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banc-serv Newsletter: Issue 06

October 05, 2017 | By: Karen McHugh
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Industry Update: 

SBA recently published in the CFR the final rule that provides recent changes to SBA 7(a) loan regulations.  Most changes became effective 9/20/17.  Here is a brief summary of some of those changes.

  • Ineligible businesses:
    1. SBA removing consumer and marketing coops from ineligible business types
  • Eligible Passive Companies:
    1. SBA will now allow loan proceeds to be used to finance a change of ownership between existing owners of the EPC
      1. OC must be co-borrower for “the purchase of other assets for use by the OC, including the purchase of stock or intangible assets”
  • Restrictions on Uses of Proceeds
    1. SBA prohibits the use of proceeds for payment of past due Federal or State payroll taxes – and adds same restriction to prohibiting payment of sales taxes (any taxes collected by small businesses in trust on behalf of a Federal, State or local government entity)
  • Personal guaranties
    1. SBA and delegated lenders have authority to obtain full or limited guaranties from appropriate individuals or entities regardless of their ownership interest in the EPC or the OC. The SBA lender may determine when credit or other reasons make it necessary to obtain a full or limited guaranty from appropriate individuals or entities.  (The previous regulation restricted SBA from requiring personal guaranties from individuals with less than 5% ownership under any circumstance)
  • Certified Lenders Program (CLP)
    SBA is removing Certified Lenders Program (CLP) and inserting in its place “Delegated Authority”.

 SBA intends to have the new SOP 50 10 updated and take effect on 1/1/18; so, we will look forward to additional guidance and clarity.

SBA 7(a) “Ah Ha” Moment  - Standby Agreements

In general, SBA allows a standby agreement may be considered acceptable equity for SBA’s purposes.  If a debt is put on FULL standby (no payments of principal or interest) for the term of the SBA loan, it may be considered equity.  However, if a debt is put on PARTIAL standby (interest payments only being made) may be considered equity when there is adequate historical business cash flow available to make the payments.

When SBA loan proceeds will be used to purchase a business and if intangible assets exceed $500,000, the loan may only be processed through delegated authority (PLP processing) IF 25% or more equity is required.  The equity can come from the borrower and/or the seller.  A seller note may be considered equity if the seller debt is put on FULL standby for at least 2 years.

When the loan is processed through non-delegated procedures, it has come to our attention that the SBA Loan Guaranty Processing Center (LGPC) requires a FULL standby agreement in the event a seller note is to be considered equity. 

Lender Responsibilities – PLP Lender Responsibilities

The Preferred lender must stay informed on and must apply all of SBA Loan Program Requirements.  These responsibilities fall into the following areas:

  • Eligibility Review
    • Keep supporting documentation for eligibility analysis in the file for SBA future review
  • Credit Analysis
    • SBA authorizes PLP lenders to make the credit decision without prior SBA review
  • Loan Authorization
    • PLP lenders draft the Loan Authorization without SBA review and execute on behalf of SBA
    • After closing, the PLP lender must send an executed copy of the Loan Authorization to the Commercial Loan Servicing Center (CLSC)
  • Closing Requirements
    • SBA closing requirements are the same for PLP loans as for standard 7(a) loans
    • PLP lenders have authorization and responsibility for all pre-disbursement Loan Authorization requirements
  • Servicing and Liquidation
    • SOP 50 57 2 and Matrix guides all lenders in delegated authority

All SBA loan files should look the same (same forms, same documentation, same order); however, for delegated loans (PLP, Express) certain documentation is not submitted to SBA for review or approval.  Be aware that SBA auditors will be looking for complete files and supporting documentation at time of loan review.  Also, if the loan defaults, the lender should be prepared to share origination, servicing and liquidation documentation to SBA when requesting payment of the SBA guaranteed amount.

Inside banc-serv – NO FEE LSP

Momentum is growing with the recent roll out of a new program called “No Fee LSP”.  Lenders do not have to necessarily turn away borrowers anymore if their loan request doesn’t meet the lender’s credit box requirements or if the borrower is located outside of the lending footprint.  Now there is a Plan B but most of the work of gathering documentation and qualifying the borrower is delegated to the loan specialists (think “sales assistant” at Newtek.  Here is how it works:

  • Refer loan to Newtek via Newtracker (online referral system)
  • Newtek contacts loan applicant, gathers required documentation
  • bsP analyzes the financial information and prepares credit memorandum according to SBA requirements
  • The credit memorandum is presented to the lender for consideration
    • Plan A: the lender chooses to approve the loan and then utilizes bsP to package the loan for submission to SBA and then close the loan
      • Lender pays bsP fees
    • Plan B: the lender chooses to not approve the loan and refers the loan to Newtek to make the loan
      • There is no charge for credit underwriting
      • Newtek pays a referral fees that is credited against any outstanding bsP LSP fees

See where banc-serv will be next!

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