SBA LENDING UPDATE: EXPLORING THE NEW SOP 50 10 5(F) AND OTHER NEW SBA PROGRAM INITIATIVES Central Texas Assoc. of Guaranteed Government Lenders February 5 & 6, 2014
Agenda: SOP 50 10 5(F) Pending and recently enacted rule/policy changes affecting SBA lenders 2
Part I SOP 50 10 (5) (F) - Effective January 1, 2014 Definition of Good Standing 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) 3
Good Standing pa lender must be in good standing with its state regulator and Federal Financial Institution Regulator (FFIR) as determined by SBA. satisfactory financial condition (e.g., capital and liquidity) satisfactory small business credit administration and servicing policies, procedures and practices. p SOP 50 10 5(f) Subpart A, Chapter 1, II.C.c), pg. 7 4
Franchises p Re-write of Review of Franchise/License/Dealer/Jobber or Similar Agreement provisions p Rely on Certification of Franchisor p SBA will assist PLP lenders determine if affiliation exists for those franchises not on Registry Delegatedfranchisereviews@sba.gov p Although affiliation determination may be made by SBA on loans not on Registry, lender must still determine whether financing meets all other eligibility rules 5
Get Executed Franchise Documents pif Lender disburses the proceeds without obtaining the necessary executed franchise documents, including any amendments and/or addendums, SBA may deny liability of guaranty. 6
Gas Stations preview Relevant Documents: Title Report (with copies of chain and Exceptions), Supply Agreements, Purchase Documents plook for: Repurchase Options, Impairment of Collateral Value, Alteration of Lender/SBA s rights (Subordination not sufficient) 7
Business with An Associate of Poor Character psubject 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 8
Business with An Associate of Poor Character pyou can clear it!?! Maybe pplp 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 time 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 9
Refinancing Change of Ownership Debt p NOW Reads: p But comments says: g) Debt used to finance a change of ownership; SOP 50 10 5 (F) Subpart B, Chapter 1, IV, E. 3.g), pg. 115 10
Additional Refi Provisions prefinancing Same Institutions Debt 36 month look back - late beyond 29 days pborrower or Lender can get evidence from prior lender of SBA loan for refinance p7(a) to refinance 504 Loan Both TPL and 504 refinanced or TPL paid in full, part of larger transaction (GP only) 11
Credit Criteria Loan < $350,000 p New policy: Loans $350,000 and under must be processed under SLA Credit Score prescreening prior to submission of ETran application p 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. p 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 12
Credit Criteria Loan < $350,000 p 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 13
Credit Criteria Loans > $350,000.00 pnew 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 14
Credit Criteria Loans > $350,000.00 pocf/ds must be greater than 1.15 to 1.0 on a historical and/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 pif not.. 15
Former Collateral Requirements pwith some sub-program specific exceptions, SBA generally required all available assets 16
New Collateral Requirements pfor loans of $25,000 and less no collateral required pfor loans over $25,000 Lien on all assets financed by loan proceeds still mandatory 17
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-sbaguaranteed commercial loans p At a minimum obtain a lien on the applicant s fixed assets. p 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. 18
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. p Fully Secured means all available assets with a combined net book value up to the loan amount. p Fixed Assets, then Trading Assets (10% of current book value) and then personal real estate (up to shortfall) 19
New Collateral Requirements (Cont.) p Liens on residence may be limited to150% of equity - if tax implications from filing at higher amount p Lien on personal residence still NOT required if equity less than 25% p Lien on jointly held R/E still required even if one spouse has NO ownership interest in business with limited guaranty required p No lien required if R/E wholly owned by non-owner spouse p Lien on other personally owned assets, e.g., stocks, bonds, CDs, etc., NOT required 20
Life Insurance p 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 p 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 21
Other SOP Changes p 147 Note and 148 and 148L Full and Limited Guaranty forms no longer mandatory be careful Lenders forms must contain SBA required clauses p Applications Forms 1919 (Borrower) and 1920SX (Lender) Elimination of 4 and 4i Must use E-Tran for processing ALL loans 22
Other SOP Changes p504 Loan program changes Does not require credit reports on non-guarantor affiliates SBA can participate in Projects financed by obligations exempt from 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 23
Recent SBA Procedural Notices pfrandata Unique Numbering System (FRUNS) Starting October 1, 2013 Must submit a FUNS number for all franchise loans through ETran Control No. 2000-840 p7(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 24
OMB Circular A-129 pcredit Reporting Requirements (SOP 50 57 p. 30) pmandatory that lenders report SBA loans to a commercial credit agency of Lender s choice (quarterly) pocrm will likely be looking for compliance in conducting its onsite reviews; and the position of NGPC is unclear p31 U.S.C. 3711 pclarifying notice from SBA in process 25
Other Important Changes p Affiliation and Personal Resources Rule policy revisions still under review may be finalized before 1/1/2014 Affiliation if ownership of 51% or more No negative control permitted p SBA One part of requirements for fiscal and transfer agent contract (Colson) p OCRM/OIG Anticipated additional enforcement initiatives (which could lead to more lenders losing PLP status or being removed from program) 26
IPERA Audits p OIG report on SBA s failure to comply with the Improper Payments Elimination and Recovery Act (IPERA) p SBA agreed to implement a payment recapture plan for approved loans, both before and after closing. p What to do? 27
Thanks! Any Questions? Ethan W. Smith, Esq. esmith@starfieldsmith.com P: 267-470-1186 1300 Virginia Drive Suite 325 Ft. Washington, PA 19034 P: 215-542-7070 F: 215-534-9023 1100 Lake Destiny Road Suite 105 Maitland, FL 32751 P: 407-667-8811 F: 407-667-0020 www.starfieldsmith.com 28