One of the most important details of an SBA Loan Authorization is often the most overlooked: accurately posting the borrower’s monthly payments. Here's where lenders can go wrong, and why it’s important to get it right.
When a lender is issued a Loan Authorization from the Small Business Administration (SBA), the document can be construed as a “clear-to-close” from the SBA, providing the lender with SBA’s blessing to close and fund the loan. The Loan Authorization acts as a closing outline, detailing specific items the lender and borrower must comply with to appropriately close the loan and retain SBA’s guaranty. Within the Loan Authorization are detailed Repayment Terms, or SBA Note Terms.
Each 7(a) GP loan authorization states “Lender must insert…to be executed by Borrower, the following terms, without modification…” and then outlines the note terms the borrower will agree to at closing. As simple as it may be to copy the verbiage from the authorization, it is also imperative the lender follows the note terms when booking the loan, as well as when posting and reporting payments to SBA and their fiscal transfer agent (FTA), Guidehouse. Accurately posting the borrower’s monthly payments is one of the most important details of this section of the Loan Authorization – and is also often the most overlooked.
All SBA loans accrue interest daily. These are referred to as daily simple interest loans. The note terms contained in the Loan Authorization are as follows: “Lender will apply each installment payment first to pay interest accrued to the day Lender receives the payment, then to bring principal current, then to pay any late fees, and will apply any remaining balance to reduce principal.”
For loans in regular servicing status, when the borrower makes a payment, the lender must apply for the payment so that interest is paid current to the date of the payment. Once the interest is paid current, the lender can apply the remaining funds to the principal balance. If the borrower has incurred a late charge or other fees on the loan, and they have paid additional funds towards those fees, the fees can only be satisfied if the interest on the loan is current. If the interest is not current, SBA expects any additional funds paid to be applied to interest until the interest is brought current.
Why is this important?
If the loan is sold on the secondary market, Guidehouse is reconciling the 1502 report a lender submits on a monthly basis. They post the payment in their system according to the note terms, and if the lender has not posted the payment, in the same manner, it will cause the loans to be out of balance.
If Guidehouse’s records do not match the 1502 report submitted by the lender, this generates what Guidehouse refers to as a “Payment Discrepancy Report.” The report is sent to the lender if there is a principal discrepancy greater than $10.00 or a paid-to-date discrepancy greater than two days. Depending on how great of a discrepancy there is, reconciling the transcripts could result in additional funds owed to Guidehouse.
Additionally, whether a loan is sold or unsold, if it were to ever fall into liquidation status, SBA requires the lender complete SBA Form 1149 – Lender’s Transcript of Account. This transcript requires the lender to report the date of every payment the borrower made, along with the interest-paid-from and -to dates. If the interest-paid-to dates do not reflect that interest was paid current to the date of the payment, SBA will require the lender to correct any payments that were not applied in accordance with the note terms. Imagine having to go back and adjust every monthly payment the borrower made over the life of the loan to correct the interest-paid-to-date! It is a time-consuming effort that can also result in a higher principal balance left over once the transcript is corrected.
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