SBA Lending: Documenting, Closing and Servicing 7(a) and CDC/504 - - PowerPoint PPT Presentation

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

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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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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

• rder 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
• f 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

• n 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

• f 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
• 7aLoanMod@sba.gov
• Sacramento504Servicing@sba.gov
• 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

• Form159@colsonservices.com
• Retain original

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OTHER ISSUES

• 1502 reporting (1502@colsonservices.com )
• 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 cbrown@ehjlaw.com Heather E. Ward ENGEL, HAIRSTON & JOHANSON, P.C. 109 N. 20th Street, 4th Floor Birmingham, Alabama 35203 (205) 328-4600 hward@ehjlaw.com

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