SBA Member Business Loans

Transcription

1 Policy: Area of Responsibility: SBA Member Business Loans Senior Management Last Board Review: October 9, 2014 SBA 7(a) Program Overview: Emory Alliance Credit Union is engaged in conventional small business lending and will primarily utilize the Small Business Administration 7(a) loans to augment our existing business lending program. The Credit Union will also originate SBA Express lines of credit and small loans to compliment an existing relationship or in seeking a new SBA loan relationship. SBA supported loans will be utilized to extend credit to eligible small business concerns when a request cannot be accommodated under the existing business lending policy. Emory ACU will certify and explain on each SBA loan made, why credit is not available based on conventional requirements. Emory ACU will avoid conflicts of interest (actual or apparent) with all borrowers. The credit union will not put itself in a preferential position to SBA relating to processing, servicing or liquidation of any SBA loan with respect to such things as repayment, collateral, guaranties or control. When offering SBA loans, the credit union will make sure that SBA program requirements are met and follow government regulations to assure that the integrity of the SBA guaranty is maintained throughout the life of the loan. Business loan eligibility, policy and procedures defined in this policy (including requirements outlined in the Code of Federal Regulations, SBA policy and procedures, notices, etc.) apply to all SBA loans made by Emory ACU. However, unless specifically required by SBA regulations defined in this policy or elsewhere, the loan officer should defer to its Emory ACU business loan policies, as applicable. Summarization: Loans guaranteed by the U.S. Small Business Administration (SBA) are important to Emory ACU because SBA programs provide the opportunity to support small business members with more flexible terms than otherwise possible, thereby expanding the quality and volume of business lending products and services. The following philosophy statements summarize the credit union s approach to SBA lending: The credit union is committed to sustaining a quality and profitable program for the benefit of its members. The credit union respects the mission and policies of the U.S. Small Business Administration. The credit union believes in soundness, profitability and growth. SBA loan guaranties are used by the credit union to improve a generally sound proposal that may exhibit some weaknesses. The credit union attempts to make good deals better, both for the members and the credit union. The credit union will strive to maintain high credit quality. Emory ACU believes that a reasonable SBA loan must demonstrate sound repayment (cash flow from the business enterprise either historical or pro forma). The SBA credit enhancement does not mitigate bad character or highly adverse personal credit. The credit union will not decline a credit application strictly on credit score, but will look beyond the numbers to understand a borrower and their proposal. 1

2 Emory ACU believes the SBA guaranty helps mitigate collateral gaps (both quality and quantity) inherent in certain industries. The credit union is committed to serving healthy niches within markets served. While full dependence on repayment is not centered in the SBA guaranty, the credit union recognizes the value of the credit enhancement and therefore places high emphasis on proper: o Application and Eligibility documentation o Credit underwriting o Closing documentation o Servicing actions o Liquidation processes SBA Lending Overview of Program Parameters A. Types of SBA Loan Programs SBA 7(a) Loans Deferred Loan Participation Program where SBA guarantees the loan The maximum guaranty is $3,750,000 and maximum loan amount is $5,000,000 for 7(a) loans to any one borrower, plus its affiliates Guaranty % for loans of: o $150,000 or less = up to 85% (or highest guaranty % allowed by SBA) o More than $150,000 = up to 75% (or highest guaranty % allowed by SBA) SBA Express Loans Emory ACU will use this sub-program of the SBA 7(a) program for revolving lines of credit and small term loans up to the SBA limit of $350,000. The maximum guaranty is 50% of the loan amount, but the application paperwork and process is streamlined. Companion SBA Express lines of credit with a larger 7(a) can be a viable option for both the credit union and the borrower. The process should mirror conventional loan processes for like size and type loans. In no instance will the SBA guaranty be greater than 75% of the lender s advance amount on a specific unit of floor planned collateral. EACU Limits NCUA & DBF regulations require EACU to limit our business loan portfolio to 12.25% of assets, subject to the limitation of 10% of capital and surplus to any one borrower. B. SBA Lender Status SBA 7(a) Loan Program Participating Lender: Emory ACU is an SBA participating lender, which enables the credit union to market, expedite and produce SBA loans. Under the program, the credit union is responsible for assuring the loan meets and documents all SBA program eligibility criteria with a review by SBA at time of loan application submission. Also, the credit union has the responsibility of understanding program requirements, fully documenting the file for eligibility criteria, and underwriting the credit prudently (operating without the SBA net ). 2

3 Participating Lender status also requires the credit union to service its SBA loan portfolio (after the loan is booked) with the unilateral authority to approve servicing and liquidation actions with limited SBA prior approval. Lending Service Providers (LSP): There are many types of loans that have specific eligibility criteria, complicated credit or other specific complications. Due to the expertise needed for these loans, we have chosen to partner with SBA Complete, an LSP with an exceptional reputation for working with SBA participating lenders. SBA Complete will assist us with underwriting the loan, assist in packaging it to be sent to the SBA, prepare all title work, loan documentation, issue an Opinion Letter, and service the loan after it is booked. The Credit Union is still responsible for the lending approval/decision, but will have expert underwriting & documentation with which to make those decisions. C. SBA Program Eligibility Requirements Emory ACU will follow SBA Loan Program requirements included in the Code of Federal Regulation (CFR), standard operating procedures (SOP s), policy and procedural notices (PN s), lender guides, the SBA website ( SBA forms and checklists. The credit union will include a complete SBA eligibility checklist (per SBA loan program requirement) in each loan file, and supporting documentation will be provided when required. SBA Loan Process: SBA requires the credit union to document its decisions, actions and due diligence in all aspects of the loan making process. In order to adequately preserve the SBA guaranty, the credit union will provide thorough documentation in the four major areas including: at time of origination/approval; at time of closing and funding; at time of regular servicing; and, at time of liquidation and guaranty purchase request. SBA lending is a specialized subset of commercial lending. Each team member should understand the overall approach and flow, and the various roles and responsibilities associated with SBA lending. SBA has delegated significant rights and responsibilities to Emory Alliance Credit Union under the SBA 7(a) general participating lender program. The credit union will accomplish the following functions by outsourcing many of the processes to our partner lender service provider, SBA Complete: Eligibility determination EACU staff will gather preliminary information, contact SBA Complete, and determine if the loan qualifies for SBA 7(a) financing (eligible criteria are set forth in SBA Standard Operating Procedures (SOP)). If the loan appears to be eligible, SBA Complete will issue a loan proposal to EACU, which will be provided to the member so that they understand the terms and costs of the loan. Once the member/borrower accepts the proposed terms, they will sign the proposal and provide a deposit, which is used to cover the cost of searches and closing costs. Credit analysis and loan structuring assuming that the loan is eligible, the CU will utilize the services of SBA Complete to underwrite the request. If EACU chooses to underwrite the loan request, SBA Complete will prepare an addendum which will address and confirm that the loan request meets all of the SBA eligibility requirements. SBA Complete will meet & speak directly with the borrowers in order to ensure that a full SBA eligibility determination can be made, which will significantly speed up the process and allow the 3

4 loan to be closed more promptly. An independent 3 rd party commercial underwriter may be contracted for underwriting, if deemed necessary. Once SBA Complete has completed the underwriting, it will be forwarded to EACU s Business Lending Committee (BLC--which is comprised of the President, Vice President of Lending, Sr Loan Officer & CFO). Upon approval by the BLC, SBA Complete will assist in preparing the official SBA application package, and send it on to the SBA for approval, which the SBA grants by issuing an Authorization Certificate. Upon receipt of SBA approval, SBA Complete will prepare the closing documents to be reviewed and approved by EACU and an attorney with SBA expertise. The closing will be arranged with and completed by an attorney with SBA expertise. Post closing disbursement and servicing after funding, the loan will be loaded onto SBA Complete s system & they will handle the servicing of the loan. Each month, Emory ACU s CFO will be responsible for preparing and submitting an SBA 1502 report to the Fiscal Transfer Agent (Colson) to ensure there are no issues with the SBA. This report includes loan status information, and a reconciliation of principal and interest allocations between EACU and the SBA for all outstanding 7(a) loans. Subsequent to closing the loan, we may choose to sell the guaranteed portion (75%) of the outstanding loan balance to the secondary market. This sale will be facilitated by SBA Complete (they will prepare all necessary paperwork to complete the sale), and provides EACU with a source of liquidity for originating new loans, building a member base & increase earnings. SBA Portfolio Management: SBA Loan Grading Loan grades are determined at origination in credit underwriting on the perceived degree of risk in the credit by applying the loan definitions provided in the SBA loan policies. Loan grading at post-closing will be handled according to SBA policy. SBA Loan Practice Guidelines SBA loan decisioning is a double-sided equation, with one side being the determination of creditworthiness (matching up to the guidelines used in conventional practices) and the other side being the determination of SBA program eligibility of the borrower and the use of loan proceeds. Both parts of the equation are equal in importance. The flow of decision making (and documentation of such) should flow in the following manner: 4

5 SBA Loan Authorization: The SBA loan authorization is the ruling document for protecting the integrity of the SBA guaranty. It is the customized agreement between the credit union and the Small Business Administration on each individual credit approved with a SBA guaranty (two-party agreement). The SBA will prepare the required Certificate Authorization upon their approval of the loan. The loan must be closed (documented) and funded according to the requirements in the Loan Authorization. Failure to do so could impair or jeopardize recovery under the SBA guaranty purchase process. SBA Loan Agreement: An SBA loan agreement will be prepared for each SBA 7(a) loan borrower. The agreement is between EACU and the borrower (two-party agreement). The SBA loan agreement will tie the borrower directly to all of the requirements imposed by the loan authorization. SBA provides a sample SBA loan agreement for use by lenders, which will be utilized by EACU on all SBA loan transactions. An SBA Note cannot be called in default due to violation of a financial covenant. Therefore, inclusion of a financial covenant is not required or encouraged (such as a mandated debt coverage or balance sheet ratio). Geographic Limits EACU will initiate SBA loans within a 75-mile radius of each of the credit union branches, located in the State of Georgia, provided the borrower is a member or eligible for membership of EACU. Emory Alliance Credit Union s field of membership includes employees of Emory University and Emory Healthcare and their Affiliates as well as the following persons: 5

6 A family member (relative by blood, adoption or marriage) or household member of anyone in the groups above; Employees of Emory Alliance CU and members of their immediate family; Organizations of such persons above; A retiree, pensioner or annuitant of the above groups; Spouse of person who was within the field of membership, at time of his or her death; Residents of Dekalb County Georgia The credit union may also initiate SBA loans in an area where, in the judgment of management, there is local support, or additional resources, available to assist the credit union with prudent lending and servicing. Concentrations of Credit The SBA guaranty mitigates some of the risk associated with the credit risk inherent in undue concentrations of credit to a single industry or borrower. Therefore, the standard concentration limits imposed in the credit union conventional business loan policy may not apply to SBA guaranteed loans if the loan has several favorable credit factors that offset the implied risk. Additional Loans to SBA Borrowers Whenever new credit is extended, a clear understanding of the aggregate credit exposure to a borrowing relationship should be documented. Care should be taken not to extend new credit to a borrower when the credit union and/or SBA could be in a position to sustain a loss, or if the new credit will convey a preference to the credit union. Generally no new credit should be extended to a borrower who may have existing credit(s) graded substandard or below unless the extension of credit is part of a comprehensive workout arrangement, coordinated with SBA. Underwriting Standards: A. Basic Guidelines for Credit Consideration All credit will be structured to match the underlying business purpose of the loan and the borrower s creditworthiness. Credit factors including cash flow repayment, management capacity and other pertinent credit factors will be evaluated to determine viability. Credit will not be extended solely on the basis of the collateral, even if values appear to significantly cover the loan. Additional consideration will be given to historical data on loan performance for various NAICS codes. Real Estate Owner occupied commercial real estate, when properly evaluated both for value and for condition (including environmental considerations), generally provides the most secure secondary source of repayment in the form of direct collateral. The credit union will be open to underwriting special purpose real estate when the risks can be weighed and mitigated by other strong credit factors. 6

7 Non-Real Estate Many viable small business loan requests fall into this category. Equipment, inventory and accounts receivable are eligible purposes and collateral for SBA guaranteed loans. Because this type of collateral is typically highly discounted or non-existent in a liquidation scenario, careful consideration will be taken at origination to understand and balance all of the other credit factors. Business Acquisitions SBA guaranties are frequently used to mitigate the risks associated with change of ownership. The credit union will perform due diligence in the origination process that includes adequate assessment and mitigation of management risks, and a thorough and SBA compliant approach to business valuations. SBA requires the business transaction be arms length and that the business valuation include at least two methodologies. Business Valuations: If the amount to be financed (total project including all other financing) minus the appraised value of real estate and/or equipment being financed is greater than $250,000 or there is a close relationship between the buyer and seller, the credit union must obtain an independent business valuation from a qualified source. The credit union may not use a business valuation provided by the seller or the buyer. Any amount in excess of the business valuation may not be financed with the SBA guaranteed loan. Construction Construction lending is a natural adjunct of SBA lending since many loans will be used to fund renovation of existing facilities or new construction for an owner occupied building. EACU chooses to utilize the SBA 7(a) guaranty to its fullest extent by putting it in place during the construction period of the term loan product. When necessary, additional collateral may be required to mitigate the potential risks of adverse change during a construction loan period. The credit union will finance construction of both stand-alone buildings and leasehold improvements through the SBA program. The SBA typically requires bonded contractors, but given the difficulty of bonding coupled with the cost associated with bonded contractors, the credit union may waive this requirement. SBA allows a waiver on the requirement of a performance bond when a third party in the business of providing construction management services controls the disbursement of the proceeds. B. Loan Pricing EACU will price SBA loans within the maximum interest rates allowable by SBA according to the pricing guidance provided by management at the time of origination. C. Maximum Maturities Regular 7(a) Loans: EACU will make SBA loans within the maximum allowable terms. While the following chart identifies the appropriate maturity based on type of asset financed, the life of the asset and the borrower s ability to repay the loan should be used when determining maximum term of a SBA 7(a) loan. Maximum terms are: Working capital 7-10 years (Note: SBA prefers a 7-year maximum but will allow up to 10 years with justification in file) Equipment years (If term exceeds 10 years, a third party written estimation of life of asset must be documented in the file) 7

8 Real estate 25 years + time needed for construction When loans are used for multiple purposes, the maturity is determined by one of two methods: Blended term with weighted average, or the Maximum maturity for the asset class comprising the largest percentage of the use of proceeds SBA Express: Term loans same as regular 7(a) loans Lines of Credit not to exceed 7 years. The revolving period and term out period must not exceed 7 years, so the recommended combinations are: 4 years revolving + 3 years term out 5 years revolving + 2 year term out The credit union may not charge renewal fees. D. Financial Information Requirements Prudent lending requires the credit union to collect current financial information on business applicants and document appropriate analysis of such information. Due diligence should test for potential material and adverse changes in the condition of the business. Financial information for new SBA 7(a) loans include, but not limited to the following: o Most recent 3 years of business financial statements and/or tax returns for the business o Business interim financial statement dated within 90 days of loan application o Business debt schedule o Personal financial statement within 90 days of loan application and the most recent personal tax return for any owner/guarantor with an interest of 20% or more (to include personal cash flow and personal balance sheet) o Ongoing SBA financial statement requirements for 7(a) loans are annual financial statements for business and guarantors (and possibly more often to start-up businesses or businesses making substantial changes in ongoing operations). E. Personal Guaranty Requirements 20% or more owners of the applicant business are required to provide an unlimited personal guaranty Anyone with less than 20% ownership may provide a limited guaranty. Each request will be evaluated to determine when additional guaranties may be necessary. F. Collateral Analysis Requirements Regular 7(a) Loans: SBA allows the credit union to determine liquidation values at time of origination based on the local market and economic conditions, as long as the values can be justified. Collateral will carry the same liquidation values as Emory ACU conventional policies on real estate and non-real estate loans at time of origination. 8

9 Per SBA s fully secured rule, SBA requires that the liquidation values must equal or exceed the SBA 7(a) loan amount. Where collateral is considered inadequate, it is important that existing cash flow is available to support the existing and proposed debt or other favorable credit factors exist. Business operating and trading assets may be assigned a value up to 10% of the current value for the calculation of fully secured because any assets in this category have negligible value in a liquidation. If the lender expects that these assets may be subordinated to a new working capital or other credit facility, then these assets should not be included in the calculation of fully secured. SBA Express For loans of $25,000 or less, the credit union is not required to take collateral. For loans over $25,000, the credit union may follow the conventional loan policy for similarly sized commercial loans. G. Real Estate Appraisals A real estate appraisal is required on all loans greater than $250,000 and is collateralized primarily by commercial real property. The appraisal must be prepared in compliance with Uniform Standards of Professional Appraisal Practice (USPAP). All appraisals for loans greater than $250,000 must be performed by either a State certified or State licensed appraiser except when the real estate transaction is over $1,000,000, then the appraisal must be performed by a State certified appraiser. If the loan will be used to finance construction or involve substantial renovation of an existing building, the appraisal must estimate what the market value will be at completion of construction. After construction is complete, the credit union must obtain a statement from the appraiser that the building was built with only minor deviations (if any) from the plans and specifications upon which the original estimate of value was based. If the appraiser cannot provide such a statement, the credit union may not close the loan without SBA s prior written permission. If the loan is for a business acquisition, the credit union may use a going concern appraisal to meet the real estate appraisal requirements if: the loan proceeds will be used to purchase a special use property the appraisal is performed by an appraiser experienced in the particular industry, and the appraisal allocates separate values to the individual components of the transaction including land, building, equipment and assets. H. Environmental Risk Assessment SBA requires an Environmental Risk Assessment of all commercial property upon which a security interest such as a mortgage, deed of trust, or leasehold deed of trust is offered as security for a loan. I. Loan Disbursements The disbursement period must be tailored to meet the requirements of each loan. All loan disbursements must be completed no later than 12 months from the approval date of the loan authorization, unless the disbursement period is extended by proper SBA procedures. The final disbursement period cannot exceed 48 months from the approval date of the loan authorization. SBA will automatically cancel any undisbursed balance remaining after 48 months. 9

10 J. Modifications Loan modifications are permitted provided that the loan meets SBA eligibility requirements, that the borrower is still creditworthy despite the change, and the credit union follows SBA mandated procedures (obtain SBA written approval when required). SBA Liquidations and Workouts The credit union will refer to the Servicing and Liquidation Actions 7(a) Lender Matrix to determine if the credit union has unilateral authority to take an action. A. Intensive Servicing (Workouts) To the extent that is prudent, it is the credit union s policy to work with all SBA borrowers to come up with a strategy that allows them to fully repay the loan. The only instances where the credit union would feel that it was not in EACU s/ SBA s best interest to work with the borrower would be in the case where there could be rapidly depreciating collateral value or if the borrower has shown to be not of sound character. The SBA encourages the credit union to consider workouts wherever possible prior to liquidation. B. Liquidation While the loan is classified in regular servicing status, SBA houses EACU loan information in the SBA Commercial Loan Service Center (CLSC) in Little Rock, AR. The credit union must notify the CLSC when a workout is not feasible and liquidation is necessary. SBA will then transfer the file to the SBA National Guaranty Purchase Center (NGPC) in Herndon, VA. The NGPC should then notify the credit union to continue servicing the account and completely liquidate the collateral assets or sue upon any loan instrument. The credit union is responsible for pursuing the entire indebtedness regardless of the guaranteed percentage. The credit union will document the reason and justification for all decisions and retain these and the supporting documents in the loan file for future SBA review. When taking an action that falls within the credit union s authority, EACU will notate the loan file with a statement such as this action was taken under unilateral authority. EACU will notify SBA of all unilateral actions where SBA notification is required so SBA s loan database can be updated (change of name, address, change of interest rate, change EIN, etc.). SBA requires the credit union to make a site visit and prepare a detailed report containing an inventory of assets, and an assessment of their condition and value within 60 days of an uncured payment default, or sooner if there are assets of significant value that could be easily moved or depleted. If a payment default does not exist, but an event has occurred that would cause the loan to be placed in liquidation (i.e., bankruptcy filing, business shutdown, or foreclosure by a prior lienholder), a site visit must be conducted within 15 days of that event. When all worthwhile collateral has been liquidated and no further recoveries are anticipated, a final wrap-up report that documents the action taken to liquidate the account must be provided to SBA. C. Guaranty Purchase 10

11 The credit union may demand in writing that SBA honor its guaranty if the borrower is in default on any installment for more than 60 calendar days and the default has not been cured, provided all business personal property securing the defaulted loan has been liquidated. The SBA guaranty purchase process will be centralized so that the guaranty purchase file is adequate and submitted properly. The guaranty purchase packages will be sent electronically to the NGPC. For loans sold into the secondary market: The loan must be purchased from the secondary market to avoid excessive interest charges as soon as the loan becomes more than 60 days delinquent. It is the credit union s policy to request SBA to purchase the guaranty from the secondary market holder. The credit union must provide at a minimum a demand letter, the SBA loan authorization and a copy of the transcript of account to secondarymarketliq@sba.gov. Once the loan has been purchased, the credit union must submit a post purchase 10-TAB guaranty package within 15 days. For loans not sold into the secondary market: For loans not sold, the credit union will request payment of the guaranty directly from SBA. Payment of the guaranty involves a process that includes submission of the 10-TAB purchase package. The credit union s guaranty purchase demand must be made within 180 days after loan maturity or completion of liquidation / litigation actions (or SBA s guaranty may be cancelled). General Restrictions: The Board fully understands that SBA 7(a) loans have the potential to increase the credit union s risk profile if not managed appropriately. As such, the Board hereby agrees to abide by the following parameters until such time as changes are warranted and approved by Regulatory Agencies: SBA loans will be closed by outside counsel engaged by Emory ACU with relevant experience with SBA 7(a) loans, as applicable; EACU will concentrate SBA lending within its field of membership as indicated earlier, and will not, under any circumstances, originate SBA loans outside of a 75 mile radius of EACU s branch locations; EACU will not originate loans to start-up business, defined as companies with less than 2- years operating history, without real estate or other marketable collateral with an appraised value that supports an LTV of not more than 75%. The Board believes that the introduction of SBA 7(a) loans will expand the credit union s appeal to the small business community, positioning it to serve a wider spectrum of members, while providing the credit union with alternative sources of liquidity and income. EACU will carefully manage its SBA product lines in keeping with this policy. 11