Administration of the SBA Loan Guaranty Program

Due to often contradictory federal banking regulations, it’s doubtful that private commercial lenders would fulfill the demand for small business financing without assistance from the Small Business Administration (SBA). The agency provides the private lender with a financial enhancement in order to facilitate the extension of credit that might otherwise not be unavailable.

The program essentially allows the lender to apply to the agency for a guaranty covering a portion of a small business loan. The agency considers this application based on a set of eligibility standards that defines the characteristics of borrowers who are qualified to receive assistance. There are also some restrictions on how the proceeds of these guaranteed loans may be used.

The lender actually provides the funding for the loan and will always have direct exposure risk for a constant percentage of the outstanding principal balance. The lender is the primary contact for the borrower in servicing the loan account. The borrower is not involved directly with the agency unless there is a loan default. In the case of a default, the agency may then be required to buy the guaranteed portion of the loan from the lender and then initiate collection efforts directly from the borrower.

Since the agency rarely meets the borrower or visits the business, the SBA must rely on the written application of the lender in order to approve the request for a guaranty. The requirements for this application include an extensive list of information designed to ensure the borrower’s compliance with the many financial, regulatory, and business qualifications that help to reduce the lender’s exposure to loss. When approved, the guaranty is provided via a standard SBA authorization agreement which is executed by the lender and the SBA. Utilization of the SBA program does not subject the borrower to any additional scrutiny or attention from any other federal agency.

Any federal- or state-chartered bank can participate in the SBA Loan Guaranty Programs. In addition, a limited number of SBA-licensed nonbank lenders also have the capability to make SBA-guaranteed loans. Each lender is required to enter into a Participation Agreement which outlines the lender’s responsibility to comply with the program regulations. Regulatory authority for the SBA and the general regulations of its business credit programs are taken from the Code of Federal Regulations, Volume 13, Business Credit and Assistance.

The SBA Loan Guaranty Programs are operated under a common set of rules known as the Standard Operating Procedures (SOPs). They are administered by more than sixty district offices located throughout the country, each with a district director.

Supervision of the 7(a) Program is managed by the finance chief in each district. These districts are organized into ten regions, which are headed by a politically-appointed regional director, who is involved with the broader policy issues involving the agency.

Finally, the SBA guaranty carries the full faith and credit of the federal government, enabling lenders to sell the guaranteed portions of these loans to investors and provide some liquidity to the lender’s loan portfolio. This is particularly important to smaller-sized community banks, which may have limited capital with which to fund loans.




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