(Management & Operations is again exactly what you think it is. SBA is reviewing your overall SBA operations and assessing whether management is involved in the day to day details or if they are nonexistent. A review of the structure of management including the Board of Directors and all committees is performed. The internal operating plan of management is also reviewed to determine if it is adequate for the size of the operation and to ascertain whether goals are attainable. If an SBA Credit Policy Manual exists, actual policies and procedures are reviewed to determine if they adequately follow the manual and are in conformity with the Code of Federal Regulations (CFR) and the SBA’s Standard Operating Procedures (SOP’s). Internal and external controls are also reviewed as they are always an important aspect of any management and operational structure.

The Credit Administration component consists of a review of all procedures associated with an SBA loan commencing with the application phase and concluding with the liquidation phase, if applicable. Therefore, application, underwriting, processing, closing, servicing, intensive servicing, collections, and liquidation areas are all reviewed in detail. The SBA is looking to ensure all borrowers are creditworthy small businesses with sufficient management experience to succeed in the stated endeavor, whether an existing or new business.

Pre closing and post closing check and balances are reviewed to determine if adequate internal controls exist. The internal risk rating system is also monitored to determine if it is assessing risk appropriately.  If loan agents or brokers are used in the application process, a thorough review of the entities and their involvement including underwriting is assessed to determine if a pattern or trend has occurred with past dues, delinquencies or liquidations.  Loan sales are also reviewed to determine if compliant with SBA requirements.

The Compliance component review encompasses borrower eligibility and reporting requirements.  All areas of borrower eligibility such as, credit not available elsewhere, personal resources test, size determination, no prior loss to the federal government and EPC/OC requirements, to name just a few, are reviewed when conducting loan review to ascertain compliance with all SBA mandates. Required reporting to SBA is also reviewed for completeness, accuracy, and timeliness.

The SBA Risk Based Review culminates with a written report documenting the review in detail and outlining any deficiencies noted. Any patterns or trends noted during the on-site review in both process and loan review will be stipulated as findings in the written report. The report is usually received within 60 days of the actual on-site review.

Common pitfalls for construction lenders can be found in several areas of the loan process. One area where issues can occur is the proper documentation of borrower injection for 7(a) lenders and borrower contribution for 504 CDC’s. If borrower injection or borrower contribution is a requirement in the Loan Authorization, properly documenting the injection or contribution is absolutely necessary in order to meet SBA’s requirements. Documentation in the borrower injection or contribution area can never be too much! 

Site Visits are also a very important part of construction lending. Adequately monitoring construction performance, the job site, costs, disbursements, and construction timeframes are integral to successful completion of a project. Keeping the borrower, general contractor, sub-contractors, lender, and sometimes a CDC happy while eliminating any mechanics and materialmen’s liens, is not an easy feat. Site visits are also required at various intervals of default, liquidation, and during some borrower servicing requests. Dollars spent in this area to ensure compliance with SBA requirements is money well spent.  Again, documentation in this area can never be too much!  

SBA wants to know the whole story intricately on each and every borrower when conducting the SBA Risk Based Review. This applies to a current, past due, delinquent, or liquidation loan. The only way to ensure SBA has the full story and accurately assesses your compliance is to properly document all loan files.

The most basic and the most advanced rules to follow in SBA are:  Document and Document. Prudent lending actions can be justified to SBA with proper documentation.