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(This is Part One of a two-part series on guaranty purchase.)
To request SBA honor its guaranty by purchasing the SBA guaranteed portion of a 7(a) Loan (“guaranty purchase”), Lenders submit a Universal Purchase Package (“UPP”). The UPP is a is the set of documents prepared and submitted by a 7(a) Lender to support the guaranty purchase request. After receiving the guaranty purchase request, SBA’s first step is review of the UPP by the appropriate SBA Center, which is determined based on the loan amount, delivery method, and location of the Borrower. For example, guaranty purchase review for Standard 7(a) loans—which are loans greater than $500,000—begins at the National Guaranty Purchase Center (“NGPC”). For loans $500,000 or less and SBA Express loans, guaranty purchase review begins at the appropriate Commercial Loan Service Center (Fresno or Little Rock, based on the Borrower’s location).
During guaranty purchase review, the Center thoroughly reviews all documentation provided to support Lender’s request and forms a conclusion, based on the facts presented, whether the Lender’s origination, closing, servicing, and liquidation of the loan was in accordance with the loan documents, regulations, and SBA Standard Operating Procedures in place at the time of guaranty purchase. The Center then makes a recommendation in writing regarding whether SBA is legally obligated to honor the guaranty on the loan. The Center may recommend that SBA fully honor the guaranty, or the Center may recommend a partial or full Denial of Liability.
As defined in SBA SOP 50 57 3, Denial of Liability means:
“a determination made by SBA pursuant to 13 C.F.R. § 120.520 and 13 C.F.R. § 120.524 that it is not obligated to purchase the guaranteed portion of the 7(a) Loan. SBA may Deny Liability for the full amount of the guaranteed portion of the Loan or any part thereof.”
Denial of Liability may be either partial or full. A partial Denial of Liability is justified if the Lender's actions or inactions caused, or could cause, a Material Loss but less than a total or near total loss on the Loan, and the Lender does. A full Denial of Liability is justified if the Lender's actions or inactions caused an actual or anticipated total or near total loss on the Loan, resulted in SBA guaranteeing an ineligible Loan, or are deemed material to the soundness or integrity of the 7(a) Loan program and the Lender does not voluntarily agree to terminate the SBA Loan guaranty. Alternatively, a Lender may voluntarily agree to a Repair: A specific dollar amount that SBA will deduct from the amount that SBA pays on the SBA guaranty for a 7(a) Loan, to compensate SBA for an actual or anticipated loss on the Loan caused by the Lender’s actions or inactions. A Repair does not reduce the SBA Loan guaranty percentage or SBA’s pro-rata share of expenses or recoveries. Generally, a Repair is appropriate when the Lender's actions or inactions have caused an actual or anticipated loss that justifies a partial Denial of Liability by SBA.
If the Center recommends partial or full Denial of Liability, the Lender has three options:
- Agree to the Denial of Liability and repay any amount owing to SBA.
- Disagree with the Denial of Liability and provide additional information to the Center.
- Disagree with the Denial of Liability without providing additional information.
If the Lender has a good faith disagreement with the Center’s recommendation, the Lender should consider disagreeing and providing additional information. For example, if the Lender can provide additional relevant facts that directly address the basis for the Center’s recommendation, those facts should be provided with the Lender’s response. The final authority to deny a guaranty lies with SBA Headquarters, so if the Lender disagrees without providing additional information, the Center’s recommendation will be forwarded for a Headquarters decision.
In Part Two we will discuss Headquarters decisions regarding guaranty purchase and the possibility of appeal.
Helpful Links
Guaranty Purchase Process:
https://www.sba.gov/about-sba/sba-locations/loan-guaranty-centers/national-guaranty-purchase-center-herndon-va/guaranty-purchase-process#section-header-0
If your lending institution has questions about SBA guaranty purchase review, or other SBA lending matters, please contact us at SBAQuestions@JellumLaw.com.
This article is provided for general information and educational purposes only. It does not solicit, establish, or continue an attorney-client relationship. The contents should not be construed as legal advice or opinion. If the organization would like formal legal advice, our professional liability insurer (as well as the applicable attorney ethical rules) requires that we establish a formal attorney-client relationship. If you are interested in learning more about working with Jellum Law, please contact us at SBAQuestions@JellumLaw.com.
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