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October 24, 2017 @ 11 a.m. Eastern
For technical assistance, contact the AT&T Helpdesk at 888-796-6118 - Thank you!
Mistakes That Can Cost You
Your Guaranty
We would like to thank Ethan for his time and providing information regarding his experience in lending and working
on SBA loans from his perspective.
All opinions, conclusions, and/or recommendations expressed herein are those of the presenter and do not
necessarily reflect the views of the SBA.
Presented By: Ethan W. Smith, Esq.
Instructor
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Ethan W. Smith Partner, Starfield & Smith, PC Ethan W. Smith's areas of practice focus on government guaranteed lending, commercial lending, banking, real estate and commercial law. Ethan has closed thousands of government guaranteed loans nationwide. Starfield & Smith, P.C. is a boutique law firm specializing in all aspects of SBA-guaranteed lending, from origination through liquidation, for lenders nationwide. Starfield & Smith closes over $200 million of SBA guaranteed loans for its lender clients every quarter. For more information about Starfield & Smith, visit www.starfieldsmith.com .
© 2017, Starfield & Smith, P.C., All Rights Reserved
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Agenda: Eligibility
Improper PLP Processing
Conflict of Interest
Financials
Environmental
Use of Proceeds
Refinance
Collateral
Insurance
© 2017, Starfield & Smith, P.C., All Rights Reserved
Guiding Principle
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© 2017, Starfield & Smith, P.C., All Rights Reserved
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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
© 2017, Starfield & Smith, P.C., All Rights Reserved
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Eligibility
Character 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
© 2017, Starfield & Smith, P.C., All Rights Reserved
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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
© 2017, Starfield & Smith, P.C., All Rights Reserved
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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
© 2017, Starfield & Smith, P.C., All Rights Reserved
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Financials Early Default/Problem Loan
Lender unable to produce 4506 Transcripts
Often lenders underwrite Change of Ownership as startup when seller refuses to provide financials – beware!
“Materiality” standard is
not always followed
FULL DENIAL
© 2017, Starfield & Smith, P.C., All Rights Reserved
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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
© 2017, Starfield & Smith, P.C., All Rights Reserved
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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
© 2017, Starfield & Smith, P.C., All Rights Reserved
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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
© 2017, Starfield & Smith, P.C., All Rights Reserved
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Collateral
Wrong lien position is #1 reason for repairs!
© 2017, Starfield & Smith, P.C., All Rights Reserved
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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
© 2017, Starfield & Smith, P.C., All Rights Reserved
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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 Garbage In – Garbage Out
© 2017, Starfield & Smith, P.C., All Rights Reserved
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Questions
??? © 2017, Starfield & Smith, P.C., All Rights Reserved
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Thanks!
Ethan W. Smith, Esq. [email protected]
1300 Virginia Drive Suite 325 Ft. Washington, PA 19034 P: 215-542-7070 F: 215-534-9023
2600 Maitland Center Parkway, Suite 330 Maitland, FL 32751 P: (407) 667-8811 F: (407) 667-0020
www.starfieldsmith.com
© 2017, Starfield & Smith, P.C., All Rights Reserved
Contact Information
SBA WV District Office
Rick Haney – 304.623.7449 or [email protected]
Leo Lopez – 304.347.5220 or [email protected]
Or contact your local Lender Relations Specialist – www.sba.gov
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