Why Your Mainframe Core Banking System Won’t Properly Account for SBA Loans

Many SBA lenders struggle with accounting accuracy related to servicing SBA 7 and now PPP loans. The problem is core banking systems were not designed to manage SBA loans properly. Furthermore, a large volume of PPP loans being forgiven or not fully forgiven throughout the pandemic crisis has compounded the issue. 

Core systems are not built to handle SBA loans. Mainframe core banking systems post payments as billed instead of paying interest to the date of payment receipt. Furthermore, other issues related to irregular payments, NSF payments, prepayments, underpayments, and even perfect payments can result in account imbalances and massive inaccuracies. Interest calculations are often miscalculated and do not accurately reflect the correct 365 days actual required to sell 7A loans on the secondary market.

Let’s look at some reasons why your mainframe core banking system won’t properly account for SBA loans. 

Why Core Banking Systems Fail

Core banking systems are ill-equipped to support the various nuances of SBA lending. Frequently, these antiquated banking systems rely heavily upon manual adjustments, drain FTE resources, and result in inefficient processes. 

Inefficiencies may result from key data itemizations, incorrect loan balances, status codes, and inaccurate interest rates. The SBA should be notified of the current loan status related to whether loans have been canceled, withdrawn, deferred or become inactive. 

To ensure accuracy, information should be updated on the first calendar day to the last calendar day of the prior month. The final banking records should be reflected on the 1502 Report and completed by the fifth day of the following month to ensure timeliness.

Issues with Core Banking Systems

Many core systems erroneously post payments as billed instead of accounting for daily interest paid. The problems really begin as soon as a payment is posted to the loan because the principal and Interest splits are incorrect.  As a result, irregular payments, NSF payments, prepayments, underpayments, and perfect payments can create incorrect payment splits throwing off loan balances and payment dates.

Interest calculations may be stated incorrectly due to a lack of accounting for daily accruals. These seemingly insignificant daily variations often reflect miscalculations of interest to borrowers and lending institutions.

Here are some things to keep in mind for adequately servicing SBA loans:

• Disbursed funds + undisbursed funds must equal SBA approved loan amounts

• Ongoing servicing fee calculations must be performed manually to ensure accuracy

• Late payments sent by borrower must be remitted immediately on SEPARATE 1502 forms

• Ongoing fee basis point calculations are different for partially disbursed loans

Proper reflection of core banking systems is critical for ensuring SBA loan accuracy. Here are some ways to successfully manage your SBA loan portfolio.

How to Service SBA Loans Accurately 

All payments should be posted to reflect interest charged to the date of payment receipt. Any remaining funds should be allocated towards reducing the principal balance amount. Accrual-based methods of interest are acceptable to secondary markets. 

Here’s some ways to ensure payments are accounted for correctly:

• Use the correct status codes

• Make sure closing balances and interest paid syncs up from one report to another

• Wire payments directly to Colson, as checks do not post in a timely manner

The following payment scheduling should be followed:

• Regular payments should be made on the 3rd to 5th calendar day of the month, or next business day, whichever comes first

• Late payments should be made within two business days after receipt

• Partial pre-pay or payoffs should be made immediately

Late payments and prepayments must be sent via separate 1502 forms using separate wires. Don’t hold payments for extended periods of time or comingle funds with the following months.

How to Grow SBA Portfolios

Properly servicing your SBA portfolio is critical for meeting your bank’s production goals. Core banking systems are not prepared to support SBA lending nuances due to manual adjustments, draining FTE resources, and inefficient processes to keep the core in balance with Colson or the soon-to-be Summit Group.

Selling on the secondary market compounds the challenges of servicing SBA loans. Banking institutions must properly account for gain on sales (FASBI 166 compliance), track payments to investors, and calculate ongoing guarantee fees based on authorization dates. 

Banks, credit unions, LSPs, and nonbank lenders must be able to use specific SBA systems capable of interfacing the correct calculations and information to the lender’s general ledger. Furthermore, the ability to push client information to antiquated core systems should remain a focus point. 

If lenders have extenuating circumstances related to manual and inefficient systems, it may be time to find an appropriate solution or upgrade. Seeking to grow SBA portfolios using technology is a safe way to scale your processes while protecting lending assets and SBA loan guarantees.

Why Should You Choose PCFS Solutions?

As an end-to-end SBA-specific software used for servicing SBA 7A and PPP portfolios—PCFS Solutions is a system that provides lender servicing teams, portfolio managers, loan operations, and executive teams with the confidence needed to meet SBA-specific requirements. 

Loan Manager can eliminate costly accounting errors, lost guarantees, and gain improved audit guidance within existing Microsoft Windows environments.

If you would like to learn more about how PCFS Solutions can help your team manage SBA loans, feel free to reach out to us for additional information and support.