SBA Lending Matters Newsletter
A Word from Arne

Recently, I attended the annual conference of the National Association of Government Guaranteed Lenders (NAGGL). The conference was a great opportunity to talk with various SBA administrators and network with other key service providers. As you can probably guess, a lot of our discussions centered on the newly published changes to the SBA Standard Operating Procedures.  I’ve described a couple of the most significant SOP changes here:

Debt Refinancing – A change in policy now prohibits refinancing of debt held in the personal name of the owners of an applicant, with one notable exception: personal credit card debt used for business purposes. All other personal debts -- including home equity loans even with the proceeds are used for business purposes – are ineligible for refinancing. In the case of personal credit card debt used for business purposes, the burden of verification falls to the lender.  As part of the application process, lenders must verify and document that proceeds of personal credit card debt were used for legitimate business purposes. This may be a painstaking process. It will require an examination of historical credit card activity, so you need to be prepared to review the records.

Change of Ownership – This SOP has been amended to prohibit an individual partner, shareholder, or an unrelated third party from using SBA loan proceeds to purchase an existing owner’s interest in a business.  The provision now requires for a business entity, rather than an individual, to be the borrower if a change of ownership is being financed with the proceeds of an SBA loan. When one business owner is purchasing the ownership interest of another, the transaction is to be structured as a stock redemption by the business borrower. The stock must be redeemed by the business entity, and retired to the treasury.

It is the policy of the SBA to periodically review and refine the procedures set forth in these SOPs.  As always, please call us with any SBA-related question or issue you may encounter.  We’re here to help, and, as a qualified Lender Service Provider, we can serve as your out-of-house SBA loan department – so you can take advantage of SBA lending without the burden of keeping up with changes like these. .  Holtmeyer & Monson – endorsed by the Independent Community Bankers of America – is happy to fill this need for your institution.

Featured Article

New SOP Insurance Requirements
By Katie O'Brien, Esq., Starfield & Smith, P.C.
http://www.starfieldsmith.com

SOP 50 10 5(D), which became effective on October 1, 2011, made several changes to the SBA's life insurance and flood insurance requirements. Whereas the previous versions of the SOP required lenders to obtain life insurance when the viability of the business was tied to an individual or individuals, SOP 50 10 5(D) at page 204-205 appears to give Lenders more authority over whether they decide to require life insurance, but don't be fooled.

Although life insurance is no longer mandatory, Lenders must now determine whether "repayment of the loan is dependent upon 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 so, the lender must require life insurance unless the lender decides that it is unnecessary because of the adequacy of collateral and/or the presence of secondary sources of repayment. Although not mentioned in SOP 50 10 5(D), another factor to consider is whether the owner has a succession plan in place and the details of that plan. If the lender determines that, based on its analysis of the specific facts of the file, they are not going to require life insurance, they must document their file by including their decision in the credit memorandum. And as with any other decision that the SBA might question in a guaranty purchase review, Lenders should provide as much information as possible supporting their determination.

Although this change makes life insurance a credit decision instead of a mandatory SBA requirement, if there is a loss on the loan which the SBA determines is due to the death of the owner, and the lender did not require life insurance, the lender will be responsible for such loss. Therefore, lenders who choose to waive life insurance do so at their own risk.

SOP 50 10 5(D) also sets forth two smaller changes regarding life insurance: (1) Because the lender must ensure that the borrower pays the policy premiums, lenders may now set up an escrow account for the payment of the premiums on the policy. Lenders should follow the escrow requirements for commercial real estate taxes and insurance escrows which are set forth on pages 226-227 of SOP 50 10 5(D); and (2) The SBA has clarified that for SBA Express, Export Express and Patriot Express, lenders may follow their institutions' internal policies for life insurance on conventional commercial loans of a similar size.

The SBA has always required that borrowers obtain flood insurance under the National Flood Insurance Program ("NFIP") on real estate and business personal property if any portion of a building that is collateral for the Loan, or any business personal property collateral is located in a building that is in a special flood hazard area. The amount of flood insurance required for real and/or personal property collateral located in a flood zone should be the lesser of the maximum amount of insurance available, or replacement cost. It is important to note that the maximum amount of flood insurance available under NFIP programs is limited to a maximum of $500,000 each, for both building and contents coverage, respectively.

Although these flood insurance requirements have not changed, SOP 50 10 5(D) adds clarification that flood insurance requirements apply equally to condominiums and cooperative units. If a condominium or cooperative unit lies in a flood zone, the condominium association or the cooperative association must obtain flood insurance for the exterior shell of the entire building and the individual unit owner must obtain a separate flood insurance policy for his/her actual unit. What remains unclear is whether the flood policy from the condominium or cooperative association must list the lender as the mortgagee and provide a mortgagee endorsement, or if a certificate showing the coverage is in place is sufficient. Although most condo and co-op associations will not list the mortgagee for a particular unit as a mortgagee on the policy for the entire building, the SOP language is broad enough to make the Agency's intent on this subject unclear. Until such time as this policy is clarified, the best practice is to ask for this coverage and document your file when the request is denied.

For more information regarding these and other changes to the SOP, contact Katie at [email protected].


Regulatory Corner

Working Capital CAPLine Program Change
With the recent revision of the SBA Standard Operating Procedures, a significant change was made to the Working Capital CAPLine program. This product now allows lenders to provide creditworthy applicants with revolving working capital financing, up to $5 million, for a term of up to 10 years. These lines will carry the standard 7a guaranty percentages. Lenders may choose to establish a borrowing base formula, or follow minimum underwriting and monitoring standards. Lenders must establish a first security interest in trading assets (A/R and Inventory). Please call your Holtmeyer & Monson representative for additional details on this new program.

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SBA Hot Topic

Recent changes to the SOPs have resulted in the following SBA Note (Form 148) requirements: (1) The initial interest rate must remain in effect until the first change period unless reduced in writing in accordance with SOP 5010; (2) The interest rate spread as identified in the Note may not be changed during the life of the Loan without the written agreement of the Borrower; (3) For variable rate loans, the interest rate adjustment period may not be changed without the written consent of the Borrower.

 

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