Disbursement of loan proceeds is a critical step in the SBA loan closing process. General disbursement requirements that apply to all 7(a) loans include stating the disbursement period in the loan authorization, tailoring the disbursement period to meet the specific requirements of each individual loan, and fully disbursing the loan within 48 months of approval to avoid a cancellation of any remaining loan balance. Many closing scenarios exist where loan balances are not fully disbursed, a lender needs to utilize an escrow account as part of a closing, or other actions must be taken with respect to disbursements for a lender to charge interest to a borrower or sell a loan on the secondary market. These scenarios are addressed in SOP 50 10 5(K).

This article addresses the new SBA Form 1050 Settlement Sheet and its use in documenting and verifying the disbursement of loan proceeds. SBA notes failure to use loan proceeds as required by an Authorization as a regular lender deficiency when reviewing PLP audit and guaranty repurchase reviews. SBA Form 1050 must be completed correctly by the lender in order to preserve a lender’s guaranty on an SBA loan.

All lenders must document each disbursement on an SBA-guaranteed loan, subject to some exceptions for certain express and small loans. Except under SBA Express, Export Express, and 7(a) Small Loans, the lender and borrower must complete and sign SBA Form 1050 at the time of the first disbursement. If a loan includes multiple disbursements the lender must document each subsequent disbursement and attach the documentation to the original Form 1050. The documentation must include sufficient details for SBA to determine the recipient of each disbursement, the date and amount of each disbursement, and the purpose of each disbursement. Additionally, the lender must obtain evidence to support the disbursements such as canceled checks or paid receipts to confirm loan proceeds were used for the purposes stated in the Authorization. Along with the supporting documents providing evidence of the disbursement, the lender must also retain the signed SBA Form 1050 in its loan file.

As of July 1, 2019, SBA now only accepts the revised version of the SBA Form 1050 Settlement Sheet. The revised SBA Form 1050 is divided into sections to assist the lender in submitting required disbursement information and includes updates to the identifying information fields, the declarative statements on the previous version of the form, documentation of the source of each type of borrower equity injection, and revised certifications from the lender and the borrower regarding compliance with the disbursement requirements.

The new SBA Form 1050 now provides a table that includes a list of authorized uses of loan proceeds and blank fields in which the lender must indicate the names of the payee, the amount disbursed and any authorized amount remaining. The identifying fields now include sections for insertion of the note amount, SBA loan number and SBA loan name, the lender’s FIRS number and the lender’s name.

While the SBA Form 1050 has been revised, lenders must still ensure the use of proceeds sections between a loan presentation, Authorization, and settlement sheet match. Any changes must be documented appropriately during the underwriting, closing, and disbursing process. A complete and correct SBA Form 1050 will document and verify loan proceeds were disbursed as contemplated by the Authorization and that any equity injection required is injected by a borrower prior to disbursement of loan proceeds. A complete and correct SBA Form 1050 will also ensure a lender has provided the required documentation detailing loan disbursements. This documentation will help ensure a lender will not risk facing a repair or denial of its guaranty based on uses of proceeds not matching authorized uses of proceeds when a loan is submitted for repurchase and will help prevent any negative audit findings relating to the same use of proceeds issues should a loan file ever be audited. By staying abreast of changes to SBA Form 1050 and the disbursement documentation process, lenders can avoid the risk of a repair or denial resulting from the misuse or misallocation of loan proceeds.

If you have questions regarding the SBA Form 1050, please feel free to contact Your Legal Department ® at Questions@JellumLaw.com .