By Mark Austin, MBA – SBA Senior Consultant, Financial Institutions Group

A commonly asked question amongst Small Business Administration (SBA) lenders is related to acceptable insurance documentation requirements for a 10-day notice of cancellation. The SBA’s standard operating procedures (SOP) 50 10 7.1 states for real estate and personal property pledged as collateral, the policy or endorsements MUST provide at least 10 days prior written notice of policy cancellation to the 7(a) lender or the CDC/SBA for 504 loans. The SOP does not have this specific requirement for SBA loans of less than $500,000. However, if the lender's loan policy requires 10 days prior written notice of cancellation, the lender should follow its loan policy guidelines for SBA 7(a) loans under $500,000. 

The cited reference above does not state the policy provisions concerning the number of days prior written notice. What if the policy only allows for five days? Without reviewing the underlying policy or an excerpt of the policy provision discussing prior written notice of cancellation, a review could not determine if the insurance policy complies with SBA loan program requirements.

While obtaining insurance documentation can be burdensome for lenders, SOP language is clear on the requirement that the 10-day notice MUST be included in the policy or endorsement provision for loans greater than $500,000. For loans less than $500,000, the lender should follow its internal loan policy for guidance. 

There is an open-ended requirement that the SBA loan portfolio be managed in a commercially reasonable manner consistent with prudent lending standards. Any procedural steps an SBA lender can take to minimize potential repairs or denial of guaranty regarding compliance with insurance requirements during the life of the loan is always recommended.  

We’re Here to Help

While acceptable insurance requirements can get complicated for lenders, you don’t have to tackle them alone.  Doeren Mayhew's SBA Lending Pros have the answers to questions you may have.