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banc-serv Newsletter: Issue 03

December 05, 2016 | By: Nick Rodgers
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Industry Update: Changes On The Horizon

Changes are on the horizon for the SBA. As usual, it’s that time of year when Standard Operating Procedures are updated and proposed rules become finalized. Upon returning from the annual National Association of Government Guaranteed Lenders (NAGGL) conference recently, it seems timely to share some anticipated changes that will affect our lending Partners moving forward. Below is just a brief summary of some of the items to anticipate:

The SBA announced a soft launch involving a rebranding of the 7(a) and 504 programs. The announcement can be found in Information Notice 0000-2169 (effective 12/1/16). Each program has been given a new name according to its two core business loan programs:

  • SBA 7(a): SBA Advantage Loan Program

  • SBA 504: SBA Grow Loan Program

The SBA expects a transition period for rebranding that will allow the SBA website, regulations, SOPs, forms, and vendor software to be updated. All policies, procedures, and forms are still in effect.

  • SOP 50 10 5 (I) – proposed effective date January 1, 2017

Another major change anticipated within the next revision of the SBA’s Standard Operating Procedures (SOP 50 10 5) includes franchise eligibility documentation requirements. This should ease the eligibility determination process. In addition, the SBA is making improvements to the processing requirements association with Form 912.

  • Liquidation

    • Effective 12/1/15, lenders must “resolve” purchased loans by the earliest of:

      • 24 months after SBA’s purchase – for loans purchased on or after 12/1/15, or

      • By 12/1/17 (24 months from effective date of SOP) – for loans purchased by SBA prior to 12/1/15

    • The 24-month clock starts at date of purchase – the date when the loan is classified as in liquidation is not relevant for purposes of loan resolution

  • Franchise policy (anticipated revisions):

    • A new universal addendum to franchise agreement, signed by franchisor and franchisee that will address affiliation requirements. This will replace the requirement to conduct a review of franchise disclosure documents for affiliation.

    • The franchise agreement will no longer be sent to SBA for review.

    • Changes will not be allowed to this document.

  • Form 912 improvements (anticipated revisions):

    • SBA is re-engineering the process and replacing the existing Office of Inspector General (OIG)/Office of Security Operations (OSO) procedures to that of an internal review by SBA the Office of the Chief Operating Officer (OCOO) to better expedite criminal background checks. It should reduce the SBA’s review of “remote in time” and “minor in nature” criminal activities by allowing lenders to document their file without external review. It is anticipated that SBA will publish a procedural notice before the newly revised SOP is released. We look to see this on or around 12/16/16. Our team will work with you once this is published should you have a 912 clearance pending.

What is in the future for SOPs?

The SBA is working on overhauling the Standard Operating Procedure document to provide better order—aiming to consolidate topics and making the SOPs available electronically. Currently, the existing version is not organized in a way that allows the reader to ascertain all the information available on one topic in one place. For example, if you search “change of ownership” in the existing SOP 50 10 5 (H), this reference is listed on 20 different pages in different contexts.

With a newly “renovated” SOP, SBA will provide housekeeping clean up to include an incorporation of many of the rules changing (per proposed rule published for comment recently; comment period ended 10/11/16). Some examples of these anticipated changes include:

  • Define allowable fees

    • Clarifying fees that lenders may charge borrowers

  • EPC/OC – partner buy out

    • Allowing loans to finance the change of ownership of an EPC when an existing owner is purchasing the interest of a departing owner

    • Clarifying existing rent limitations in EPC/OC structures

    • Clarifying guarantor requirements in both EPC/OC and other loan structures

  • Adjusting when the guaranty fee must be paid on a short-term loan

  • Removing regulations pertaining to the now-defunct CLP program

  • Clarifying SBA’s “Delegated Authority” (formerly PLP) criteria

  • Slightly expanding the parties with which a lender may share its SBA findings for purposes of assisting the lender in improving its performance

As always, banc-serv will aim to keep you apprised of all industry changes.

 



SBA 7(a) “Ah Ha” Moment: SBA 7(a) Size Standards

The most recent Monthly banc-serv Buzz session involved “SBA Size Standards and Affiliation”. In that discussion, banc-serv presented requirements when determining whether a business applicant is considered “small” and, therefore, eligible for SBA financing. There are two different approaches that are acceptable to SBA: 1) The NAICS code (industry classification) approach and 2) the Alternative size standard. Most lending institutions defer to the Alternative size standard method because it is easier to determine AND more businesses fit within the standard. The two approaches are:

SBA 7(a) – NAICS code driven (see 13 CFR, Part 121 for size standards for each industry)

  • Retail: typically may not exceed $7 million in gross sales over last 3 years

  • Wholesale: typically may not have more than 100 employees

  • Manufacturing: typically may not have more than 500 employees

Alternative Size Standard

  • Tangible Net Worth may not exceed $15 million,

AND

  • Average Net Income for last 2 full years may not exceed $5 million

The size standard calculation applies to the applicant business AND affiliate businesses. When utilizing the NAICS code driven approach, it is necessary to utilize a two pronged test:

  • Applicant business alone (without affiliates) must meet the standard for the industry it is primarily engaged, AND

  • Applicant + Affiliates (the group) must meet the standard for EITHER the primary industry of the applicant alone OR the primary industry of the group (whichever is higher)

When utilizing the Alternative size standard approach, make sure to add the affiliate business(es) financial information to the applicant business financial information to make sure the tangible net worth and average net income of all combined do not exceed the standards.

Don't forget to place future banc-serv Buzz monthly sessions on your calendar.  A final session is scheduled for 2016:

  • December 14  - Financing a Franchise Busines

 



Inside banc-serv: Giving Back

‘Tis the season of gratefulness and giving back. Here at banc-serv, we're thankful for our Lending Partners and look forward to growing relationships in 2017. We also pride ourselves in the efforts we take throughout the year to give back to our community and those around us. For those of you that are not aware of how we accomplish these goals, here is a summary of our efforts in 2016:

1st Quarter: We participated in the St. Vincent de Paul food pantry in Indianapolis, IN. banc-serv team members take a 4-hour morning shift and help volunteers pass out food to the needy and restock the pantry shelves for the volunteers.

2nd Quarter: We participated in Relay for Life – American Cancer Society. banc-serv team members volunteer to raise money for our company and contribute those funds toward Relay For Life and a 24-hour walk-a-thon in Westfield, IN. Staff volunteers sign up to walk 30 minute shifts. We also raise funds through in-house company “money makers”. These include events such as Pitch in Breakfasts and Lunches – each plate is $5.00; Bring Your Dog to Work Day - $5.00/day; Wear Your Favorite Shade of Pink in October for Breast Cancer Awareness Month - $5.00; and many more.

3rd Quarter: banc-serv participated in Habitat for Humanity build. Team members volunteer to help work on a house as it is in the process of being built for a chosen family. We sign up with a local chapter in Hamilton County, IN where we volunteer in activities such as painting, floor installation, and building patio decks.

4th Quarter: In December, we will be in service to the assist the United Way Christmas Service. banc-serv adopts two families in the Indianapolis area that were selected by the United Way. We shop for each member of the family on a Friday afternoon and host a wrapping party on Friday evening at the banc-serv offices (it’s a family affair). We then deliver all gifts to both families on Saturday morning. This year our shopping and delivery will be Friday, 12/2 and Saturday 12/3.

Community service aside, banc-serv continues to evolve in the SBA industry. Recognized for industry efforts, banc-serv just recently received the Essential Partners Award during the 2016 NAGGL Conference in Scottsdale, Ari. Kerri Agee, banc-serv's President, is shown below receiving the award on the company’s behalf. At her side is NAGGL CEO/President, Tony Wilkinson, and NAGGL Chairman of the Board, Larry Conley (with J.P. Morgan Chase).

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SBA Lending in “Real Life”: Determining Business Affiliation

Recently, the SBA amended their approach to determining whether or not affiliation exists between a small business applicant and other businesses. It is important to know how to make this determination as will affect size standard eligibility, the maximum loan amount and guaranteed portion available, and the credit analysis when addressing repayment ability from outside sources.

There are five “buckets” to consider when determining affiliation:

  • Affiliation based on Ownership: Control is determined by,

    • Person (or entity) that owns more than 50% of voting equity in the applicant business

    • If no one owns more than 50% controls rests with officers

    • When a minority owner has the ability to prevent a quorum or block an action, they are deemed to have control

  • Affiliation arising under Stock Options: rule remains unchanged

  • Affiliation based on Management: affiliation arises where one or more officers, directors, managing members or partners who control the Board of Directors and/or management of one business ALSO control the Board of Directors and/or management of one or more other businesses. Management agreements are included in the types of managers and management subject to consideration

  • Affiliation based on Identity of Interest: Affiliation may arise from two businesses owned by close family members,

    • Firms with identical or substantially identical business interests

    • Family members operate a business in the same or similar industry in the same geographic area

  • Affiliation based on Franchise/License Agreements: SBA limits franchise or license agreement reviews to the applicant business only

Example:

ABC Company = applicant

  • Bobby Bigbucks owns 50% of ABC Company

  • Bobby is President (and decision maker) of ABC Company

  • Bobby owns 20% of DEF Company and is an officer

  • Bobby owns 50% of GHI Company and is not an officer

  • Bobby’s spouse owns 100% of another company that is in the same industry as ABC Company

First of all, assume there is no possibility of affiliation based on negative control, stock options/agreements to merge, management agreements, or franchise agreements.

Bobby does not have control by ownership (needs to be more than 50%) of the applicant business. Bobby does have control by agreement (he is a manager officer). Therefore, we have to consider other the businesses that Bobby also has control in.

Bobby owns 20% of DEF (no control based on ownership). Bobby is an officer, so he does have control by agreement, therefore, DEF is affiliated with ABC.

Bobby owns 50% of GHI (no control based on ownership). Bobby is not an officer (no control by agreement). Therefore, GHI is not affiliated with ABC.

Bobby’s spouse owns and controls another business that appears to be affiliated with ABC Company based on the type of industry and geographical location.

The SBA views that the borrower/lender is “guilty until proven innocent”. In that regard, the lender should explain why entities are not affiliated and should also provide proper documentation.

 



People Powering banc-serv

Vicki Combs has been a part of the banc-serv team for almost ten years.  She is a Senior RM (Relationship Manager) who manages the loan process (front end) for our lending PartnersHer responsibilities include determining the eligibility of loans, packaging loans for SBA submission, obtaining SBA approval, gathering all closing compliance, preparing closing documents, and ensuring loans are closed in accordance with SBA requirements. Throughout each loan’s journey, Vicki will be the liaison between lenders/partners, borrowers, attorneys, and title insurance companies.

Vicki has a strong foundation in SBA lending, with her initial experience pertaining to SBA loan servicing. Her growth and experience can be accredited to her extensive portfolio management regarding servicing action modifications. Vicki's well rounded skill set has allowed her to grow rapidly within banc-serv. She is now responsible for the SBA loan origination process for large, National lenders with higher volume.

Vicki is married with four children and three grandchildren. She also assists with her family owned business by handling the bookkeeping and paperwork in her spare time. The business is a used merchandise store with sales in tools, precious metal and jewelry. She is the second generation to own and operate the company that has been in business for over 22 years. Without question, her family owned business is another reason for Vicki's extensive skill set in the SBA and at banc-serv. Ultimately, she was drawn to banc-serv because of the company's position as a small business and overarching mission to help provide other small businesses accross the country with necessary capital. 

Vicki is a valued employee who assists in the mid-level management of her department when needed. She is also important to others within the organization, supplementing other areas of banc-serv by helping with loan reviews and ancillary services. She enjoys the ability to assist her lenders by customizing and creating protocol that best fits their culture and environment.

  

Sincerely,

The banc-serv Team

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