Guaranty Purchase Process
SBA reviews requests to honor (purchase) a guaranty, to determine if lenders have complied with the SBA loan authorization, SBA requirements, and prudent lending practices.
The amount and types of documentation that lenders must include in a guaranty purchase package depends on the type of loan, use of proceeds, collateral, and other factors. Learn more:
When to Request a Purchase
A lender first may request payment on the SBA guaranty for loans made under most SBA loan programs following a 60-day uncured delinquency. However, in all loan programs SBA strongly encourages lenders to fully liquidate the loan prior to requesting purchase. Special rules apply for certain loan programs.
LowDoc Loans (SOP 50 50 4A Ch. 6, Para. 6.c.)
- A Lender can request purchase when:
- Lender has liquidated all personal property, except in bankruptcy situations, an
- Lender has indicated in writing how it will pursue all other sources of recovery.
- SBA will pay a maximum of 120 days of accrued interest.
- SBA will share in the reasonable and necessary expenses on a pro-rata basis up to its share of total recoveries.
SBA Express Loans (SBA Express Program Guide, Sec. 8)
Express loans are handled by either the Little Rock or Fresno Commercial loans Centers – whichever is appropriate for your institution.
Lender can request purchase when it has fully liquidated all collateral and pursued all avenues of collection. Exceptions:
- SBA will immediately process the purchase request of all Export Express Loans; and
- SBA will immediately process the purchase request of any SBA Express loan that:
- Has a principal balance of $50,000 or less at the time of the purchase request or
- Involves, regardless of the loan balance, bankruptcy, judicial foreclosure, litigation or other unusual liquidation circumstances likely to extend the liquidation process more than 90 days past the earliest date that the lender could request purchase. (Generally, the earliest date a lender could request SBA to purchase is when there has been an uncured default exceeding 60 days.)
When requesting the purchase of an SBA Express loan with a balance of $50,000 or less, the lender generally will not be required to substantiate the liquidation of business assets, although the lender must document the liquidation of all business assets in its wrap-up report. SBA will pay up to 120 days of interest.
EWCP (SOP 50 50 4A, Ch. 6, Para. 9.f)
Lenders may make demand as soon as the loan is classified as being in liquidation and 30 days after the earliest uncured payment default, but must not make demand later than 180 days after the earliest uncured payment default (See also SOP 50 51 2A, Ch. 10, Para 3).
Payment of Interest
- If SBA receives a lender’s complete purchase package within 120 days of default, then all interest is payable to the date of the purchase payment, including interest during the time SBA is processing the purchase, and also from the interest-paid-to-date until the date of default.
- If SBA does not receive lender’s complete purchase package within 120 days from the date of default, only 120 days of interest is payable.
- If lender has liquidated the loan prior to requesting purchase, lender is allowed to recover up to 120 days of accrued interest from liquidation proceeds. The rate of interest is the rate in effect on the day that the loan went into default. These interest days should begin with the interest-paid-to date up to 120 days maximum. SBA will then purchase the guaranteed principal balance remaining. Late charges are not covered under SBA’s guaranty agreement with a lender and therefore lender cannot recover such fees from liquidation proceeds.
Due to legislative changes, for loans that were approved between September 28, 1996 and September 30, 2000, SBA will pay the lender the rate of interest indicated in 13 C.F.R. § 120.122 less one percent. SOP 50 50 4A, Ch. 9, Para. 8.b. Congress eliminated this requirement for loans approved after September 30, 2000. See SBA Procedural Notice 5000-703 (Dec. 2000).
Lenders also should refer to the discussion below of the payment of interest for guaranties that are sold in the Secondary Market and 13 C.F.R. §§ 120.521, 120.522 and SOP 50 50 4A, Ch. 9, Paras.7-8.
Litigation Plan Approval
In some cases, the lender will or must seek assistance from outside legal counsel. In such a case, the lender will develop a written plan that encompasses the work to be performed and the fees to be charged. Depending on the nature and scope of this work, SBA may need to be consulted prior to implementation.
- No Prior Approval. SBA’s prior approval is not required for Routine Litigation. Routine Litigation means uncontested litigation, such as non-adversarial matters in bankruptcy and undisputed foreclosure actions, having estimated legal fees not exceeding $10,000.
- Prior Approval Required. Lender must obtain SBA's prior approval of a litigation plan before proceeding with any Non-Routine Litigation, as defined below: Non-Routine Litigation includes:
All litigation where factual or legal issues are in dispute.
- Any litigation where legal fees are estimated to exceed $10,000.
- Any litigation involving a loan where a Lender has an actual or potential conflict of interest with SBA.
- Any litigation where the Lender has made a separate loan to the same borrower which is not a 7(a).
- Any litigation involving the appointment of a receiver.
For all loans, either Center or District Counsel will review all attorney’s fees (even those under $10,000) incurred by the lender to ensure that they were necessary, reasonable, and customary (this includes post purchase reviews). This also includes cases where a litigation loan has been approved for legal fees in excess of actual final expenses.
If expenses are determined to be unnecessary, unreasonable or not customary they will be deducted from any purchase request. If the lender has already deducted them from recoveries, lender will be requested to reimburse the SBA for those fees and expenses deemed to be either unnecessary or unreasonable. In the case where legal fees are being reviewed as part of a post purchase review, copies of all attorneys’ invoices, as noted above, will be reviewed for necessity, reasonableness and whether or not they are customary for the area. If SBA Counsel determines that they were not reasonable, necessary and customary the lender will be responsible for reimbursing SBA for the fees that are disapproved.
Common Errors in Purchase Packages
Try to avoid the following scenarios when putting your purchase packages together:
There are no tabs or the package is not organized in order of the checklist or authorization.
The transcript is not signed and/or is not in the SBA 1149 format. All transcripts must minimally include the following:
- SBA loan name and 10-digit loan number
- Method used for interest computation (360 day or 365 day)
- Date and amount of each disbursement
- Date and amount of each payment showing principal and interest applications
- Date to which interest is paid (which should be the same date payment was received)
- Interest rate changes (for variable rate loans)
- Next payment due date (defined as the "default date," at which point the interest rate becomes fixed; no changes to the rate should be reflected thereafter)
- If applicable, amount of lender's successful bid at foreclosure sale (reflected on the transcript as a credit to the principal balance)
Early default issues:
- Evidence of equity injection is missing
- Settlement sheets are incorrect or do not have supporting documentation to evidence disbursements
- Post default UCCs are missing or are incorrect
- If the loan is an early default by a PLP lender, the credit memo and/or SBA Form 912 are often missing
IRS Income Tax Verification is often missing or incorrect.
If you are submitting a Low Doc loan for purchase, the liquidation of all non-real estate assets must be completed before the purchase request may be submitted unless the borrower has filed bankruptcy. We have received several Low Doc loan purchase requests where the liquidation has not occurred and there is no indication of bankruptcy, which causes us to assume that the purchase package is not ready to be submitted.
For all loans, in situations where liquidation has occurred at the time that purchase is being requested, the Report of Sale and Appraisal(s) (or some other satisfactory valuation of collateral), or final wrap up report are often missing. We cannot purchase the guaranty without these extremely important pieces of information.
- Site Visit Reports are often missing.
- Wire transfer information is missing.
- Environmental Questionnaire/Phase I, II is not provided when required.
- Risk Management Database information is missing.
- LowDoc Eligibility Checklist (if LowDoc Loan) is not provided when required.
Top Reasons for Repair and Denial
- Lien and collateral issues that result in missed recoveries (generally a repair) include:
- Failure to obtain required lien position
- Failure to properly perfect security interest
- Failure to fully collateralize loan at origination when additional collateral was available
- Unauthorized use of proceeds:
- Proceeds disbursed for purpose(s) inconsistent with the loan authorization or subsequent modifications without a business justification. (Could be a Denial if early default and improper use of proceeds caused the failure of the business)
- Same lender Non-SBA loan paid with PLP loan proceeds (preference)
- Liquidation deficiencies (generally a repair unless harm is the full value of the outstanding balance):
- Failure to conduct site visit which resulted in missed recoveries
- Improper safeguarding or disposition of collateral which resulted in missed recoveries
- Misapplication of recoveries to lender’s loan when SBA-guaranteed loan has lien priority
- Undocumented servicing actions (generally a repair):
- Liens not properly renewed during servicing on worthwhile collateral
- Release or subordination of collateral without documented business justification
- Allowing hazard insurance to lapse on major collateral and collateral was subsequently destroyed
- Failure to maintain life insurance on principal and principal subsequently dies
- Early defaults (denial if determined to be reason for business failure):
- Missing or unsupported verification of required equity injection (includes verification of source in some cases)
- Missing or unsupported documentation of verification of borrower financial information with IRS when financial information was relied on in lender’s credit analysis
- SBA loan eligibility (denial):
- Ineligible franchise
- Ineligible loan purpose
- Ineligible loan recipient (loan to an associate of lender)
Secondary Market Purchases and Post Purchase Policy
SBA strongly encourages lenders to purchase directly from the secondary market holder those defaulted loans that lenders had sold in the secondary market after loan closing. Should the primary lender refuse to purchase SBA will purchase from the secondary holder upon receipt of the documentation described below. If the primary lender purchases from the secondary market, and subsequently requests an SBA purchase, pre-purchase review submission instructions should be followed.
Documentation for Secondary Market Purchase by SBA
- Written notice and request for transcripts: The lender must advise SBA in writing that it will not purchase from the secondary market. SBA will then notify both the Fiscal Transfer Agent and the lender that SBA will purchase the guaranteed portion. The lender must send any future loan collections to SBA’s Denver Finance Center using SBA Form 172.
- Transcript of Account: It is strongly suggested the primary lender use SBA Transcript Form 1149. Failure to provide all of the required transcript information may result in a delay of the purchase and an invoice to the primary lender for the interest expense associated with that delay.
- Executed Copy of the Loan Authorization
- Executed Copies of all Payment Modifications: Enclose copies of all deferment and other payment/terms modifications.
- Investor Approval of all Payment/Term Modifications: As required, (refer to the 1086 and applicable SOP).
- Email address to which a copy of the purchase transaction summary should be sent
The above should be sent to the Herndon Center (via regular or over-night mail only) and be clearly marked as a secondary market purchase request.
Post Purchase Review
Within 15 days of purchase the primary lender will submit a Post Purchase Review (PPR) documents package. Instructions for preparation of the PPR package are the same as those for submitting a guaranty purchase request for a loan not sold into the secondary market (Pre-Purchase Review). Please use the new Universal Purchase Package (UPP) to organize your purchase request.
Questions regarding Secondary Market issues? Contact the Fiscal Transfer Agent at FTA@SBA.gov.
Denials of Liability and Repairs
SBA’s general policy for guaranty purchases is to reach a fair decision based on a thorough review of lender’s purchase request and all relevant documentation. If a lender has been deficient in its handling of a loan, the SBA office processing the purchase will attempt to reach an equitable resolution with the lender, which may involve the lender agreeing to a monetary adjustment in the amount of SBA’s guaranty (referred to by SBA as a "repair").
However, SBA may consider a denial of its liability under its guaranty or litigation to recover funds SBA already paid under its guaranty to the lender (or secondary market holder) if the lender is not negotiating in good faith, the lender is unwilling to agree to a repair that reflects the harm caused to the SBA, or the lender’s actions are sufficiently serious that a repair would be inappropriate. SBA regulations at 13 CFR §120.524 describe when SBA will be released of liability on a loan guaranty. Lender also should consult the guaranty purchase procedures in SOP 50 50 4A, Chapters 9 and 10, and SOP 50 51 2A, Chapter 13.
Expiration of guaranty after maturity: If the lender fails to request purchase within 120 days after loan maturity, SBA is not legally obligated to purchase the guaranty. 13 C.F.R. § 120.524. Under certain circumstances, SBA may permit reinstatement of the guaranty and extension of the maturity (thereby extending the period during which the lender may request purchase). For example, reinstatement may be appropriate if the lender was actively servicing or liquidating the account with SBA knowledge or concurrence, and inadvertently failed to timely request purchase or extend the loan maturity.