lerch early sba sop 50 10 5(f) update

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

© Lerch, Early & Brewer, Chtd. 2013 www.lerchearly.com

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


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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http://www.sba.gov/for-lenders


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


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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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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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



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


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


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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If Third Party Loan provides preference in commitment/term sheet, issuance of Authorization is considered prior written consent to preference

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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) [email protected]

(301) [email protected]


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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