SBA Digest: Preserving the Guaranty – Securing Proper Lien Position

While the Small Business Administration ("SBA") does not make loans, it does guarantee loans made to small businesses by banks and other commercial lending institutions (collectively "Lenders"). Because many SBA loans are under-collateralized, it is vital for Lenders to preserve the SBA guaranty and avoid common mistakes that could lead to repair or denial. One of the most common repair issues stems from failure to obtain proper lien position on collateral securing the loan. Fortunately, Lenders can avoid potential issues by taking the following steps and confirming their proper lien position.

If a loan is secured by a lien on a borrower's business personal property, the borrower must execute a Security Agreement at closing and the Lender must file a UCC-1 financing statement in the correct county or state office in the borrower's state of formation. The Lender can pre-file a UCC-1 statement prior to closing if it obtains written authorization from borrower. The Lender can include authorization to pre-file a UCC-1 in its initial commitment letter, or ask for separate written authorization from the borrower.

After the borrower provides written consent to pre-file, the Lender should file its UCC-1 and order a UCC search on the borrower to confirm whether it has the proper lien position on the collateral. If the search order reveals liens which negatively impact the Lender's lien position, Lender should require that borrower obtains proper evidence of lien termination or subordination prior to closing.

If the Lender is taking real property as collateral, the process is different because it is not possible to pre-file a mortgage or deed of trust prior to closing. If title insurance is required on the real property collateral, the Lender should order a title policy to ensure proper lien position and engage counsel to negotiate deletion of exceptions that could prime the Lender's interest in the collateral.

In the event a title search is required on the real property in lieu of a title policy, the Lender should order a title search within 30 days of closing. A title search differs from a title policy in that it does not provide insurance for a proper lien position. If the title search shows that the Lender will have the proper lien position, the Lender should proceed towards closing and record its mortgage or deed of trust. After the mortgage or deed of trust is recorded, Lender should re-order a title search to confirm that no other intervening liens were filed between the initial search and recording.

Whether the Lender is taking a lien on business personal property or real estate, it is fundamental that it takes necessary steps to ensure its proper lien position. Lewis Kappes proudly represents lenders and banks involved in SBA financing, as well as other commercial lending matters. For more information on securing a proper lien position or negotiating title insurance, please contact:

Chris Poling:

Kevin Morrissey:

Scott Oliver: