EXPLORING THE NEW SOP 50 10 5(F) AND OTHER NEW SBA PROGRAM INITIATIVES W.P.A.S.G.L. Western Pennsylvania Association of SBA-Guaranteed Lenders October 4, 2013
EXPLORING THE NEW SOP 50 10 5(F) AND OTHER NEW SBA PROGRAM
INITIATIVES
W.P.A.S.G.L.Western Pennsylvania Association of SBA-Guaranteed Lenders
October 4, 2013
Agenda:
SOP 50 10 5(F)
Pending and recently enacted rule/policy changes affecting SBA lenders
Case Studies and Best Practices
2
Definition of Good Standing Additional Guidance for SBLCs/CDCs Rewrite of Franchise Review Provisions Debarment Further Defined Changes to 912 clearance process ETran Submissions Only Refinance changes Credit Criteria different for two loan categories ($350,000 < >) Collateral policy: valuation methods and requirements for personally
owned assets Life insurance 147 Note and 148 Guarantee forms Application – 1919 and 1920 (replacing 4 and 4i)
Part ISOP 50 10 (5) (F) - Effective January 1, 2014
3
Good Standing A lender must be in good standing with its state regulator and Federal Financial
Institution Regulator (FFIR) as determined by SBA. For purposes of participation in the 7(a) program, SBA considers a lender to be in good standing with its state/FFIR if it has satisfactory financial condition and satisfactory small business credit administration and servicing policies, procedures and practices. Accordingly, the lender’s written request to participate must include a written statement that to the best of its knowledge, the lender has satisfactory: i) financial condition (e.g., capital and liquidity); ii) small business credit administration policies, procedures, and practices that it continues to adhere to in its operations; and iii) small business servicing policies, procedures, and practices that it continues to adhere to in its operations. When reviewing good standing, SBA will look to see that a lender does not have significant deficiencies or weaknesses in these areas. “Significant” may be evidenced by the number or seriousness of the deficiencies, as determined by SBA in its discretion. SBA will verify any good standing statement where possible with public (e.g., Cease and Desist SOP 50 10 5(F) Orders and Call Reports) and/or non-public information from the lender’s primary and/or other regulators.
SOP 50 10 5(f) Subpart A, Chapter 1, II.C.c), pg. 7
4
SBLC GuidanceSubmit credit policy to SBA consistent with
origination, servicing and liquidation requirements in SOP and CFR
Provide annual validation that credit scoring model is predictive of loan performance
Board must adopt controls over operations, programs and resources
Must demonstrate compliance with policies, procedures and controls
5
CDC Guidance Each CDC’s board of directors must adopt and fully
implement an internal control policy which provides adequate direction to the institution for effective control over and accountability for operations, programs, and resources. The board adopted internal control policy must, at a minimum, comply with 13 CFR §120.826(b).
SOP 50 10 5 (F) Subpart A, Chapter 3II, B. 1.a), pg. 47
6
Franchises Re-write of Review of Franchise/License/Dealer/Jobber or
Similar Agreement provisions
Rely on Certification of Franchisor
SBA will assist PLP lenders determine if affiliation exists for those franchises not on Registry [email protected]
Although affiliation determination may be made by SBA on loans not on Registry, lender must still determine whether financing meets all other eligibility rules
7
Get Executed Franchise Documents
If Lender disburses the proceeds without obtaining the necessary executed franchise documents, including any amendments and/or addendums, SBA may deny liability of guaranty.
8
Gas Stations
Review Relevant Documents: Title Report Supply Agreements Franchise Agreements Purchase Documents
Look for: Repurchase Options Impairment of
Collateral Value Alteration of
Lender/SBA’s rights Subordination not
sufficient
9
Business with An Associate of Poor Character
Subject Individual: Owner, partner, officer, managing member, owner of
20% or more, Trustor and day-to-day Manager Form 1919 – Questions 1, 2 & 3 If Yes to 1= Not Eligible If Yes to 2 or 3 = Find out more. Felony = Fingerprint Misdemeanor = Name Check or Fingerprint Send 912 to Field Office
10
Business with An Associate of Poor Character
You can clear it! Maybe…PLP Lender or SBA Field Officer can clear the
following: Single minor misdemeanor offense or arrest; or Up to 3 minor offenses (arrests and/or convictions at
one tie or separately), concluded more than 10 years prior to date of the SBA application; or
A prior offence cleared by D/FA on prior application – valid for 6 months
11
Refinancing Change of Ownership Debt
NOW Reads:
g) Debt used to finance a change of ownership;
But comments says:
SOP 50 10 5 (F) Subpart B, Chapter 1, IV, E. 3.g), pg. 115
12
Additional Refi ProvisionsRefinancing Same Institutions Debt – 36 month
look back - late beyond 29 daysBorrower or Lender can get evidence from prior
lender of SBA loan for refinance7(a) to refinance 504 Loan – Both TPL and 504
refinanced or TPL paid in full, part of larger transaction
13
Credit Criteria – Loan < $350,000
Current policy: Loans may be processed 7(a) , Express or SLA , etc. New policy: Loans $350,000 and under must be processed under SLA
Credit Score prescreening prior to submission of ETran application
If loan application does not receive an acceptable credit score, Lender may submit Standard processing or (if SBA Express Lender) an SBA Express Application via ETran for 50% guaranty.
Eligibility for SLA will continue to be based onpre-screening credit score and specified mandatory credit evaluation including that applicant’s debt service and global cash flow ratio exceeds 1:1 on a historical or projected cash flow basis
14
Credit Criteria – Loan < $350,000
Lender’s Credit Analysis:
History of business Management experience Debt Service Coverage Ration exceeds 1:1 Projected Cash Flow Ratio exceeds 1:1 Owner/Guarantor personal financial statements, consistent with
similar non –SBA loans May use own credit scoring criteria Analyze strength of business – credit/deposit behavior Verify tax returns Equity and pro forma debt to worth are acceptable based on
Lender’s non-SBA loan policies
15
Credit Criteria – Loans > $350,000.00Current policy: lender using delegated authority
makes own credit determination subject to requirement that business has ability to repay loan from its cash flow
New policy: lender must— Determine if repayment ability from business cash flow
exists AND Follow SBA-mandated credit evaluation criteria
INCLUDING minimum debt service coverage ratio of 1.15:1 based on a historical and/or projected basis
SOP Equity Injection requirements apply16
Credit Criteria – Loans > $350,000.00OCF/DS must be greater than 1.15 to 1.0 on
a historical or projected basis
Operating Cash Flow (OCF) as earnings before interest, taxes, depreciation and amortization (EBITDA)
Debt Service is defined as required P&I payments on all business debt inclusive of SBA loan proceeds
17
Current Collateral RequirementsWith some sub-program specific exceptions, SBA
generally requires that – Assets financed by loan be taken as collateral AND Loan must be fully secured (based on liquidation value)
to the extent that collateral is available AND If business collateral insufficient to fully secure loan,
personal collateral of all types, including personally owned R/E, must be taken
Limited guaranty of spouse required if necessary to secure lien on jointly held R/E
18
Collateral Requirements50 10 (5) (F)
At a minimum obtain a lien on the applicant’s fixed assets.
Lender may secure applicant’s trading assets (using a 10% current book value for the calculation) if it does so for similarly sized non-SBA-guaranteed commercial loans.
Loans between $25,000 to $350,000
Follow collateral policies and procedures that Lender has established and implemented for its similarly-sized non-SBA-guaranteed commercial loans
19
Fully Secured means all available assets with a combined net book value up to the loan amount.
Fixed Assets, then Trading Assets (10% of current book value) and then personal real estate (up to shortfall)
Loans between $350,000 to $5,000,000
SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount. If fixed assets do not fully secure the loan, the lender must take available equity in the personal real estate of the principals as collateral.
Collateral Requirements50 10 (5) (F)
20
New Collateral Requirements
For loans of $25,000 and less – no collateral required
For loans over $25,000 – Lien on all assets financed by loan proceeds still mandatory
21
New Collateral Requirements (Cont.) Liens on residence may be limited to150% of equity - if tax
implications from filing at higher amount Lien on personal residence still NOT required if equity less
than 25% Lien on jointly held R/E still required even if one spouse
has NO ownership interest in business – with limited guaranty required
No lien required if R/E wholly owned by non-owner spouse
Lien on other personally owned assets, e.g., stocks, bonds, CDs, etc., NOT required
22
Life Insurance Current policy: lender has authority to decide whether to
require life insurance BUT if not required and principal dies resulting in a loss on the loan, SBA MAY DENY LIABILITY
New policy to allow lender to follow same policy that it uses regarding life insurance for its unguaranteed commercial loans of similar size and type
But, expectation by SBA that, on loans over $350,000 processed under the regular 7(a) program, sole proprietors, sole member LLCs, etc. must obtain life insurance unless loan is fully secured If principal uninsurable, lender must obtain written documentation
from a licensed insurer
23
Other SOP Changes 147 Note and 148 and 148L Full and Limited Guaranty
forms no longer mandatory – be careful Lenders forms must contain SBA required clauses
Applications – Forms 1919 (Borrower) and 1920SX (Lender) Elimination of 4 and 4i Must use E-Tran for processing ALL loans
24
Other SOP Changes504 Loan program changes in new SOP:
Does not require credit reports on non-guarantor affiliates
SBA can participate in Projects financed by obligations exempt form local or state taxes
Incorporates clarifications under 7(a) program (i.e. franchise reviews), permissible debt refinancing and change of ownership
Eliminates wet signatures on personal financial statements, balance sheets and income statements, fed tax returns and aging AR reports
25
Part II
Recently Enacted SOP Changes and Rules Affecting SBA Lenders
26
Recent SBA Procedural NoticesFRANdata Unique Numbering System (FRUNS) –
Starting October 1, 2013 Must submit a FUNS number for all franchise loans through ETran Control No. 2000-840
7(a) and 504 Fees – Starting October 1, 2013 Guaranty and on-going fees to be waived for all loans under
$150,000 beginning 10/1/2013 For other loans, on-going fee going down from 55 to 52 basis
points Control No. 5000-1288
27
Change of Ownership
Co-Borrowers – adequacy of consideration
Asset Purchase, Stock Redemption and Stock Purchase
28
OMB Circular A-129Credit Reporting Requirements (SOP 50 57 p. 30)Mandatory that lenders report SBA loans to a
commercial credit agency of Lender’s choice (quarterly)
OCRM will likely be looking for compliance in conducting its onsite reviews; and the position of NGPC is unclear
31 U.S.C.§3711Clarifying notice from SBA in process
29
IPERA Audits
OIG report on SBA’s failure to comply with the Improper Payments Elimination and Recovery Act (IPERA)
SBA agreed to implement a payment recapture plan for approved loans, both before and after closing.
Do lenders close loans if audit pending? If deficiencies noted after funding, what should lenders do?
30
Servicing and Liquidation PoliciesSOP 50 57 clarified to state that it only
governs loans after final disbursement has been made For servicing actions after initial disbursement, but
prior to final disbursement, lenders should still refer to SOP 50 10
New Matrix issued 4/30/2013New SBA Litigation Plan Tabs and Charge Off TabsSOP 50 55, Servicing and Liquidation SOP for 504
loans issued 9/5/2013
31
Other Important Changes Affiliation and Personal Resources Rule policy revisions –
still under review – may be finalized before 1/1/2014 SBA One – part of requirements for fiscal and transfer
agent contract OCRM/OIG – Anticipated additional enforcement
initiatives (which could lead to more lenders losing PLP status or being removed from program)
32
Part III
Case Studies on the Top Reasons for Repairs/Denials
Recommendations/Best Practices
33
Case Study #1 - Eligibility Affiliation
Loan Structuring to exceed program maximums Lender failure to perform sufficiently detailed affiliation analysis FULL DENIAL
Ineligible Business Loan to purchase CRE and convert use to Brazilian Restaurant Existing use at time of closing – ineligible Lender failure to monitor UOP and change of use FULL DENIAL
34
Case Study #2 – Improper PLP ProcessingLender refinance its own debt
$350k interim loan for equipment purchase SOP does not allow PLP processing to refi same lender
debt, unless an interim loan approved within 90 days of PLP #
Delay caused by fire Lender obtains PLP 10 mos. after interim loan approval
and closing $350k REPAIR
35
Case Study #3 – Program IntegrityBank officer part owner of CRE developerBank approves loans to CRE purchasersPotential conflict of interest not disclosed to SBAFULL DENIAL
36
Case Study #4 - Financials Early Default/Problem Loan Lender unable to produce 4506 Transcripts Logic conundrum – difficult to prove a negative Often lenders underwrite Change of Ownership as startup
when seller refuses to provide financials – beware! “Materiality” standard is not always followed FULL DENIAL
37
Case Study #5 – Environmental
Gas station loanEnvironmental consultant recommends additional
testingLender does not require additional testingContamination at default
Lender cannot prove CRE was “clean” at closingREPAIR – cost of cleanup
38
Case Study #6 – Use of Proceeds
Lender has burden to prove proper UOPLender does not reallocate proceeds in LAProceeds designated for one purpose used for
another purpose (i.e.: inventory $ used for working capital; renovation $ used for debt refi., etc.)
REPAIR i/a/o improperly disbursed proceeds
39
Case Study #7 – RefinanceLender refinances several debts of Borrower
Ineligible purpose – 1 debt refinanced financed the buy-in of 1 principal“Creeping control” – ineligible
Ineligible debt – same debt was also owed to SBIC
REPAIR i/a/o line item allocated to refinance the ineligible debt
40
Case Study #8 – CollateralLien PositionGuarantors
Application: Ownership 41%/41%/18% Operating Agreement: 33.3%/33.3%/33.3% Lender failed to verify ownership “18%” owner actually owned 1/3
Guaranty requiredIndividual has means and refuses to share financial info.
REPAIR? DENIAL?
41
Case Study #9 – InsuranceLife – loan to sole proprietor
Failure to obtain life insurance Borrower dies REPAIR i/a/o loan balance less collateral recovery
Casualty – Acord Certificate Failure to get copy of binder Insurance company contests claim for coverage after
fire destroys business REPAIR i/a/o difference between replacement cost and
litigation settlement amount
42
Case Study #10 – 912 Issues Principal answers “No” to questions 7, 8 & 9 on 912 Form Principal convicted of 2 misdemeanors (sexual assault) in
1993 and had felony arrest (battery) in 2002 (charges dropped)
Lender performs criminal background search prior to closing – no records found
Lender discovers misrepresentation on subsequent conventional loan application
What should the lender do?
43
Recommendations/Best PracticesBegin with the end in mindSubmit “close calls” for GP processingUse 10 Tabs as post-closing audit checklistEngage in a compliance mindset in each phase of a
loanConstant improvement in front-end practicesAvoid “GIGO”
44
Thanks! Any Questions?Kimberly A. Rayer, [email protected]: 267-470-1208
1300 Virginia DriveSuite 325Ft. Washington, PA 19034P: 215-542-7070F: 215-534-9023
www.starfieldsmith
45