SBA Lending Matters Newsletter
A Word from Arne

On September 27th, the President signed the Small Business Jobs & Credit Act (HR 5297). This legislation provides small business tax breaks of $12 billion and $30 billion in funding targeted to community banks with $10 billion or less in assets. The bill establishes several key provisions directly affecting community banks.  As our subscribers are aware, the SBA stimulus provisions, which raised the maximum guaranty percentages and waived guaranty fees, expired in May. This bill reestablishes these critical provisions, and also provides community banks with a Small Business Lending Fund (SBLF) that may be treated as Tier I capital by recipient banks.

Several provisions of this legislation directly affect SBA lenders, as follows:

  1. Borrower Guaranty Fee Waiver – The bill extends the waiver of loan guaranty fees until 12-31-10, or until the allocation of $505 million is committed. This fee waiver has been very well received in the past, and has greatly increased SBA lending. Rest assured that we are already working legislatively to address this fee waiver on a more permanent basis after 12-31-10.
  2. Guaranty Limits – Passage of the bill reestablishes the 90% full faith and credit guaranty for SBA 7(a) loans up to $1,666,666. The guaranty percentage limit on loans over this amount will trend downward to 75% on loans of $2 million. This provision is temporary, effective until 12-31-10.
  3. Maximum Loan Amounts – HR 5297 permanently increases the maximum 7(a) loan to $5 million (from $2 million) and increases the maximum 504 loan debenture to $5 million (from $1.5 million).  Also, 504 loans for public policy goals are increased to $5 million (from $2 million) and small manufacturer debentures to $5.5 million (from $4 million).
  4. Express Loan Program – The bill temporarily increases the maximum loan under the SBA Express Loan Program to $1 million for a period of one year after enactment.
  5. Borrower Size Standards – Previously, borrowers were required to meet a size standard based on annual revenues, with an alternative standard based on net worth and after-tax profit. The new standards are established at $15 million of tangible net worth and 2 year average net after-tax income of $5 million. These new standards will significantly expand the eligibility criteria for SBA applicants.

HR 5297 establishes several other provisions in the areas of tax relief and small business lending. Please contact us with any specific questions you may have. We expect the SBA to act quickly to release a Policy Notice regarding this critical legislation.

Featured Article

Best Practices: Environmental Investigations
By Jessica L. Conn, Esq., Starfield & Smith, P.C.
http://www.starfieldsmith.com

Under the SOP, the SBA requires a lender to perform an environmental investigation for all commercial property that will secure an SBA loan. The type of investigation is dependent on the level of risk of contamination. For GP loans, the lender must submit the environmental investigation report to the SBA for approval.

In order to determine the type of environmental investigation that is appropriate for a particular transaction, the lender should begin by establishing the NAICS code(s) that best describes the property's "current and known prior uses." If the NAICS code matches an environmentally sensitive industry listed in Appendix 4 of SOP 50 10 5(B), then the lender's environmental investigation must begin with a Phase I, regardless of the loan amount. If there is not a NAICS code match, then investigation may begin with an environmental questionnaire for loans of $150,000 and under. For loans over $150,000 where there is no NAICS code match, the investigation must begin with an environmental questionnaire and records search with risk assessment, at the very least. The following is a brief description of the various types of environmental investigations:

ENVIRONMENTAL QUESTIONNAIRE ("EQ"):  The EQ is created by the lender, as the SBA does not currently have a form that is required to be used. There are, however, certain standards that the lender's EQ must meet:

  • The EQ must be completed or reviewed by a lender that has made at least one site visit to the property and a good faith effort to conduct an interview with the current owner or operator of the property.
  • The current owner or operator must sign the EQ. If the current owner or operator refuses to sign, then the lender must obtain a transaction screen.
  • There are several inquiries that the SOPs require be included in the questionnaire, including but not limited to, the past and present uses of the property and adjoining property, identification of hazardous substances, and evidence of contamination on the property and adjoining properties. The full list of required inquiries can be found in Appendix 2 of SOP 50 10 5 (B), pg. 329.

RECORDS SEARCH WITH RISK ASSESSMENT ("RSRA"):  A RSRA includes:

  • A search of government databases for a compliant Phase I and a search of historical use records for the property and adjoining properties, and
  • A risk assessment by an environmental professional, as to the level of risk for contamination based on the search. The report must identify the environmental professional by name, but a reliance letter is not needed.

TRANSACTION SCREEN ("TS"):  A TS is an investigation compliant with the standards set by ASTM International that includes:

  • An interview with the owner or operator of the property,
  • A visit to the property
  • Completion of an environmental questionnaire, and
  • A review of government records and historical sources.

PHASE I:  A Phase I is an investigation compliant with the Phase I standards set by ASTM International that contains an opinion of an environmental professional regarding the presence of contaminants and the risk involved with such contaminants. The environmental professional should provide a recommendation of how to proceed, if it is concluded that further investigation is warranted.

If the results of any particular environmental investigation are that further investigation is warranted, the SOP 10 50 5 (B) sets forth guidelines as to what the next stage of investigation should be. You can find a chart that outlines the various types of environmental investigation and SBA recommendations here.

In their environmental investigations, it is crucial for lenders to follow the guidelines set by the SBA in order to protect the SBA guaranty and the lender's lien on the commercial real estate. For more information on this and other SBA related topics, contact Jessica Conn at 215-542-7070 or [email protected].


Regulatory Corner

SBA Updates Standard Operating Procedures
The SBA has updated its Standard Operating Procedures (SOP) effective October 1st.  This new SOP makes changes and updates in the areas of defining “passive income”. It also allows banks to finance bank-owned OREO, subject to traditional requirements. The SOP clarifies the requirements for financing business acquisitions, and makes the new, expanded Alternate Size Standard permanent. Holtmeyer & Monson will be happy to assist you with any specific SOP and/or eligibility questions you may have. There are still many “gray areas” in the SOP and we will provide research services to get you a definitive eligibility interpretation.

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Lenders must perform site visits within 15 days of an event of default, and within 60 days of a payment default. Detailed site visits should be performed to protect your SBA guaranty, the interest of the SBA/Bank, and to demonstrate vigilance to the borrower. Permanent loan files should include pictures and notes from your visits.

 

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