SBA Lending Matters Newsletter
A Word from Arne

Recently Emily Richmond and Dustin Powell, two of our executives, attended the annual Wisconsin District Office SBA Conference. Most SBA district offices hold these yearly conferences, and we regularly attend and often participate. One of the speakers at the Wisconsin event was from the SBA Office of Credit and Risk Management (OCRM). We believe several key takeaways from that presentation are important to share with you. They’re summarized below.

Preparing the Lender’s Credit Memo
Preparing the Lender’s Credit Memo deserves your careful attention. It’s essential for information in this document to exactly match what is provided in the SBA loan application. Also note that the agency’s scrutiny of Credit Unavailable Elsewhere rationales is becoming more intense. Lenders must identify and explain reasons why an SBA loan applicant cannot obtain conventional financing with reasonable terms and conditions. Acceptable justification includes the applicant’s need for a longer term than the lender’s conventional loan policy permits, a collateral shortfall, or other deviation from the lender’s conventional loan policy. As with any credit granting decision, prudent lending practices must always be followed.

Refinancing an Existing SBA Loan
The SBA generally frowns on refinancing an existing SBA loan from another institution. It’s likely that the borrower has already paid a guaranty fee on the original SBA loan, and the agency may contend that limited SBA funds would be better allocated to other borrowers. A viable alternative to refinancing is to transfer the existing SBA loan from one lender to another. Once the transfer is successfully completed, the “receiving” lender typically establishes the senior security interest. We’re happy to assist our H&M clients with the guaranty transfer process.

Many thanks to Emily and Dustin for their valuable input on topics discussed at the SBA Conference. As a qualified SBA Lender Service Provider (and a Preferred Service Provider of the Independent Community Bankers of America), we make it a priority to be a reliable resource for lenders. Whether you have SBA-related questions, or want to learn how H&M can serve as your out-of-house SBA loan department, we always welcome your inquiries and interest.

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Featured Article

Rates are Rising. What’s Your Plan?
by Shawn O’Brien, President, QwickRate

It came as no surprise that the Federal Reserve announced an interest rate increase on March 15, 2017. News and speculation of rate hikes has been circulating for months. But this latest move adds more certainty to conjecture. The following day Kiplinger Staff Economist David Payne wrote, “The Federal Open Market Committee meeting was significant in that the Fed now appears committed to a path of steady rate hikes. It will probably lift short-term rates by 0.25% two more times in 2017, first at its June 14 meeting and next on either September 20 or December 13.”

What will this mean for deposits? For the past five years, banks have been awash with liquidity; however, with the continuing rise in rates, movement in deposits will occur as customers chase higher returns. In addition, post-crisis call report numbers indicate that three out of four deposits in community banks are in Demand or Savings accounts. Never before has the risk of repricing deposits through CD specials been greater. Banks need to be aware and cautious. This heavier concentration raises concerns on the part of regulators, since demand accounts are typically associated with higher levels of volatility.

The wise move is to plan ahead.  With the competition for deposits increasing, other local banks may decide to run CD specials or new marketing programs. Just a few financial institutions in a local market are all it would take to light the match. Banks must weigh the cost of these special programs, as well as the potential risks tied to repricing their current deposit base. While many banks might assume they wouldn’t lose deposits, that complacency could be problematic. The reality is, their situations could change overnight.
In preparation, banks must diversify their funding sources to reliably raise deposits as needed and satisfy regulatory requirements.

The must-have for every bank’s liquidity strategy
All banks should have a non-brokered liquidity source as part of a diversified funding strategy. Connecting with institutional investors subscribing to a Direct Deposit CD listing service is a successful method for generating out-of-area funding. The banks do not jeopardize relationships with local depositors, and will not be at the mercy of “rate wars” among local competing institutions.

QwickRate maintains a Marketplace that allows direct communication between CD investors and financial institutions seeking to generate funding. The Marketplace offers banks a stable source of deposits. Institutional investors have less sensitivity to rate fluctuations than consumer depositors, so their investing strategies are less volatile.

Furthermore, the QwickRate Marketplace meets the FDIC definition of a Direct Deposit CD listing service (by official opinion, a non-brokered deposit source), which is now reported on a separate line of the call report.

Read full article

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Regulatory Corner

Refinancing of Existing Seller Financing
Many small businesses request for their SBA loans to include the refinancing of seller financing. To be eligible, SBA requires for the existing debt to have been in place for at least 24 months and a 24-month history of payments must be provided. If the seller financing has been placed on full standby (i.e., the seller doesn’t receive any payment on the loan for 2 years), refinancing won’t be permitted due to the absence of a payment history. If the seller financing has been on partial standby (i.e., seller receives interest-only payments for 2 years), a payment history exists and refinancing is possible.

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SBA Hot Topic
For an SBA loan with a variable interest rate to be sold in the Secondary Market, the Note must now: state the specific date of the first rate adjustment; or clearly define the first rate adjustment date (e.g. beginning with the first calendar quarter following initial disbursement). If not, a loan modification signed by the borrower will be required.
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