SBA Lending Matters Newsletter
A Word from Arne

Community banks are united by many commonalities, including the needs to generate non-interest fee income and strengthen their balance sheets with commercial loans. There’s no question that SBA loans will accomplish these goals. But bankers have differing opinions about how fast it can be done, and how much work it will take. If you think “a long time” and “a lot of effort”, those false assumptions can be costing you. SBA lending can generate significant returns very quickly, with minimal staff involvement.

In fact, in a matter of just two weeks, a bank that was totally new to SBA lending earned more than $100,000 in non-interest fee income from its first government-guaranteed loan – with no net cost to the bank. The institution outsourced (portions of) the entire process to our firm, from loan application to sale of the guaranteed portion of the loan in the secondary market.

SBA 7a loans carry a full faith and credit guarantee, backed by the government, ranging from 75 to 85 percent of the loan. They’re a great way for lenders to mitigate credit risk and significantly expand their commercial lending efforts. The secondary market for the guaranteed portion of 7a term loans is very active. It’s also remarkably lucrative for the lenders, since they can earn significant premiums on the sale of the loan guarantees. Current premium levels for properly structured loans are reaching historic levels as high as 17 points depending on loan structure items such as rate, term, and adjustability. Yes, that is 117% of par of the guaranteed portion of an SBA 7a loan. This means that a $1,000,000 floating rate 25-year loan, at an interest rate of prime + 2.75% with a quarterly rate adjustment, would generate a gross premium of $127,500 ($750,000 x 17%) for your institution.

In addition, SBA programs allow community banks to fill a critical niche in their markets by reasonably fulfilling commercial loan requests from creditworthy “non-traditional” borrowers (i.e.,  those involved in business acquisitions, franchises, start- ups, and service industries). We describe this activity as lending to “marginal” borrowers. You’ll notice I did not say substandard borrowers; we always advise clients that an SBA guaranty is never an excuse to make a poor credit decision.

All in all, SBA lending is an outstanding program for any community bank looking for commercial loan growth and non-interest fee income. Booking the non-guaranteed portions of SBA loans, and selling the guaranteed portions, can satisfy critical needs for lenders – while serving small business owners.

If you’re interested in SBA lending, but have concerns about doing it profitably, please consider letting Holtmeyer & Monson serve as your out-of-house SBA loan department in the role of a qualified Lender Service Provider. We are a designated as a Preferred Service Provider by the Independent Community Bankers of America, and we’re happy to fill this need for your institution. And always feel free to call us with any SBA-related question or issue.

From all of us at Holtmeyer & Monson, we wish you a very Merry Christmas and Happy Holiday Season!

Featured Article

Best Practices: Documenting Disbursement of 7(a) Loan Proceeds
By: Jennifer E. Borra, Esq.
http://www.starfieldsmith.com

Getting all parties of a transaction to the closing table may seem like the final hurdle in closing an SBA loan, but one of the most important steps to properly closing the loan happens at closing: disbursement of loan proceeds. The SBA cites failure to use loan proceeds as required by the loan authorization as one of the most common lender deficiencies noted in PLP audits and guaranty purchase reviews. SOP 50 10 5(E), Subpart B, Chapter IV, Paragraph C, Section 4 states that 7(a) lenders must have SBA Form 1050 (Settlement Sheet) executed at the time of first disbursement and must provide backup documentation for each and every disbursement of loan proceeds. Additionally, the SOP indicates the types of evidence and documentation required to prove compliance with the use of proceeds listed in the Loan Authorization.

While the 1050 requires supporting documentation, as a practical matter, how does the lender demonstrate where the funds actually went? Lenders should request copies of each disbursement check from the closing attorney or escrow officer's account at settlement. Additionally, lenders should collect any corresponding invoices or receipts to show the charges incurred by the borrower that were paid at the time of closing. Lenders must ensure that each disbursement check supports the use of proceeds categories listed in the Loan Authorization. If the disbursement amounts do not match the use of proceeds as originally projected, then the lender may need to modify the use of proceeds in accordance with the SOP and 7(a) Servicing and Liquidation Matrix.

In the case of refinances, creating a settlement statement illustrating the disbursement of funds is relatively straightforward. There is the credit of loan proceeds and line item debits for the use of proceeds categories all payoffs and any vendor invoices and lender charges. In a business acquisition or real estate transaction, preparing a settlement statement may be more complex. In most cases, the parties will prepare a separate settlement statement, aside from the lender's form 1050 to account for all of the debits and credits. There are typically buyer/seller adjustments that will affect the bottom line for the borrower. For instance, rent adjustments, tax adjustments, costs advanced for goods, lease adjustments, recording taxes, transfer taxes, and similar prorated items. The lender must carefully review the charges and insure that the use of proceeds are applied correctly. For multi disbursement loans, each disbursement must be supported by copies of checks, invoices, purchase orders, draw requests or other documentation sufficient to illustrate the proceeds were actually used for the purposes set forth in the Loan Authorization. Under no circumstances should loan proceeds be disbursed directly to the borrower, unless it is working capital or reimbursement for an authorized use that has been fully documented by the lender.

Through careful documentation and review of all disbursements made at closing, lenders can confirm compliance with the authorization's use of proceeds and minimize the risk of any repairs to the guaranty arising from documentation of the loan disbursement.

For more information regarding closing and disbursement matters, please contact Jen at (215) 542-7070 or at [email protected].


Regulatory Corner

The Difference Between Equity and Collateral
Equity injection often becomes an issue during the structuring of SBA loan projects.  For example, our Project Costs Analysis may indicate the need for a reasonable injection of equity. Borrowers frequently tell us, “I have some equity in my home that I can use to meet this requirement.” It is true that equity in a personal asset, such as a home, may represent a source of collateral. But in order for this equity to be used to capitalize an SBA loan project, the agency requires the borrower to convert the equity into cash (i.e., a check), and then to apply those proceeds to his/her SBA credit project as leverage. That’s why we use the term “free equity” to describe this type of borrower capitalization. Please call your Holtmeyer & Monson representative for additional details about this issue.

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SBA Hot Topic
Regardless of closing date, the guaranty fee on an SBA 7a loan is due to the SBA within 90 days of the authorization issuance date – and the lender must pay the fee electronically. After loan disbursement, the lender may be reimbursed for the guaranty fee out of the borrower’s loan proceeds.  Contact us with any questions.

 

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