SBA Lending Matters Newsletter
A Word from Arne

As we return from the ICBA National Convention and Techworld® in Nashville, it’s a good time to reconfirm our mission. We have a very simple one: we want to serve as your out-of-house SBA loan department. Right now it’s critical for community banks to leverage their resources in order to not only survive, but thrive, in this increasingly competitive market. One great way to maximize bank assets is to get involved in Small Business Administration lending. And the better way to maximize SBA lending is to outsource your institution’s lending function without added cost.

SBA lending offers your institution the opportunity to provide creditworthy borrowers with very flexible financing programs. As a result, borrowers can access long-term financing for asset acquisition, debt refinancing, permanent working capital, and revolving lines of credit. I think we can all agree that one of the most important elements to the success of our small business clients is cash flow. Structuring a credit facility with an SBA guaranty serves to optimize small business cash flow levels.

If your institution is looking to add non-interest fee income, SBA lending and the sale of loan guarantees in the secondary market can generate tremendous profits for your bank – all while serving the needs of your small business borrowers.

Still have questions about the real value and benefits of SBA lending for your bank? I invite you to take just a few minutes and run your loan numbers using the SBA Loan Yield Calculator, which is available on our website – www.holtandmon.com/calculator. The calculator estimates your potential earnings on any SBA loan.

Outsourcing an institution’s SBA function makes good sense on many levels. It eliminates the overhead involved in setting up and maintaining an SBA department, erases the need to train and retain staff, and ensures operational efficiency. And there’s great profitability available through secondary market sales.  All of these factors make SBA lending good business for banking institutions.

We look forward to sharing more with you. Give us a call anytime and we’ll be happy to help.

Featured Article

Best Practices: Landlord's Waivers: When are they Needed?
By Timothy D'Lauro, Esq., Starfield & Smith, P.C.
http://www.starfieldsmith.com

One of the most troublesome issues lenders face is whether they must obtain a Landlord's Waiver, especially when third party landlords are uncooperative or when the personal property collateral has marginal value. Since Landlord's Waivers are a frequent requirement in the making of SBA loans, lenders must understand what the SBA means by a Landlord's Waiver, and when a lender is required to obtain one.

The elements of a Landlord's Waiver are most precisely set forth in the following optional requirements from the National Authorization 7(a) Boilerplate:

"Lender must obtain a written agreement from all Lessors (including sublessors) agreeing to: (1) Subordinate to Lender Lessor's interest, if any, in this property; (2) Provide Lender written notice of default and reasonable opportunity to cure the default; and (3) Allow Lender the right to take possession and dispose of or remove the collateral."

Thus, if a Landlord's Waiver is required, it must include provisions whereby the landlord agrees to subordinate to the lender its interest in the subject collateral located on the leased property; notify the lender of the borrower's default and allow an opportunity to cure; and permit the lender to enter onto the leased property and to remove and dispose of the collateral.

SOP 50 10 5(D) identifies several circumstances when a Landlord's Waiver should be obtained. "When a substantial portion of the loan proceeds are to be used for leasehold improvements or a substantial portion of the collateral consists of leasehold improvements, fixtures, machinery, or equipment that is attached to leased real estate, the lender should obtain ... [an] Assignment of Lease ...; and [a] Landlord's Waiver." (SOP 50 10 5(D) at page 208) (emphasis added). The SOP provides further guidance: "[t]he Landlord's Waiver ... should be obtained for all SBA loans with tangible personal property as collateral." (SOP 50 10 5(D) at page 208).

Accordingly, there are two identified circumstances when a lender should use its best efforts to obtain a Landlord's Waiver: (1) when the lender is financing the making of, or its collateral is substantially comprised of, leasehold improvements, fixtures, machinery or equipment that are or are to be attached to leased real estate, or (2) when the lender is financing SBA loans with tangible personal property collateral. Not surprisingly, because lenders making SBA-guaranteed loans are required to take security interests in "all available collateral," prudent lending suggests lenders should attempt to obtain a Landlord's Waiver when making SBA-guaranteed loans made to borrowers who operate or otherwise have collateral located on leased property.

Obtaining a Landlord's Waiver in an EPC-OC loan (i.e., when the landlord and tenant are borrowers or guarantors) is rarely controversial. However, Lenders frequently find that obtaining a Landlord's Waiver from a third-party landlord presents a significant challenge. Such landlords may refuse to subordinate their rights or obligate themselves to provide notice of default; insist on limiting the lender's access to the leased premises; require broad indemnification from the lender; provide only a brief window for the removal of collateral; or otherwise object to the terms and provisions of a landlord's waiver that addresses the SBA's requirements.

Generally, the prudent lender should view the SBA's suggestion as an imperative, as the failure to obtain the required waiver may result in a repair or denial of the SBA guarantee if the absence of the waiver - and the rights it provides to the lender - prevents the lender from liquidating its collateral, and the lender suffers a loss as a result. If the landlord is unwilling to agree to the necessary provisions, the lender should decline the loan; or move forward by obtaining the SBA's approval to waive the requirement (for loans submitted through standard processing); or make a credit decision to omit the Landlord's Waiver entirely.

Any such justification is critical. For example, if the value of the collateral is substantial and the landlord will not cooperate, the lender may not continue to process the loan without jeopardizing the SBA loan guaranty. If, however, the loan is processed through a lender's delegated authority, the lender must establish that the liquidation value of the collateral is de minimus; the bank has been unsuccessful in obtaining the waiver; and the lender is nevertheless proceeding with the loan since the cost of the recovery would likely exceed the liquidation value of the collateral. The documentation must be performed contemporaneously with the Lender's decision so that, in the event of the event of a default and guaranty purchase submission, the Lender may make a credible argument to the SBA.

For any questions about when Landlord's Waivers are needed, please contact Tim at [email protected] or (215) 542-7070.


Regulatory Corner

Owner’s Life Insurance Requirements
We are often asked what the SBA requires concerning the assignment of life insurance policies covering business principals. The following are details included in SOP 50 10 5 (D) issued by the SBA last fall:

The lender must determine if repayment of the loan depends on an owner’s active participation in the business. In other words, if the owner dies, will the business operations be adversely affected and the loan default? If this is the case, the lender must require life insurance that is consistent with the size and term of the loan. The lender must obtain a collateral assignment, listing the lender as assignee, for the insurance. In determining the appropriate amount of life insurance needed, the lender may factor in the amount and type of collateral available to repay the loan upon the borrower’s death.  The lender may determine that no life insurance is necessary due to the adequacy of collateral and/or the presence of secondary sources of repayment. This determination must be documented by the lender in the credit memo. If the lender determines that life insurance is not necessary and a loss on the loan results from the death of the owner, the lender will be responsible for the loss. Please call your Holtmeyer & Monson representative for additional details on this issue.

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SBA Hot Topic

The new SOP includes requirements for GP & CLP program loans. As of 10-01-11, prior approval must be obtained from the SBA for any changes to the loan authorization -- including changes to the use of loan proceeds -- until the final disbursement of loan proceeds. This SOP effectively nullifies the portion of the SBA servicing matrix that indicates changes can be made after initial disbursement of the proceeds.

 

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