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What you need to know about the new SBA SOP 50 10 5(f), which contains updated requirements for lenders and Certified Development Companies (CDCs) to participate in SBA lending programs. It takes effect January 1, 2014.
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SBA SOP 50 10 5(F)
November 20, 2013
Alison W. RindArnold D. Spevack
Lerch, Early & Brewer, Chtd.
www.lerchearly.com
Pre s e nte d to s p o ns o ring o rg a niz a tio n
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Overview Credit Underwriting Collateral Requirements Eligibility Miscellaneous
Today’s Program
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Overview
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Purpose of New SOP
Streamline process Facilitate underwriting of small
eligible loans to existing lender process
Major revisions in Credit underwriting Collateral requirements4
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Purpose of New SOP (con’t)
What was previously referred to as SLA (≤$350K) has one set of underwriting criteria; move toward underwriting – global cash flow analysis
Loans > $350K have separate set of underwriting criteria, based on DSC ratio
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Credit Underwriting
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Loans ≤ $350K → SOP at p. 161
Prescreen thru E-Tran If acceptable, apply thru E-Tran
If not Submit for standard processing
(unlikely) Process with Express and 50%
guaranty via E-Tran
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Loans ≤ $350K (con’t)
Complete IRS verification before submitting thru E-Tran New Form 450T
Score calculated on consumer and business bureau data, borrower financials, application data
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Minimum Score
Based on lower end of risk profile of current SBA profile
Moving target Posted on the website
www.sba.gov/for-lenders
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Credit Analysis – Demonstrate Ability to Repay with Cash Flow Brief history of business Length of time under current
management DSC ratio of 1:10 on historical or
projected cash flow
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Credit Analysis (con’t)
Owner/guarantor analysis – consistent with similarly-sized non-SBA guaranteed commercial loans
May use own credit scoring criteria to assess applicant consistent as noted above
Equity and pro-forma debt to worth determination based on above
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Loans >$350K→ SOP at 163-165
Demonstrate ability to repay loan with cash flow
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Demonstrating Ability to Repay Brief history Length of time in business under
current management Financial analysis of repayment
ability based on historical financial statements (balance sheet, debt schedule, income statement) and/or tax returns and projections
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New Definition
New definition of operating cash flow - EBITDA
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Analysis of Cash Flow Impact
Unfunded capital expenditures Non-recurring income Expenses and distributions Distributions for S Corp taxes Rent payments Owner’s draw Effect of affiliated businesses15
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Debt Service
All principal and interest payments on all SBA debt inclusive of new SBA loan
DSC Ratio (OCF/DS) must be 1.15:1 or greater on historical and/or projected basis
Document analysis of assumptions and projected cash flow
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Collateral Requirements
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Major Changes
What collateral must be taken SBA’s appraisal and business
valuation standards Requirements re: securing
personal guaranties Required insurance
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Until January 1, 2014, Lender Must
Take 1st lien position on assets financed and
Fully secure all loans based on liquidation value of collateral
Must not decline loan solely because of collateral shortfall
Take personal collateral when business collateral insufficient
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When 50 10 5(F) Takes Effect → SOP at 168 General requirements same as (E) Must identify collateral and use
commercially reasonable and prudent lending practices
Do not decline loans solely on inadequate collateral
SBA guaranty ≠ available collateral
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When 50 10 5(F) Takes Effect (con’t) → SOP at 168
If loan proceeds used to purchase assets, lender must have 1st lien
If used to refinance debt, must have same collateral position and line priority as debt being refinanced
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Collateral Lender Must Take
Not required to take collateral
<$25K
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Collateral Lender Must Take
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Must obtain lien on applicant’s fixed assets at minimum
May take lien on trading assets (using 10% of book value) if does so for conventional loans
See SBA provision for when SBA deems loan to be “fully secured” →SOP at 169
≥$25K but ≤ $350K → SOP at 168– Same as non-SBA BUT
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Collateral Lender Must Take
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Must collateralize loan to max possible If fixed assets do not fully secure, must
take equity in personal real estate of principals No longer lien on other personal property
>$350K → SOP at 168
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Collateral Lender Must Take
No change in collateral requirements
SBA Express, Patriot Express, Export Express, EWPC, International Trade Loans
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Loan is “Fully-Secured” →SOP at 169
If lender has taken security interests in all available fixed assets with a combined “net book value” as adjusted up to the loan amount.
“Net book value” = asset original price less depreciation less amortization →SOP at 169
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New Language re Spousal Guarantees →SOP at 169 “When individual alone or individual and his or
her spouse together own 20% or more of the Small Business Applicant, the lender must consider taking as collateral available equity in personal real estate that is owned individually, by the applicant owner as well as available equity in personal real estate owned jointly. Real estate transferred by the applicant to the non-owning spouse within 6 months of the date of the application will not be exempt from consideration as available collateral.”
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Valuation of M&E →SOP at 169
75% of net book value OR
80% with an Orderly Liquidation Appraisal minus any prior liens for the calculation of “fully-secured”
50% of net book value OR
80% with an Orderly Liquidation Appraisal minus any prior liens”
New Used
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Valuation of Real Estate→SOP at 169
85% of value for the calculation of “fully secured” and the value in accordance with SBA appraisal requirements
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Valuation of Fixed Assets→SOP at 169 If loan will be secured by fixed
assets and valuation of fixed assets is greater than depreciated value (net book value), lender must obtain independent appraisal to support higher valuation
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Appraisal & Business Valuation→SOP at 171 Loans >$250K secured by real
property – NO CHANGE in appraisal requirement
Federally regulated lenders
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Federally-Regulated Lenders Must obtain appraisal by state
licensed or certified appraiser and follow primary regulators’ FIRREA requirements for real estate
USPAP-compliant Dated within 12 months of application
for guaranty
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Non-FRLs and SBLCs
Continue to adhere to prior SOP appraisal requirements
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Appraisal & Business Valuation (con’t) New SOP revises Qualified Source
List to delete a CPA, unless also holds listed designation →SOP at 174
Version 5(F) deletes requirement for business valuation when refinancing change of ownership “except for seller notes” →SOP at 115
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Equity Injection Requirements →SOP at 161
Begin with pre-screening for credit score
Is equity and pro-forma debt-to-worth acceptable based on similar non-SBA loan?
Up to $5 millionNo changes to
SOP →SOP at 166-168
≤$350K Loans > $350K
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Express, Export Express, Patriot Express Loans →SOP at 165
Credit decision left to business judgment of lender (includes consideration of past bankruptcy and any equity injection requirement)
If requires for non-SBA, must do so for these
Owners of ≥20% must inject liquid assets above certain thresholds
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Personal Guarantees and Guarantor Collateral →SOP at 168-170
Owners of ≥20% must provide unlimited personal guaranty
New language at beginning of Collateral Requirements
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Collateral Shortfall with Inadequate Business Fixed Assets →SOP 169
Required to take equity in personal residence (lien may be limited to amount of shortfall)
Lien against residence/investment real estate may be limited to 150% of equity if there are tax consequences
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Collateral Shortfall with Inadequate Business Fixed Assets (con’t)
No change in prior requirement that non-owner spouse must provide limited guaranty needed to perfect lien on joint collateral
Real estate transferred within 6 months of application not exempt
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Insurance Requirements →SOP at 187-188 Hazard insurance required on
assets pledged as collateral Flood insurance forms changed
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Life Insurance →SOP at 188 and 189 SLA Loans, SBA Express, Export
Express and Patriot Express – May follow similar to non-SBA
Loans >$350K – new language
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Life Insurance on Loans >$350K May use similar non-SBA policies EXCEPT
If not fully secured, life insurance required for principals of sole proprietorships, single member LLCs or for businesses otherwise dependent on one owner
Amount and type of collateral may be factored into amount of life insurance
If lender determines principal is uninsurable, must obtain documentation from licensed insurer
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Eligibility
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Franchise Requirement Changes →SOP at 78
Language added re determination for affiliation purposes
Language added to permit PLP lenders to submit franchise agreement to SBA for eligibility determination
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Revisions re Ineligible Businesses →SOP at 89, 92
Financial advisors →SOP at 89 Involved in gambling →SOP at
92 Promoting religion →SOP at 92
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912 Clearance →SOP at 93
Principals are incarcerated, on probation, on parole or under indictment
“Deferred prosecution” record Obtain “complete understanding”
for any “yes” response
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“Yes” Response Can Be Cleared If Single minor (misdemeanor) offense
or arrest Up to 3 minor offenses concluded
more than 10 years ago Prior offense cleared by Director of
Office of Financial Assistance (but only good for 6 months) →SOP at 96
912 Appeals → SOP at 9847
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Refi of Existing 504 with 7a →SOP at 117 May refinance a 504 loan with a 7a loan
if the transaction meets the requirements in the SOP
Both Third Party Loan and 504 being refi’d OR Third Party Loan paid in full and 504 needs refi as
part of larger transaction to provide funding for expansion or renovation of Project Property
Must document justification Applicable 504 prepayment penalties apply
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Application Process
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Application New Forms →SOP at 197 Form 1919 (Borrower’s Info) and
Form 1920 (SX) – IDs eligibility issues: Use for all 7(a) loan types
Forms not completed yet Form1919 includes Forms 601, 1261,
1624 and 912 1920(SX) does not include eligibility
worksheets (save old for reference and save in each loan file)
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E-Tran ≤$350K →SOP at 202
DUNS # required – Startups must apply for DUNS # for E-Tran submission
If credit scoring acceptable, complete app to get PLP # (or then submit CLP for credit underwriting)
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E-Tran >$350K →SOP at 202
Forms 4 and 4(I) no longer to be used
Collateral list not included in new forms – must still collect collateral listing
May want to use template52
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Miscellaneous Changes
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CAPLine – Working Capital Lines Disbursement →SOP at 217-226
Borrowing base OR 1:1 collateral ratio clarification Includes valuation of real estate
owned at 85%
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CAPLine – Proceeds of Collections →SOP at 217-226 Must pay down the line Consistent with borrower’s
operating cash cycle
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CAPLine – Inclusion of Receivables →SOP at 217-226 Subcontracts that are foreign AR
issued by Export-Import Bank or major private insurer can increase advance rate to 90%
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CAPLine – Annual Review→SOP at 217-226 If maturity coincides with
scheduled annual review, lender may advance on line up to maturity in conjunction with similar non-SBA loans
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Financial Statements→SOP at 198
Business financials – 180 days Personal financials – 90 days
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Loan Documentation
Form 1050 no longer required for ≤$350K (still document disbursements)
May use own forms with language added (Form 147, 148)
If it ain’t broke, don’t fix it
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504 Credit Standards →SOP at 237
Clarification: Credit reports only required for
Small business concern Owners Guarantor affiliates
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504 Credit Standards (con’t)
Documentation required for Third Party Loan →SOP at 239
LOI Term sheet Commitment letter
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504 Credit Standards (con’t)
If Third Party Loan provides preference in commitment/term sheet, issuance of Authorization is considered prior written consent to preference
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504 Credit Standards (con’t)
SBA may now participate in projects financed with obligations exempt from state and local taxes →SOP at 243
Industrial development bonds Industrial revenue bonds
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Speakers
Alison Rind is a lending attorney at Lerch, Early & Brewer who represents commercial lenders in loan transactions and other commercial matters. These include participants in SBA and other government-guaranteed lending programs.
Arnie Spevack is an attorney at Lerch, Early & Brewer who represents individuals, businesses, lenders and borrowers in financings, closings, negotiations and in the courts.
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(301) 657-0750awrind@lerchearly.com
(301) 657-0749adspevack@lerchearly.com
© Lerch, Early & Brewer, Chtd. 2013 www.lerchearly.com
For more information
Lerch, Early & Brewer, Chtd.3 Bethesda Metro Center
Suite 460Bethesda, MD 20814
(301) 986-1300www.lerchearly.com
Thank you for your participation
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www.lerchearly.com
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