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  **TO:**        All                                      **CONTROL NO.:**            5000-700
                 Employees                                                            

  **SUBJECT**:               Guaranty Repair Tracking     **EFFECTIVE:**   12-12-00   
                             System                                                   
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**I. [Purpose of This Notice]{.underline}**

> The purpose of this notice is to provide instructions for implementing
> the Agency's guaranty repair tracking system. As part of its portfolio
> management, SBA must identify and evaluate situations where a lender's
> actions or omissions are severe enough to consider reducing or denying
> liability under the Agency's 7(a) guaranty on a loan. SBA refers to a
> reduction of the guaranty percentage as a guaranty "repair." If the
> lender and SBA field office agree to a repair, SBA will reduce the
> percentage of a loan covered by its guaranty to reflect the "cost" of
> the lender's actions or inactions, or the projected loss to the
> Agency. In addition to denials or repairs of guaranties, a lender may
> voluntarily release SBA's guaranty. SBA is implementing a system to
> track loan guaranty problems and identify lender performance trends
> related to guaranty issues.
>
> If loan origination, servicing or liquidation problems affecting a
> guaranty cannot be handled through a voluntary agreement with the
> participant, the case must be referred to the Office of Financial
> Assistance. In these cases, the field office makes a recommendation
> for a full or partial denial of liability, or initiation of litigation
> against the lender if the guaranty has been purchased by SBA from the
> secondary market. SBA has averaged between ten and twenty full denials
> of liability each year.
>
> Loan problems may be discovered any time during the life of a loan,
> such as during a lender site visit, a pre-or post-purchase review,
> etc. The Office of Lender Oversight may identify loan problems during
> compliance or other regulatory reviews. Also, the Inspector General
> may uncover problems during its audits.
>
> Currently, SBA cannot track guaranty repairs or full/partial denials
> of liability through its automated systems. To correct this situation,
> the Agency has developed a new automated system that will be available
> effective with the publication of this notice. This system will
> provide monthly reports of loans with repairs or full/partial denials,
> and will permit Agencywide tracking of lender performance in these
> types of cases.

## General Information and Procedures for the New Tracking System 

### If a lender was deficient in loan origination or servicing, and the deficiency is significant enough that it may result in a repair action if SBA were to process a guaranty purchase, the SBA servicing loan officer must indicate the problem in the loan record using the 

### Delinquent Loan Collection System (DLCS). To do this, enter a "GI" (for "Guaranty Issue") in the action code input field in the DLCS action/update screen. In addition, you must include comments in the chronological record regarding the nature of the problem. 

When you identify a loan in DLCS as having a guaranty issue, a message
will be displayed automatically in the PMQD04 loan status screen, the
PMQD26 chronological record screen and the PMCD01 (DLCS) collection
status screen. The message will say "Guaranty Issue: mm/dd/yy" and will
alert the viewer to the potential guaranty purchase problem. The date
shown is the date you entered the guaranty issue indicator.

### If the problems with a loan identified by a "GI" are subsequently resolved prior to purchase, such as through an adequate explanation from the lender or the lender's taking corrective action, you must enter a "GR" (for "Guaranty Issue Resolved") in the action code input field in the DLCS action/update screen. Once this is done, the guaranty issue indicator will no longer appear in the computer screens mentioned above.

> Please see Appendix 30 (Loan Policy and Program Oversight Guide for
> Lender Reviews) to SOP 50 50 4B. Section VII.D. of this appendix
> addresses loan deficiency notification and contains additional
> information on procedures to be followed when you identify
> deficiencies that may affect guaranty purchase.

### 

## Guaranty Actions

#### A. Purchase

If a loan has been identified with a guaranty issue outstanding through
your entry of "GI" in the action code section of the DLCS action/update
screen, a warning screen will appear if the guaranty purchase screen is
accessed for the loan. The warning screen will say:

A GUARANTY ISSUE WAS IDENTIFIED FOR THIS LOAN.

PLEASE CHECK LOAN RECORDS TO ENSURE THAT THE

ISSUE IS REVIEWED AND CONSIDERED

IN THE PURCHASE PROCESS.

The user will have the option of continuing the purchase and processing
the repair, or discontinuing in order to research the matter.

If a loan has a "GI" indicator, the Guaranty Loan Purchase System (GLPS)
will only permit a user to process a purchase if the user indicates a
repair code in the purchase screen. If you resolve the issues on a loan
through a repair action (such as a reduction in the guaranty percentage
or a reduction in the dollar amount purchased), then you must enter one
of the following repair codes in the new "repair code" input field to
indicate the primary problem on the loan when you process the purchase.
Although there may be more than one problem in origination or servicing,
please identify the issue with the greatest potential dollar impact.

a = gty repair: lien or collateral deficiency

b = gty repair: guaranty on loan not obtained

c = gty repair: property insurance not obtained

d = gty repair: life insurance not obtained

e = gty repair: conflict of interest

f = gty repair: eligibility problem

g = gty repair: improper use of proceeds

h = gty repair: equity injection not verified

i = gty repair: faulty credit analysis

j = gty repair: tax returns not obtained from IRS

k = gty repair: other processing/closing deficiency

l = gty repair: other servicing deficiency

m = gty repair: other liquidation deficiency

> After you process a guaranty purchase with a repair action, please
> indicate the dollar amount of the repair in the chronological record
> for the loan.

#### Voluntary Withdrawal of the Guaranty by the Lender

A lender may agree to voluntarily release SBA from its contractual
obligation to purchase the Agency's guaranteed portion of a loan. If
this occurs, you must indicate one of the repair codes shown in A above
on your SBA Form 327 action sent to the Denver Finance Center (DFC). DFC
will remove the loan from SBA's loan database. Please note that the
LAUD13 screen (field 365) will not allow you to process a voluntary
release of SBA's guaranty. This is done by DFC from your 327 action.

B.  **Denial of liability**

If the lender will not agree to resolve the loan problems through a
voluntary repair, you must process a full or partial denial of liability
action. If the Administrator approves a partial denial of liability, you
will process the partial denial through purchasing at a reduced amount
using the GLPS screen as in processing a repair (see A above). If the
Administrator has authorized a full denial of liability, you will be
notified by the Office of Financial Assistance and you must then
indicate one of the repair codes shown in A above in your SBA Form 327
action that you send to Denver to remove the guaranty from SBA's
database. Please note that the LAUD13 screen (field 365) will not allow
you to process a denial of liability on a loan. This is done by DFC from
your 327 action.

## Reports

> Summary monthly guaranty repair reports are being developed that will
> show lender voluntary releases, denials of liability and repairs
> nationwide and by region, district and lender. These reports will show
> cumulative totals for each repair type (a-m). The reports will be
> available on-line shortly.
>
> If you have questions, please contact Walter Intlekofer in the Office
> of Portfolio Management (202-205-7543).

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

# Jane Palsgrove Butler

# Associate Administrator

for Financial Assistance

Expires: 12-01-01