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What you need to know about the new SBA SOP 50 10 5(G), which contains updated requirements for lenders and Certified Development Companies (CDCs) to participate in SBA lending programs. It took effect October 1, 2014.
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SBA SOP 50 10 5(g)
November 19, 2014
Alison W. Rind Arnold D. Spevack
Lerch, Early & Brewer, Chtd.
www.lerchearly.com
© Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
Overview
Elimination of personal resource test
Other eligibility issues
Credit standards, collateral & environmental
Other revisions
SBA 504 loans
SBA One
Today’s Program
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Overview
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Purpose of New SOP
Incorporate previously approved rules and policies that became effective after the last SOP was issued
Clarify existing requirements
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Elimination of Personal Resource Test
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→ SOP At Pages 85, 238, 247
Effective April 21, 2014 See SBA Notice 5000-132 Do not need to review personal resources
of 20% or more owner, spouses or dependent children
Does not eliminate the requirement to demonstrate credit is not available elsewhere
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Other Eligibility Issues
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Franchises (SOP at 87, 249)
SBA Notice 5000-1322 Key Test- whether a business is perceived by
the public to be a single business or multiple businesses operating in the same space
Characterization as business leasing to independent contracts (Salon Suites) – ineligible
Franchises may be addressing these concerns
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Franchises con’t (SOP at 87, 249)
Just because it is on the Franchise Registry does not mean that it is an eligible franchise
Registry only clears size standards and affiliations
Given lack of clarity, lenders might consider submitting these types of franchises for standard processing
Cannot use proceeds to renovate leased space
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Required Guarantors (SOP at 103,297)
Clarification EPC/OC- spouse owning at least 5% of
either the EPC or OC must guaranty loan if, together with the owner, they own 20% or more.
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Form 1919 (SOP at 190)
Clarifying language Any partner that is involved in the
management of the business, as well as all 20% owners of partnership, must complete SBA Form 1919.
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Credit Standards, Collateral, etc.
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New Option for Delegated Lenders (SOP at 154, 155 and 195)
Small loans up to $350K Use same credit standards for loans >$350K
(equity, 1.15x DSC, collateral) Other Alternatives:
Process SBA Express Wait 90 days and resubmit Non-delegated lenders – submit to
processing center as standard package
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At Guaranty Purchase
7(a) Small Loans scored after July 1, 2014 will not be required to submit evidence of cash flow spreads with a request for purchase.
Purchase requests submitted to: [email protected] [email protected]
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Tax Verifications (SOP at 192)
For PLP lenders- must obtain IRS verification prior to 1st disbursement
Non-PLP lenders – submit with application package
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Environmental Reports (SOP at 172)
Environmental Reports must be submitted to SBA Center processing the application
PLP lenders, lenders making 7(a) Small Loans, SBA Express and Export Express loans need not submit environmental reports to SBA Center
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Other Revisions
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Export Express Loans (SOP at 118)
Clarification Lender must maintain in its loan file evidence
that at least 70% of the initial advance (up to the loan amount) was used for export purposes
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Credit Scoring (13 CFR 120.150)
Credit scoring covers: Character, reputation and credit history Strength of business Past earnings, projected cash flow and
future prospects Ability to repay the loan with earnings from
the business
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Credit Scoring con’t
Other items lender must address in credit analysis: Experience and depth of management Sufficient invested equity Potential for long term success Nature and value of collateral Potential impact of any affiliates
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Lender’s Small Loan Credit Memo (SOP at 155)
Brief history of business Brief description of management team Owner/guarantor analysis including
personal financial statements consistent with similarly sized non-SBA loans
Collection of business tax returns and IRS verification
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© Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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Lender’s Small Loan Credit Memo (SOP at 155) con’t
List of Collateral and estimated value Effect of affiliates upon repayment Equity injection and pro-forma debt to worth
if required with similarly sized non-SBA loans
These items, plus acceptable credit score, complete the lender analysis. Lender may require additional analysis. 22
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SBA 504 Update
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Elimination of Nine Month Rule (SOP at 235)
Effective April 21, 2014 When looking at expenditures for land,
building, machinery, equipment and professional fees, any expenditures made more than nine months ago are included
Including expenditures financed with short term debt
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Third Party Lender Preference (SOP at 233)
No longer any reference to “preference” Third party lender may take additional
collateral but: Lender must dispose of additional collateral
and apply proceeds to third party loan prior to final disposition of project property
Better off taking additional collateral on interim loan only
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Indemnification- Third Party Lender Agreement
SBA Notice 5000-1320 Open ended indemnification clauses in real
estate documents Violation of Anti-Deficiency Act
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Indemnification- Third Party Lender Agreement con’t
CDC must either: Obtain a waiver from the indemnified party Require addendum to Third Party Lender
Agreement to defer foreclosure
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© Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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504 Closings (SOP at 302)
504 Debenture Closing Checklist (Form 2286) – revised:
13 items – regular closings Eight items – expedited closings Form 2203 (checklist for complete file
review) also revised Construction documents moved
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© Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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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 a commercial transactions
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) 657-0750 awrind@ lerchearly.com
(301) 657-0749 adspevack@ lerchearly.com
© Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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For more information
Lerch, Early & Brewer, Chtd. 3 Bethesda Metro Center, Suite 460
Bethesda, MD 20814 (301) 986-1300
www.lerchearly.com
Thank you for your participation
This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting
on any information contained here.
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