SOP5010(5)(F) - Western Pennsylvania Association Of SBA

Western Pennsylvania Association of SBA-Guaranteed Lenders
October 4, 2013
 SOP 50 10 5(F)
 Pending and recently enacted rule/policy changes
affecting SBA lenders
 Case Studies and Best Practices
Part I
SOP 50 10 (5) (F) - Effective January 1, 2014
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)
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
SBLC Guidance
Submit 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
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
 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
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.
Gas Stations
Review Relevant
 Title Report
 Supply Agreements
 Franchise Agreements
 Purchase Documents
Look for:
 Repurchase Options
 Impairment of
Collateral Value
 Alteration of
Lender/SBA’s rights
 Subordination not
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
Business with An Associate of Poor Character
You can clear it! Maybe…
PLP Lender or SBA Field Officer can clear the
 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
Refinancing Change of Ownership Debt
 NOW Reads:
 But comments says:
g) Debt used to
finance a change of
SOP 50 10 5 (F) Subpart B, Chapter 1, IV, E. 3.g), pg. 115
Additional Refi Provisions
Refinancing Same Institutions Debt – 36 month
look back - late beyond 29 days
Borrower or Lender can get evidence from prior
lender of SBA loan for refinance
7(a) to refinance 504 Loan – Both TPL and 504
refinanced or TPL paid in full, part of larger
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 on
pre-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
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
Credit Criteria – Loans > $350,000.00
Current 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 apply
Credit Criteria – Loans > $350,000.00
OCF/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
Current Collateral Requirements
With 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
Collateral Requirements
50 10 (5) (F)
Loans between
$25,000 to $350,000
Follow collateral policies and
procedures that Lender has
established and implemented
for its similarly-sized non-SBAguaranteed commercial loans
 At a minimum obtain
a lien on the
applicant’s fixed
 Lender may secure
applicant’s trading
assets (using a 10%
current book value
for the calculation) if
it does so for
similarly sized nonSBA-guaranteed
commercial loans.
Collateral Requirements
50 10 (5) (F)
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
 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)
New Collateral Requirements
For loans of $25,000 and less – no collateral
For loans over $25,000 – Lien on all assets
financed by loan proceeds still mandatory
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
 Lien on other personally owned assets, e.g., stocks, bonds,
CDs, etc., NOT required
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
 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
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
 Elimination of 4 and 4i
 Must use E-Tran for processing ALL loans
Other SOP Changes
504 Loan program changes in new SOP:
 Does not require credit reports on non-guarantor
 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
Part II
Recently Enacted SOP Changes and Rules
Affecting SBA Lenders
Recent SBA Procedural Notices
FRANdata 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
Change of Ownership
Co-Borrowers – adequacy of consideration
Asset Purchase, Stock Redemption and
Stock Purchase
OMB Circular A-129
Credit Reporting Requirements (SOP 50 57 p. 30)
Mandatory that lenders report SBA loans to a
commercial credit agency of Lender’s choice
OCRM will likely be looking for compliance in
conducting its onsite reviews; and the position of
NGPC is unclear
31 U.S.C.§3711
Clarifying notice from SBA in process
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?
Servicing and Liquidation Policies
SOP 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 4/30/2013
New SBA Litigation Plan Tabs and Charge Off
SOP 50 55, Servicing and Liquidation SOP for 504
loans issued 9/5/2013
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)
Part III
Case Studies on the Top Reasons for
Recommendations/Best Practices
Case Study #1 - Eligibility
 Affiliation
 Loan Structuring to exceed program maximums
 Lender failure to perform sufficiently detailed affiliation analysis
 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
Case Study #2 – Improper PLP
Lender 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
 Delay caused by fire
 Lender obtains PLP 10 mos. after interim loan approval
and closing
 $350k REPAIR
Case Study #3 – Program
Bank officer part owner of CRE developer
Bank approves loans to CRE purchasers
Potential conflict of interest not disclosed to SBA
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
Case Study #5 – Environmental
Gas station loan
Environmental consultant recommends additional
Lender does not require additional testing
Contamination at default
 Lender cannot prove CRE was “clean” at closing
REPAIR – cost of cleanup
Case Study #6 – Use of Proceeds
Lender has burden to prove proper UOP
Lender does not reallocate proceeds in LA
Proceeds designated for one purpose used for
another purpose (i.e.: inventory $ used for
working capital; renovation $ used for debt refi.,
REPAIR i/a/o improperly disbursed proceeds
Case Study #7 – Refinance
Lender refinances several debts of Borrower
 Ineligible purpose – 1 debt refinanced financed the buyin 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
Case Study #8 – Collateral
Lien Position
 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 required
Individual has means and refuses to share financial info.
Case Study #9 – Insurance
Life – 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
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
 Lender performs criminal background search prior to
closing – no records found
 Lender discovers misrepresentation on subsequent
conventional loan application
 What should the lender do?
Begin with the end in mind
Submit “close calls” for GP processing
Use 10 Tabs as post-closing audit checklist
Engage in a compliance mindset in each phase of a
Constant improvement in front-end practices
Avoid “GIGO”
Thanks! Any Questions?
Kimberly A. Rayer, Esq.
[email protected]
P: 267-470-1208
1300 Virginia Drive
Suite 325
Ft. Washington, PA 19034
P: 215-542-7070
F: 215-534-9023
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