SBA Lending Matters Newsletter
A Word from Arne

Anyone who follows the economy and politics knows about the great deal of discussion in Washington regarding the cost effectiveness of our government programs. Legislators are directing a keen focus on duplicative government programs, and the Small Business Administration is no exception.

Recently, the House Committee on Small Business renewed its efforts to identify areas in the SBA program delivery where duplication exists. This is being done to allow the agency to maximize efficiency and minimize waste. These practical measures will ensure that the agency remains vibrant and is able to fulfill its mandate to deliver valuable, proven products to credit-worthy small businesses.

Toward that end, the SBA has introduced a number of pilot programs. Recent introductions include the Small Loan Advantage Program, Community Advantage Program, Impact Investing and Early Stage Innovation Program, and the Distance Learning Portal. There’s no doubt that these programs are well intended. But do they serve small businesses in the most efficient and cost effective manner? Today, reducing or eliminating duplication and program waste not only serve to improve program performance, but assure that taxpayers are getting maximum bang for their buck.

The activities of ICBA and NAGGL are critical in this regard. Holtmeyer & Monson is very active in both organizations. We always appreciate your input if you discover SBA programs or delivery systems that duplicate services, or simply do not work — the ARC Loan Program being one example.

SBA has several time tested, effective programs such as the 7(a), 504, Express, and CAP Lines programs. Adequate funding and support of these successful programs are essential as the SBA continues to provide credit enhancements to small business borrowers. It seems logical that small businesses are poised to lead our economic recovery through job creation. Let’s all do our part to assure a successful economic recovery.

In conclusion, please call upon us here at H&M with any SBA-related question or issue you may have.  As a qualified SBA Lender Service Provider, we can serve as your out-of-house SBA loan department. Holtmeyer & Monson, endorsed by the Independent Community Bankers of America,  is happy to fill this need for your institution.

Featured Article

Best Practices: Trusts in SBA Lending
By Kimberly Rayer, Esq., Starfield & Smith, P.C.
http://www.starfieldsmith.com

When an SBA lender comes across a small business applicant whose ownership interests or assets are owned by a Trust, the first question often asked is whether the Trust or Trustee need to be a borrower or a guarantor of the loan. The simple answer is that if the Trust benefits directly from the loan, then it should be a borrower. However, lenders should keep in mind that the answer is often impacted by both the terms of the Trust agreement and the requirements in the SOP 50 10 5 (C) ("SOP").

A Trust does not need to meet the criteria as "small" under SBA regulations in order to qualify for SBA financing. Instead, the SOP states that in order to determine whether a Trust is eligible for SBA financing, a Lender must determine the eligibility status of the Trustor (the party that created the Trust). All donors to the Trust are deemed to be Trustors for the purpose of determining the eligibility of the Trust. However, beneficiaries of the Trust are not considered for eligibility purposes, nor are they required to be guarantors of an SBA loan.

If the Trust owns commercial real estate and the purpose of the loan is to refinance the mortgage on that property, then the Trust should be a borrower and, under the SOP, the operating company must be either a co-borrower or a guarantor. However, if the Trust is an Employee Stock Ownership Plan, which prohibits the Trust from being a guarantor or a co-borrower, then, pursuant to the SOP, the Trust cannot be an EPC and is ineligible for SBA financing.

If the Trust owns 20% or more of the small business applicant, the trust must guarantee the loan and the Trustee must sign the guarantee on behalf of the Trust. However, Lenders should be aware that under certain state laws and pursuant to the terms of some Trust agreements, the assets of the Trust may be held in title by the Trustee, individually, and not in the name of the Trust. If so, it is important that the Trustee grant the security interest to Lender in the assets held in Trust. Further, if the Trustee's principal place of residence is in a state that is different than the state where the Trust was formed, then the Lender should file a financing statement against Trustee in its state of residence, as well as, against the Trustee in its state of formation.

Finally, when a Trust is either a co-borrower or guarantor of an SBA loan, the SOP requires that the Lender obtain the following certification from the Trustee:

(1) The Trustee has authority to act on behalf of the Trust;

(2) The Trust has authority to borrow funds, pledge trust assets, and lease the property to the Operating Company;

(3) The Trustee has provided accurate, pertinent language from the trust agreement confirming the above; and

(4) The Trustee has provided and will continue to provide SBA with a true and complete list of all trustors and donors.

By keeping these guidelines in mind, lenders can ensure that their SBA loans involving trusts are properly secured and are compliant with the applicable SBA regulations. For more information regarding SBA loans involving Trusts, please contact Kim at [email protected] or 267-470-1208.


Regulatory Corner

SBA Policy Change: Secondary Market Guaranty Sales
The SBA has recently published a Procedural Notice regarding secondary market guaranty sales by “higher risk lenders”. Effective June 30, 2011, lenders falling under the following “Actions” will be required to enter into a Reserve Account Agreement when selling loan guarantees:

Actions –

  1. Cease & Desist Order
  2. Consent Agreement
  3. Supervisory Action citing unsafe and unsound banking practices
  4. Bank Auditor issuance of a Going Concern Opinion

The Reserve Account Agreement requires lenders to establish and initially fund a reserve account at a “well-capitalized” FDIC insured institution, and, afterwards, to deposit funds into the account to support each secondary market sale. The amount of the lender’s initial deposit depends on the gross loan size of its SBA portfolio. The amount the lender must deposit for each subsequent sale will be based on the dollar amount of the loans to be sold, relative to the SBA repair/denial rate.

There is much discussion in the industry regarding these requirements, and we will keep you informed of further details.

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SBA Hot Topic

Recently, we’ve received several questions about the ability of borrowers to transfer an existing SBA loan from one bank to another. SBA does provide a mechanism for this. Three parties are involved in this transaction – the Borrower, the Sending Bank (currently holding the loan), and the Receiving Bank (wishing to take over the loan). To initiate the transfer, the Borrower must make a request to the Sending Bank. The Receiving Bank will want to do a complete file review of the loan to assure that the documentation (especially the SBA Guaranty) is in order. Holtmeyer & Monson can assist you in this effort.

 

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