SBA Lending Matters Newsletter
A Word from Arne

Summertime always brings us the pleasure of attending the numerous state banking association conventions and banker appreciation events. There’s no substitute for meeting face to face, sharing ideas with clients and key industry contacts. It’s also great to learn about local economies and the needs that SBA lending can fill. We’re happy to answer your questions and work with you to serve your small business customers. Call us anytime!

SBA Waives Cash Flow Analysis

This summer also brings a change in the SBA’s Standard Operating Procedure (SOP) 50 10 5(F). Effective July 1, in order to accelerate the processing time for 7a applications, the SBA will no longer require cash flow or debt service coverage analysis on loans of $350,000 or less. This SOP revision is tied to the SBA credit scoring model introduced last year. It considers a borrower’s personal and business credit score, but gives more weight to business data. Lifting the analysis requirements has caused much discussion. (See the American Banker article, “SBA’s Waiver of Cash-Flow Analysis Divides Bankers”, with comments from yours truly.)

Holtmeyer & Monson is all about streamlining processes! But, while the SBA credit scoring model is a valuable predictive tool, we believe it should not replace sound decision making prior to granting credit. We always require our clients to adequately demonstrate that a borrower can repay the requested loan.

Simplifying the application process can encourage more lenders and borrowers to participate in SBA, and we think all creditworthy small businesses should be able to access to the capital they need -- it's critical for our economy. Administrator Contreras-Sweet is absolutely on the right track in her efficiency efforts, and her personal story is nothing short of amazing. However, in our experience, comprehensive cash flow analysis is essential for any commercial loan application – SBA or conventional – and we will continue to advise our clients accordingly.

New Vice President on Board

Join us in welcoming Dustin Powell. As Vice President, Dustin will be based in our Wisconsin office, and handling client accounts throughout the United States. Dustin joins H&M after a seven-year banking career as a commercial lender. Powell holds a degree in Business Administration from the University of Wisconsin – Lacrosse.

As always, gives us a call if we can answer any questions. We're standing by to help.

Featured Article

Best Practices: Lender’s Loss Payee vs. Loss Payee: What’s the Difference?
By: Katie O'Brien

If a Small Business Administration (“SBA”) loan is secured with a lien on equipment, fixtures or inventory, the SBA requires that the borrower’s business personal property insurance policy contain a lender’s loss payable clause in favor of the secured lender. Although most lenders are aware of this requirement, it is important to recognize the difference between a “lender’s loss payee” endorsement and a “loss payee” endorsement. In addition to the fact that a lender’s loss payee endorsement is an SBA requirement, there are also practical benefits and protections associated with being named a lender’s loss payee and real consequences associated with being named merely as a loss payee on an insurance policy.

If a lender is designated as a loss payee on a borrower’s insurance policy, the lender is entitled to receive insurance proceeds if a covered loss occurs, but only if the insured borrower is entitled to payment under the policy. Although this may sound like sufficient coverage, if the insured borrower fails to make premium payments, intentionally destroys insured property, fails to file a claim in a timely manner, commits fraud under the policy or commits any other act which is deemed a breach of the policy thereby causing the policy to be void, a loss payee will not have a right to receive insurance proceeds. A loss payee’s rights are only as good as the insured’s rights. Therefore, a loss payee can not enforce the terms of a policy once the policy has been voided.

This point was recently illustrated in Westfield Ins. Co. v. Talmer Bancorp, 545 Fed. Appx. 402 (6th Cir.2013). In that case, a lender was named a loss payee on its borrower’s personal property insurance policy. When the borrower’s inventory was allegedly stolen, the borrower did not disclose the lender’s security interest in the inventory to the insurance company. In fact, the borrower affirmatively indicated to the insurance company that no lender held a security interest in the stolen inventory. Borrower’s fraudulent misrepresentation caused the insurance policy to be voided. Because a loss payee’s rights are derived from the insured’s coverage (which coverage was no longer in place), the Court held that the lender was not entitled to receive insurance proceeds for the stolen inventory.

The case above may have had a different outcome if the lender had been designated as a lender’s loss payee. Most lender’s loss payable endorsements allow a lender’s loss payee to collect insurance proceeds even when the insured borrower has not complied with the terms of the policy and the policy has otherwise become void. A lender’s loss payee also typically receives 10 days’ prior notice of cancellation of the policy for nonpayment, 30 days’ prior notice of cancellation of the policy for other reasons and 10 days’ prior notice of non-renewal of the policy. A mere loss payee is not given these protections. Another benefit of being named a lender’s loss payee is that a lender retains its right to receive insurance proceeds even when the lender has commenced foreclosure proceedings against the borrower.

If a loan is secured with a lien on equipment, fixtures or inventory, it is important for the lender to obtain a copy of the borrower’s insurance policy and a proper lender’s loss payable endorsement and to review both to ensure the lender has sufficient rights under the policy. For questions regarding insurance coverage for SBA and conventional commercial loans, contact Katie at 267-470-1207 or [email protected].

Regulatory Corner

New: SBA Increases Monetary Size Standards to Account for Inflation
The SBA has issued an interim ruling that adjusts program-based size standards used to determine what qualifies as a “small business”. A previous adjustment was made in 2008. The standards, which vary by industry, are based on employee count, annual revenues or total assets. As a result, approximately 8,500 more companies can now be designated as small business.

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SBA Hot Topic
The SBA gives qualified lenders delegated authority to determine eligibility for Express loans – on their own – but they must adhere to SBA application procedures. If they don’t (as we see too often while servicing the loans), guaranty claims may be a problem. H&M is obligated to ensure that SBA guarantees are valid and intact.


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