SBA Lending Matters Newsletter
A Word from Arne

Now that the calendar has turned to 2011 – and the SBA stimulus provisions offered by the SBA have expired – many lenders are taking stock of their current and projected SBA lending philosophy. Although the 90% guaranty level and guaranty fee waiver were great while they lasted, the agency is now back to normal operations.

There is little or no chance that Congress will enact future stimulus programs. But, the expiration of the previous one is certainly NOT a reason to curtail SBA lending activity; in fact, lenders have many reasons to continue or even expand their SBA lending programs.

  • Robust SBA Loan Demand Continues.  As some banks refrain from making SBA loans without the benefit of stimulus provisions, active SBA lenders will benefit from the continued demand for these loans. They understand that, as lenders take on a larger share of the credit risk, the agency’s standard guaranty levels actually drive stronger loan applications. And, since the loan guaranty fees paid by borrowers are capitalized into the financing transaction, borrowers have fewer objections to paying the fees.
  • Access to Capital. It’s perhaps the most critical challenge facing small business owners.  SBA lending programs continue to be an excellent way for these businesses to obtain much-needed funds.
  • Adequate Agency Funding. Even though the stimulus program has expired, it appears that Congress will continue to fund the Small Business Administration at an adequate level. In addition, I believe that the new Congress is maintaining its focus on small business, knowing that the success of these enterprises will eventually lead our country out of the downturn.
  • Huge Opportunities for Profit. Community banks are always searching for sources of non-interest fee income.  The securitization and sale of government full faith and credit guarantees is by far the most profitable activity a bank can engage in. The secondary market for the sale of government-backed loan guarantees remains vibrant. Premium levels are historically high right now, and savvy lenders are capitalizing on them.

In conclusion, even without the temporary stimulus provisions, the use of Small Business Administration lending programs should be an integral component of a bank’s commercial lending operation.  If staffing up for SBA lending activity is a concern, consider trusting this function to a qualified Lender Service Provider.  Holtmeyer & Monson – endorsed by the Independent Community Bankers of America – is happy to partner with you to generate more fee income for your institution, at no additional net cost to the bank. Just give us a quick call to find out more.

Featured Article

Best Practices: Documenting SBA Loan Disbursements
By Christopher M. Evans, Esq., Starfield & Smith, P.C.
http://www.starfieldsmith.com

The SBA requires lenders participating in the 7(a) loan program to fully document all loan disbursements in accordance with SBA regulations. In the guaranty purchase context, a lender's failure to adequately document each disbursement of an SBA-guaranteed loan is one of the top reasons for a repair or denial of the guaranty. Lenders should always be mindful of their obligations to properly document each disbursement and ensure that disbursed funds are used in accordance with the allotted use of proceeds in the Loan Authorization in order to preserve the SBA guaranty. When financing the purchase of equipment or inventory, lenders must obtain copies of invoices, purchase orders, and copies of cancelled checks or evidence of wire transfers, as applicable. In the context of loans used to finance leasehold improvements or construction, lenders must make sure that all draws are properly documented by the construction manager or supported by invoices.

For each initial disbursement, all lenders are required to complete the SBA Form 1050 Settlement Sheet, which both the lender and the borrower must sign. Subsequent disbursements must be documented in detail and attached to the initial Form 1050 Settlement Sheet in the loan file. Documentation for each disbursement should clearly indicate 1) the recipient of each disbursement, 2) the date and amount of each disbursement, and 3) the purpose of each disbursement. Finally, every disbursement must be documented with supporting evidence which clearly establishes that loan proceeds were used for the purposes outlined in the Loan Authorization. While accounting for the entirety of each disbursement may seem cumbersome, documentation evidencing proper use of loan proceeds is required in Tab 5 of every SBA guaranty purchase request. The lack of such evidence is likely to lead to a repair or denial of the guaranty.

If making a disbursement for working capital when working capital is not a designated use of proceeds in the Loan Authorization, lenders should make sure the disbursement does not violate the 10% or $10,000 rule set forth in the Loan Authorization. ("Lender may disburse to Borrower as working capital only, funds not spent for the listed purposes as long as those funds do not exceed 10% of the specific purpose authorized or $10,000, whichever is less").

Lenders should never disburse loan proceeds solely to pay the SBA Guarantee, but may disburse loan proceeds designated for closing costs and/or working capital to cover closing costs and the SBA Guarantee Fee. Furthermore, an Eligible Passive Company is never eligible to receive working capital funds.

While determining exactly what supporting documentation will properly evidence the use of loan proceeds is not an exact science, the SOP 50 10 5 (C) provides lenders with guidelines at pages 231-232. Joint payee checks, copies of receipts, invoices, or other supporting documentation clearly marked by the vendor or contractor as "paid", and evidence of wire transfers to vendors with copies of invoices are all considered acceptable supporting documentation for the use of loan proceeds. In the absence of additional documentation, checks made directly to the lender or borrower, unpaid offers, orders or invoices, or cancelled checks from the borrower do not clearly establish that loan proceeds were used for the stated purposes outlined in the Loan Authorization. If unable to properly document the use of loan proceeds, a lender must document the file with a detailed explanation of the efforts made to obtain such documentation and the reason for its unavailability.

For more information on other issues related to documenting SBA loans or submitting guaranty purchase requests, contact the author at [email protected] or 215-542-7070.


Regulatory Corner

SBA Updates Standard Operating Procedures
The SBA has updated its Standard Operating Procedures (SOPs) effective October 1st. Financing transactions that were previously ineligible are now possible through the SBA. For example, mini-storage facilities and golf courses many now be financed under the 7(a) or 504 programs. Many “gray areas” still exist in the SOP’s, and we will research those areas to provide you with definitive eligibility interpretations. Contact us for assistance with any specific SOP and/or eligibility questions you may have.

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Lenders are required to compare the tax data received from the IRS with the financial data/ tax returns submitted by the borrower as part of his/her loan application. If there are significant discrepancies, the borrower must resolve them to the satisfaction of the lender and SBA. Failure to resolve the differences may result in the cancellation of the loan. If the loan involves a change of ownership, lenders must verify financial information provided by the seller of the business in the same manner.

 

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