An SBA lender has an excellent opportunity to expand its portfolio by acquiring from the FDIC SBA loans originated by a failed bank. These loans may be acquired at a discount and are backed by an SBA guaranty and, possibly, FDIC loss sharing. However, such loans and acquisitions come with risks that lenders should consider carefully before proceeding.

First, in bidding for such loans, the lender should consider whether it is bidding with or without FDIC loss share. As described on the FDIC's website, "[u]nder loss share, the FDIC absorbs a portion of the loss on a specified pool of assets which maximizes asset recoveries and minimizes FDIC losses."  Thus, under a loss share agreement between the lender and the FDIC, for a specified period the FDIC will reimburse a substantial portion of the losses on covered assets.  If a lender bids for assets without loss share, it generally will not be entitled to recover from the FDIC if it suffers losses in connection with the acquired loans - i.e., the lender itself will bear all such losses - so it should take into account whether it is willing to sustain the losses without compensation from the FDIC.

Second, the lender should take into account whether the SBA will honor its guaranty(ies), and whether the FDIC will share losses if the loan cannot be submitted for guaranty purchase.  Whether the guaranty will be honored depends on whether the originating lender complied with SBA requirements in all phases of the life of the loan, i.e., origination, closing, servicing and liquidation, and whether the file includes all documentation required to be submitted with a guaranty purchase request.  If the failed lender's file is incomplete, the acquiring lender may have insufficient documentation to submit a complete guaranty purchase package to the SBA; the requirements for guaranty purchase are not lessened because the loan was acquired through the FDIC. If the originating lender has not complied with SBA requirements, the SBA may repair or deny its guaranty. The lender should consider whether it is willing to accept such risk, particularly if it will not have a loss-share agreement in place.
 

Third, the lender should consider (i) whether the SBA loans to be acquired were sold on the secondary market, (ii) what financial obligations the FDIC and SBA consider the purchasing lender to acquire with respect to the sold portion, and (iii) what financial risk secondary market sales may pose for the acquiring lender. In SBA Policy Notice No. 5000-1307, the SBA set forth its position that the acquiring institution is "responsible for the contingent liabilities associated with the 7(a) loans sold on the secondary market by failed financial institutions."  Thus, if an acquired loan defaults and guaranty purchase is requested, the SBA will hold the acquiring lender responsible for both the retained and sold portions of the loan, and will require the lender to bear financial responsibility for denial of the guaranty, including the portion of the loan sold on the secondary market.  As a result, if the acquired loan defaults and the guaranty is denied, the lender will have financial responsibility to the SBA for 100% of the loan, not just for the unsold portion.  Lenders acquiring SBA loans from the FDIC may wish to specifically obtain the FDIC's agreement that (i) the acquiring lender is acquiring both the portion of the loan sold on the secondary market and the portion of the loan on the failed bank's books, and (ii) any loss-share will cover both the retained portion of the loan and the portion of the loan sold on the secondary market.  If such agreement is not obtained, the lender risks that it may bear responsibility to the SBA for portions of the loan that the FDIC does not consider the lender to have acquired, and for which the FDIC will not make loss-share payments (if loss share is part of the agreement). This may require the lender to take financial responsibility for obligations for which it did not expect to be liable at acquisition.

Lenders should keep the foregoing considerations in mind when contemplating the purchase of SBA-guaranteed loans from the FDIC.

For more information regarding issues related to SBA loans acquired from the FDIC, please contact Amy at [email protected] or at 267-470-1187.