By now you have heard that the SBA released a new SOP (Standard Operating Procedure) document in May. The purpose of this email is to highlight a few of the more important changes to make you aware of them. Of course, anytime you have questions regarding these or other SBA issues, feel free to contact us.

-SBA has clarified the policies regarding debt refinancing. Formerly, the SOP stated that SBA guaranteed loan proceeds may not be used to refinance debt used to finance a loan purpose that would have been ineligible at the time it was originally made. SBA is clarifying this provision by adding language to explain that a lender may refinance debt originally used to finance a loan purpose that would have been ineligible at the time it was made, if the condition that would have made the loan ineligible no longer exists. SBA is also streamlining the requirements that the lender must take in order to ensure that SBA guaranteed loan proceeds are only used to refinance debt that was used for eligible purposes.

As refinance opportunities present themselves contact us to further discuss these requirements.

– SBA has updated the real property appraisal requirements to conform to changes recently made in the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP now has only two written report options for real and personal property appraisal assignments: Appraisal Report and Restricted Appraisal Report.  All 7(a) lenders will be required to obtain a current USPAP-compliant Appraisal Report, not a Restricted Appraisal Report, for all real property appraisals on loans over $250,000 secured by commercial realestate.

Be sure that your appraisers are aware of USPAP requirements and are preparing USPAP compliant Appraisal Reports.

  – SBA has updated the requirements for business appraisals. They have added to the list of qualified sources to perform a business appraisal and have changed the    business appraisal requirements for change of ownership transactions involving a Special Purpose Property. If an applicant business operates from a Special Purpose Property (for  example, car washes, hotels, gas stations with or without a convenience store, golf courses, medical facilities or bowling alleys), the going concern appraisal must be completed by a  Certified General Real Property Appraiser with experience appraising the specific business/property type.

Again, as these situations arise, we will help guide you through the specific requirements.

Per SBA regulations, 13 CFR 103.2, SBA may not do business with any individual or entity that is debarred under the SBA or Government-wide debarment regulations. In this regard, SBA is now requiring that Lenders check all of their referral agents, employees and bank management that have anything to do with SBA lending to be sure they have not been debarred from doing business with the SBA.

Below is a link that you can check for this purpose. Please let me know if you have any questions.

SBA Lending: Suspensions and Debarments

Don’t let this growing opportunity get past you! Let us know how we can help.

The secondary market continues to offer very attractive premiums for the sale of the guaranteed portion of SBA 7(a) loans. Below are some recent quotes including two “non-traditional” pricing scenarios. Anything other than Prime+ floating adjusted monthly or quarterly is considered non-traditional by the secondary market. However, these loans can be sold at a premium and should be offered when the competitive nature of a deal dictates. Worst case, the bank can elect to not sell and still book an earning asset with an SBA guarantee.

Loan Amount         Term                     Pricing                           Premium

$703,000                  25 years               P+2.75 adj. monthly            18.559%

$282,000                  10 years               P+2.75 adj. monthly            13.73%

$540,000                  25 years               P+1.90 adj. every 5yrs.       4.55%

$600,000                  25 years                6.00% fixed                          3.50%

Most loans for the purchase of business assets, i.e., real estate, equipment, an existing business, etc. require that the borrower provide some sort of cash equity injection or down payment. SBA is very particular in this regard and the amount and specific use of the equity injection will be clearly spelled out in the Loan Authorization.

Proof that the borrower has provided the correct amount of equity injection in a particular transaction must be documented to SBA standards or risk a repair or denial of the guarantee in the event of liquidation. The following should be collected prior to closing and kept in the borrower’s file:

-Proof that the equity injection was used for the stated purpose in the Loan Authorization. If the stated purpose is for the purchase of real estate for example then the money cannot be used to pay closing costs or any other purpose. If necessary we can ask SBA to change the stated use to fit particular circumstances, however this must be done prior to closing.

-Verify the cash injection by obtaining the following documentation (excerpt from the current SOP):

1. A copy of a check or wire transfer along with evidence that the check or wire was processed showing the funds were moved into the borrower’s account or escrow;

2. A copy of the statements of account for the account from which the funds are being withdrawn for each of the two most recent months prior to disbursement showing that the funds were available; and

3. A subsequent statement of the borrower’s account showing that the funds were deposited or a copy of an escrow settlement statement showing the use of the cash.

-In the event that a “gift letter” is used as the borrower’s source of a cash injection, the above documentation must be obtained for the person supplying the gift.

On January 1, 2014, SBA’s new SOP (Standard Operating Procedure) 50 10(F) became effective for all loans approved on or after that date. Below we have summarized some of the more important changes. Many of the new policies are still being “tweaked” and SBA is working on issuance of further guidance concerning interpretation and implementation. As always we will continue to keep you informed as information is made available. To all of our clients, you can rest assured that we have already implemented these new rules into our processes and the handling of your loans.

·         E-Tran System-All 7(a) loans are now required to be submitted for approval through SBA’s E-Tran system. This system has historically been used for only very small loans and by PLP lenders. E-Tran submission is now a requirement for all loans. Small Business Resource Associates has been approved to use this system for all of our client banks.

·         $350,000 and less loan amounts-SBA now requires that these smaller loans be credit scored through the E-Tran system. If the loan receives a passing score, it can be further processed through E-Tran. If the loans fails it can still be sent through the normal approval channels.  There are specific requirements that the lender’s credit analysis must contain for the file, which we will help you with on a case by case basis.

·         Spousal Pledge of Real Estate-A non-owner spouse will no longer be required to pledge collateral that is held solely in their name provided there was no transfer of assets within the last 6 months of the application date.

·         Other Collateral Requirements-Liens on stocks, bonds, CDs are no longer required.

·         Life Insurance-For loans over $350,000 lenders can use their own internal guidelines on when to require coverage if the loan is fully secured. If the loan is not fully secured life insurance is still required on principals of sole proprietorships, single member LLCs, or other businesses dependent on one owner’s active participation.

·         Application Forms-Forms 1919 and 1920 will take the place of Forms 4 and 4I. These forms are still being revised by SBA.

·         Business Financial Statements-must now be dated within 180 days of submission. Personal financials remain at 90 days.

·         Colson Report Form 1502-Must be submitted electronically.

·         DUNS Numbers-A Dun and Bradstreet number will be requested for all loans, however the SBA has removed this as a strict requirement. A DUNS Number can easily be obtained without cost by the borrower.

·         Franchise Requirements-If the lender disburses the proceeds without obtaining the necessary executed franchise documents, including any amendments and/or addendums, SBA may deny liability of guaranty.

·         Business Credit Reporting-required for all SBA loans

·         Affiliation and Personal Resource Rules-still under review and revision.

We were recently asked to get an idea of what premiums might be on fixed vs variable rate loans for a client so I thought I’d share that information with you. The numbers highlighted below represent the range of bids obtained for each particular scenario:

10 Year Term

• P+2.75% floating; Adjusted Quarterly 11.00%-12.375%
• P+2.75% floating; Adjusted Annually 6.00%-7.00%
• 6% Fixed Life of the loan 2.00%-4.00%

25 year Term

• P+2.75% floating; Adjusted Quarterly 15.00%-17.5%
• P+2.75% floating; Adjusted Annually 8.00%-10.00%
• 6% Fixed Life of the loan 0%-2.00%
• 6% Fixed for 5 years; P+2.75% adjusted every 5 years 3.50%-6.50%

SBA recently released loan data for fiscal 2013 revealing that the agency had experienced the third largest lending year in SBA history. SBA approved more than 54,000 loans representing $29.6 billion. This was the agency’s third highest year. The second highest year was in 2012 with $30.25 billion and 53,848 loans and the highest ever was in 2011 with $30.5 billion and 61,689 loans.

Over the past five years, SBA has supported $126 billion in lending to over 260,000 small businesses across the U.S.

Did you realize that almost all business loan requests are potential SBA 7(a) loans. Unless the company is not for profit or the request is investment or speculative in nature the loan usually can be made under the 7(a) program.

The best place to look for 7(a) opportunities is right in your own loan portfolio. Most conventional bank loans are made with short maturities, 3 or 5 year balloons so they will usually qualify for refinance. Refinancing under 7(a) benefits the borrower by giving them longer terms and cash out for improvements or working capital. The bank benefits by lowering its risk, mitigating collateral deficiencies, and earning substantial fee income by selling the guaranteed portion.

Another great place to look is failed banks that have been taken over by outside banks under loss share agreements. These agreements with the FDIC usually expire within 3 to 5 years so often times those banks will put pressure on borrowers to move their loan before that time is up. Most of these are good borrowers but due to market conditions may be underwater with their collateral. These make excellent candidates for 7(a) refinancing since the SBA will approve loans even when they are not fully collateralized. With the SBA guarantee, the refinancing bank mitigates the less than fully secured position creating a win win scenario.

The point to remember is, don’t wait for these loans to find you, they are right there in front of you waiting for you to find them!

Small Business Resource Associates recently facilitated an SBA 7(a) loan for a community bank in Georgia resulting in a record premium of 19.955%. The loan was for the purchase of commercial real estate in the amount of $780,000, 25 year term, floating at Prime + 2.75%.

The secondary market is at an all time high, are you getting your share of these record premiums?