SBA Lending Matters Newsletter
A Word from Arne

Jump In the SBA Pool — The Timing’s Perfect

Welcome to our first issue of SBA Lending Matters — a bimonthly newsletter solely focused on providing tips, guidance and tools to help community banks with their SBA lending. In each newsletter, I will share a few words and top-of-mind thoughts that will add value to your lending strategies and activities.

This month, I want to reinforce the critical importance of having government-guaranteed loans in your lending portfolio. As a Preferred Service Provider of the ICBA, we have the opportunity to talk and network with community bankers all over the country on a daily basis. It still surprises me to learn the number of banks that are not actively pursuing guaranteed loans for their small business customers.

As you know, small business is the lifeblood of our economy — and access to capital remains one of the biggest struggles for these companies. Government-guaranteed SBA loans have always been a great opportunity for these businesses — and for community banks, as well. Even though the American Recovery and Reinvestment Act (ARRA) expired May 31, and has not yet been extended by Congress, there’s one thing banks can count on: the SBA Lending waters are more perfect than ever.

Based on our “sources on the ground”, we have every reason to believe that the ARRA program will be extended until December 31, 2010. If expectations hold true, this will be great, because ARRA has added tremendous advantages to SBA-backed loans:

  • Guarantees have been boosted to 75%-90% of the loan amount
  • Borrowers’ loan fees are now waived

With or without the legislation, SBA lending brings along huge benefits to community banks. By jumping into the SBA lending market now (or raising your current lending activity) you can:

  • Make more loans in your local market. You can be the local hero, providing borrowers access to capital while you’re competing more effectively and gaining new deposit relationships.
  • Restructure existing debt.  As you help existing customers expand their businesses, you’ll be helping the institution further mitigate bank leverage and concentration issues.
  • Gain a highly lucrative source of fee income. Servicing fees and the sale of SBA loan guarantees can yield some of the most profitable returns that community banks can realize.
  • Keep customers in your bank. Small business can be exponentially more profitable for banks than consumer relationships. The last thing you want to do is turn them away to a competitor…get them into a loan program that will work for them.

Don’t be intimidated by the intricate rules, red tape and amounts of paperwork that must be carefully navigated to properly complete and service an SBA loan. That’s where our company excels.  We work with community banks like yours every day, successfully leading their loans through this process — from loan packaging and closing, to securitization and sale, through portfolio servicing. Working closely on your behalf with the SBA, we make it easy for your bank to profit, freeing up your loan staff to concentrate on the customer relationship and strengthening other areas of opportunity.

Do you want to add a comment? We’d like to hear your feedback.

Featured Article

When are Affiliate Guarantees Required? 
By Ethan W. Smith, Starfield & Smith, P.C.

Lenders often wonder when they are required to obtain guarantees of entities affiliated with their borrowers. The SOP 50-10 requires a lender to consider affiliates when analyzing size standards and determining maximum loan size and guaranty amounts. Even so, the SOP does not specifically address the question of whether a lender must require an affiliate of the borrower to guarantee a loan. And since the SOP requires that lenders take a security interest in all available collateral (for loans that are not fully secured otherwise), lenders may sometimes need to consider requiring guarantees of affiliates of the borrower.

13 CFR §121.103 states the standards for determining affiliation.  Specifically, the SBA considers businesses to be affiliated "when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists."  13 CFR §121.103(a).  In determining whether affiliation exists the SBA looks at the totality of the circumstances, even if no single factor rises to the level of affiliation. As they perform an affiliation analysis, the SBA requires lenders to consider a variety of factors, such as:

  • Common ownership - If an individual or entity owns 50% or more of two or more entities, then those entities are affiliates.  Additionally, even if the ownership interest does not exceed 50%, but a common owner owns a large ownership percentage compared to other ownership blocks, affiliation may exist.  For the SBA, common ownership includes stock options and convertible securities.
  • Common management - If the management of one concern controls the management of another concern, affiliation may exist.  Management may include one or more officers, directors, managing members, or partners of an entity.
  • Previous relationships with or ties to another concern — If individuals or firms have substantially identical business or economic interests (family members, common investments, or economic dependence through contractual or other relationships), they may be treated as one party with an aggregation of these interests.

Control may be affirmative or negative and direct or indirect. Negative control includes, but is not limited to, instances where a minority owner has the ability to block action by the majority owners.  Indirect control includes control that is exercised indirectly through a third party.

If a loan is not otherwise fully secured, lenders should consider taking the guarantees of the borrower’s affiliates. If such guarantees cannot be obtained, the lender should fully explain the circumstances in its credit file, and should provide sufficient justification, from a credit standpoint, for making the loan without the guarantees. Taking these steps should help the lender preserve the loan guarantee in the event that the loan defaults and the lender requests SBA's purchase.

For more information on affiliation and other eligibility issues, contact Ethan Smith at 215-542-7070 or [email protected].

Regulatory Corner

Expiration of Stimulus Plan Provisions
Effective May 31, 2010, the loan incentives provided via the stimulus provisions under the American Recovery and Reinvestment Act (ARRA) legislation ran out of funding. SBA lending activity has dropped precipitously since the expiration of the ARRA stimulus provisions. They included a maximum 90% guaranty under the SBA 7a loan program as well as a waiver of the guaranty fee. However, there is considerable action in the House and Senate to enact SBA Recovery Act legislation that would extend the stimulus provisions through 12-31-10. We’ll keep you posted on the progress of this important issue.

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SBA Hot Topic

Avoid processing delays! As of January, SBA form 912 (Statement of Personal History) now requires not only the signature of the applicant, but also his/her initials on items 7 through 9. Double check your applications before submitting!


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