sba lending: documenting, closing and servicing 7(a)...
TRANSCRIPT
SBA Lending: Documenting, Closing and
Servicing 7(a) and CDC/504 Loans Navigating SBA Approval and Authorization Process,
Preserving the Loan Guaranty and Security Interest
Today’s faculty features:
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THURSDAY, SEPTEMBER 18, 2014
Presenting a live 90-minute webinar with interactive Q&A
William Craig Brown, Shareholder, Engel Hairston & Johanson, Birmingham, Ala.
Heather E. Ward, Engel Hairston & Johanson, Birmingham, Ala.
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FOR LIVE EVENT ONLY
S B A 5 0 4 A N D 7 ( A ) L O A N S
DOCUMENTING, CLOSING AND SERVICING
OVERVIEW
• Handout material available at www.EHJlaw.com
• Brief review of 504 and 7(a)
• Hot Topics
• Documentation
• Liquidation and Preservation of Collateral – prior
seminar material available at www.EHJlaw.com
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LENDING PROGRAMS
THE 504 LOAN AND THE 7(A) LOAN
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THE SMALL BUSINESS ADMINISTRATION
Striving to help start, build, and grow businesses in
order to create jobs and stimulate the economy
• SBA lending assistance provides benefits to
borrowers by making funds available and assisting
with long-term financing.
• Borrowers can be eligible for up to $5 million in SBA-
backed financing.
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LENDING PROGRAMS
The 504 Loan
• SBA uses a Certified Development Company (CDC) as a lender partner to actually finance the loan secured by a 100 percent SBA-guaranteed debenture for up to 40% of the total project financing.
• Benefit borrowers because of the long-term fixed rates and typically lower equity requirements.
The 7(a) Loan
• Loan made wholly by the lender who submits application to SBA for approval of the SBA guarantee against lender’s deficiency in the event of default.
• SBA will collect a guaranty fee on the guaranteed portion of the loan.
• Collateral may include personal assets if business assets do not fully secure the loan.
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HOT TOPICS
PERENNIAL PROBLEMS THAT CAN CAUSE YOU PAIN
• 1. Screen-outs at approval
• 2. Verification of Equity
• 3. Evidencing Use of Proceeds
• 4. Failing to follow the Authorization
• 5. Tax Transcripts
• 6. Life Insurance
• 7. Landlord’s and Leases
• 8. Secondary Market Sales
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SCREEN-OUTS
A. Eligibility Issues:
1) Be a for-profit business,
2) Meet SBA size requirements,
3) Show good character, credit, management, and ability
to repay, and
4) Must be an eligible type of business (easier to see what is
NOT eligible, SOP 50 10 (5)(F) listing of ineligible)
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SCREEN-OUTS
B. FRANCHISE ELIGIBILITY
1. SBA will determine if the business is eligible
on the basis of whether the small business applicant
constitutes an affiliate of the franchise.
2. Affiliate of Franchise unacceptable
control provision
3. List of franchise agreements (the
“Registry” www.franchiseregistry.com ) that have
been approved for size/affiliation/control issues.
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SCREEN-OUTS
C. INCOMPLETE APPLICATIONS
7(a) Loans
• Borrower’s Information Form (SBA Form 1919)
• Lender’s Application Form (SBA Form 1920)
• Lender’s Credit Memo
• Documents required based on condition of the Loan
• Statement of Personal History (SBA Form 912)
504 Loans
• SBA Form 1244
• Statement of Personal
History (SBA Form 912)
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VERIFICATION OF EQUITY INJECTION (SOP 50 57, PG. 153-155)
Lenders are required to verify the borrower’s equity
injection before disbursing loan proceeds.
1) The Source
a) Gifts
b) Seller Note or other financing
c) Land or value of non-cash assets
d) Cash
2) The Existence
a) Gift Letter or affidavit
b) Seller Note
c) Bank statements (at least 2-months)
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VERIFICATION OF EQUITY INJECTION (SOP 50 57, PG. 153-155)
Credible EVIDENCE of Cash Injection:
1. Documentation showing check or wire transfer
processed or funds deposited into account on
behalf of Borrower prior to initial disbursement
2. (e.g. fully executed settlement statement or bank
account statement showing deposit of funds)
NOT Credible Evidence of Cash Injection:
1. Promissory Note, gift letter or financial statement
without corroborating documentation
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VERIFICATION OF EQUITY INJECTION (SOP 50 57, PG. 153-155)
Credible SOURCE of Cash Injection:
1. Gift letter from an identified source showing
amount and date of gift and NO OBLIGATION to
repay……
2. Corroborating evidence the gift was actually
made such as bank statement before the date of
the gift and bank statement dated after the date
of the gift
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EVIDENCING USE OF PROCEEDS
• Acquire land and/or purchase, construct or renovate buildings
• Improve a site (e.g. grading, streets, parking, landscaping), up to 5% for community improvements
• Acquire and install fixed assets such a capital equipment or heavy machinery
• Acquire and install fixed assets such a capital equipment or heavy machinery
• Purchase Inventory*
• Supplies*
• Raw Materials*
• Working Capital*
• Refinance*
• Business Acquisition*
* See Chart on page 14 of accompanying handout
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EVIDENCING USE OF PROCEEDS
Certifications:
• SBA 1050 Settlement Sheet
• “At time of disbursement, Lender and Borrower certify…loan
funds used or will be used….in accordance with the
Authorization.”
• SBA Form 2288 Interim Lender Certification
• “Best of your information, knowledge and belief, …..disbursed in
accordance with the Authorization.”
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EVIDENCING USE OF PROCEEDS (SOP 50 10(5)(F), PG. 209 AND SOP 50 57, PG. 152)
No
• Affidavit alone;
• Bank statement
showing only check
number and amount;
• Purchase order with no
proof of payment;
• Invoices not marked
“paid”
Yes
• “Paid” invoice with
cancelled checks or
bank statements
showing cleared;
• Receipts;
• Evidence of electronic
funds transfer to
vendor;
• Joint payee checks
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FAILING TO FOLLOW AUTHORIZATION
Roadmap to the Transaction
• Borrower entity and structure
• Loan amounts
• Use of funds
• Maturity and Repayment Provisions
• Collateral required and lien positions
• Insurance requirements
• Occupancy Requirements
• Other Documentation Requirements
• Tax transcripts
• Organizational documentation
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FAILING TO FOLLOW AUTHORIZATION
• Requirement to close in accordance with the
Authorization
• Modify the Authorization • All changes prior to closing
• 327 Action submitted to
• After closing
• Unilateral Action Matrix
• SBA Notice and Approval
• SBA Notice but No Approval
• Neither Notice or Approval
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FAILING TO FOLLOW AUTHORIZATION
Certifications: • SBA 1050 Settlement Sheet
• “At time of disbursement, Lender and Borrower certify…loan funds used or will be used….in accordance with the Authorization.”
• Create a basis for SBA Denial of Guaranty
• SBA Form 2287 Third Party Lender Agreement
• Loan amount consistent with Authorization
• CDC rely on accurate information provided
• Agree to comply with all SBA requirements governing 504 Loan
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TAX TRANSCRIPTS
504
• Within 10 days of
receipt of Authorization
CDC submits Form
4506-T to IRS;
• Last 2 years unless 7(a)
size standard used,
then 3 years
• Compare data;
• Resolve differences
7(a)
• Prior to submission (Non-
PLP) or prior to first
disbursement (PLP) submit
Form 4506-T to IRS;
• Last 3 years of operation
unless start-up;
• No response in 10 days
may close but must
resubmit; compare, and
resolve differences
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LIFE INSURANCE
• “With respect to collateral taken, Lenders must use commercially reasonable and prudent practices to identify collateral”….conforming to same policies for similar non-SBA commercial loans. (SOP 50 10 (5)(F), Subpart B, Chp. 3.II.A. General Requirements)
• Not specific SBA collateral requirement
• Collateral Assignment; Not beneficiary
• Life insurance specific form and specific requirements;
• Acknowledgment of assignment by Home Office prior to Disbursement
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LANDLORDS AND LEASES
• Leases • Proper parties named
• Term, including options, equal to maturity
• Proper occupancy requirements, if applicable • EPC leases 100% to OC
• If existing building, then lease or sublease up to 49%
• If new construction, occupy 60%, lease long-term 20%; lease remaining 20% if will occupy within 10 years
• Don’t use 504 proceeds for tenant interior improvements (13 CFR 120.871(a))
• “Rentable Property” is total square footage of all buildings used for business operations….NOT common areas….NOT Exterior areas…UNLESS it’s parking or actively used in business operations
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LANDLORDS AND LEASES
• Landlords
• If majority of collateral = fixtures, leasehold improvements
and equipment attached to leased property
• Assignment of Lease
• Required term
• Required 60-day written notice of default
• Landlord’s Waiver
• Subordinate to Lender’s interest
• Grant notice of default
• Grant opportunity to cure
• Grant Lender right to re-enter and remove collateral
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LANDLORDS AND LEASES
• Landlords
• If majority of collateral = leasehold interest in land
• Tenant’s right to encumber
• No modification or cancellation without Lender (CDC)
approval;
• Right to acquire leasehold at foreclosure
• Right to re-assign leasehold
• Right to sublease
• Share hazard insurance or condemnation proceeds
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OTHER ISSUES
• SBA Form 159 (Compensation Agreement)
• Not state-licensed appraisers
• Not borrower accountant
• Not attorney in connection with SBA loan closing
• Not environmental professional employed by lender
• Submit to FTA with initial 1502 in transactions where lender
charged packaging fee or paid agent fee
• Retain original
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OTHER ISSUES
• 1502 reporting ([email protected] )
• Paying ongoing guarantee fee
• Notice requirements under Third Party Lender
Agreement
• Secondary Market Sales for Guaranteed Loans • www.sba.gov/for-lenders
• Sale of the guaranteed portion
• Increases lender liquidity
• Fee income
• Remember must be either 30/360 or Actual/365 for interest
accrual
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SUMMING IT UP
• Close the Loan in accordance with terms and
conditions of the Authorization;
• Obtain valid and enforceable Loan documents;
• Retain all Loan closing documents, for audit as well
as submitted to SBA for request to honor guarantee.
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SUMMING IT UP
• Proactively approach any issues early in the
process.
• Properly document all actions.
• Remember the lender’s actions will be reviewed to
determine if they were prudent, lawful and commercially
reasonable, and consistent with the lender’s practice on its
non-SBA loans.
• Many servicing actions require prior SBA approval or
notification.
• Review the Servicing and Liquidations Actions 7(a) Lender
Matrix (See Exhibit N).
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QUESTIONS?
William C. Brown
ENGEL, HAIRSTON & JOHANSON, P.C.
109 N. 20th Street, 4th Floor
Birmingham, Alabama 35203
(205) 328-4600
Heather E. Ward
ENGEL, HAIRSTON & JOHANSON, P.C.
109 N. 20th Street, 4th Floor
Birmingham, Alabama 35203
(205) 328-4600
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