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EXPLORING THE NEW SOP (F) AND OTHER NEW SBA PROGRAM INITIATIVES

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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 SOP W.P.A.S.G.L. Western Pennsylvania Association of SBA-Guaranteed Lenders October 4, 2013

2 Agenda: SOP (F) Pending and recently enacted rule/policy changes affecting SBA lenders Case Studies and Best Practices As you can see from the Agenda, we are going to begin by focusing on the (F) changes 7(a) program New SBA initiatives SOP represents a minimum standard; lenders must always comply with sound lending practices Feel free to ask questions

3 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) 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 SOP If conflict between LA and SOP, latest prevails (SOP per Seaborn). Document decision in file.

4 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 (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. 7 Definition added for becoming a 7(a) Lender- pg. 7, CLP - Pg. 17, PLP - Pg. 20, Renewal -Pg. 23, Also Export & Express

5 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

6 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 § (b). SOP (F) Subpart A, Chapter 3II, B. 1.a), pg. 47 1. 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 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 Although affiliation determination may be made by SBA on loans not on Registry, lender must still determine whether financing meets all other eligibility rules SBA 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 elsewhere Issue: 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 Registry Don’t forget to look at Franchise Findings (http://www.sba.gov/content/franchise-findings Looking for Control – set net profits, billing, option to purchase Right 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 Value Alteration of Lender/SBA’s rights Subordination not sufficient Review Relevant Documents: Title Report Supply Agreements Franchise Agreements Purchase Documents Credit card system to provide for payment of gasoline products. OK Most 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 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 7. 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; 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 Only D/FA can authorize disbursement of a loan without a 912 clearance PLP lender cannot clear felony Still 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 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 SOP (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 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

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 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 SBA SOP now providing guidance to lender on credit in an attempt to resolve issues with OIG Lender must document in file definition or formula to calculate global cash flow - Exception for loans under $50,000 Lenders 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 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 SBA SOP now providing guidance to lender on credit in an attempt to resolve issues with OIG Lender must document in file definition or formula to calculate global cash flow - Exception for loans under $50,000 Lenders 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 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

17 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

18 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 Note: 6 month look-back rule on assets transferred from a spouse

19 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-SBA-guaranteed commercial loans 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.

20 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 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 shortfall 2. 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 required For 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 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 Note: 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 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 Loans processed under SLA, Express or Patriot Express (under $350,000) lenders follow conventional policies

24 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 Probably best to utilize 147 and 148 forms for secondary market sales; all mandatory language in place Transition period for E-Tran applications. 1/1/14 Loan 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 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 Probably best to utilize 147 and 148 forms for secondary market sales; all mandatory language in place Transition period for E-Tran applications. 1/1/14 Loan 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 II Recently Enacted SOP Changes and Rules Affecting SBA Lenders

27 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 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

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 unclear 31 U.S.C.§3711 Clarifying notice from SBA in process

30 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?

31 Servicing and Liquidation Policies
SOP 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 4/30/2013

32 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) 55 bps to 52 bps Fee waiver for loans at or under $150,000 (budget says $150,000 – discrepancy) Electronic fingerprint cards Affiliation 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
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

35 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

36 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

37 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

38 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

39 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

40 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

41 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?

42 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

43 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?

44 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”

45 Thanks! Any Questions? Kimberly A. Rayer, Esq.
P: 1300 Virginia Drive Suite 325 Ft. Washington, PA 19034 P: F:


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