At the recent Annual Conference of the National Association of Government Guaranteed Lenders (NAGGL), I was briefed on some very significant changes being undertaken by the Small Business Administration. The changes will take effect January 1, 2014. Our staff is being trained on the new SOPs and we will be up to speed on day one.
New Processing Policies for 7(a) Loans and CAPLines Based on Loan Size
The SBA has established new policies for processing 7(a) loans and CAPLines of in amounts of $350,000 or less – excluding Express loans and lines. Effective January 1, term loans and lines of credit of $350,000 or less will be processed under the current Small Loan Advantage Program (SLA). Applications for these facilities require a pre-screening process that generates a credit score based on consumer and business bureau data, borrower financials, and other data. Applications with an acceptable credit score may be processed using E-Tran. Applications with unacceptable credit scores may be processed using the current 7(a) method.
Term loans and CAPLines in excess of $350,000 will continue to be processed as they are now.
Changes Regarding Debt Service Coverage Ratios and Collateral Polices
In addition to the changes above, SBA has clarified global debt service coverage ratios for the two loan amount classifications. SLA loans ($350,000 or less) require demonstration of a projected or historic debt service ratio of 1:1 or greater. Loans in excess of $350,000 must demonstrate a projected or historic debt service ratio of 1:15 or greater.
Regarding collateral conditions for the two loan classifications, lenders must follow their conventional loan collateral policies for 7a loans of $350,000 or less. Loans in excess of $350,000 will adhere to the SBA existing collateral policies.
All of our personnel are being trained on these SOP changes in order to hit the ground running on January 1st. No doubt, individual cases may require further interpretation and clarification. Be assured that we will handle these situations quickly.
As the nation’s leading Lender Service Provider, we’re committed to providing clients with current and accurate information regarding SBA programs and policies. This is one of our major responsibilities as your out-of-house SBA loan department. (And, I believe, one of the reasons we have been selected as a Preferred Service Provider of the Independent Community Bankers of America.) So please call with any questions. We’re glad to be of service.
As we approach the holiday season, let me extend our wishes for a Merry Christmas from all of us here at Holtmeyer & Monson.
Featured Article
Best Practices: NEW Collateral Requirements under SOP 50 10 5(F)
By: Kristen G. Dickey
http://www.starfieldsmith.com
With the release of the new SOP 50 10 5(F), effective January 1, 2014, comes significant revisions to the collateral requirements previously required by the SBA. The SBA is stepping away from the “all available collateral” rule with the recent changes.
Generally, under the new SOP, the SBA explains that with respect to collateral taken, lenders must use commercially reasonable and prudent practices to identify collateral items, which conform to procedures at least as thorough as those used for their similarly-sized non-SBA guaranteed commercial loans. Specifically, though, the SBA separates the requirements for “adequate collateral” into three (3) separate categories: (1) loans of $25,000.00 or less, (2) loans over $25,000.00 but less than or equal to $350,000.00, and (3) loans over $350,000.00.
Adequate Collateral
1. Loans of $25,000.00 loans or less
- Lender is not required to take collateral for loans of $25,000.00 or less.
2. Loans over $25,000.00 but less than or equal to $350,000.00
- At a minimum, the lender must obtain a lien on the applicant’s fixed assets to SECURE the loan. Lender may also secure an applicant’s trading assets (using 10% current of book value for the calculation) if it does so for similarly sized non-SBA guaranteed commercial loans.
3. Loans over $350,000.00
- Lender must collateralize the loan with fixed assets to the maximum extent possible up to the loan amount. If fixed assets do not FULLY SECURE the loan, the lender must take available equity in the personal real estate of the principals as collateral.
- Departure: Previously, other personally-held assets such as publicly-traded stocks, bonds, mutual funds, certificates of deposits and investment property not included in a retirement account could be pledged as collateral, if needed.
- Note: When an individual alone or an individual and his/her spouse together own 20% or more of the Small Business Applicant, the lender must consider as collateral available equity in the personal real estate that is owned individually by the applicant owner as well as available equity in personal real estate owned jointly. Real estate transferred to non-owning spouse within 6 months of loan application is not exempt.
- The SBA considers the loan “fully-secured” if the lender has taken security interests in all available fixed assets with a combined ‘net book value’ as adjusted up to the loan amount. See SOP 10 50 5(F) Subpart B, Chapter 4, Paragraph II.A(1)(f)
- Liens on a personal residence or investment property may be limited to the amount of the collateral shortfall.
- Departure: Previously, if the loan was not fully-secured, a lender was required to a take a lien for the full amount of the loan on secondary collateral even if the shortfall was a small fraction of the loan.
- As before, liens on a personal residence or investment property may be limited to 150% of the equity in the collateral, rather than the loan amount, if there are tax implications associated with the lien amount in the particular state where the lien is filed.
- SBA still does not require a lender to collateralize a loan to meet the “fully-secured” definition when the equity in the residence is less than 25% of the property’s fair market value.
Lien Priority
- When loan proceeds will be used to purchase assets, a first security interest in those assets must be obtained.
- When loan proceeds will be used to refinance existing debt, the loan must be secured with at least the same security and lien priority as the debt that is being financed.
- Departure: Previously, the loan only had to be secured with the same security as the debt being refinanced. The SBA has clarified that the lien priority must also be the same.
- Note: It is unclear whether these lien priority requirements apply to loans of $25,000.00 or less.
While the SBA provides specific direction to lenders as to what constitutes adequate collateral, ambiguity still exists in the new SOP language. For example, a lender that would typically take a personal residence as collateral for a similarly-sized non-SBA guaranteed commercial loan even when there is minimal value in the real estate must do so pursuant to the new SOP. However, this lender may have difficulty reconciling its standard practice with the SOP provision that states the lender is not required to collateralize a loan to meet the “fully-secured” definition when the equity in the residence is less than 25% of the property’s fair market value.
Lenders should take care in analyzing the collateral and ensure they are complying with the current regulations to secure the SBA guaranty. For more information regarding available collateral, please contact Kristen at 407.667.8811 or [email protected].
Regulatory Corner
SBA Finishes Third Year of Record Volume in FY 2013
The Small Business Administration ended its fiscal year on September 30, 2013 by posting its third highest year of SBA lending to date, delivering $29.6 billion in 54,000 loans to the nation’s small businesses. The 2013 totals are surpassed only by the previous two record years of $30.25 billion (53,848 loans) in 2012 and $40.5 billion (61,689 loans) in 2011. Altogether, the SBA has supported $126 billion in lending to more than 260,000 small businesses during the last five years.
Speaking of these achievements, acting SBA Administrator Jeanne Hulit stated, “SBA has reached record levels and we continue to get more capital into the hands of small business owners than ever before.” We at Holtmeyer & Monson are proud to have played a role in helping banks secure loans for their customers, and look forward to helping financial institutions and entrepreneurs reap even greater benefits in 2014.
