One of the most important requirements of SBA lending relates to the lender’s monthly reporting requirements utilizing SBA Form 1502, Guaranty Loan Status & Lender Remittance Form. This form includes loan status information for all SBA guaranteed loans, regardless of whether the borrower made a payment in the current month. Lenders must submit these completed forms to the SBA’s 7(a) Fiscal and Transfer Agent, Colson Services Corp. (Colson). The due date for transmitting loan account updates and payments to Colson is the third calendar day of each month, or the next business day thereafter if the third calendar day of the month is not a business day, plus a two-business day grace period.
SBA Form 1502 reports highly detailed information about each SBA loan including installment due dates, the amount disbursed during the current period, the amount undisbursed on the total loan, interest rate, guaranteed portion interest payments, guaranteed portion principal payments, interest paid to and from dates, ongoing SBA guarantee fees due, principal and interest participation remittances to investors who purchase the guaranteed portion of the loan, prepayment/payoff information, and liquidation status information.
The importance of properly completing this form cannot be understated. To follow are the most common, but avoidable errors lenders make when completing this form and tips for accurately completing Form 1502 monthly.
- Failure to report approved loans which are undispersed. Lenders often overlook including undisbursed loans within the 1502 report. To avoid an error from Colson, the lender must simply report a status code “9” associated with all fully undisbursed loans in the Form until the loan is closed and disbursed.
- Failure to accurately report payment or disbursement activity during the month. ALL payment and disbursement activity during the month must be reported on Form 1502; however lenders often prepare this form early and neglect to check their loan reporting systems for payments or disbursements within the last few days of the month. As a result, at times, activity occurring at the end of the month is mistakenly reported in the subsequent month and significant late penalty fees may be assessed if associated participation remittances are submitted late. Therefore, it is critical for lenders to always double check loan disbursement and payment activity prior to submitting the monthly Form.
- Improperly calculating interest. The SBA permits only the 30/360 or Actual/365 interest accrual methods when a loan is sold. However, lenders frequently and unknowingly book loans utilizing the 365/360 method, which can result in illegally setting the interest rate higher than the statutory maximum rate (if fully priced). This also causes the loan to become out of balance relative to the interest accrual method selected on SBA Form 1086 (Loan Sale Participation Agreement).
Additionally, the SBA Note requires interest to be calculated from the date of loan disbursement through the date the lender receives funds for payment; and then the dates to and from when lender receives funds for payment after the loan is fully disbursed. Lenders commonly track interest payments from payment due date to payment due date per the actual billings. This often creates situations where too much is allocated to either principal or interest within a payment, depending on whether the borrower makes payments early or late.
Lastly, if the guaranteed portion of the loan is sold on the secondary market, the rate adjustment date should be set at “calendar quarterly” versus “quarterly”. While this may seem insignificant, booking the loan with a “quarterly” adjustment period causes the rate to adjust every three (3) months from the date of the note. A “calendar quarterly” adjustment period causes the rate to reset each January 1st, April 1st, July 1st, and October 1st . The resulting effect of booking improperly can cause the rate to adjust months before or after the actual adjustment date and cause significant discrepancies relative to the interest remitted to Colson.
If interest is calculated incorrectly, Colson will eventually issue a discrepancy notice when the interest calculation is off by more than two (2) days. By double checking initial entries to the core system to ensure interest is accrued based on the proper accrual method, payment dates and rate adjustment period, lenders can avoid time consuming and costly reconciliation efforts as the loan becomes more seasoned and difficult to reconcile.
- Failure to re-amortize loans at minimum on an annual basis. SBA promissory notes require lenders to re-amortize the payments annually to ensure the principal is paid in full upon maturity. Bear in mind that in cases of variable interest rate loans, any interest rate increases will increase the amount of interest due. Therefore, if the loan payment is not re-amortized at a minimum on an annual basis, payments made based on a lower interest rate would create a significant balloon payment at the time of loan maturity.
Fixed rate loans also require an annual re-amortization. If the borrower consistently makes loan payments early or late, there may be excess principal or interest paid with each loan payment (given the interest calculation is based on the actual payment dates documented in the loan system). Over time, this inaccuracy will cause a deviation from the established loan amortization schedule and cause a pre-payment or balloon payment upon maturity.
- Pro-rating the participation remittance during the month the loan is sold.Upon sale of guaranteed portion of the loan, the ongoing SBA Guarantee Fee is absorbed by the investor. The lender is, however, obligated to pay the SBA Guarantee Fee on a pro-rated basis through the date of loan sale then pay the participant’s share of principal and interest after the date of sale. During the month the loan is sold there are two required payments to the SBA in order to cover the ongoing guarantee fee and participant’s principal and interest payment. Lender’s often overlook the required SBA guarantee fee payment requirement during the month a loan is sold.
In summary, taking the appropriate measures to ensure loans are accurately reported upon monthly to the SBA can save significant time, costs, and resources by avoiding complex reconciliation efforts to rectify past mistakes and costly penalty fees.
For additional SBA loan compliance information, contact the experts at Innovative Financing Solutions today!