sba sop updates 50 10 5(i) seminar

SBA SOP Update

Presented by

Alison Rind | Arnie Spevack

Mike Smith | Matt DiMeglio

1© 2017 Lerch, Early & Brewer, Chtd.

50 10 5(I) Lender and Development Company Loan Programs

Revisions to SOP 50 10 5(I)

• Streamline Procedures for Determining Size Eligibility Based on Affiliation for Franchised Businesses

• Businesses Which Restrict Patronage

• Fee Relief- Veteran Owned Businesses

• Credit Elsewhere Requirements

• Collateral Determination

• Effective January 1, 2017

• Applies to Both 7(a) and 504 Lending


Lead Disclosure Requirements: Pitfalls For The Unwary RE Professional50 10 5(I) Lender and Development Company Loan Programs

Franchise Affiliation

• Revised Regulation 13 CFR 121.301(f)(5)

Affiliation based on franchise and license agreements. Therestraints imposed on a franchisee or licensee by its franchise orlicense agreement generally will not be considered in determiningwhether the franchisor or licensor is affiliated with an applicantfranchisee or licensee provided the applicant franchisee or licenseehas the right to profit from its efforts and bears the risk of losscommensurate with ownership. SBA will only consider the franchiseor license agreements of the applicant concern.



What This Means

• Keys to the test unobstructed rights to profit

• No shift of risk of loss

• No longer need to review franchises of affiliates

• Lenders to follow instructions in E-Tran/SBA One to identify specific franchise for the Applicant



SBA Review of Franchises

• SBA will no longer review franchise agreements• Instead a universal SBA Addendum must be executed for each

franchise related SBA guaranteed loan

• If franchisor refuses to execute the Addendum- loan is not eligible

• No negotiations of the Addendum are allowed



Terms of Addendum

• Franchisor right of first refusal of partial interest may be exercised only if the proposed transferee is not a current owner or family member

• Any consent to transfer of partial or full interest must not be unreasonably withheld and transferor will not be liable for the acts of the transferee

• If franchisee owns the real estate where the franchise is located, franchisor may not record any restrictive covenants, branding covenants or environmental use restrictions

• Franchisor will not directly control (hire, fire or schedule) franchisee’s employees



Addendum Only Addresses Affiliation

• If Addendum is signed, the SBA will not deem the franchisor and franchisee affiliated

• SBA loan can only be made if Addendum is signed

• Applicant franchisee and franchise system must meet all other SBA eligibility requirements

• Lender must not make any disbursement of loan proceeds without obtaining executed franchise agreement and addendum and review all other documents the franchisor requires to ensure compliance with SBA Loan Program Requirements



Applicant Franchisors

• Any applicant franchisor must not exceed size standards• Affiliates are included in this determination

• Applicants operating under franchise development agreements are ineligible (not including master franchise agreements)

• These are deemed to be passive investments and inherently speculative

• Agreements containing area development rights may be eligible if the agreement complies with the above guidance



Franchise Registry

• SBA will no longer maintain an internal or external centralized listing of franchise systems where the franchisee is not considered affiliated with the franchisor for size determinations



Businesses Which Restrict Patronage

• Businesses restricting patronage for any reason other than capacity are not eligible

• If franchise targets one gender, it must offer services to both genders• Lender to document file with:

• Affidavit of Small Business Applicant that the business is open to both genders

• Evidence that the facility is open to both genders (ie, separate bath/locker rooms or membership demographics



Credit Elsewhere

• Acceptable factors to demonstrate credit is not available elsewhere have been modified to incorporate changes made to the Small Business Act (15 USC Section 636(a)(1))

• The following factors are not acceptable in determining credit not available elsewhere

• Lender’s legal limit

• Lender’s liquidity dependent upon selling the guaranteed portion on the secondary market

• Need to meet CRA requirements

• Refinance debt already on reasonable terms



Credit Elsewhere – Acceptable Factors

• Business need longer maturity than lender’s policy permits (ie, business needs a loan that is not on demand)

• Requested loan amount exceeds the lender’s policy limit regarding a loan it can make to one customer

• Collateral does not support lender’s policy requirements

• Lender’s policy normally does not allow loans to new businesses or businesses in a particular industry

• Any other factors relating to credit, that, in the lender’s opinion cannot be overcome without the guaranty (specify these reason)



Credit Elsewhere CONTINUED

• SBA is increasingly reviewing a lender’s analysis of the credit elsewhere test. This increased scrutiny means that a lender must elaborate in great detail its determination of credit not available elsewhere

• Merely listing the criteria listed in the SOP is not sufficient

• A narrative specific to this particular borrower as well as the lender’s particular program requirements must be addressed in the credit memo



Other Revisions to SOP 50 10 5(I)

• Guarantee Fees• Loans to Veterans and Spouses of Veterans

• No guarantee fee (so long as program is subsidy zero) for loans up to $350,000.00



Other Revisions to SOP 50 10 5(I) CONTINUED

• Collateral• Requirements related to determination of adequacy of collateral

• Lender must review the impact of covenants and other restrictions recorded against the collateral which may impact value and marketability and document analysis in credit file

• Deed restrictions, covenants, easements, reversionary interests, subordinations, leases and options and any other provisions that affect the use of the property or benefit a third party

• Engineering controls that require installation of costly devices or structures (ie, wells, barrier walls) prior to constructing or remodeling buildings or otherwise improving property



Revised Procedures – SBA Forms 912 and 1081 and Fingerprint Cards (FD 258)• Effective December 15, 2016

• Office of Personnel Security (OPS) within SBA’s Office of the Chief Operating Officer (COO) is now responsible for processing fingerprint checks for all SBA Forms 912 (Statement of Personal History) and 1081 (Statement of Personal History for use by lenders) for SBA loan programs

• Office of Inspector General (OIG) will no longer accept SBA Forms 912 and 1081 and Fingerprint Cards for processing



Businesses with an Associate of Poor Character

• Requirements for who must complete the Form 912 has not changed

• Types of offenses that require a background check have changed

• Process streamlined for faster processing

• Incomplete packages submitted for processing will be returned unprocessed



Businesses with an Associate of Poor Character CONTINUED

• If Subject Individuals responds “No” to questions 1, 2 and 3 on SBA Form 1919, then the loan can be processed with no SBA Form 912 required

• If Subject Individuals responds “Yes” to Question 1 (presently subject to an indictment, criminal information, arraignment or other means by which formal criminal charges are brought) or in response to Question 3, the individual is currently on probation (including probation before judgment), then the Applicant is ineligible




• If Subject responds “Yes” to Question 2 or Question 3 (other than active probation), then a character determination will be required




• Procedures for Determination• Complete the Form 912

• Provide written explanation about the details of any “Yes” response to include particulars as set forth in the SOP (details did not change)

• If Lender determines upon review of the court disposition of the case(s) resulted in one or more multiple misdemeanor convictions whose conditions were met more than 6 months prior to receipt of the SBA application, then the Lender must retain the supporting documentation in its file with the original Form 912 and may proceed with processing the loan with no further 912 review




• Procedures for Determination• If Individual discloses any misdemeanor convictions within 6 months of

receipt of the Application, or if there are any misdemeanor convictions for crimes against a minor (ie, child endangerment, abuse, possession of child pornography), or if the 912 form discloses a felony conviction, then a background check must be performed

• Fingerprint check (FD 258) must be used• Name checks no longer used

• Lender may not disburse the loan until formal clearance from SBA is received in writing




• Procedures for Determination• OPS will conduct the background check

• OPS will submit FD 258 to the FBI or the FBI’s Electronic Fingerprint Submission, if available

• Lenders may obtain the FD 258 from its local SBA Field Office or on the FBI’s website at www.fbi.gov

• For felony convictions, Lenders must submit the complete and detailed Form 912 package signed by the Individual within 90 calendars days prior to submission to SBA

• Delegated lenders – Submit directly to OPS (See SBA Notice 5000-1399 for location)

• Non-delegated lenders – Submit to local SBA Field Office of LGPC for forwarding to OPS



http://www.fbi.gov/

• Procedures for Determination• FBI generally takes 30 days to process fingerprint check

• Upon receipt of determination from the FBI, OPS will refer the matter to the SBA Director/Office of Financial Assistance (D/OFA) or designee to make the character determination

• SBA Field Office or LGPC will notify lender of the Agency’s determination

• Copy of clearance to be added to the lender’s loan file

• Reconsiderations should be submitted to D/OFA at SBA Headquarters




• Procedures for Determination• Factors that may contribute to favorable reconsideration are:

• Additional information provided by the applicant that satisfactorily explains the circumstances of the prior offense

• Passage of time since offense where no additional offenses were committed and the fact that the individual has led a responsible life and made a contribution to the community.




• SBA requires recertification of all users of its online Capital Access Financial System (CAFS) on a bi-annual basis. CAFS is the online system that includes lenders’ access to E-Tran Origination, E-Tran Servicing, and SBA One.

• Last year SBA began requiring that SBA lenders designate “Authorizing Officials” who would be responsible for approving the users of E-Tran and SBA One and then recertifying them on a bi-annual basis.



Bi-Annual Recertification for SBA One and E-Tran Access - Starts Jan. 11

• Beginning on January 11, 2017 and ending on February 11, 2017, the Lender Authorizing Official will need to recertify the users at its lending institution. If a user is not recertified, they will be denied access to SBA’s CAFS systems. Information on the recertification process is available at https://caweb.sba.gov/cls/help/CAFS%20AO%20Account%20Certification.pdf.

• The CAFS Website is https://caweb.sba.gov/cls/dsp_login.cfm.

• If you need assistance, please send an email to [email protected].



Bi-Annual Recertification for SBA One and E-Tran Access - Starts Jan. 11 CONTINUED

https://protect-us.mimecast.com/s/lN09B9FmJeId?domain=caweb.sba.gov

https://protect-us.mimecast.com/s/zN60B0Fmz2I2?domain=caweb.sba.gov

mailto:[email protected]


QUESTIONS?

50 10 5(I) Lender and Development Company Loan Programs

© 2017 Lerch, Early & Brewer, Chtd. 28

About the Presenters

Alison Rind ([email protected]) is chair of the Commercial Lending Practice Group at Lerch Early and is an SBA lending attorney who represents commercial lenders in loan transactions and commercial matters, including participants in SBA and government-guaranteed lending programs.

Michael Smith ([email protected]) is a commercial lending attorney at Lerch Early who primarily focuses on the structuring, negotiation, documentation, due diligence and closing of commercial lending transactions.

Arnold Spevack ([email protected]) is a commercial lending attorney at Lerch Early who represents businesses, lenders and borrowers in financings, closings, negotiations, and in the courts.

Matthew DiMeglio ([email protected]) is a real estate and lending attorney at Lerch Early who helps national, regional, and local banks, credit unions, and SBA lenders close loans.

sba sop updates 50 10 5(i) seminar

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