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Presented by: Ethan W. Smith, Esq. HOW TO PROTECT YOUR SBA GUARANTY WPASGL March, 2014 © 2014, Starfield & Smith, P.C., All Rights Reserved
2 Agenda: Eligibility PLP Abuse Conflict of Interest Financials Environmental Use of Proceeds Refinance Collateral Underwriting © 2014, Starfield & Smith, P.C., All Rights Reserved
Guiding Principle 3 © 2014, Starfield & Smith, P.C., All Rights Reserved
4 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 © 2014, Starfield & Smith, P.C., All Rights Reserved
5 Eligibility 912/1919 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 © 2014, Starfield & Smith, P.C., All Rights Reserved
6 PLP ABUSE 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 © 2014, Starfield & Smith, P.C., All Rights Reserved
7 Conflict of Interest Bank officer part owner of CRE developer Bank approves loans to CRE purchasers Potential conflict of interest not disclosed to SBA FULL DENIAL © 2014, Starfield & Smith, P.C., All Rights Reserved
8 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 © 2014, Starfield & Smith, P.C., All Rights Reserved
9 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 © 2014, Starfield & Smith, P.C., All Rights Reserved
10 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 © 2014, Starfield & Smith, P.C., All Rights Reserved
11 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 © 2014, Starfield & Smith, P.C., All Rights Reserved
12 Collateral Wrong lien position is #1 reason for repairs! © 2014, Starfield & Smith, P.C., All Rights Reserved
13 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 © 2014, Starfield & Smith, P.C., All Rights Reserved
14 Recommendations/Best Practices Begin with the end in mind Submit “close calls” for GP processing Use 10 Tabs as post-closing audit checklist Independent loan level risk based reviews Constant improvement in front-end practices Avoid GIGO © 2014, Starfield & Smith, P.C., All Rights Reserved
15 Questions ??? © 2014, Starfield & Smith, P.C., All Rights Reserved
16 Thanks! Ethan W. Smith, Esq Virginia Drive Suite 325 Ft. Washington, PA P: F: North Lake Destiny Road, Suite 105 Maitland, FL P: (407) F: (407) © 2014, Starfield & Smith, P.C., All Rights Reserved
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