SBA Lending Matters Newsletter
A Word from Arne

This summer, you may run into us at one of the numerous Bank Appreciation Day events around the country, as well as state banking association conventions. We find these to be an excellent platform not only to connect with new clients and old friends, but also a chance to spread the good word about SBA lending. In my conversations with community bankers around the country, I hear several common concerns. Local community banks are experiencing weak loan demand, compressed interest margins, and overbearing regulatory burdens.

The ICBA supports a range of solutions to address these pressing issues. One proposed solution is a bill introduced by Senators Sherrod Brown (D-Ohio) and David Vitter (R-La.) -- the Terminating Bailouts for Taxpayer Fairness (TBTF) Act (S.798) – which requires more balanced capital guidelines for banks. If passed, the TBTF Act would address the risk currently posed by Too Big To Fail megabanks. The largest banks would have to meet a new 15 percent equity capital requirement in order to absorb potential losses and avoid another taxpayer bailout. Capital requirements would remain at the current 10 percent level for community banks, and at eight percent for mid-sized and regional banks. The TBTF legislation would also provide regulatory relief for community banks.

Additionally, the ICBA has developed an excellent platform to effectively address regulatory relief. Its Plan for Prosperity is a framework of legislative priorities that are positioned for effective advancement in Congress. The provisions described in the Plan are designed to rebalance the unsustainable regulatory burden placed on community banks – and allow them to effectively serve their local communities.

On another front, we in the SBA industry are awaiting the appointment of a new Administrator of the SBA upon Karen Mills’ departure from this post. We will keep our readers informed as developments occur. SBA activity remains strong, with the number of loans rising 2.7 percent and approved dollars up 19 percent compared to last year. And we are seeing the same type of increase at Holtmeyer & Monson as well. Happy to help so many of our customers take advantage of the market, as premium sales on the loan guarantees remain at a historic high.

Remember, if you have questions about any of the information you read here – or any other issue surrounding SBA lending – please give us a call. As a qualified Lender Service Provider, we owe it to our customers to be “up” on all things SBA. So whether you want us to serve as your out-of-house SBA loan department, or just need clarification about some things, we’re glad to oblige.

Featured Article

Best Practices: Amending Note Terms Under SOP 50 57
By: Kimberly A. Rayer, Esq.
http://www.starfieldsmith.com

While most Lenders are well versed on SBA loan eligibility and loan closing conditions, many are not as familiar with the SBA’s requirements when it comes time for loan servicing requests from their Borrowers. The new SOP 50 57 sets out that the general policy and goal for loan servicing and liquidation for SBA 7(a) loans is as follows:

Borrowers should repay their SBA loans in accordance with the terms specified in the Loan Authorization, Note and the other Loan Documents. However, when loan servicing and liquidation activities are necessary, they should reflect a balancing of SBA’s interest in: (1) achieving the goals of the loan program, i.e., helping entrepreneurs start, build and grow viable small businesses; and (2) maintaining the integrity of the loan program, i.e., ensuring that the Agency can maximize its recovery if the Borrower defaults on the loan.

Lenders should start with this policy in mind when considering whether to grant a change in Note terms for a Borrower who is having difficulty making timely loan payments.

Once a Lender determines that it is consistent with SBA policy to grant a change in Note terms, the Lender must prepare a Loan Action, which is defined as “an activity or decision regarding a specific SBA loan including a decision to engage or not to engage in a particular activity, such as a decision not to enter a Protective Bid at a senior lien holder’s foreclosure sale.” The Loan Action decision, along with the Lender’s rationale for the Loan Action and all supporting documentation (i.e. appraisals, business plans, financials, etc.) should be dated and kept in the Lender’s loan file or tracking system. The Lender must also determine whether the Loan Action: (i) falls under Lender’s unilateral authority; (ii) requires notice to the SBA or (iii) requires prior approval by the SBA.

One of the most common Loan Actions is to grant a deferment period to allow a Borrower some payment relief. For Notes that are not sold on the secondary market, Lenders may use their unilateral authority to allow up to a 6 month deferment in payment if a Borrower is experiencing a temporary cash flow problem. During a deferment period interest may continue to accrue and a Borrower should make interest only or some minimal payment on the Note, although it is not specifically required by the SOP 50 57. At the end of the deferment period a Lender can re-evaluate if a further deferment makes sense, but only if the Borrower is viable and there is clear path to repayment of the loan. If the Note is sold on the secondary market, a Lender is prohibited from modifying payment terms unless the guaranteed portion has been purchased by the SBA or written consent of the secondary market investor has been obtained. However, there is an exception for a one time deferment that does not exceed a period of three months.

Requests to modify interest rates, term out a revolving line, change the installment amount or extend maturity dates are all within a Lender’s unilateral authority if the Note is not sold on the secondary market, but as the policy states above, Lenders must thoroughly analyze whether the Borrower’s business is viable or whether the deferment period or extended maturity date only delays liquidation and wastes the Lender’s opportunity to liquidate valuable collateral. Lenders should also be mindful that changes in Note terms must still comply with SBA regulations, which prohibit balloon payments at maturity.

Finally, as part of their process for documenting a Loan Action, Lenders should prepare an allonge or amendment to the Note or other Loan Documents, as needed, and obtain the consent of the guarantors to the modification. This helps to ensure that there is no confusion as to the new Note terms or the continued enforceability of the loan documents against Borrower, guarantors and any liens against collateral.

For questions regarding SBA loan modifications, please contact Kimberly Rayer at [email protected] or at (215) 542-7070.


Regulatory Corner

Significant Changes to SBA Form 912 – Statement of Personal History
The SBA has introduced a revised Form 912 with changes to questions 7, 8, and 9 dealing with a potential applicant’s criminal history.

Question 7 previously asked “Are you presently under indictment, on parole, or probation?” The new form now asks, “Are you presently subject to an indictment, criminal information, arraignment, or other means which formal criminal charges are brought in any jurisdiction?”

Question 8 previously asked, “Have you ever been charged with, and/or arrested for any criminal offense other than a motor vehicle violation?” The updated Form 912 now asks, “Have you been arrested in the past six months for any criminal offense?” This six-month window significantly streamlines the inquiry for applicants and lenders.

Question 9 now asks, “Have you ever been convicted of or pled guilty to a criminal offense other than a minor vehicle violation?” Compared to the previous version, this revision is fairer and more relevant. It addresses the character test by looking to actual criminal convictions and supporting the presumption of innocence.

Please call your Holtmeyer & Monson representative for more details about these changes.

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SBA Hot Topic
The SBA recognizes Standby Agreements for calculating debt-to-net worth. Often used in business acquisition financing, these Agreements defer total or partial payments to sellers. They should not be released without SBA approval. Release may be justified if:  the loan is seasoned; borrower is able to service all debt, including Standby; there is minimal risk SBA loan terms will not be fulfilled with timeliness.

 

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