protect the Buyer and Seller, respectively (Loan Sale or Assignment Agreement, which is separate from the SBA form)
  • The Agreement or Assignment should include:
    • What is being assigned
    • Confirm that the sale is “as is, where is, what is”
      • Address the issue of whether the Buyer or Seller has responsibility and liability for what happened up to the moment of transfer, both in the Loan Agreement and in the appropriate box in the SBA form
      • Confirm that Buyer has performed an independent analysis
      • Other?

This information is general in nature and should not be construed for tax or legal advice.