How do lenders submit SBA 7(a) loan servicing requests under SOP 50 57 3?

After a 7(a) loan has been disbursed to a borrower, the borrower may request a loan action that may need to be forwarded to the SBA by the lender via a servicing request. The request could be something simple like changing an address or it could be a variety of different requests such as assumptions, collateral substitutions or releases, obligor substitutions or releases, lien subordination or releases, etc. SBA’s SOP 50 57 3 Chapter 6 has been changed so that the lender is responsible for the appropriate review, analysis and action according to prudent lending standards for the requested servicing action. What’s that mean for the business owner? If you simply want to change your address that is considered a minor request but if you are requesting an assumption, obligor release or lien subordination the servicing request is going to be much more in depth for the lender to review.

Requirements in Effect at the Time of the Servicing Action

Another change to the 7(a) servicing process is most noticeable for assumptions and collateral or obligor substitutions. The SOP 50 10 requirements in effect at the time of the servicing action must be met (13 C.F.R. 120.180). Before this change, SBA used the rules in effect at the time the loan was originated. In other words, a requested loan assumption or substitution many years after the loan is closed must be evaluated with the current SOP 50 10 rules, not the rules that applied when the loan was originally approved. For other servicing action types please refer to Chapters 7-12 of SOP 50 57 3.

SBA Matrix

Chapter 3 of SOP 50 57 3 outlines whether or not SBA requires notification or approval of the requested servicing action. The SBA Matrix summarizes this chapter and provides a quick reference as to whether or not SBA must be notified/approved on any such servicing action. Note that the Best Practice to consider following is to include the version of the SBA Matrix used in the processing of the servicing action in the loan file. However, the current version of the SBA Matrix was last revised in February 2020 and has a reference to the definitions in Chapter 2 of SOP 50 57 2. It does not appear that the SBA Matrix has been updated since SOP 50 57 3 was published, and when it will be is unclear. Therefore, make sure to note which sections of the SOP were reviewed.

The Responsibility of the Lender

Chapter 6 focuses on the responsibility of the lender to analyze the borrower’s financial viability and short and long range needs without jeopardizing the integrity of the program. What SBA is interested in is the borrower’s ability to repay over the long-term more than what the lender may be able to recover.

As good practice, lenders are recommended to ensure loan modification requests are in writing from the borrower. If SBA approval is required, then the lender must forward a concise, clear email or letter to SBA regarding the request. SBA provides on page 68 of SOP 50 57 3 instructions as to where to send that email or letter. So as the borrower, you would put your loan modification request to the lender in writing, and if SBA approval is needed, the lender will communicate to SBA by email or letter, and not you.

Lenders must make the supporting justifications for any actions and document them in the loan file. These justifications and analyses must follow the step processes outlined by the SBA. If SBA approval is required, lenders must send in supporting documents with the SBA approval request. This verbiage in the SOP was changed to demonstrate that documentation and support are required vs. what was previously recommended or suggested (‘should be supported’ was changed to ‘are supported’ in the SOP). The change demonstrates that the SBA wants lenders to use and provide the facts.

If additional information is needed, the lender must obtain and analyze it prior to submitting to SBA. This includes the current financial statements and most recent two years of tax returns for all obligors, guarantors included. As the business owner, when you are thinking of modifying your loan, be prepared for your lender to request current financial statements and two years of tax returns for you and any guarantors, before the lender submits anything for modification. If an approved action materially changes the loan terms, the lender must receive written consent from all obligors. Otherwise, the lender risks losing its rights to recovery should the loan default. For example, a modification and reaffirmation agreement could be signed by all obligors.