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How SBA Lenders Can Avoid Enforcement Actions

Brandon C. Meadows, Esq.
sba enforcement actions formal enforcement action informal enforcement action enforcement actions

The SBA, through the Office of Credit Risk Management (“OCRM”), monitors and oversees the activities of all its lenders and CDCs to ensure it is effectively following loan program requirements and protecting the integrity of the SBA program. In the event an SBA lender or CDC demonstrates an unacceptable risk profile, and an inability or unwillingness to proactively or timely resolve the issues which created an unacceptable risk profile, the SBA may take an enforcement action against that lender or CDC. Enforcement actions may be informal or formal, they and may even result in an immediate suspension of the lender or CDC’s ability to participate in the SBA loan program. The best way for SBA lenders and CDCs to avoid an undesirable enforcement action is to anticipate and recognize any actions that may trigger an enforcement action.

What Triggers Enforcement Actions?

There are ten grounds that may trigger an enforcement action against all SBA lenders and CDCs. These include:

  1. Failure to maintain eligibility requirements for specific SBA programs and delegated authorities;
  2. Failure to comply materially with any requirement imposed by loan program requirements;
  3. Making a material false statement or failure to disclose a material fact to SBA;
  4. Not performing underwriting, closing, disbursing, servicing, liquidation, litigation or other actions in a commercially reasonable and prudent manner;
  5. Failure within the time period specified to correct an underwriting, closing, disbursing, servicing, liquidation, litigation, or reporting deficiency, or failure in any material respect to take other corrective action, after receiving notice from SBA or a deficiency and the need to take corrective action;
  6. Engaging in a pattern of uncooperative behavior or taking an action that SBA determined is detrimental to the integrity or reputation of an SBA program, that undermines management or administration of a program, or that is not consistent with standards of good conduct;
  7. Repeated failure to correct continuing deficiencies;
  8. Unauthorized disclosure of reports, risk rating, or confidential information;
  9. Any other reason that SBA determined may increase SBA’s financial risk; failure to properly oversee agent activity; or, indictment on felony or fraud charges of an officer, key employee, or loan agent involved with SBA loans; or
  10. As otherwise authorized by law.

13 CFR § 120.1400(c).

In addition to the ten grounds listed above, there are two additional grounds that may trigger an enforcement action against a CDC:

  1. Failure to receive SBA approval for at least four 504 loans during the last two consecutive fiscal years; or
  2. For PCLP CDCs, failure to establish or maintain a LLRF as required by the PLCP.

13 CFR § 120.1400(f).

What Are The Types of Enforcement Actions?

Informal Enforcement Actions Against 7(a) Lender

In the event one of the grounds that may trigger an enforcement action is present, the director of OCRM may, in his or her discretion, take an informal enforcement action against a 7(a) lender, rather than a formal enforcement action. The director may forego a formal enforcement action if, for example, the 7(a) lender commits to correct its violation, or the 7(a) lender’s violation isn’t frequent or severe. The informal enforcement actions against a 7(a) lender may include:

  1. A letter from the SBA discussing serious or persistent supervisory concerns, and corrective action required by the 7(a) lender;
  2. Require the 7(a) lender to complete training to address certain findings, weaknesses, and deficiencies;
  3. Require the 7(a) lender to submit a commitment letter or board resolution, satisfactory to the SBA, signed by the 7(a) lender’s board on behalf of the entity that may:
    1. Include specific written commitment to take corrective actions in response to the 7(a) lender’s acknowledged deficiencies;
    2. Identify the person(s) responsible for taking corrective action; and
    3. Set forth the timeframe for taking the corrective action;
  4. Require the 7(a) lender to enter into a written agreement with the SBA to address and correct identified weaknesses and/or limit or mitigate risk; and
  5. Other information enforcement action as determined by the SBA on a case by case basis.

13 CFR § 120.1300(a).

Formal Enforcement Actions

In the event the director of the OCRM agrees that a formal enforcement action is appropriate against a 7(a), or if the lender is a CDC, one or more of the following formal enforcement actions may be taken:

  1. Limit the maximum dollar amount that the SBA will guarantee;
  2. Suspend or revoke the SBA lender or CDC’s delegated authority;
  3. Suspend or revoke the SBA lender or CDC’s authority to participate in the SBA loan program, including the authority to make, service, liquidate, or litigate 7(a) or 504 loans;
  4. Immediately suspend the SBA lender or CDC’s delegated authority to participate in the SBA loan program, including the authority to make, service, liquidate, or litigate 7(a) or 504 loans;
  5. Debar a person, including an officer, director, general partner, manager, employee, agent, or other participant in the affairs of the SBA lender or CDC’s SBA operations; or
  6. All other enforcement actions against the SBA lender or CDC as authorized under law.

13 CFR § 120.1500(a)-(b).

In addition to the six possible formal enforcement actions listed above, the SBA may take any of the following enforcement actions against a 7(a) lender:

  1. Suspend or revoke a 7(a) lender’s authority to sell or purchase loans or certificates in the secondary market; or
  2. Civil monetary penalty against the 7(a) lender, not exceeding $250,000 plus any increases required under law.

13 CFR § 120.1500(b).

Likewise, and in addition to the six possible formal enforcement actions listed above, the SBA may take any of the following enforcement actions against a CDC:

  1. Require the CDC to transfer all or part of its existing 504 loan portfolio and/or part of its pending 504 loan applications to the SBA, another CDC, or any other entity designated by the SBA, temporarily or permanently;
  2. Instruct the Central Servicing Agent to withhold payment of servicing, late and/or other fees to the CDC; or
  3. Apply to any federal court of competent jurisdiction for the court to take exclusive jurisdiction, without notice, of the CDC, and the SBA will be entitled to the appointment of a receiver of the SBA’s choosing to hold, administer, operate, and/or liquidate the CDC; and to such injunctive or equitable relief as may be appropriate.

13 CFR § 120.1500(e).

What is The Process of an Informal Enforcement Action?

If the SBA decides to undertake an information enforcement action, rather than a formal enforcement action, the lender or CDC will have an opportunity to appeal that decision to the appropriate Federal district court or the SBA’s Office of Hearings and Appeals (“OHA”), within 20 calendar days of the date of the decision. The enforcement action will remain in effect pending resolution of the appeal. In addition, the SBA has the ability to undertake one or more formal enforcement actions while the appeal of an informal enforcement action is pending. 13 CFR § 120.1300(c).

What is The Process of a Formal Enforcement Action?

Written Notice

If the SBA decides to undertake a formal enforcement action against an SBA lender or CDC, except for the appointment of a receiver for a CDC, the SBA will issue a written notice identifying the proposed formal enforcement action or notifying it of an immediate suspension. The notice will set forth the underlying facts and reasons for the proposed enforcement action or immediate suspension. If the reason for a formal enforcement action is based upon information obtained by a third party, the notice will provide copies of the documentation received by the third party, or the name of the third party if the information was received by the SBA orally, unless the SBA finds a compelling reason not to provide such information. 13 CFR § 120.1600(a)(1).

Opportunity to Object

Following written notice, the SBA lender or CDC will have an opportunity to object. If the SBA lender or CDC decides to object to the proposed formal enforcement action, it must file a written objection with the appropriate Office of Capital Access, or other SBA official as identified in the notice, within 30 calendar days of its receipt of the written notice. The written objection must set forth all of the grounds known by the lender or CDC to contest the proposed formal enforcement action or immediate suspension, all mitigating factors, and must include documentation that the lender or CDC finds to support their objection. 13 CFR § 120.1600(a)(2).

Lenders or CDCs may also make a request for clarification within 30 calendar days of its receipt of the written notice. If the SBA determines that the lender or CDC does not understand the reasons for the formal enforcement action, the agency will provide clarification in writing. 13 CFR § 120.1600(a)(2).

Alternatively, SBA lenders or CDCs may request additional time to respond to the SBA’s written notice, if it can show the reasons why it was unable to respond within the 30-day timeframe. The SBA has the discretion to provide the lender or CDC with additional time. A request for additional time must be made in writing within the 30-day timeframe. Id.

In addition, in the event the lender or CDC can show that there is newly discovered material evidence, which could not have been discovered within the timeframe given by the SBA to respond to the notice, or if there is a compelling reason beyond the lender or CDC’s control as to why it was not able to present the information in the timeframe given, and the lender or CDC would be prejudiced by not being able to present such information, the lender or CDC may be able to submit such information to the SBA and request that the agency consider such information in its final agency decision. Id.

Written Notice of Final Decision

In the event the SBA lender or CDC timely filed an objection to the proposed enforcement action, other than an objection to immediate suspension, the SBA will issue a written notice of the final agency decision within 90 days of either receiving the objection or from when additional information is provided, whichever is less, unless the SBA provides notice that it requires additional time. If the objection was made to an immediate suspension, the SBA will issue a written notice of the final agency decision within 30 days of receiving the objection or from when additional information is provided, unless the SBA provides notice that it requires additional time. The SBA also has the discretion to request additional information from the lender or CDC, or conduct other investigation, prior to issuing a final agency decision. 13 CFR § 120.1600(a)(3).

If the SBA lender or CDC did not file a timely objection, or the SBA decides not to consider an untimely objection, the SBA will issue a written notice of final agency decision to the lender or CDC, notifying it that the SBA is undertaking one or more of the proposed formal enforcement actions. 13 CFR § 120.1600(a)(4).

Appeal

After the lender or CDC receives the written notice of final agency decision, the lender or CDC may file an appeal with the appropriate federal district court. Alternatively, 7(a) lenders may file an appeal with the OHA within 30 calendar days of the date of the decision. Any enforcement action will remain in effect pending resolution of the appeal. 13 CFR § 120.1600(a)(5).

Conclusion

The best way for an SBA lender or CDC to avoid an enforcement action is to understand and avoid the actions that may trigger an enforcement action. However, sometimes mistakes are made, and an SBA lender or CDC may be subject to an informal or formal enforcement action. In the event of an informal enforcement action against a 7(a) lender, the lender has an opportunity to file an appeal. On the other hand, in the event of a formal enforcement action, the lender or CDC has an opportunity to file a written objection and/or file an appeal. Lenders facing a potential enforcement action should seek legal counsel to assist them with a proactive strategy to remain in compliance with SBA regulations.

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