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Community banks and the SBA 7(a): Three questions to ask third-party servicers

March 22, 2017 Article 1 min read
The flagship lending program of the U.S. Small Business Administration, the SBA 7(a) program, has advantages for both lenders and small business owners.

The flagship lending program of the U.S. Small Business Administration, the SBA 7(a) program, has advantages for both lenders and small business owners. For lenders, the program provides a guarantee on business loans that can help the bank safely grow its commercial lending portfolio. For small businesses, the guarantee helps them obtain loans on better terms than a traditional commercial loan — with more flexibility in structure, which in turn helps the entity’s cash flow.

Due to the lack of SBA experts on staff, many community banks turn to third-party packaging agents who work directly with the borrower to manage loan-related paperwork and streamline the application and approval process. Working with third-party servicers also allows banks to be more flexible in their loan structures, which can help boost CRA numbers. 

But, as the SBA 7(a) program grows and the number of third-party vendors also grows, it's critical for you as a lender to fully vet any servicer you're considering for SBA 7(a) processing. Servicers have been under increasing scrutiny by the SBA's Office of Credit Risk Management, and any loan that’s not closed exactly to the program's policies and procedures can have serious ramifications for lenders, including loss of your SBA guaranty.  
Before engaging with any third-party servicer, be sure to ask about:
  1. Fee structure, including setup fees, when fees are payable, and whether fees charged by the third-party servicer need be reported to the SBA after a certain percentage or dollar amount.
  2. Experience prior to becoming a third-party processor: Does the servicer know the banking industry inside and out? Has it worked as a commercial lender using the SBA program? Does the servicer have SBA certifications and/or belong to SBA-recognized organizations such as NAGGL (National Association of Government Guaranteed Lenders)? 
  3. References of other community banks who have worked with the servicer. Contact all references, and ask whether the servicer is knowledgeable about the SBA, responsive to correspondence from the bank and borrower, and whether the bank would hire the company again.  
In many cases, working with a third-party servicer can be an efficient and cost-effective route for community banks. But due diligence during selection is a must to ensure the SBA 7(a) program not only helps your customers grow their businesses, but also helps your institution grow its portfolio of sound loans.  

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