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The New                     SBA SOP 50 10 5(E)                     Key Updates for                     Lenders            ...
Overview Dates &                         Interest Rate Policy  Documentation                    on Variable Loans Small...
Dates & Documentation3        © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
Revision E Effective Date Applies to all applications    received by the SBA on or after    June 1, 2012.4           © Le...
Related SBA Notices5000-1239: key revisions E of SOP 50 10(5)5000-1240: changes to Small Loan Advantage5000-1241: revis...
SOP Online To download a copy of the SOP, go to    http://www.sba.gov/lender-documentation-    tool?type=sops&order=field...
Small Loan Advantage    Revisions                            Collateral Policy    Credit Score Pre-                    ...
Small Loan Advantage New version of prior adopted  program Pages     10     82-83     182-184     197     225-2278 ...
Revisions to SLA      All                                          Revolving     SBA                                      ...
Change in FormsOld Forms• S/RLA Forms (SBA Forms  2301 Parts A, B and C)• PLP Eligibility Checklist (SBA  Form 7)      New...
SLA Revisions (con’t)                                                Similarly Sized     SBA SLA Closing                  ...
Credit Score Pre-Screening12      © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
Credit Score Pre-Screening(con’t)                                          E-                                         Tran...
If Credit Score is NotAcceptableLender may submit standard     7(a) loan app through LGPC     or, if lender is SBA Expres...
After Credit Screen – Non PLP E-Tran Additional docs electronically to     the Standard 7(a) Loan Guaranty     Processin...
PLP Lenders Submitting SLALoans E-Tran SBA will not conduct eligibility  review prior to issuing loan  number Must reta...
PLP Lenders Submitting SLALoans (con’t) Eligibility requirements for SLA same  as Standard 7(a) Apps that cannot be proc...
Retain Copies ofDocumentationLender must retain copies of     documentation in its loan file     for all SLA loans whethe...
Credit Analysis SLA lenders must perform a     thorough and complete credit     analysis of applicant in order to     ens...
SLA Lender’s Credit MemoMust Include                                                    Similarly                         ...
Cash Flow Analysis Adequacy Duration Dependability of cash  flow/projected cash flow analysis Owner/Guarantor analysis...
Credit Scoring Criteria                                                   Similarly                          SBA          ...
Lender’s Credit Decisions Length of time/depth of  management experience Key account characteristics Verify accuracy ag...
Equity Requirements                                                   Similarly                                           ...
Collateral Policy          <$25K                                         $25K-$350K Not required to                      ...
Life Insurance & EnvironmentalPolicy                                             Similarly Sized      SBA SLA Life       I...
Closing & Disbursement Same as similarly-sized non-SBA  procedures and documentation Must obtain collateral and meet  co...
Lender Must Ensure That Note Is legally enforceable and  assignable Has a stated maturity Is not payable on demand Inc...
Franchise Issues     Information     Eligibility29            © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
Franchise Information No changes to Franchise  Registry process When NOT on the Franchise  Registry, must check the  Fra...
Franchise Eligiblity Prohibits franchise agreement  provision that requires sale of real  property Now allows agreement ...
Cooperatives32        © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
Cooperatives - Eligibility Adds guidance Clarifies agricultural coop can be  considered producer coop Clarifies worker ...
EPC Loans34       © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
EPC Loans Common practice of loan  proceeds to be used for multiple  purposes OC as co-borrower35        © Lerch, Early ...
Debt Refinancing36        © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
Debt Refinancing Now allows refinancing of debt in  personal name of owner used for  business purposes No change in how ...
CAPLines38       © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
Debt Refinancing UnderCAPLines Only short-term revolving debt  can be refinanced with working  capital CAPLine Refinanci...
Change of Ownership Transactions     Involving Stock Purchases40         © Lerch, Early & Brewer, Chtd. 2012   www.lerchea...
Change of Ownership TransactionsInvolving Stock Purchases Business required to be borrower Cannot be made to an individu...
Clarification of Interest Rate     Policy42          © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
Clarification of Interest Rate Policy Previous SOP allowed lender to  delay but spread remained the  same Language incon...
Payment of Guaranty Fee44        © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
Payment of Guaranty Fee Submit electronically Increases in loans Extensions of maturity45        © Lerch, Early & Brewe...
Fees for Packaging & Other     Services46         © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
Fees for Packaging & OtherServices Lenders or 3rd parties permitted to  charge a fee based on % of loan Restrictions on ...
Fees May not exceed 3% on loans  ≤$50K May not exceed 2% on first $1  million and an additional ¼% over  $1 million (max...
Fees (con’t) Paid by lender to lender service  provider may not be passed on Direct costs of in-house counsel  may be ch...
Post-Approval Loan     Modifications50        © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
SOP Revisions Re Loans NotClosed/Fully Disbursed Requests for post-approval loan  modifications or notifications of  unil...
Eligible 504 Project Costs52         © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
Eligible 504 Project Costs Previously permitted purchase  costs of land without building to  be included in project costs...
504 Appraisal Requirements54        © Lerch, Early & Brewer, Chtd. 2012   www.lerchearly.com
504 Appraisal Requirements Previously required appraisal to  identify CDC and SBA as  client/intended user Removes requi...
Additional Items     Export Lending Programs     SBA Request for SOP Suggestions     SOP50-10Modernization@sba.gov.     Is...
Speakers                  Alison Rind is an attorney at Lerch, Early &                   Brewer in Bethesda, MD who repre...
Speakers               Arnie Spevack is an attorney at Lerch, Early &                  Brewer in Bethesda, MD who represe...
Speakers                  Nicole Soraruf is an attorney at Lerch, Early &                   Brewer in Bethesda, MD who he...
For more information             Lerch, Early & Brewer, Chtd.          3 Bethesda Metro Center, Suite 460                 ...
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SBA sop 50 10 5(e) 2012 06-12

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Discussion of the SBA's Small Loan Advantage program from a seminar by Alison Rind and Arnie Spevack, SBA lending attorneys at Lerch, Early & Brewer in Bethesda, Maryland who represent lenders in transactions involving SBA and other government-guaranteed loans.

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  • SOP 50 10 (E) applies to all applications received by the SBA on or after June 1, 2012.
  • SBA notices related to the changes:5000-1239 details key revisions E of SOP 50 10(5)5000-1240 details changes to Small Loan Advantage5000-1241 details revisions to Export lending programs
  • SOP 50 10(5)E on websiteTo download a copy of the SOP, go to http://www.sba.gov/lender-documentation-tool?type=sops&amp;order=field_sopno_value.There are two versions:Document with “tracked changes” which shows what was updated in this recent revisionDocument without tracked changes.
  • Revisions:Expansion to all SBA participating lenders (not just PLP lenders) with an SBA Form 750 on file;Maximum loan size increased from $250,000 to $350,000;Revolving lines of credit are prohibited under SLA (use CAPline instead).Use credit-scoring by SBA prior to loan approval (or issuance of a loan number for applications submitted by PLP lenders);
  • Change in forms from the S/RLA forms (SBA Forms 2301 Parts A, B and C) and PLP Eligibility Checklist (SBA Form 7) to the forms used in the SBA Express and Pilot Loan Programs (SBA Forms 1919 and 1920 Parts B and C);
  • Must submit applications electronically- E-Tran has been updated to include SLA as a choice (notify your vendors);Lenders will continue to have option of using their own notes and guaranty forms rather than SBA Forms (just like Express);Lenders to follow same closing and disbursement procedures and documentation as it uses for its similarly-sized non-SBA guaranteed commercial loans.
  • Credit score is a combination of consumer credit bureau data, business bureau data, borrower financials and application data – minimum score to be posted at www.sba.gov/for-lenders . Currently at 140
  • All SLA applications will begin with a pre-screening for a credit score. Lender will enter certain information into E-Tran (specific information is described below) and a credit score will be issued. If application receives an acceptable credit score, application may be submitted under SLA via E-Tran. If loan application does not receive an acceptable credit score, lender may submit a standard 7(a) loan application through the LGPC or, if the lender is an SBA Express lender, an SBA Express application via E-Tran for a 50% guaranty.
  • If loan application does not receive an acceptable credit score, lender may submit a standard 7(a) loan application through the LGPC or, if the lender is an SBA Express lender, an SBA Express application via E-Tran for a 50% guaranty.
  • All Lenders will start with the instant credit screen.After the credit screen:Non-Preferred Lenders Program (PLP) Lenders:Will enter certain information about applicant and the loan into E-Tran and then will submit additional documentation electronically to the Standard 7(a) Loan Guaranty Processing Center (LGPC) for review of creditworthiness and eligibility (Form 1919 plus any other forms required based on a “yes” response to the 1919 (ie, 912), Form 1920SX Parts B and C and lender’s credit memorandum
  • PLP lenders submitting SLA loans: Lender will continue completing the application via E-Tran. SBA will not conduct an eligibility review prior to issuing a loan number. Lender must retain in its loan file documentation supporting its eligibility determination and SBA will review this documentation as part of any guaranty purchase request or when conducting lender oversight activities.
  • PLP lenders submitting SLA loans: Eligibility requirements for SLA are the same as Standard 7(a) as set forth in SOP 50 10 5(E), Subpart B, Chapter 2. Applications that cannot be processed under a lender’s PLP authority (for example, they include refinancing same institution debt) may be submitted using the non-delegated procedures described more fully below.
  • Lender must retain copies of the documentation identified in B above in its loan file for all SLA loans whether submitted under delegated or non-delegated authority.
  • SLA lenders must perform a thorough and complete credit analysis of applicant in order to ensure that loan is of such sound value as to reasonably assure repayment and this credit analysis must be documented in the loan file.
  • SLA lender’s credit memorandum must, at a minimum, include:A combination of factors for underwriting and credit decision consistent with its similarly sized, non-SBA guaranteed commercial loans, including;
  • Cash flow analysis to determine adequacy, duration and dependability of cash flow or in the case of a small business applicant doing business less than two years, projected cash flow analysis; andOwner/Guarantor analysis.
  • Lenders may use their own credit scoring criteria to assess the character, reputation, and credit history of the applicant (and the Operating Company, if applicable), its Associates, and guarantors, including historical performance as well as the potential for long term success. This may include a business credit scoring model (such a model cannot rely solely on consumer credit scores), as long as lender uses the business credit scoring model for its similarly-sized, non-SBA guaranteed commercial loans. Although SBLCs do not make non-SBA guaranteed loans, SBA has determined that they may use credit scoring. Lenders must validate (and document) with appropriate and accepted statistical methodologies that their business credit scoring model is predictive of loan performance and they must provide that documentation to SBA upon request. The business credit scoring results must be documented in each loan file and available for SBA review.
  • Lender’s credit decision must consider the length of time in business under current management and, if applicable, depth of management experience in this industry or a related industry. Such analysis should include a brief description of management team of the company.Lenders must review strength of business including systematically analyzing key characteristics of the account such as internal Credit/Deposit behavior data, current consumer credit bureau data, and Small Business Financial Exchange data to determine ongoing creditworthiness such as the probability of an account reaching 90 days past due in the next 6 months. This may be conducted using a risk management or credit scoring model if the lender uses such a model to review its similarly-sized, non-SBA guaranteed commercial loans. If the lender does not have the ability to systematically analyze the borrower, the lender must collect and analyze business tax returns.Lenders must verify the accuracy of applicant’s financial data against income tax data by submitting IRS Form 4506-T, Request for Transcript of Tax Form to the Internal Revenue Service (IRS) as required in SOP 50 10 5(E), Subpart B, Chapter 5, Paragraph III.Lenders must demonstrate Small Business Applicant’s ability to repay loan from cash flow of the business by documenting that:Small Business Applicant’s debt service coverage ratio exceeds 1:1 on a projected basis; andWith the exception of loans under $50,000, the Small Business Applicant’s global cash flow coverage ratio exceeds 1:1 on a projected basis. Lender must document in the loan file the definition or formula used to calculate global cash flow.
  • Equity RequirementsAdequate equity is important to ensure the long term survival of a business.Lender must determine if equity and pro forma debt-to-worth are acceptable based on their policies and procedures for their similarly-sized, non-SBA commercial loans.If lender requires an equity injection and, as part of its standard processes for similarly-sized, non-SBA guaranteed commercial loans verifies the equity injection, it must do so for SLA loans.
  • Collateral PolicyFor SLA loans of $25,000 or less, lenders are not required to take collateral. For SLA loans over $25,000 and up to and including $350,000, the lender must follow the collateral policies and procedures that it has established and implemented for its similarly-sized non-SBA guaranteed commercial loans, but at a minimum the lender must obtain a lien on the borrower’s business assets to secure the SBA-guaranteed loan. In addition, for those loans that are more than $250,000 and collateralized by commercial real estate, lenders must comply with the appraisal requirements set forth in SOP 50 10 5(E), Subpart B, Chapter 4, Paragraph II.C. With respect to collateral taken, lenders must use commercially reasonable and prudent practices to identify collateral items, which would include conformance with procedures at least as thorough as those used for their similarly-sized non-SBA guaranteed commercial loans.
  • Life Insurance &amp; Environmental PoliciesLife InsuranceLenders may follow their internal policy for similarly-sized non-SBA guaranteed commercial loans.Environmental PolicyFor all SLA loans, lenders will follow the environmental policies and procedures set forth in SOP 50 10 5(E), Subpart B, Chapter 4, Paragraph III that apply to SBA Express loans.
  • Closing and DisbursementLender must use the same closing and disbursement procedures and documentation as it uses for its similarly-sized non-SBA guaranteed commercial loans. Lender must obtain all required collateral and must meet all other required conditions before loan disbursement, including obtaining valid and enforceable security interests in any loan collateral. These conditions include requirements identified in the loan write-up, such as standby agreements, appraisals, business licenses, and cash/equity injections.Lenders have the option of closing SLA loans with the lender’s own note and guaranty agreements rather than SBA Forms.Lender must use the same closing and disbursement procedures and documentation as it uses for its similarly-sized non-SBA guaranteed commercial loans.
  • If lender uses its own note form, the lender must ensure that note:is legally enforceable and assignable; has a stated maturity; andis not payable on demand. In addition, if lender uses its own note form, it must include the following language:“When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.”If lender uses its own guaranty form, it must include the following language:“When SBA is the holder, the Note and this Guarantee will be construed and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Guarantee, Guarantor may not claim or assert any local or state law against SBA to deny any obligation, defeat any claims of SBA, or preempt federal law.”Lender should not send any closing documentation to SBA after closing an SLA loan but should retain all documents in the loan file.
  • Franchise IssuesFranchise Information (Pages 95-96 for 7(a) Loans and pages 274-275 for 504 Loans)No change to Franchise Registry processRemains mandatory that when franchise is NOT on the Franchise Registry, lender must check the Franchise Findings List to determine whether there have been any findings for a particular franchise or similar agreement which, if still in the Agreement, would make the Agreement ineligibleBut, lenders may (no longer mandatory) go to the Franchise Findings List when the franchise is listed on the Registry -- http://www.sba.gov/content/franchise-findings (See SOP p. 94)
  • Franchise Eligibility (Page 97 for 7(a) Loans and page 277 for 504 Loans)Continues to prohibit a franchise agreement provision that requires the franchisee or EPC owner to sell the real property to the franchisor upon expiration or breach of the Agreement.But, SOP now allows a franchise agreement to require franchisee to lease the real property to the franchisor on reasonable terms for the remainder of the term of the franchise agreement.Provision can be in the franchise agreement itself or recorded as a deed restriction or a purchase option. (See SOP p. 97)
  • Cooperatives – Eligibility (Page 109-110 for 7(a) Loans and page 290 for 504 Loans)Adds guidance regarding eligibility of certain types of cooperativesClarifies that an agricultural cooperative under certain circumstances can be considered to be a producer cooperative and therefore eligible if it meets the requirements for eligible producer cooperativesClarifies that a worker cooperative, in which the employees of the small business own the company as a cooperative, is eligible if it meets all other SBA eligibility requirements.
  • EPC Loans (Pages 124-125)Incorporates a final rule to allow the common practice of allowing loan proceeds for a loan made in an EPC/OC structure to be used for multiple purposes.Clarifies the requirement that if the OC is a co-borrower with the EPC, part of the proceeds may be used for working capital or purchase of other assets for use by the OC. Significantly, the loan proceeds can be used for the purchase of stock or intangible assets.But, the OC must be a co-borrower if it receives any loan proceeds as working capital and/or for the purchase of other assets, including intangible assets for the Operating Company’s use.The rule remains unchanged that an EPC may not use loan proceeds to acquire a business, acquire stock in a business or any intangible assets of a business or to refinance debt that was incurred for those purposes.It is now clear that an EPC/OC structure can be used for any eligible business purpose so long as the loan is structured such that both the EPC and OC are co-borrowers.These regulatory amendments took effect as of May 17, 2012
  • Policies regarding Debt Refinancing (Page 133)Previous SOP stated that SBA loan proceeds may not be used to refinance debt in the personal name of the owner(s), with a limited exception for credit card debt in the owner’s name that was used for business purposes. SBA is now allowing the refinancing of other debt in the personal name of the owner(s), such as a HELOC, that was used for business purposes. Borrower must certify that amount being refinanced was used exclusively for business purposes and provide appropriate documentation, such as a copy of the note and/or current loan statement, to demonstrate that debt was, in fact, used for business purposes. For example, a sole proprietor may demonstrate that debt was used for business purposes by providing a copy of the note and documentation that shows debt is reflected on business balance sheet and/or the interest deduction is reported on Schedule “C” not the Schedule “A” of the proprietor’s tax return. If the interest deduction reported on the Schedule C includes multiple debts, then the applicant must provide a copy of the appropriate IRS Form 1098 related to the debt being refinanced.There was no change on how to document credit card debt in personal name. Lender must still obtain certification from the applicant that the debt was incurred for business purposes, must review the credit card statements to determine which charges were business related, obtain receipts for items over $100 and obtain copies of all statements evidencing the debt to be paid.
  • CAPLines (pages 136-137)Debt refinancing under Working Capital CAPLines: Clarification in new SOP that only short-term revolving debt can be refinanced with a Working Capital CAPLine. If the application includes refinancing of same-institution, SBA-guaranteed short-term revolving debt, in addition to requirements outlined below, the lender’s exposure to applicant will not be reduced. Short-term revolving debt must be terminated after it is paid off with the CAPLine; Refinancing does not put SBA in a position to sustain a loss which the existing lender is presently facing;Borrower has a sufficient borrowing base to support the Working Capital CAPLine plus any other short-term debt that is not being refinanced; Refinancing is specifically identified in the Use of Proceeds section of the Authorization; and If application includes the refinancing of same institution short-term debt:Application must be submitted to the LGPC (Loan Guaranty Processing Center) for processing; such applications may not be processed under delegated authority; andIf applicant defaults on the SBA-guaranteed CAPLine within 90 days of initial disbursement, there will be a presumption that the loan proceeds were used to pay a creditor in a position to sustain a loss causing a shift of all or part of the loss to SBA in violation of 13 CFR 120.201 and SBA may deny liability on its guaranty of the line. Disbursement on Contract CAPLinesSBA is clarifying length of time interest only payments may be required on a Contract CAPLine to reflect that final payment on the contract typically is not received until 30-60 days after contract completion.New SOP: (1) Interest only payments for any period exceeding the borrower’s cash cycle, seasonal cycle, contract final payment date, or project completion date are not permitted. This change reflects that final payment on the contract typically is not received until 30-60 days after contract completion.Old SOP said: (1) Interest only payments for any period exceeding the borrower’s cash cycle, seasonal cycle, contract completion date, or project completion date are not permitted.
  • Change of Ownership Transactions Involving Stock Purchases (pages 139-140)SBA requires the business to be the borrowerLoan cannot be made to an individual purchasing stock in the business, even if the individual is identified as a co-borrower with the business.For example, if a change of ownership involves one or more individuals:In a change of ownership between existing individual owners, applicant business will use loan proceeds to purchase the stock from the departing owner(s) (a stock redemption) resulting in the remaining stockholder(s) owning 100% of the stock outstanding.In a change of ownership where an individual wants to purchase all of the stock of a corporation, applicant business will use loan proceeds to purchase the stock of all existing owners (a stock redemption) and simultaneously issue the stock to the new owner(s), who will purchase the stock from the company using his/her own funds (but not with an SBA-guaranteed loan). The amount paid for the stock is determined by the business/new owner(s) (not SBA).Incorporate into stock redemption agreement, a provision whereby the new owner is simultaneously purchasing stock from the corporation as its equity injection.If the buyer of the stock is a business entity and that business is acquiring/merging with the selling business, then the buyer may use an SBA-guaranteed loan to purchase all of the stock and absorb the selling business and retire the purchased stock. In this case, it appears that there would be a co-borrower situation whereby the business buying the stock and the business where the stock will be purchased will be co-borrowers. Post closing, the business buying the stock could merge with the selling business to form 1 entity.
  • Clarification of Interest Rate Policy on Variable Rate Loans (Page 159)Previous SOP allowed lender to delay the initial adjustment period on a variable rate loan, but also stated that “[w]henever a lender delays the initial adjustment period, the spread over the base rate used to calculate the initial Note rate must remain the same once the interest rate begins to fluctuate.” That language was inconsistent with other language in the SOP so SBA is deleting the sentence quoted above. Bottom line: for a loan with a delayed initial adjustment period, a Lender may change the spread over the base rate, provided the lender complies with the requirements of subparagraph 2 on page 158 of the new SOP (can’t exceed maximum allowable interest rate in effect at time of application)
  • Payment of Guaranty Fee (Pages 164-166) Must submit fee electronicallyVia pay.govSBA-approved bulk CH method (new)Increases in LoansFee to be paid within 30 days from the date the increase was approved - electronicallyFailure to pay within 30 days will cause the entire guaranty to be cancelledExtensions of Maturity Beyond 1 YearFee to be paid within 30 days from the date the increase was approved - electronicallyFailure to pay within 30 days will cause the entire guaranty to be cancelled
  • Fees for Packaging and Other Services (Page 169-171)SBA is revising its policy to permit lenders or third parties, including lender service providers (LSPs), to charge a fee based on a percentage of the loan amount for packaging and other services. If a lender or third party charges a fee for loan packaging or other services that is based on a percentage of the loan amount, in no event may the fee:exceed 3% on loans of $50,000 or less, and for loans over $50,000, 2% on the first $1 million and an additional ¼% on amounts over $1 million, with a maximum fee of $30,000.Fees must be reasonable and customar customary for the services actually provided and must be consistent with those fees charged on the lender’s similarly-sized, non-SBA guaranteed commercial loansStandard Fee charged to all applicants is not acceptableClarifies that fees paid by lender to a lender service provider may not be passed on to Small Business Applicant. Reminds lenders that if they permit a lender service provider to access E-Tran on their behalf, lender is responsible for all entries and certifications made on its behalf into the E-Tran system.Direct costs of in-house counsel associated with loan may be charged to borrower On an hourly basisServices must actually be performedSBA is changing that policy to allow lenders to be reimbursed for direct costs (including reasonable overhead) of legal services provided by lender’s in-house counsel in connection with an SBA guaranteed loan, but in no event may lender be reimbursed for an amount that would exceed the reasonable cost of outside counsel. In addition, such charges must be reasonable and customary for the services performed. These fees may be reviewed at any time and lender must refund any fee considered unreasonable by SBA. Reminder – SBA 159 forms to be submitted to Colson after initial disbursement (retain originals in file)
  • Fees for Packaging and Other Services (Page 169-171)SBA is revising its policy to permit lenders or third parties, including lender service providers (LSPs), to charge a fee based on a percentage of the loan amount for packaging and other services. If a lender or third party charges a fee for loan packaging or other services that is based on a percentage of the loan amount, in no event may the fee:exceed 3% on loans of $50,000 or less, and for loans over $50,000, 2% on the first $1 million and an additional ¼% on amounts over $1 million, with a maximum fee of $30,000.Fees must be reasonable and customary for the services actually provided and must be consistent with those fees charged on the lender’s similarly-sized, non-SBA guaranteed commercial loansStandard Fee charged to all applicants is not acceptable
  • Clarifies that fees paid by lender to a lender service provider may not be passed on to Small Business Applicant. Reminds lenders that if they permit a lender service provider to access E-Tran on their behalf, lender is responsible for all entries and certifications made on its behalf into the E-Tran system.Direct costs of in-house counsel associated with loan may be charged to borrower On an hourly basisServices must actually be performedSBA is changing that policy to allow lenders to be reimbursed for direct costs (including reasonable overhead) of legal services provided by lender’s in-house counsel in connection with an SBA guaranteed loan, but in no event may lender be reimbursed for an amount that would exceed the reasonable cost of outside counsel. In addition, such charges must be reasonable and customary for the services performed. These fees may be reviewed at any time and lender must refund any fee considered unreasonable by SBA. Reminder – SBA 159 forms to be submitted to Colson after initial disbursement (retain originals in file)
  • Post-Approval Loan Modifications (Page 230)SOP has been revised to inform lenders that, for all loans that have not been closed or fully disbursed:requests for post-approval loan modifications or notifications of unilateral actions are to be submitted to the LGPC. after a loan is closed and fully disbursed, such requests or notifications are to be submitted to the appropriate CLSC (Little Rock). In addition, the SOP has been revised to advise lenders that if a change is made using E-Tran Servicing, no further notification to SBA is necessary.
  • Eligible 504 Project Costs (Page 307)Prior SOP permitted costs incurred by the Borrower, prior to the loan application, for the purchase of land without a building to be included in the project costs. SBA is amending the policy permitting the inclusion of short term debt for land purchased prior to application as an eligible project cost to include not only land with no building, but also land with a building that will be razed prior to construction of the new building. SBA considers the destruction of the building on purchased land to be part of the costs of preparing the land for new construction. The value of the land and new construction must be supported by an appraisal as set forth in SOP 50 10 5(E).
  • 504 Appraisal Requirements (Page 319)Previous SOP required the appraisal report to identify the CDC and SBA as a client and/or an intended user. To avoid additional expense to the Small Business Applicant, SBA is removing the requirement that the CDC be identified on the appraisal report as the client or an intended user. SBA, however, must continue to be named as either the client or an intended user.See the SOP for fees.
  • Export Lending Programs- See SBA Information Notice 5000-1241 SBA request for SOP SuggestionsLenders, CDCs and other interested parties may continue to send suggestions concerning the SOP to SBA at SOP50-10Modernization@sba.gov.This e-mail box is set up to receive only.Issuance of SOP 50 53 (A) – June 1, 2012Lender Supervision and EnforcementIssuance of SOP 50 51 (4) – Combined Servicing/LiquidationDue out later this year
  • Transcript of "SBA sop 50 10 5(e) 2012 06-12"

    1. 1. The New SBA SOP 50 10 5(E) Key Updates for Lenders Alison W. Rind Arnold D. Spevack Lerch, Early & Brewer, Chtd.www.lerchearly.com June 12, 2012
    2. 2. Overview Dates &  Interest Rate Policy Documentation on Variable Loans Small Loan  Guaranty Fee Advantage Payment Franchise Issues  Packaging & Other Fees Cooperatives  Post-Approval EPC Loans Modifications Debt Refinancing  504s CAPLines © Lerch, Early & Brewer,Export Lending 2  Chtd. 2012 www.lerchearly.com
    3. 3. Dates & Documentation3 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    4. 4. Revision E Effective Date Applies to all applications received by the SBA on or after June 1, 2012.4 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    5. 5. Related SBA Notices5000-1239: key revisions E of SOP 50 10(5)5000-1240: changes to Small Loan Advantage5000-1241: revisions to Export Lending programs5 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    6. 6. SOP Online To download a copy of the SOP, go to http://www.sba.gov/lender-documentation- tool?type=sops&order=field_sopno_value Two versions Document with “tracked changes” shows what was updated in this recent revision Document without tracked changes6 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    7. 7. Small Loan Advantage Revisions Collateral Policy Credit Score Pre- Life Insurance & Screening Environmental After Credit Screen Policies Credit Analysis Closing & Equity Requirements Disbursement7 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    8. 8. Small Loan Advantage New version of prior adopted program Pages  10  82-83  182-184  197  225-2278 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    9. 9. Revisions to SLA All Revolving SBA Lines of Lenders Credit New: $350K Old: $250K Maximum Credit scoring by SBA loan size increased prior to loan approval9 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    10. 10. Change in FormsOld Forms• S/RLA Forms (SBA Forms 2301 Parts A, B and C)• PLP Eligibility Checklist (SBA Form 7) New Forms • Forms used in the SBA Express and Pilot Loan Programs (SBA Forms 1919 and 1920 Parts B and C) 10 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    11. 11. SLA Revisions (con’t) Similarly Sized SBA SLA Closing Non-SBA SLA Closing SBA Closing = SBA SLA Closing and Disbursement SBA SLA Closing SBA SLA Closing and Disbursement and Disbursement Procedures and and Disbursement and Disbursement and Disbursement Procedures and and Procedures and Documentation Procedures Procedures and Procedures and Documentation Documentation Documentation Documentation Documentation11 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    12. 12. Credit Score Pre-Screening12 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    13. 13. Credit Score Pre-Screening(con’t) E- Tran   Submit Submit standard under SLA 7(a) loan app13 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    14. 14. If Credit Score is NotAcceptableLender may submit standard 7(a) loan app through LGPC or, if lender is SBA Express lender, an SBA Express application via E-Tran for a 50% guaranty14 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    15. 15. After Credit Screen – Non PLP E-Tran Additional docs electronically to the Standard 7(a) Loan Guaranty Processing Center (LGPC)  (Form 1919 plus any other forms required based on a “yes” response to the 1919 (i.e., 912), Form 1920SX Parts B and C and lender’s credit15 memorandum) & Brewer, Chtd. 2012 © Lerch, Early www.lerchearly.com
    16. 16. PLP Lenders Submitting SLALoans E-Tran SBA will not conduct eligibility review prior to issuing loan number Must retain loan file documentation - SBA will review16 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    17. 17. PLP Lenders Submitting SLALoans (con’t) Eligibility requirements for SLA same as Standard 7(a) Apps that cannot be processed under lender’s PLP authority (e.g., include refinancing same institution debt) may be submitted using non- delegated procedures17 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    18. 18. Retain Copies ofDocumentationLender must retain copies of documentation in its loan file for all SLA loans whether submitted under delegated or non-delegated authority18 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    19. 19. Credit Analysis SLA lenders must perform a thorough and complete credit analysis of applicant in order to ensure that loan is of such sound value as to reasonably assure repayment and this credit analysis must be documented in19 the loan file. © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    20. 20. SLA Lender’s Credit MemoMust Include Similarly SBA SLA SBA SLA SBA SLA SBA SLA SBA SLA Sized Non- CombinationCombination Combination Combination SBAforof Combination ofFactors for = of Factors for of Factors ofFactors for Factors forUnderwriting Combination Underwriting Underwriting Underwriting of Factors for Underwriting & Credit & Credit & Credit & Credit Underwriting & Credit Decisions Decisions Decisions Decisions & Credit Decisions Decisions 20 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    21. 21. Cash Flow Analysis Adequacy Duration Dependability of cash flow/projected cash flow analysis Owner/Guarantor analysis21 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    22. 22. Credit Scoring Criteria Similarly SBA Sized SLA Non- Busines s Credit = SBA Busines Scoring s Credit Model Scoring Model22 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    23. 23. Lender’s Credit Decisions Length of time/depth of management experience Key account characteristics Verify accuracy against tax data Demonstrate ability to repay  Debtservice coverage >1:1  Cash flow coverage ratio >1:123 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    24. 24. Equity Requirements Similarly Sized Non- SBA SLA SBA SLA SBA SLA SBA SLA SBA SLA SBA CombinationCombination Equity & Combination Combination Equity for &of Factors for of Pro-Forma Factors forUnderwriting Debt to Worth = of Factors for of Pro-Forma Factors Underwriting Underwriting Underwriting Debt to Worth & Credit & Credit & Equity Credit & Equity Credit Decisions Injection Decisions Decisions Decisions Injection Required? Required? 24 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    25. 25. Collateral Policy <$25K $25K-$350K Not required to  Same policies & procedures as take collateral non-SBA  Must obtain lien on business$250K+ collateralized by commercial real estate must assetscomply with appraisal requirementsLenders must use commercially reasonable and prudentpractices 25 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    26. 26. Life Insurance & EnvironmentalPolicy Similarly Sized SBA SLA Life Insurance = Non-SBA Life Insurance Internal Policy Internal Policy For all SLA loans, lender will follow the environmental policies of SOP 50 10 5(E), Subpart B, Chapter 4,26 Paragraph III © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    27. 27. Closing & Disbursement Same as similarly-sized non-SBA procedures and documentation Must obtain collateral and meet conditions before disbursement Option to use own note and guaranty forms27 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    28. 28. Lender Must Ensure That Note Is legally enforceable and assignable Has a stated maturity Is not payable on demand Includes specific language28 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    29. 29. Franchise Issues Information Eligibility29 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    30. 30. Franchise Information No changes to Franchise Registry process When NOT on the Franchise Registry, must check the Franchise Findings List Now lenders may (not must) go to the Franchise Findings List when30franchise IS on registry © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    31. 31. Franchise Eligiblity Prohibits franchise agreement provision that requires sale of real property Now allows agreement to require lease of real property on reasonable terms31 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    32. 32. Cooperatives32 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    33. 33. Cooperatives - Eligibility Adds guidance Clarifies agricultural coop can be considered producer coop Clarifies worker coop is eligible if meets all other SBA eligibility requirements33 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    34. 34. EPC Loans34 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    35. 35. EPC Loans Common practice of loan proceeds to be used for multiple purposes OC as co-borrower35 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    36. 36. Debt Refinancing36 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    37. 37. Debt Refinancing Now allows refinancing of debt in personal name of owner used for business purposes No change in how to document credit card debt in personal name37 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    38. 38. CAPLines38 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    39. 39. Debt Refinancing UnderCAPLines Only short-term revolving debt can be refinanced with working capital CAPLine Refinancing of same-institution, SBA-guaranteed short-term revolving debt Disbursement on Contract39CAPLines© Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    40. 40. Change of Ownership Transactions Involving Stock Purchases40 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    41. 41. Change of Ownership TransactionsInvolving Stock Purchases Business required to be borrower Cannot be made to an individual If buyer is business entity and is aquiring/merging with selling business, buyer may use SBA- guaranteed loan41 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    42. 42. Clarification of Interest Rate Policy42 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    43. 43. Clarification of Interest Rate Policy Previous SOP allowed lender to delay but spread remained the same Language inconsistent, so deleted Now lender may change spread over base rate provided lender43complies with SOP requirements © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    44. 44. Payment of Guaranty Fee44 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    45. 45. Payment of Guaranty Fee Submit electronically Increases in loans Extensions of maturity45 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    46. 46. Fees for Packaging & Other Services46 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    47. 47. Fees for Packaging & OtherServices Lenders or 3rd parties permitted to charge a fee based on % of loan Restrictions on fees47 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    48. 48. Fees May not exceed 3% on loans ≤$50K May not exceed 2% on first $1 million and an additional ¼% over $1 million (max fee of $30K) Must be reasonable, customary and consistent Must not be standard48 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    49. 49. Fees (con’t) Paid by lender to lender service provider may not be passed on Direct costs of in-house counsel may be charged to borrower under certain circumstances49 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    50. 50. Post-Approval Loan Modifications50 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    51. 51. SOP Revisions Re Loans NotClosed/Fully Disbursed Requests for post-approval loan modifications or notifications of unilateral actions submitted to LGPC After loan is closed and fully disbursed, submitted to CLSC If change is made using E-Tran51Servicing, no further notification © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    52. 52. Eligible 504 Project Costs52 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    53. 53. Eligible 504 Project Costs Previously permitted purchase costs of land without building to be included in project costs Now includes land with building that will be razed Cost of destruction part of preparing land for new53construction © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    54. 54. 504 Appraisal Requirements54 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    55. 55. 504 Appraisal Requirements Previously required appraisal to identify CDC and SBA as client/intended user Removes requirement that CDC is identified SBA still must be named55 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    56. 56. Additional Items Export Lending Programs SBA Request for SOP Suggestions SOP50-10Modernization@sba.gov. Issuance of SOP 50 53(A) Issuance of SOP 50 51 (4)56 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    57. 57. Speakers  Alison Rind is an attorney at Lerch, Early & Brewer in Bethesda, MD who represents commercial lenders in loan transactions and other(301) 657-0750 commercial matters. These include participantsawrind@ in SBA and other government-guaranteed lendinglerchearly.com programs. Her experience crosses a broad spectrum of lending areas. In addition to government programs, she handles real estate and asset-secured loans, construction loans, foreclosures and loan workout arrangements. Her clients include large national and regional financial institutions as well as smaller community banks in the Washington, D.C., metropolitan area. 57 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    58. 58. Speakers  Arnie Spevack is an attorney at Lerch, Early & Brewer in Bethesda, MD who represents individuals, businesses, lenders and borrowers in((301) 657-0749 financings, closings, negotiations and in theadspevack@ courts. Arnies experience includes all aspects oflerchearly.com commercial lending, as well as providing assistance in the acquisition, development, operation and management of office, retail and residential projects. An experienced creditors rights attorney, Arnie assists both borrowers and lenders in workout negotiations and helps them refinance existing real estate mortgages and business loans. 58 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    59. 59. Speakers  Nicole Soraruf is an attorney at Lerch, Early & Brewer in Bethesda, MD who helps national, regional and local banks, credit unions and SBA(301) 657-0151 lenders close loans, and works with real estatennsoraruf@ buyers, sellers, landlord and tenants in contractlerchearly.com and lease negotiations. 59 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
    60. 60. 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 herein.60 © Lerch, Early & Brewer, Chtd. 2012 www.lerchearly.com
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