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Hello Suzanne,
It's time I finally talk about Lender Service Providers (known as "LSP's") and risks lenders may not know about.
LSP's are involved in the origination, servicing and liquidation of SBA loans and are subject to numerous rules set out by SBA. I believe many of these were rules from the 2015 version of the SOP.
LSP's and Lending Institutions are required to have an agreement in place and must be approved by the SBA. SBA is very specific as to what is required in these agreements. In fact, those rules are all spelled out on pages 185-187 of the current SOP 50 10 6.
After 10 years with SBA, I left in 2018 to become a LSP as I could see that lenders really needed help in getting an authorization from the SBA. There are a lot of rules and nuances to these loans and I wanted to help directly, which I couldn't do at the SBA. There were also some questionable things I saw in the industry. At the time, little did I know, I was going to get quite an education on the LSP industry.
I set out to be the one that did the "right thing" (even if it meant losing out on a deal) so I named my company, "Integrity SBA Services LLC." My intent has been to keep the lender out of trouble (as well as myself).
Many details come up throughout the process on these loans and a company needs to have the honesty to speak up when an eligibility issue arises (even if it hurts the deal) or during the discovery of needing additional details or documentation.
While at SBA, I had too many conversations with lenders where the lender said "our LSP told us just to do this or that" and I would have to say "that is covering up the eligibility issue, which doesn't make it eligible."
Since that time, it has been quite an adventure. It hasn't been easy to compete against other companies who are in direct violation of SBA. In fact, I don't know of a company that is truly following the SBA rules to the degree they should be; and therefore, keeping the lender out of trouble.
I was excited in February of 2020, when SBA put into effect a Final Rule that was going to take down the operating structures of, what I believe, would have been a majority LSP's.
BUT, then Covid happened, and Congress rescinded that Final Rule in the CARES Act. Then everyone went on the roller coaster called "PPP."
Here are the biggest concerns from my perspective:
- An LSP cannot handle a transaction both for the lender and the borrower.
I've seen companies have an LSP agreement with the lender to handle the lender's side of things. Then they have the borrower sign a separate agreement to collect a fee for the borrower's side of things. Now, while they may be splitting hairs on services provided, SBA is aware that this is occurring. No company can work both for the lender and the borrower in the same transaction. This is also how fraud occurs as the LSP has full control of all the details and lenders have placed full trust into the LSP. There's a lot of money riding on the completion of these deals and it's easy for anyone to cover up an eligibility issue that comes up. When there are separation of control issues, this opens up the potential for fraud. You may be familiar with the following fraud convictions involving employees from BancServ (later Newtek) and Vital Financial Services.
As a former fraud auditor for an Attorney General, I could add more about the separation of controls and handing over all SBA functions to an LSP, but I'll just leave it right there.
- An LSP may only receive compensation from the 7(a) Lender for services provided under an SBA-reviewed LSP Agreement. Such charges must not be passed on to the Applicant or paid out of the SBA-guaranteed loan proceeds.
SBA considers an LSP to be a contractor to the bank and therefore paid by the lender. In the deals we process, we work in a standard packaging fee to the lender so at the end of the day, the lender typically recoups some, all or more than the LSP fee in closing. This is all in compliance with SBA and how they expect an LSP to operate.
- The LSP only provides assistance to the 7(a) Lender.
We work directly with the lender and the lender works directly with the borrower. We
believe the bank's relationship is with the borrower and not a third party. This also helps with separation of controls as the lender drives the relationship and details of their loan.
- The 7(a) Lender and the LSP cannot share in any Secondary Market premiums.
While this may not be happening directly, many LSP's have been crafty in being paid their "loan fee" after the secondary market sale. Whichever way they slice the semantics or the steps involved, they are still being paid from the premiums and SBA is aware of this.
- Fees related to assisting the 7(a) Lender with packaging, processing, or underwriting cannot be contingent on whether the loan is approved or closed.
If you have an LSP that sells you on that you do not pay if the loan isn't approved or
closed, that is a violation of the LSP rules.
SBA has been collecting evidence during their OCRM reviews this past year. You may have filled out a 27-point questionnaire about your LSP. It has been fascinating to see the questions they've asked on these questionnaires and a confirmation to myself about the issues I rant about. I will be curious to see what SBA does with the answers from these questionnaires.
I've also been told by SBA that lenders may be expected to pay fees back to borrowers if they were charged in violoation of the LSP rules. I do not know if that will happen or if they have plans to correct the LSP companies directly.
The world of LSP's is complex and comes with a lot of rules, restrictions and limitations for the integrity of the SBA program. The purpose is to keep fraud at a minimum while also protecting borrowers from excessive fees as determined by SBA.
Because the LSP rules and the complication involved, we have diversified services to include also SBA loan audits (file reviews), SBA loan training and Q&A supporting to SBA departments as these services are not subject to Lender Service Providers agreements and the rules set out by SBA.
These services are not directly involved in origination, servicing or liquidating a loan and do not need an LSP agreement, as required by SBA. While we still provide loan processing, providing loan reviews, training and answering questions has been much easier to provide without all the rules.
While I have taken some heat on how we operate (from people that have used other providers), I can assure you that we are the ONE company that follows the SBA LSP rules and is intent on keep you your institution out of trouble when it comes to these relationships.
If you'd like to talk further about the rules of LSP's or any service, please reach out and I'd be happy to discuss further.
Have a super week!
Suzanne
suzanne@integritysbaservices.com
Services Available:
SBA Training
SBA File Reviews
SBA Loan Processing
Q&A Support for SBA Departments
To learn more, contact Suzanne at suzanne@integritysbaservices.com.
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