SBA LENDING UPDATE: EXPLORING THE NEW SOP 50 … · OTHER NEW SBA PROGRAM INITIATIVES Central Texas Assoc. of Guaranteed Government Lenders ... pLien on jointly held R/E still required

EXPLORING THE NEW SOP 50 10 5(F) AND

OTHER NEW SBA PROGRAM INITIATIVES

Central Texas Assoc. of Guaranteed Government LendersFebruary 5 & 6, 2014

SBA LENDING UPDATE:

© 2014, Starfield & Smith, P.C.

Agenda:

n SOP 50 10 5(F)

n Pending and recently enacted rule/policy changes affecting SBA lenders

2


n Definition of Good Standing

n Rewrite of Franchise Review Provisions

n Debarment Further Defined

n Changes to 912 clearance process

n ETran Submissions Only

n Refinance changes

n Credit Criteria different for two loan categories ($350,000 < >)

n Collateral policy: valuation methods and requirements for personally owned assets

n Life insurance

n 147 Note and 148 Guarantee forms

n Application – 1919 and 1920 (replacing 4 and 4i)

Part I

SOP 50 10 (5) (F) - Effective January 1, 2014

3


Good Standing

pA lender must be in good standing with its state regulator and Federal Financial Institution Regulator (FFIR) as determined by SBA. n satisfactory financial condition (e.g., capital and liquidity)

n satisfactory small business credit administration and servicing policies, procedures and practices. p SOP 50 10 5(f) Subpart A, Chapter 1, II.C.c), pg. 7

4


Franchises

p Re-write of Review of Franchise/License/Dealer/Jobber or Similar Agreement provisions

p Rely on Certification of Franchisor

p SBA will assist PLP lenders determine if affiliation exists for those franchises not on Registryn [email protected]

p Although affiliation determination may be made by SBA on loans not on Registry, lender must still determine whether financing meets all other eligibility rules

5


Get Executed Franchise Documents

pIf Lender disburses the proceeds without obtaining the necessary executed franchise documents, including any amendments and/or addendums, SBA may deny liability of guaranty.

6


Gas Stations

pReview Relevant

Documents: Title Report

(with copies of chain and

Exceptions), Supply

Agreements, Purchase Documents

pLook for: Repurchase Options, Impairment of Collateral Value, Alteration of Lender/SBA’s rights (Subordination not sufficient)

7


Business with An Associate of Poor Character

pSubject Individual:

nOwner, partner, officer, managing member, owner of 20% or more, Trustor and day-to-day Manager

n Form 1919 – Questions 1, 2 & 3

n If Yes to 1= Not Eligible

n If Yes to 2 or 3 = Find out more.

n Felony = Fingerprint

nMisdemeanor = Name Check

or Fingerprint

n Send 912 to Field Office

8


Business with An Associate of Poor Character

pYou can clear it!?! Maybe…

pPLP Lender or SBA Field Officer can clear the following:

n Single minor misdemeanor offense or arrest; or

nUp to 3 minor offenses (arrests and/or convictions at one time or separately), concluded more than 10 years prior to date of the SBA application; or

n A prior offence

cleared by D/FA on

prior application –

valid for 6 months9


Refinancing Change of Ownership Debt

p NOW Reads:

g) Debt used to finance a change of ownership;

p But comments says:

SOP 50 10 5 (F) Subpart B, Chapter 1, IV, E. 3.g), pg. 115

10


Additional Refi Provisions

pRefinancing Same Institutions Debt – 36 month look back - late beyond 29 days

pBorrower or Lender can get evidence from prior lender of SBA loan for refinance

p7(a) to refinance 504 Loan –

Both TPL and 504 refinanced

or TPL paid in full, part of

larger transaction (GP only)

11


Credit Criteria – Loan < $350,000p New policy: Loans $350,000 and under must be processed under SLA

Credit Score prescreening prior to submission of ETran application

p 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.

p 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

12


Credit Criteria – Loan < $350,000

p Lender’s Credit Analysis:

n History of businessn Management experiencen Debt Service Coverage Ration exceeds 1:1n Projected Cash Flow Ratio exceeds 1:1n Owner/Guarantor personal financial

statements, consistent with similar non –SBA loans

n May use own credit scoring criterian Analyze strength of business – credit/

deposit behaviorn Verify tax returnsn Equity and pro forma debt to worth are acceptable based on Lender’s

non-SBA loan policies

13


Credit Criteria – Loans > $350,000.00

pNew policy: lender must—nDetermine if repayment ability from business cash flow

exists AND

n Follow SBA-mandated

credit evaluation criteria

INCLUDING minimum debt

service coverage ratio of

1.15:1 based on a historical

and/or projected basis

n SOP Equity Injection

requirements apply

14


Credit Criteria – Loans > $350,000.00

pOCF/DS must be greater than 1.15 to 1.0 on a historical and/or projected basisn Operating Cash Flow (OCF) as earnings before interest, taxes,

depreciation and amortization (EBITDA)

n Debt Service is defined as required P&I payments on all business debt inclusive of SBA loan proceeds

pIf not………….. à

15


Former Collateral Requirements

pWith some sub-program specific exceptions, SBA generally required “all available assets”

16


New Collateral Requirements

pFor loans of $25,000 and less – no collateral required

pFor loans over $25,000 –

Lien on all assets

financed by loan

proceeds still mandatory

17


Collateral Requirements50 10 (5) (F)

p At a minimum obtain a lien on the applicant’s fixed assets.

p 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 andprocedures that Lender hasestablished and implementedfor its similarly-sized non-SBA-guaranteed commercial loans

18


p Fully Secured means all available assets with a combined net book value up to the loan amount.

p 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 lendercollateralize the loan to themaximum extent possible up tothe loan amount.

Collateral Requirements50 10 (5) (F)

19


New Collateral Requirements (Cont.)

p Liens on residence may be limited to150% of equity - if tax implications from filing at higher amount

p Lien on personal residence still NOT required if equity less than 25%

p Lien on jointly held R/E still required even if one spouse has NO ownership interest in business – with limited guaranty required

p No lien required if R/E wholly owned by

non-owner spouse

p Lien on other personally owned assets,

e.g., stocks, bonds, CDs, etc., NOT required

20


Life Insurancep 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

p 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 securedn If principal uninsurable, lender must obtain written documentation

from a licensed insurer

21


Other SOP Changes

p 147 Note and 148 and 148L Full and Limited Guaranty forms no longer mandatory – be carefuln Lenders forms must contain SBA required clauses

p Applications – Forms 1919 (Borrower) and 1920SX (Lender)n Elimination of 4 and 4i

n Must use E-Tran for processing

ALL loans

22


Other SOP Changes

p504 Loan program changes nDoes not require credit reports on

non-guarantor affiliates

n SBA can participate in Projects financed by obligations exempt from local or state taxes

n Incorporates clarifications under 7(a) program (i.e. franchise reviews), permissible debt refinancing and change of ownership

n Eliminates wet signatures on personal financial statements, balance sheets and income statements, fed tax returns and aging AR reports

23


Recent SBA Procedural Notices

pFRANdata Unique Numbering System (FRUNS) –Starting October 1, 2013n Must submit a FUNS number for all franchise loans through ETran

n Control No. 2000-840

p7(a) and 504 Fees – Starting October 1, 2013n Guaranty and on-going fees to be waived for all loans under

$150,000 beginning 10/1/2013

n For other loans, on-going fee going down from 55 to 52 basis points

n Control No. 5000-1288

24


OMB Circular A-129

pCredit Reporting Requirements (SOP 50 57 p. 30)

pMandatory that lenders report SBA loans to a commercial credit agency of Lender’s choice (quarterly)

pOCRM will likely be looking for compliance in conducting its onsite reviews; and the position of NGPC is unclear

p31 U.S.C.§3711

pClarifying notice from SBA in process

25


Other Important Changes

p Affiliation and Personal Resources Rule policy revisions –still under review – may be finalized before 1/1/2014n Affiliation if ownership of 51% or more

n No negative control permitted

p SBA One – part of requirements for fiscal and transfer agent contract (Colson)

p OCRM/OIG – Anticipated additional

enforcement initiatives (which could

lead to more lenders losing PLP status

or being removed from program)

26


IPERA Audits

p OIG report on SBA’s failure to comply with the Improper Payments Elimination and Recovery Act (IPERA)

p SBA agreed to implement

a payment recapture plan

for approved loans, both

before and after closing.

pWhat to do?

27


Thanks! Any Questions?

Ethan W. Smith, [email protected]

P: 267-470-1186

1300 Virginia DriveSuite 325Ft. Washington, PA 19034P: 215-542-7070F: 215-534-9023

www.starfieldsmith.com

28

1100 Lake Destiny RoadSuite 105Maitland, FL 32751P: 407-667-8811F: 407-667-0020
