A Word from Arne
Recently, I attended the NAGGL (National Association of Government Guaranteed Lenders) National Conference. This annual event is a great forum – not only for meeting with industry experts and sharing ideas, but also for spending some valuable time with Pam Smith, Director of the SBA Loan Guaranty Processing Center in Citrus Heights, CA. Pam gave an excellent presentation on SBA Application Screen Outs and Declines. A Screen Out occurs when an SBA application is accepted for underwriting, but is missing some inputs. That application must be pulled out of the processing queue and set aside until the reason for the Screen Out is resolved. Holtmeyer & Monson strives every day to submit fully documented, compliant SBA applications on behalf of our clients to avoid Screen Outs and approval delays. In the rare event that an H&M-produced application is missing information, the SBA will generally call us to briefly discuss any file deficiencies so that the application can proceed more quickly. This professional courtesy is a by-product of our long-standing relationships with all of the SBA Loan Specialists, and benefits everyone involved in the transaction – lenders, borrowers and the SBA as well.
Screen Out Reason #1: Lender Credit Memo
So, what are the most common reasons for a Screen Out? The centerpiece of all SBA applications is the lender credit memo. An SBA Loan Specialist in California does not have the advantage of knowing your borrower, and it becomes critical for lenders to "tell the story" of the loan request in the credit memo. Adequate detail embodied in the lender credit memo will allow the Loan Specialist to gain quick familiarity with the request, and move the application along without delay. During our SBA lender training sessions with H&M clients, we place heavy emphasis on the preparation of high-quality lender memos. The SBA requires that these memos exactly match the respective SBA applications. In order to satisfy that requirement, we must occasionally advise our lender clients that they need to provide additional content in the credit memo. Please understand that our intent is to enable faster processing by the SBA.
Avoiding a Decline
No one likes for an SBA application to be declined, especially after all of the hard work required to complete it. At Holtmeyer & Monson, we pride ourselves on not submitting any application that is either ineligible or deficient to the point of affecting a decline. The top two causes of declines are (1) ineligible use of proceeds and (2) unsatisfactory credit for either the borrowing entity or its principal. We have committed to the SBA that we will not submit any application for their consideration that does not merit an approval. It is our obligation to be good stewards of government resources. In the event that we must advise a client lender, or borrower, that a proposed SBA loan application will be declined for any reason, you can be sure that we have reviewed the application with an SBA Loan Specialist to reach consensus regarding the reason for the decline.
As a reminder, a reality of SBA lending is that a loan may default and a Guaranty Claim and/or Liquidation may become necessary. We have developed a very high level of expertise in this area and encourage readers to contact us immediately if this type of situation arises.
In fact, we invite you to call upon us with any SBA-related question or issue you may have. We’ll be glad to share our knowledge on the subject. As a qualified SBA Lender Service Provider, we serve as the out-of -house SBA loan department for many banks. There’s almost nothing SBA related that we haven’t run across in this capacity, which is one of the reasons we were named a Preferred Service Provider of the Independent Community Bankers of America.
What Goes Down: Floating-rate investments come in a variety of structures
by Jim Reber, President and CEO, ICBA Securities
OK folks, the time has come to really take another look at floaters. Investments whose yields adjust in concert with general market rates sound great to community bank portfolio managers. Especially those who are exposed to rising rates, and particularly those who think that 2017 is finally the year that rates in fact move noticeably higher.
There are a wide variety of securities that accomplish this objective, including some that in fact are fixed rate. You’ve likely heard the term “cushion bond,” which is simply a callable security that is priced above par. The yield to maturity will increase if general interest rates rise by virtue of the call not being exercised by the issuer.
More traditional are the adjustable rate mortgage (ARM) securities, the collateralized mortgage obligation (CMO) floaters, and the prime-based Small Business Administration (SBA) securities that will to some extent mirror what interest rates do in general. Many banks mix in a combination of the above to diversify their adjustable portfolio. Here is a review of the more popular securities utilized by thousands of your fellow community banks.
ARMed and effective
True adjustable rate mortgage loans are hard to find these days. This is because homeowners insist on a fixed rate, at least for a start-up period, before they begin to adjust. You commercial lenders out there know the drill.
The product that is available is a known as a “hybrid ARM.” At least you, the buyer, can choose how long of a fixed-rate period you’re willing to accept prior to the bond becoming a floater. It can be as short as three years, and as long as ten. Be aware, however, that as the initial “reset” date approaches, the prepayment speeds tend to increase, sometimes dramatically. These also are generally priced at moderate premiums.
Many of you will recall that a CMO is a bond that has dedicated cash flows carved out of a generic batch of fixed-rate mortgages securities. The underwriters that create these “tranches” can also produce floating rate CMO’s. The benefit to you, the buyer, is that these usually come with very low premiums, and they tend to be very rate sensitive as they are tied to money-market rates like 30-day LIBOR and have no periodic rate caps.
What CMO floaters also have are very erratic principal cash flows. Their average lives can swing from literally less than a year, to over 20 years. Community banks who invest in these don’t seem to mind, since they are more interested in the fact that the bond will float than when they get their money back. Note that CMO floaters can have lifetime ceilings on their rates that as low at 6%.
About two-thirds of all SBA 7(a) originated by community banks each year are sold into the secondary market, usually at significant gains. The “poolers” will group them into homogenous sets and issue securities that are zero percent risk-weighted.
These pools have appeal to community banks because they are true floating rate securities. They are tied to prime (which is almost perfectly correlated to fed funds), and there are no rate caps, either periodic or lifetime. The risk metric known as “effective duration” is very low for 7(a) as a result. However, care needs to be exercised in managing the premia that come attached to these securities.
Community banks have around 12% of their portfolios in some type of adjustable-rate securities. Given that short-term rates (for 2 years and shorter) are at their highs since 2009, yields on all these options are beginning to be more attractive. If, in fact, the Federal Reserve does indeed orchestrate several more rate hikes this year, floaters stand a good chance to be among the best performers in your own investment portfolio.
Jim Reber is president and CEO of ICBA Securities, an institutional fixed income broker/dealer and can be reached at 800-422-6442 or firstname.lastname@example.org.
Loan Covenants – Are They Enforceable?
As we process SBA loan applications for our clients, we regularly encounter situations when the lender wishes to enter certain loan covenants into 7(a) loan applications transactions. Typically the covenants include debt-to-net-worth ratios, fixed- asset purchase limitations, debt-service coverage multiples and owners’ salary or distributions. While this practice is permissible, we discourage it for a couple of reasons, enforceability being one. For example, a borrower might be in violation of a bank covenant, but current on the SBA loan. The SBA is considered the largest risk taker in the transaction, by virtue of offering a 75-85% full faith and credit guaranty. As long as the borrower is making timely SBA loan payments, and is not in violation of the SBA loan authorization, bank loan covenants are not enforceable unless the lender is willing to cancel the SBA guaranty.
Prior to loan closing, bank and borrower must review the final SBA authorization in detail. If changes in content or closing date are needed, the SBA requires three business days to expedite any requests. The SBA will not process duplicate requests, nor expedite modifications if previous requests have been expedited for the same loan. Banks should request loan closing documents from the SBA at least two days before they’re needed (not two days prior to closing!). H&M is happy to process any required authorized modifications.