SBA Lending Matters Newsletter
A Word from Arne

This month Jeanne Hulit becomes the 32nd person to head the SBA since it was established with a pen stroke by President Eisenhower in 1953. As she announced her successor, Karen Mills said Jeanne “led the charge to streamline and simplify SBA’s loan programs and expand access to our lending programs.”

We have much to look forward to. Ms. Hulit has been with the SBA since 2009, and brings strong experience in banking and economic development to her position of Acting Administrator. We welcome her continuing service to the nation’s 28 million small businesses.

Through the years, many emerging businesses have grown into large, successful operations with support from SBA loan programs. And the last two years have been ones for the record book. More capital has been delivered into the hands of small businesses than ever before. The SBA – and its lending partners – provide critical capital access to all types of creditworthy small business borrowers. These aren’t people fighting for survival; they’re entrepreneurs and businesses owners who need loans to seize new opportunities, extend jobs to new workers, or invest in more inventory.

That’s why SBA lending offers big benefits for banks. Your institution can serve customers who may be “non-traditional” borrowers, but have great revenue potential – and may present opportunities to develop excellent deposit and/or trust relationships. Plus, your bank may add non-interest income by selling the guaranteed potions of those SBA loans in the secondary market.

Making a commitment to SBA lending works for community banks, as well as community’s borrowers. An impressive 56 percent of people express trust in local banks, while only 28 percent trust the country’s financial system.1 And according to the ICBA, community banks are the primary lending resource for small businesses and farms. Holding just one tenth of the banking industry’s assets, community banks (less than $1B in assets) made 37.5 percent of outstanding bank loans to small businesses. Finding ways to help these businesses will demonstrate leadership and dedication to helping your community thrive in today’s environment.

Eisenhower’s vision of small businesses as the economic engine of the U.S. has truly been enhanced by their partnership with the SBA. Small businesses create about 67 percent of U.S. jobs, generate the vast majority of wealth for their owners, and pay a major portion of taxes to the Treasury. We can all share pride in serving them.

Please call on us here at Holtmeyer & Monson for help with any SBA questions. It’s what we do! We are honored to be an ICBA Preferred Service Provider and excited to serve as your out-of-house SBA loan department.

1 Chicago Booth/Kellogg School Financial Trust Index

Featured Article

Best Practices: Early Default Loans and the Guaranty Purchase Package-Underwriting Issues
By: Amy R. Brownstein
http://www.starfieldsmith.com

When preparing a guaranty purchase package, Tab 7 must be completed only for “Early Default” loans. This will be the first of two articles discussing guaranty purchase requirements and issues related to Early Default loans. This article will discuss the underwriting-related requirements of Tab 7.

SOP 50 57 identifies the following events as providing the basis for an “Early Default”:

“1. Failure to make a scheduled loan payment;

2. Funding a scheduled loan payment from the sale of collateral rather than from business operations;

3. Deferment of more than three consecutive scheduled full payments; or

4. Any other event of default that required the loan to be classified in liquidation status, e.g., bankruptcy.”

Any such event is an Early Default when it occurs either (1) within 18 months of the initial disbursement, or (2) within 18 months of the final disbursement, if the final disbursement occurred more than 6 months after the initial disbursement, unless the borrower cures the default and makes scheduled loan payments for 12 consecutive months after the initial 18-month period. If the lender determines that a loan is an Early Default loan, it must address the requirements of Tab 7 of the SBA’s 7(a) 10 Tab package.

Unless the loan was made to fund a start-up, Tab 7 requires the lender to provide copies of the IRS tax transcripts, together with the financial information (e.g., financial statements) that the lender compared to the tax transcripts and relied upon in its credit analysis. Any discrepancies must be explained. The lender should review its credit memorandum; if it relied on unverified (such as compiled financial statements, in lieu of cash basis tax returns), the lender should explain why such financial information was relied upon, and why it made sense to do so.

If the defaulted loan was made under the lender’s PLP delegated authority, Tab 7 must also include the borrower’s application, the lender’s credit write-up, and documentation that the lender used and/or relied on to justify cash flow and loan approval. As this requirement, and that of the tax transcripts, suggests, the SBA will examine the lender’s underwriting for compliance with SBA requirements when the loan is an Early Default. Pursuant to SOP 50 57, a denial of the guaranty is likely to be justified if the lender’s underwriting was not prudent, e.g, if any of the following are discovered:

1. The Borrower’s projected expenses greatly exceeded projected revenues and the Borrower had no other source of income;

2. The Borrower was a startup business and the lender did not compare the Borrower’s projected revenue against an industry standard or another reliable measure, including the lender’s own experience making loans to similar businesses;

3. The cash flow analysis did not take into account an obvious fact that could easily affect the Borrower’s repayment ability, such as the owner’s monthly draw;

4. The cash flow analysis contained unjustified and overly optimistic revenue projections, (e.g., revenues projected to increase by 100% the first year when the industry standard is 25% maximum, without explanation for the difference);

5. A material mathematical error in cash flow calculations, so that the loan would not have been made or would have been restructured so an Early Default would not have occurred.

The only stated basis for overcoming the likelihood of such a denial is the presentation of credible evidence that the business failed for “totally unrelated reasons” – a very high standard. If the lender’s credit memo is likely to raise underwriting concerns upon review by the SBA, it would be advisable to contemplate explanations that can be provided to the SBA to support that the lender’s underwriting was (1) compliant with SBA requirements and (2) otherwise prudent

For more information regarding guaranty purchase requirement, please contact Amy at 215.542.7070 or [email protected].


Regulatory Corner

Change of Ownership Rules
The SBA has recently revised SOP requirements for financing change-of-ownership transactions, by allowing these transactions to be achieved through 1) asset purchase, 2) stock purchase, or 3) stock redemption of a co-borrower’s stock. Previously, the SBA had allowed these transactions to be structured only as purchases of a shareholder’s stock by an individual.

Please call your Holtmeyer & Monson representative for additional details on this issue.

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SBA Hot Topic
When a borrower moves from one leased location to another, protect the SBA guaranty by taking these steps: 1. Notify SBA of the address change. 2. Perform a flood certification on the new location. 3. Visit the site and do a collateral review. 4. Require an insurance update. 5. Consider possible environmental issues. For moves from an owned location to another, perform normal due diligence.

 

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