Presenting a live 90-minute webinar with interactive Q&A SBA Lending: Documenting, Closing and Servicing 7(a) and CDC/504 Loans Navigating SBA Approval and Authorization Process, Preserving the Loan Guaranty and Security Interest THURSDAY, SEPTEMBER 18, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: William Craig Brown, Shareholder, Engel Hairston & Johanson , Birmingham, Ala. Heather E. Ward, Engel Hairston & Johanson , Birmingham, Ala. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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DOCUMENTING, CLOSING AND SERVICING S B A 5 0 4 A N D 7 ( A ) L O A N S
OVERVIEW • Handout material available at www.EHJlaw.com • Brief review of 504 and 7(a) • Hot Topics • Documentation • Liquidation and Preservation of Collateral – prior seminar material available at www.EHJlaw.com 5
LENDING PROGRAMS THE 504 LOAN AND THE 7(A) LOAN 6
THE SMALL BUSINESS ADMINISTRATION Striving to help start, build, and grow businesses in order to create jobs and stimulate the economy • SBA lending assistance provides benefits to borrowers by making funds available and assisting with long-term financing. • Borrowers can be eligible for up to $5 million in SBA- backed financing. 7
LENDING PROGRAMS The 504 Loan The 7(a) Loan • Loan made wholly by the • SBA uses a Certified lender who submits Development Company application to SBA for (CDC) as a lender partner approval of the SBA to actually finance the loan guarantee against lender’s secured by a 100 percent deficiency in the event of SBA-guaranteed debenture default. for up to 40% of the total • SBA will collect a guaranty project financing. fee on the guaranteed portion of the loan. • Benefit borrowers because of the long-term fixed rates • Collateral may include personal assets if business and typically lower equity assets do not fully secure requirements. the loan. 8
HOT TOPICS PERENNIAL PROBLEMS THAT CAN CAUSE YOU PAIN • 1. Screen-outs at approval • 2. Verification of Equity • 3. Evidencing Use of Proceeds • 4. Failing to follow the Authorization • 5. Tax Transcripts • 6. Life Insurance • 7. Landlord’s and Leases • 8. Secondary Market Sales 9
SCREEN-OUTS A. Eligibility Issues: 1) Be a for-profit business, 2) Meet SBA size requirements, 3) Show good character, credit, management, and ability to repay, and 4) Must be an eligible type of business (easier to see what is NOT eligible, SOP 50 10 (5)(F) listing of ineligible) 10
SCREEN-OUTS B. FRANCHISE ELIGIBILITY 1. SBA will determine if the business is eligible on the basis of whether the small business applicant constitutes an affiliate of the franchise. 2. Affiliate of Franchise unacceptable control provision 3. List of franchise agreements (the “Registry” www.franchiseregistry.com ) that have been approved for size/affiliation/control issues. 11
SCREEN-OUTS C. INCOMPLETE APPLICATIONS 7(a) Loans 504 Loans • Borrower’s Information • SBA Form 1244 Form (SBA Form 1919) • Statement of Personal • Lender’s Application History (SBA Form 912) Form (SBA Form 1920) • Lender’s Credit Memo • Documents required based on condition of the Loan • Statement of Personal History (SBA Form 912) 12
VERIFICATION OF EQUITY INJECTION (SOP 50 57, PG. 153-155) Lenders are required to verify the borrower’s equity injection before disbursing loan proceeds. 1) The Source a) Gifts b) Seller Note or other financing c) Land or value of non-cash assets d) Cash 2) The Existence a) Gift Letter or affidavit b) Seller Note c) Bank statements (at least 2-months) 13
VERIFICATION OF EQUITY INJECTION (SOP 50 57, PG. 153-155) Credible EVIDENCE of Cash Injection: 1. Documentation showing check or wire transfer processed or funds deposited into account on behalf of Borrower prior to initial disbursement 2. (e.g. fully executed settlement statement or bank account statement showing deposit of funds) NOT Credible Evidence of Cash Injection: 1. Promissory Note, gift letter or financial statement without corroborating documentation 14
VERIFICATION OF EQUITY INJECTION (SOP 50 57, PG. 153-155) Credible SOURCE of Cash Injection: 1. Gift letter from an identified source showing amount and date of gift and NO OBLIGATION to repay…… 2. Corroborating evidence the gift was actually made such as bank statement before the date of the gift and bank statement dated after the date of the gift 15
EVIDENCING USE OF PROCEEDS • Acquire land and/or purchase, construct or renovate buildings • Improve a site (e.g. grading, streets, parking, landscaping), up to 5% for community improvements • Acquire and install fixed assets such a capital equipment or heavy machinery • Acquire and install fixed assets such a capital equipment or heavy machinery • Purchase Inventory* • Supplies* • Raw Materials* • Working Capital* • Refinance* • Business Acquisition* * See Chart on page 14 of accompanying handout 16
EVIDENCING USE OF PROCEEDS Certifications: • SBA 1050 Settlement Sheet • “At time of disbursement, Lender and Borrower certify…loan funds used or will be used….in accordance with the Authorization.” • SBA Form 2288 Interim Lender Certification • “ Best of your information, knowledge and belief, …..disbursed in accordance with the Authorization .” 17
EVIDENCING USE OF PROCEEDS (SOP 50 10(5)(F), PG. 209 AND SOP 50 57, PG. 152) No Yes • Affidavit alone; • “Paid” invoice with cancelled checks or • Bank statement bank statements showing only check showing cleared; number and amount; • Receipts; • Purchase order with no proof of payment; • Evidence of electronic funds transfer to • Invoices not marked vendor; “paid” • Joint payee checks 18
FAILING TO FOLLOW AUTHORIZATION Roadmap to the Transaction • Borrower entity and structure • Loan amounts • Use of funds • Maturity and Repayment Provisions • Collateral required and lien positions • Insurance requirements • Occupancy Requirements • Other Documentation Requirements • Tax transcripts • Organizational documentation 19
FAILING TO FOLLOW AUTHORIZATION • Requirement to close in accordance with the Authorization • Modify the Authorization • All changes prior to closing • 327 Action submitted to • 7aLoanMod@sba.gov • Sacramento504Servicing@sba.gov • After closing • Unilateral Action Matrix • SBA Notice and Approval • SBA Notice but No Approval • Neither Notice or Approval 20
FAILING TO FOLLOW AUTHORIZATION Certifications: • SBA 1050 Settlement Sheet • “At time of disbursement, Lender and Borrower certify…loan funds used or will be used….in accordance with the Authorization .” • Create a basis for SBA Denial of Guaranty • SBA Form 2287 Third Party Lender Agreement • Loan amount consistent with Authorization • CDC rely on accurate information provided • Agree to comply with all SBA requirements governing 504 Loan 21
TAX TRANSCRIPTS 504 7(a) • Within 10 days of • Prior to submission (Non- PLP) or prior to first receipt of Authorization disbursement (PLP) submit CDC submits Form Form 4506-T to IRS; 4506-T to IRS; • Last 3 years of operation • Last 2 years unless 7(a) unless start-up; size standard used, • No response in 10 days then 3 years may close but must • Compare data; resubmit; compare, and • Resolve differences resolve differences 22
LIFE INSURANCE • “ With respect to collateral taken, Lenders must use commercially reasonable and prudent practices to identify collateral ”….conforming to same policies for similar non-SBA commercial loans. (SOP 50 10 (5)(F), Subpart B, Chp. 3.II.A. General Requirements) • Not specific SBA collateral requirement • Collateral Assignment; Not beneficiary • Life insurance specific form and specific requirements; • Acknowledgment of assignment by Home Office prior to Disbursement 23
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