Lerch Early SOP SBA 50 10 5(g) update

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SBA SOP 50 10 5(g)

November 19, 2014

Alison W. Rind Arnold D. Spevack

Lerch, Early & Brewer, Chtd.

www.lerchearly.com

© Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com

Overview

Elimination of personal resource test

Other eligibility issues

Credit standards, collateral & environmental

Other revisions

SBA 504 loans

SBA One

Today’s Program

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Presenter

Presentation Notes

AWR


Overview

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Purpose of New SOP

Incorporate previously approved rules and policies that became effective after the last SOP was issued

Clarify existing requirements

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Presenter

Presentation Notes

AWR


Elimination of Personal Resource Test

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Presenter

Presentation Notes

AWR


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→ SOP At Pages 85, 238, 247

Effective April 21, 2014 See SBA Notice 5000-132 Do not need to review personal resources

of 20% or more owner, spouses or dependent children

Does not eliminate the requirement to demonstrate credit is not available elsewhere

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Presenter

Presentation Notes

AWR You no longer need to review the personal resources of the principals to determine eligibility Still need to document credit not available elsewhere


Other Eligibility Issues

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Presenter

Presentation Notes

ADS


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Franchises (SOP at 87, 249)

SBA Notice 5000-1322 Key Test- whether a business is perceived by

the public to be a single business or multiple businesses operating in the same space

Characterization as business leasing to independent contracts (Salon Suites) – ineligible

Franchises may be addressing these concerns

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Presenter

Presentation Notes

ADS -- SOP now provides that business such as barber shops, hair salons, nail salons and similar business operated by landlords who do not actively use or occupy the assets acquired or improvements financed with loan proceeds are ineligible. -- The key test is whether the business is perceived by the public to be a single business operated by the business owner or whether it is perceived to be separate businesses. -- Lenders must be able to document this in their approvals. -- If using PLP processing, SBA may challenge lender’s determination of eligibility.


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Franchises con’t (SOP at 87, 249)

Just because it is on the Franchise Registry does not mean that it is an eligible franchise

Registry only clears size standards and affiliations

Given lack of clarity, lenders might consider submitting these types of franchises for standard processing

Cannot use proceeds to renovate leased space

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Presenter

Presentation Notes

ADS -- Consider using standard processing. -- Remember, Borrower cannot use loan proceeds to renovate leased space.


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Required Guarantors (SOP at 103,297)

Clarification EPC/OC- spouse owning at least 5% of

either the EPC or OC must guaranty loan if, together with the owner, they own 20% or more.

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Presenter

Presentation Notes

ADS -- Each holder of an ownership interest constituting at lest 20% of either the EPC or the OC must guarantee the loan. -- And, each spouse owning 5% or more of the EPC or the OC must personally guarantee the loan in full if the combined ownership interest of both spouses ≥ 20%.


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Form 1919 (SOP at 190)

Clarifying language Any partner that is involved in the

management of the business, as well as all 20% owners of partnership, must complete SBA Form 1919.

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Presenter

Presentation Notes

ADS -- All general partners (even those with less than a 20% interest) and all limited partners Owning 20% or more of the equity in the firm; Involved in the management of the applicant’s business Must complete a Form 1919 -- The same is true for limited liability company members -- And, any persons hired by the business to manage day-to day-operations


Credit Standards, Collateral, etc.

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Presenter

Presentation Notes

ADS


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New Option for Delegated Lenders (SOP at 154, 155 and 195)

Small loans up to $350K Use same credit standards for loans >$350K

(equity, 1.15x DSC, collateral) Other Alternatives:

Process SBA Express Wait 90 days and resubmit Non-delegated lenders – submit to

processing center as standard package

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Presenter

Presentation Notes

ADS -- SBA has added new option for delegated lenders for screening of small loans ≤ $350,000. See SOP 154 If the applicant does not receive an acceptable credit score, a delegated lender may still process under delegated authority so long as the lender underwrites and closes the loan utilizing the procedures for loans over $350,000 instead of submitting it to the processing center for approval. The other options are to: Process as an SBA Express loan Wait 90 days and resubmit the loan; Non-delegated lenders can submit to the processing center


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At Guaranty Purchase

7(a) Small Loans scored after July 1, 2014 will not be required to submit evidence of cash flow spreads with a request for purchase.

Purchase requests submitted to: [email protected] [email protected]

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Presenter

Presentation Notes

ADS

mailto:[email protected]

mailto:[email protected]


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Tax Verifications (SOP at 192)

For PLP lenders- must obtain IRS verification prior to 1st disbursement

Non-PLP lenders – submit with application package

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Presenter

Presentation Notes

ADS -- With respect to the lender’s obligation to verify tax returns, PLP lenders can now defer verification of tax returns so long as this is accomplished prior to 1st disbursement. -- Non- PLP lenders must submit with the application package


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Environmental Reports (SOP at 172)

Environmental Reports must be submitted to SBA Center processing the application

PLP lenders, lenders making 7(a) Small Loans, SBA Express and Export Express loans need not submit environmental reports to SBA Center

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Presenter

Presentation Notes

ADS -- SOP now has added language clarifying that environmental reports must be submitted to the SBA center processing the application. -- PLP lenders, lenders making Small loans, Express loans and Export Express loans do not have to submit environmental reports.


Other Revisions

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Presenter

Presentation Notes

AWR


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Export Express Loans (SOP at 118)

Clarification Lender must maintain in its loan file evidence

that at least 70% of the initial advance (up to the loan amount) was used for export purposes

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Presenter

Presentation Notes

AWR Since the program is for exports, but the SBA realizes that a borrower may have both export and US business, in order to qualify for this program, at least 70% of the iniitial (100%) advance must be able to be documented for export purposes


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Credit Scoring (13 CFR 120.150)

Credit scoring covers: Character, reputation and credit history Strength of business Past earnings, projected cash flow and

future prospects Ability to repay the loan with earnings from

the business

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Presenter

Presentation Notes

AWR For underwriting purposes, there are 9 points of interest to cover. The above 4 are done thru credit scoring, so lender is only responsible to document the other 5.


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Credit Scoring con’t

Other items lender must address in credit analysis: Experience and depth of management Sufficient invested equity Potential for long term success Nature and value of collateral Potential impact of any affiliates

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Presenter

Presentation Notes

AWR


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Lender’s Small Loan Credit Memo (SOP at 155)

Brief history of business Brief description of management team Owner/guarantor analysis including

personal financial statements consistent with similarly sized non-SBA loans

Collection of business tax returns and IRS verification

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Presenter

Presentation Notes

AWR


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Lender’s Small Loan Credit Memo (SOP at 155) con’t

List of Collateral and estimated value Effect of affiliates upon repayment Equity injection and pro-forma debt to worth

if required with similarly sized non-SBA loans

These items, plus acceptable credit score, complete the lender analysis. Lender may require additional analysis. 22

Presenter

Presentation Notes

AWR


SBA 504 Update

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Elimination of Nine Month Rule (SOP at 235)

Effective April 21, 2014 When looking at expenditures for land,

building, machinery, equipment and professional fees, any expenditures made more than nine months ago are included

Including expenditures financed with short term debt

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Presenter

Presentation Notes

ADS -- 9 month rule has been eliminated (effective as of April 21st). This means that – when determining eligible project costs – when looking at expenditures for land, building, machinery & equipment, furniture and fixtures, as well as professional fees – even those expenditures incurred more than 9 months ago may still be included in the calculation. This includes even those expenditures financed with short term debt.


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Third Party Lender Preference (SOP at 233)

No longer any reference to “preference” Third party lender may take additional

collateral but: Lender must dispose of additional collateral

and apply proceeds to third party loan prior to final disposition of project property

Better off taking additional collateral on interim loan only

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Presenter

Presentation Notes

ADS -- The preference rules have now been revised to delete references to “preferences”. 3rd party lenders may now have additional collateral but: In a collection, the lender must liquidate the collateral and exhaust all reasonable avenue of collection with respect to the additional collateral no later than the date of the foreclosure of the project property and apply the sale proceeds to the 3rd party loan prior to taking the proceeds from the sale of the project property.


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Indemnification- Third Party Lender Agreement

SBA Notice 5000-1320 Open ended indemnification clauses in real

estate documents Violation of Anti-Deficiency Act

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Presenter

Presentation Notes

ADS -- There is a potential issue in 504 loans where, in the event that the SBA were to have to foreclose on the collateral real estate, the SBA might be exposed to potentially open-ended indemnification obligations. -- This might arise where, as in many instances, the property is located in a PUD or the property is otherwise subject to covenants where the property owner is exposed to open-ended financial obligations. Typically, these include storm water management covenants or other covenants obligating the property owner for open-ended monetary liability if the covenant is violated.


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Indemnification- Third Party Lender Agreement con’t

CDC must either: Obtain a waiver from the indemnified party Require addendum to Third Party Lender

Agreement to defer foreclosure

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Presenter

Presentation Notes

ADS -- Because the SBA is prohibited from taking on liability of this nature, the SBA’s posture is: CDCs must seek a waiver from the entity or the municipality with the authority to enforce the covenant; and, If no waiver is forthcoming, the 3rd party lender agreement must be augmented with language which prevents the 3rd party from foreclosing until 90 days after the SBA repurchases the debenture. Significantly, there is no provision in the law or the regulations which imposes a deadline on the SBA repurchase of a debenture from the secondary market -- AWR returned from NAGGL with the promise that the SBA is working on a fix – but, we have heard nothing further.


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504 Closings (SOP at 302)

504 Debenture Closing Checklist (Form 2286) – revised:

13 items – regular closings Eight items – expedited closings Form 2203 (checklist for complete file

review) also revised Construction documents moved

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Presenter

Presentation Notes

AWR


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Speakers

Alison Rind is a lending attorney at Lerch, Early & Brewer who represents commercial lenders in loan transactions and other commercial matters. These include participants in SBA and other government-guaranteed lending programs. Arnie Spevack is a commercial transactions

attorney at Lerch, Early & Brewer who represents individuals, businesses, lenders and borrowers in financings, closings, negotiations and in the courts.

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(301) 657-0750 awrind@ lerchearly.com

(301) 657-0749 adspevack@ lerchearly.com


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For more information

Lerch, Early & Brewer, Chtd. 3 Bethesda Metro Center, Suite 460

Bethesda, MD 20814 (301) 986-1300

www.lerchearly.com

Thank you for your participation

This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting

on any information contained here.

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Lerch Early SOP SBA 50 10 5(g) update

Presentations & Public Speaking