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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.

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exploring the new sop 50 10 5 f and other new sba program initiatives

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
Agenda:
  • 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
Part ISOP 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
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
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
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
franchises
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
    • Delegatedfranchisereviews@sba.gov
  • 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
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
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
business with an associate of poor character
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 character1
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
refinancing change of ownership debt
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
additional refi provisions
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 transaction
credit criteria loan 350 000
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
credit criteria loan 350 0001
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
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 350 000 001
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
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
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

collateral requirements 50 10 5 f1
Collateral Requirements50 10 (5) (F)
  • 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.

new collateral requirements
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
new collateral requirements cont
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
life insurance
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
other sop changes
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
other sop changes1
Other SOP Changes
  • 504 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
part ii
Part II

Recently Enacted SOP Changes and Rules Affecting SBA Lenders

recent sba procedural notices
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
Change of Ownership
  • Co-Borrowers – adequacy of consideration
  • Asset Purchase, Stock Redemption and Stock Purchase
omb circular a 129
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 (quarterly)
  • 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
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
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 Tabs
  • SOP 50 55, Servicing and Liquidation SOP for 504 loans issued 9/5/2013
other important changes
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
Part III

Case Studies on the Top Reasons for Repairs/Denials

Recommendations/Best Practices

case study 1 eligibility
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
case study 2 improper plp processing
Case Study #2 – Improper PLP Processing
  • 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 PLP #
    • Delay caused by fire
    • Lender obtains PLP 10 mos. after interim loan approval and closing
    • $350k REPAIR
case study 3 program integrity
Case Study #3 – Program Integrity
  • Bank officer part owner of CRE developer
  • Bank approves loans to CRE purchasers
  • Potential conflict of interest not disclosed to SBA
  • FULL DENIAL
case study 4 financials
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
case study 5 environmental
Case Study #5 – Environmental
  • Gas station loan
  • Environmental consultant recommends additional testing
  • 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
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., etc.)
  • REPAIR i/a/o improperly disbursed proceeds
case study 7 refinance
Case Study #7 – Refinance
  • Lender 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
case study 8 collateral
Case Study #8 – Collateral
  • Lien Position
  • Guarantors
    • 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.
  • REPAIR? DENIAL?
case study 9 insurance
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
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?
recommendations best practices
Recommendations/Best Practices
  • 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 loan
  • Constant improvement in front-end practices
  • Avoid “GIGO”
thanks any questions
Thanks! Any Questions?

Kimberly A. Rayer, Esq.

krayer@starfieldsmith.com

P: 267-470-1208

1300 Virginia Drive

Suite 325

Ft. Washington, PA 19034

P: 215-542-7070

F: 215-534-9023

www.starfieldsmith