Presentation on theme: "EXPLORING THE NEW SOP (F) AND OTHER NEW SBA PROGRAM INITIATIVES"— Presentation transcript:
1 EXPLORING THE NEW SOP 50 10 5(F) AND OTHER NEW SBA PROGRAM INITIATIVES Good morning. Thank you for inviting me.The program will cover the SOP (F) which will go into effect January 1, 2014.The focus of today’s program will be on identifying and trying to interpret the changes to the new SOP; as well as other SBA policy changes/initiatives affecting lenders.The presentation is based upon public discussions from SBA about the new SOPW.P.A.S.G.L.Western Pennsylvania Association of SBA-Guaranteed LendersOctober 4, 2013
2 Agenda:SOP (F)Pending and recently enacted rule/policy changes affecting SBA lendersCase Studies and Best PracticesAs you can see from the Agenda, we are going to begin by focusing on the (F) changes7(a) programNew SBA initiativesSOP represents a minimum standard; lenders must always comply with sound lending practicesFeel free to ask questions
3 Part I SOP 50 10 (5) (F) - Effective January 1, 2014 Definition of Good StandingAdditional Guidance for SBLCs/CDCsRewrite of Franchise Review ProvisionsDebarment Further DefinedChanges to 912 clearance processETran Submissions OnlyRefinance changesCredit Criteria different for two loan categories ($350,000 < >)Collateral policy: valuation methods and requirements for personally owned assetsLife insurance147 Note and 148 Guarantee formsApplication – 1919 and 1920 (replacing 4 and 4i)If you have any recommendations for future SOP changes and updates, them to:Note: Latest Loan Authorization dated 9/15/2011 (Version 2011) – refers to SOP (C) (which went into effect 10/1/2010) – Open issue: whether new E-Tran will obviate need for boilerplate.The latest version of the Servicing and Liquidation Matrix went into effect April 30, 2013 and supports the SOPIf conflict between LA and SOP, latest prevails (SOP per Seaborn). Document decision in file.
4 Good StandingA 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 (F) Orders and Call Reports) and/or non-public information from the lender’s primary and/or other regulators.SOP (f) Subpart A, Chapter 1, II.C.c), pg. 7Definition added for becoming a 7(a) Lender- pg. 7, CLP - Pg. 17, PLP - Pg. 20, Renewal -Pg. 23, Also Export & Express
5 SBLC GuidanceSubmit credit policy to SBA consistent with origination, servicing and liquidation requirements in SOP and CFRProvide annual validation that credit scoring model is predictive of loan performanceBoard must adopt controls over operations, programs and resourcesMust demonstrate compliance with policies, procedures and controls
6 CDC GuidanceEach 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 § (b).SOP (F) Subpart A, Chapter 3II, B. 1.a), pg. 471. The internal control policy implemented must ensure satisfactory monitoring and management of the SBA loan portfolio, including but not limited to, providing for a periodic loan review function to be performed at least annually by a person that is not directly or indirectly responsible for loan making or by outside contractors.2. It must include a list of monthly reports provided by the CDC’s management for Board review to support adequate Board oversight.3. It must provide for internal controls for loan making, servicing and liquidation.4. It must provide for a risk rating system to risk classify SBA loan assets satisfactory to SBA.5. Internal control policies and procedures must include provisions to ensure compliance with SBA’s Loan Program Requirements on eligibility.6. CDCs must provide documentation demonstrating that the internal control policies and procedures are fully implemented and followed.
7 FranchisesRe-write of Review of Franchise/License/Dealer/Jobber or Similar Agreement provisionsRely on Certification of FranchisorSBA will assist PLP lenders determine if affiliation exists for those franchises not on RegistryAlthough affiliation determination may be made by SBA on loans not on Registry, lender must still determine whether financing meets all other eligibility rulesSBA regulations require PLP lenders to make eligibility and credit decisions. Accordingly, SBA’s review is characterized as an affiliation review (not an eligibility review).Lender must review for size, underwriting, preference, credit elsewhereIssue: Will SBA identify (1) affiliation issues, (2) negotiated fixes and (3) approve fixes?Need to find the right date of your agreement to look it up on the Franchise RegistryDon’t forget to look at Franchise Findings (http://www.sba.gov/content/franchise-findingsLooking for Control – set net profits, billing, option to purchaseRight of first refusal OK
8 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.
9 Gas Stations Look for: Review Relevant Documents: Repurchase Options Impairment of Collateral ValueAlteration of Lender/SBA’s rightsSubordination not sufficientReview Relevant Documents:Title ReportSupply AgreementsFranchise AgreementsPurchase DocumentsCredit card system to provide for payment of gasoline products. OKMost Dealer Agreements are for a term of three years with limited or no renewal terms. In situations where a gasoline supplier is leasing the real property to the dealer, the Petroleum Marketing Practices Act controls and contains detailed provisions on the authority and procedure for non-renewal or termination. This type of lease arrangement, by itself, does not place inappropriate control in the oil company/dealer.While titles vary, examples of Relevant Documents that must be reviewed include: the Real Estate Sale Agreement; Terms and Conditions of Sale Contract; Escrow Instructions; Escrow Agreement; Franchise Agreement; Contract Dealer Gasoline Agreement; Branded Reseller Agreement; Memorandum of Gasoline Agreement for Dealer-Owner, Franchisee-Operated Facility; Branded Gas Sales Restriction and Covenant; Special Warranty Deed; Bill of Sale; Use Restriction Addendum; Right of First Refusal Agreement; Repurchase Option; Subordination Agreement; Environmental Release; Environmental Declaration; Environmental Matters, Remediation and Indemnification Addendum; and Site Access Agreement
10 Business with An Associate of Poor Character Subject Individual:Owner, partner, officer, managing member, owner of 20% or more, Trustor and day-to-day ManagerForm 1919 – Questions 1, 2 & 3If Yes to 1= Not EligibleIf Yes to 2 or 3 = Find out more.Felony = FingerprintMisdemeanor = Name Check or FingerprintSend 912 to Field Office7. Are you presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction?8. Have you been arrested in the past six months for any criminal offense?9. For any criminal offense – other than a minor vehicle violation – have you ever: 1) been convicted; 2) plead guilty; 3) plead nolo contendere; 4) been placed on pretrial diversion; or 5) been placed on any form of parole or probation (including probation before judgment).
11 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; orUp 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; orA prior offence cleared by D/FA on prior application – valid for 6 monthsOnly D/FA can authorize disbursement of a loan without a 912 clearancePLP lender cannot clear felonyStill need to submit 912 for Name Check – if you miss something – might not have a guaranty.
12 Refinancing Change of Ownership Debt NOW Reads:g) Debt used to finance a change of ownership;But comments says:Refinancing 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 transactionSOP (F) Subpart B, Chapter 1, IV, E. 3.g), pg. 115
13 Additional Refi Provisions Refinancing 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
14 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 applicationIf 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 basisSBA SOP now providing guidance to lender on credit in an attempt to resolve issues with OIGLender must document in file definition or formula to calculate global cash flow - Exception for loans under $50,000Lenders may use their own credit scoring criteria to assess the character, reputation and credit history of the application, its Associates, and guarantors, including historical performance as well as potential for long-term success. May include business credit scoring model (not consumer credit scores only) – SBLC may use credit scoring too.
15 Credit Criteria – Loan < $350,000 Lender’s Credit Analysis:History of businessManagement experienceDebt Service Coverage Ration exceeds 1:1Projected Cash Flow Ratio exceeds 1:1Owner/Guarantor personal financial statements, consistent with similar non –SBA loansMay use own credit scoring criteriaAnalyze strength of business – credit/deposit behaviorVerify tax returnsEquity and pro forma debt to worth are acceptable based on Lender’s non-SBA loan policiesSBA SOP now providing guidance to lender on credit in an attempt to resolve issues with OIGLender must document in file definition or formula to calculate global cash flow - Exception for loans under $50,000Lenders may use their own credit scoring criteria to assess the character, reputation and credit history of the application, its Associates, and guarantors, including historical performance as well as potential for long-term success. May include business credit scoring model (not consumer credit scores only) – SBLC may use credit scoring too.
16 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 flowNew policy: lender must—Determine if repayment ability from business cash flow exists ANDFollow SBA-mandated credit evaluation criteria INCLUDING minimum debt service coverage ratio of 1.15:1 based on a historical and/or projected basisSOP Equity Injection requirements apply
17 Credit Criteria – Loans > $350,000.00 OCF/DS must be greater than 1.15 to 1.0 on a historical or projected basisOperating 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
18 Current Collateral Requirements With some sub-program specific exceptions, SBA generally requires that –Assets financed by loan be taken as collateral ANDLoan must be fully secured (based on liquidation value) to the extent that collateral is available ANDIf business collateral insufficient to fully secure loan, personal collateral of all types, including personally owned R/E, must be takenLimited guaranty of spouse required if necessary to secure lien on jointly held R/ENote: 6 month look-back rule on assets transferred from a spouse
19 Collateral Requirements 50 10 (5) (F) Loans between$25,000 to $350,000Follow collateral policies and procedures that Lender has established and implemented for its similarly-sized non-SBA-guaranteed commercial loansAt 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.
20 Collateral Requirements 50 10 (5) (F) Loans between$350,000 to $5,000,000SBA 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.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)“Net book value” is defined as an asset's original price minus depreciation and amortization. New machinery and equipment may be valued at 75% of Net Book Value, or 80% with an Orderly Liquidation Appraisal minus any prior liens for the calculation of “fully-secured.” Used or existing machinery and equipment may be valued at 50% of Net Book Value or 80% with an Orderly Liquidation Appraisal minus any prior liens for the calculation of “fully-secured.” Real estate can be valued supported at 85% of the value for the calculation of “fully-secured” and the value must be determined in accordance with the requirements set forth in Paragraph C below. If the loan will be secured by the fixed assets and the valuation of fixed assets is greater than their depreciated value (net book value), an independent appraisal by a qualified individual must be obtained by the lender to support the higher valuation. (See Paragraph C.3 below.);1. If there is a collateral shortfall (not fully-secured) on the SBA-guaranteed loan, the lender may include trading assets as necessary (using 10% of current book value for the calculation) and will be required to take available equity in the personal real estate of the principals. Liens on a personal residence or investment property may be limited to the amount of the collateral shortfall2. Liens on a personal residence or investment property may be limited to 150% of the equity in the collateral, rather than the loan amount, if there are tax implications associated with the lien amount in the particular state where the lien is filed.g) For loans that are more than $250,000
21 New Collateral Requirements For loans of $25,000 and less – no collateral requiredFor loans over $25,000 – Lien on all assets financed by loan proceeds still mandatory
22 New Collateral Requirements (Cont.) Liens on residence may be limited to150% of equity - if tax implications from filing at higher amountLien 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 requiredNo lien required if R/E wholly owned by non-owner spouseLien on other personally owned assets, e.g., stocks, bonds, CDs, etc., NOT requiredNote: 6 month look-back rule on assets transferred from a spouse see last 2 bulleted items.NOTE: Issue whether lender must take RRE if it does so on no-SBA Loans
23 Life InsuranceCurrent 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 LIABILITYNew policy to allow lender to follow same policy that it uses regarding life insurance for its unguaranteed commercial loans of similar size and typeBut, 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 securedIf principal uninsurable, lender must obtain written documentation from a licensed insurerLoans processed under SLA, Express or Patriot Express (under $350,000) lenders follow conventional policies
24 Other SOP Changes147 Note and 148 and 148L Full and Limited Guaranty forms no longer mandatory – be carefulLenders forms must contain SBA required clausesApplications – Forms 1919 (Borrower) and 1920SX (Lender)Elimination of 4 and 4iMust use E-Tran for processing ALL loansProbably best to utilize 147 and 148 forms for secondary market sales; all mandatory language in placeTransition period for E-Tran applications. 1/1/14Loan Authorization Wizard slated to be eliminated, but understanding is that E-Tran will become new platform for document
25 Other SOP Changes 504 Loan program changes in new SOP: Does not require credit reports on non-guarantor affiliatesSBA can participate in Projects financed by obligations exempt form local or state taxesIncorporates clarifications under 7(a) program (i.e. franchise reviews), permissible debt refinancing and change of ownershipEliminates wet signatures on personal financial statements, balance sheets and income statements, fed tax returns and aging AR reportsProbably best to utilize 147 and 148 forms for secondary market sales; all mandatory language in placeTransition period for E-Tran applications. 1/1/14Loan Authorization Wizard slated to be eliminated, but understanding is that E-Tran will become new platform for document
26 Recently Enacted SOP Changes and Rules Affecting SBA Lenders Part IIRecently Enacted SOP Changes and Rules Affecting SBA Lenders
27 Recent SBA Procedural Notices FRANdata Unique Numbering System (FRUNS) – Starting October 1, 2013Must submit a FUNS number for all franchise loans through ETranControl No7(a) and 504 Fees – Starting October 1, 2013Guaranty and on-going fees to be waived for all loans under $150,000 beginning 10/1/2013For other loans, on-going fee going down from 55 to 52 basis pointsControl No
28 Change of Ownership Co-Borrowers – adequacy of consideration Asset Purchase, Stock Redemption and Stock Purchase
29 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 unclear31 U.S.C.§3711Clarifying notice from SBA in process
30 IPERA AuditsOIG 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?
31 Servicing and Liquidation Policies SOP clarified to state that it only governs loans after final disbursement has been madeFor servicing actions after initial disbursement, but prior to final disbursement, lenders should still refer to SOP 50 10New Matrix issued 4/30/2013New SBA Litigation Plan Tabs and Charge Off TabsSOP 50 55, Servicing and Liquidation SOP for 504 loans issued 9/5/20134/30/2013
32 Other Important Changes Affiliation and Personal Resources Rule policy revisions – still under review – may be finalized before 1/1/2014SBA One – part of requirements for fiscal and transfer agent contractOCRM/OIG – Anticipated additional enforcement initiatives (which could lead to more lenders losing PLP status or being removed from program)55 bps to 52 bpsFee waiver for loans at or under $150,000 (budget says $150,000 – discrepancy)Electronic fingerprint cardsAffiliation and personal resources rules pending. PR rule limits amount of liquid assets a 20% more owner of a loan applicant may retain
33 Part III Case Studies on the Top Reasons for Repairs/Denials Recommendations/Best Practices
34 Case Study #1 - Eligibility AffiliationLoan Structuring to exceed program maximumsLender failure to perform sufficiently detailed affiliation analysisFULL DENIALIneligible BusinessLoan to purchase CRE and convert use to Brazilian RestaurantExisting use at time of closing – ineligibleLender failure to monitor UOP and change of use
35 Case Study #2 – Improper PLP Processing Lender refinance its own debt$350k interim loan for equipment purchaseSOP does not allow PLP processing to refi same lender debt, unless an interim loan approved within 90 days of PLP #Delay caused by fireLender obtains PLP 10 mos. after interim loan approval and closing$350k REPAIR
36 Case Study #3 – Program Integrity Bank officer part owner of CRE developerBank approves loans to CRE purchasersPotential conflict of interest not disclosed to SBAFULL DENIAL
37 Case Study #4 - Financials Early Default/Problem LoanLender unable to produce 4506 TranscriptsLogic conundrum – difficult to prove a negativeOften lenders underwrite Change of Ownership as startup when seller refuses to provide financials – beware!“Materiality” standard is not always followedFULL DENIAL
38 Case Study #5 – Environmental Gas station loanEnvironmental consultant recommends additional testingLender does not require additional testingContamination at defaultLender cannot prove CRE was “clean” at closingREPAIR – cost of cleanup
39 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
40 Case Study #7 – Refinance Lender refinances several debts of BorrowerIneligible purpose – 1 debt refinanced financed the buy-in of 1 principal“Creeping control” – ineligibleIneligible debt – same debt was also owed to SBICREPAIR i/a/o line item allocated to refinance the ineligible debt
41 Case Study #8 – Collateral Lien PositionGuarantorsApplication: Ownership 41%/41%/18%Operating Agreement: 33.3%/33.3%/33.3%Lender failed to verify ownership“18%” owner actually owned 1/3Guaranty requiredIndividual has means and refuses to share financial info.REPAIR? DENIAL?
42 Case Study #9 – Insurance Life – loan to sole proprietorFailure to obtain life insuranceBorrower diesREPAIR i/a/o loan balance less collateral recoveryCasualty – Acord CertificateFailure to get copy of binderInsurance company contests claim for coverage after fire destroys businessREPAIR i/a/o difference between replacement cost and litigation settlement amount
43 Case Study #10 – 912 IssuesPrincipal answers “No” to questions 7, 8 & 9 on 912 FormPrincipal 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 foundLender discovers misrepresentation on subsequent conventional loan applicationWhat should the lender do?
44 Recommendations/Best Practices Begin 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”
45 Thanks! Any Questions? Kimberly A. Rayer, Esq. P:1300 Virginia DriveSuite 325Ft. Washington, PA 19034P:F: