Course Materials
SBA LENDING LEADERSHIP
Charles Green
Managing Director
Small Business Finance Institute
Atlanta, Georgia
[email protected]
404-406-3181
August 8 & 9, 2016
1
SBA LENDING LEADERSHIP MANAGING SBA LENDING* IN SYNC w/PUBLIC POLICY GOALS
PART 1
*Presentation assumes you’re reasonably proficient on SBA expectations re: borrower
eligibility, 4506‐T verification/review, credit memorandums, etc.
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SBA Leadership
Today’s Presentation Will Cover:
• Managing Choices: your bank decided to make
SBA loans—what did they get themselves in for?
• Managing Unique Risks: SBA loans enable you to
make loans otherwise avoided—now what?
• Fleshing out the context of guaranteed lending
opportunities vs. responsibilities.
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SBA Leadership
What’s your level of Participation?
•
•
•
•
PLP Lenders?
CLP Lenders?
GP Lenders?
7(a) program? 504 program? Both?
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2
SBA Leadership
Does Your Bank Sell Loans?
• Sell 7(a) loans in secondary mkt.?
• Sell 504 senior loans in secondary mkt.?
• Never sell loans?
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SBA Leadership
How Old is Your SBA Participation?
• 1980s? Lender of last resort? Three bank
declinations earned a direct SBA loan;
• 1990s? Exceptions to Equal Credit Opportunity
Act allowed SBA to collect demographic data;
• 2000s? Centralization, end of 7(a) subsidy, 40%
staff reduction.
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SBA Leadership
How Old is Your SBA Participation?
• March 1, 2009, SOP 50 10 5(A) became
effective, and May 1, 2015, SOP 50 10 5 (H)
became effective; 8 SOP updates in 7 years;
• Like all public policy, SBA evolves w/changes in
conditions & political consensus.
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MANAGING CHOICES LENDER PARTICIPATION
W/SBA IS A CHOICE
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4
SBA Leadership
PRIORITY CONFLICT?
Servicing ‐
Servicing ‐
Collections
Collections
Processing ‐
Processing ‐
Diligence
Diligence
Analysis ‐
Analysis ‐
U/W
U/W
Loan Origination
Loan Origination
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SBA Leadership
Recognize Priority Differences
• Lenders want to grow business book with more
loans and realize profitable operations;
• SBA charged with ensuring qualified loan risks &
enforcing guideline compliance.
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5
SBA Leadership
SBA Leaders Must Balance Both
• Responsibilities extend beyond the bank policy
to managing SBA program requirements;
• Recognition of SBA’s role and acceptance of
process to comply in spirit and letter of SOP;
• Harness team to live within program boundaries
for successful participation/bank rewards.
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SBA Leadership
No Guest Pass for Bad Decisions
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6
SBA Leadership
Client
Close
DD &
Doc
Prep
App
Board,
Record
File &
Collect
U/W
Decide
CIRCLE OF BUSINESS LENDING PROCESS w/PARTNER
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SBA Leadership
Why Does Your Bank Use SBA?
• Provide loans to clients beyond conventional
credit standards?
• CRA score enhancements?
• Lower credit exposure to high‐risk sector?
• Enhance revenues/profits w/loan sales?
• All of the above? Any other reasons?
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SBA Leadership
Are You a Prudent Lender?
• While SBA doesn’t define what a ‘prudent
lender’ is, SOP contains 20 references to term;
• SBA’s interest to emphasize ‘prudent lending’ is
probably rooted in several cases of gross lender
negligence.
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SBA Leadership
Are You a Prudent Lender?
• Dozens of SOP references remind lenders that
loans should be underwritten, approved, closed,
funded, serviced & administered with same
standards as applied to non‐guaranteed loans;
• Per OIG: “SBA is released from liability of the
guaranty… if lender …does not make, close,
service or liquidate loan in a prudent manner.”
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SBA Leadership
Critical Role for SBA Underwriter
• 7(a) underwriters wear 2 hats: on one hand,
prudently underwrite application comparatively
as with all commercial loans;
• On other, screen application w/SBA eligibility
guidelines & other SOP criteria;
• Challenge: balancing compliance w/‘Credit
Elsewhere’ rule & adhere to bank’s credit policy.
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SBA Leadership
SBA Credit Elsewhere Policy
• Applicant’s qualification for loan is subject to
screening by the “Credit Elsewhere Test.”
• Test determines if applicant has ability to obtain
some/all of loan from alternative sources w/o
causing undue hardship;
• Lender must assert that applicant is unable to
obtain loan on reasonable terms w/o guaranty.
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9
SBA Leadership
SBA Credit Elsewhere Policy
• And, that some/all loan is not available from
other resources of business/principals;
• Lender must substantiate factors that prevent
loan w/o SBA support & retain documented
explanation of factors in loan file;
• Lenders may use six factors to ensuring ‘credit
elsewhere’ tests are met.
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SBA Leadership
1 of 6 Factors Used to Justify C/E Test
• Loan needs longer maturity than policy permits;
• Loan exceeds LLL or policy regarding amount
loans to one customer; • Lender’s liquidity depends on selling
guaranteed loan in secondary market.

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SBA Leadership
1 of 6 Factors Used to Justify C/E Test
• Collateral doesn’t meet lender’s policy;
• Lender’s policy doesn’t allow loans to new
businesses or in applicant’s industry;
• WILD CARD: Any other factors relating to loan
that, in the lender’s opinion, cannot be
overcome except for the loan guaranty.
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SBA Leadership
Game Change: HB 2499
• As condition of raising 7(a) authorized lending in
FY 2015, two of these six tests were restricted;
• Lenders cannot rely solely on restrictions of LLL
or liquidity to justify compliance with “Credit
Elsewhere Rule.”
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SBA Leadership
Best Case: Policy Exception
• Three of six C/E exceptions cite bank credit
policy as a constraint to otherwise deny credit;
• Consistent, conscientious approval of these
loans “as exceptions” is fine‐‐unless majority of
your lending is SBA‐related;
• Over‐reliance on ‘policy exceptions’ is bad
practice.
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SBA Leadership
Worst Case: Policy Violation
• In rush to recruit, underwrite, approve and close
loans, there’s plenty of room for error;
• If repeatedly relying on ‘exceptions,’ approving
or closing SBA without reference to ‘policy
exception’ becomes ‘violation;’
• If you fund >50% of your loans with ‘exceptions’
is that exception or violation?
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12
SBA Leadership
Credit Policy vs. SBA Lending Policy
• Participating lenders are responsible to adhere
to their credit policy when U/W SBA loans;
• These practices draw more scrutiny now than
before;
• Best practice is to develop SBA‐specific terms
into current bank credit policy.
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SBA Leadership
Best Practice: SBA Policy Allowances
• Incorporate policy alternatives for different
businesses for whom you provide credit;
• Establish standard ‘screening’ for applications to
assure a consistent diversion to SBA program;
• Recognize policy constraints and demonstrate
compliant use of policy/program to build
successful business.
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SBA Leadership
Best Practice: SBA Policy Allowances
• SBA policy terms should address protocol
differences: eligibility, due diligence, structure,
documentation, process, servicing, & loan sales;
• Tighter policy definition also lowers risks of staff
errors & supervisory misinterpretation of
account mgt.
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QUESTIONS?
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MANAGING UNIQUE RISKS
COLLATERAL
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SBA Leadership
SBA Posture on Collateral:
• “Loan request is not to be declined solely on
basis of inadequate collateral. In fact, one of
primary reasons lenders use SBA‐guaranteed
program is for applicants that demonstrate
repayment ability but lack adequate collateral
to fully repay loan.”
• What does that mean?
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SBA Leadership
Collateral Overview:
• SBA requires that loans be secured to the extent
possible by the borrowing small business;
• Guaranty is no substitute for collateral, and
where under‐secured, lender expected to all
available equity in borrower/owner assets;
• Purchase money loans must get first priority lien
in subject asset.
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SBA Leadership
Collateral Overview:
• If borrower’s available collateral doesn’t meet
lender’s policy, it justifies ‘C/E’ rule compliance;
• Lenders may not unilaterally take collateral or
guarantees that do not equally benefit SBA;
• SBA does not allow ‘piggyback’ loans unless
there is a shared lien (pari passu) with SBA.
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SBA Leadership
Collateral Overview:
• SBA considers loan ‘fully secured’ when lender
has security interest in all fixed assets w/net
book value up to loan amount;
• Loans w/collateral shortfalls must take available
equity in personal RE, that may be limited to
150% value of equity;
• Personal RE <25% equity, not required.
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SBA Leadership
Real Estate Collateral
• RE secured loans >$250k must meet specific
appraisal requirements;
• If RE collateral appraisal is low, but >90% of
estimated value, lender may close w/difference
explained & risks offset;
• PLP lenders may similarly close <90% with
explanation & risks offset.
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SBA Leadership
Collateral in Authorization:
• Lender must fully describe assets to be used as
collateral in the Loan Authorization and specify
lien priority to be obtained;
• Failure to obtain agreed lien priority can be
justification to repair or cancel guaranty.
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MANAGING UNIQUE RISKS
</> $350,000
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SBA Leadership
Updated SOP 50 10 5(F)
• Changes/clarifications re loans <$350,000;
• For loans >$25,000 & <$350,000, lender must
obtain lien on fixed assets (unless value
<$25k) and may secure trading assets;
• Lenders follow own policy re life insurance.
SBA Leadership
Updated SOP 50 10 5(F)
• Changes re debt service coverage ratio (DSCR);
• Global DSCR for SLA loans (<$350,000)
requires projected/historic min. ratio of 1:1x;
• Loans in >$350,000 require projected/historic
DSCR minimum of 1:15x.
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SBA Leadership
SBA Steps Up Efforts
• “Smart system guarantee process” predictive
credit scoring combining C/B credit scores.
• SBA's total credit score intended to obtain
guaranty easier/less time‐intensive;
• Model is cost‐reducing and credit‐based.
SBA Leadership
What’s Up w/SLA Loan Underwriting?
• Subpart B, Chapter 4, Section I, Paragraph A,
Part 1(a) provides SLA loans to be initially
screened by SBA credit scoring;
• Applications scoring >140 eliminates lender
requirement to provide most financial analysis
so application may be uploaded via E‐Tran.
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SBA Leadership
What’s Up w/SLA Loan Underwriting?
• Applications scoring <140 may still be
submitted as standard 7a loan to LGPC, or
Express loan via E‐Tran;
• Specific information for applications is
described in Chapter 6, of this Subpart B.
SBA Leadership
What’s Up w/SLA Loan Underwriting?
• Applications scoring <140 may still be
submitted as standard 7a loan to LGPC, or
Be aware of primary Express loan via E‐Tran;
regulator’s view re • Specific information for applications is
small loan analysis
described in Chapter 6, of this Subpart B.
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SBA Leadership
Stipulated Credit Analysis
• Applicant (including Operating Company)
must be creditworthy & loans must be sound
as to reasonably assure repayment;
• Acceptable credit score satisfies lender
requirement to consider following:
SBA Leadership
Stipulated Credit Analysis
• Credit history of applicant (& OC if applicable),
its associates, and guarantors, including
historical performance as well as potential for
long term success (“credit”);
• Evaluation of strength of business (“capacity”).
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SBA Leadership
Stipulated Credit Analysis
• Past earnings, projected cash flow, and future
financial projections;
• Applicant’s ability to repay the loan with
business earnings;
• Note: Character determined through Form
1919 & SBA Form 912, if required.
SBA Leadership
Lender’s Responsibilities
• Credit memo should demonstrate reasonable
assurance of repayment and must include:
• √ Brief description of business history;
• √ Description of MGT. team, including length
of time under current management & depth
of experience industry.
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SBA Leadership
Lender’s Responsibilities
• √ Owner/Guarantor analysis, including PFS, as
lender treats similarly‐sized non‐SBA loans;
• √ Confirmation of Lender’s collection/
verification of business TRs and reconciliation
of applicant’s FS data w/TR.
SBA Leadership
Lender’s Responsibilities
• √ Receipt/analysis IRS Form 4506‐T required
prior to submitting application to SBA;
• √ Lender must determine that applicant’s
equity & pro‐forma debt‐to‐worth are
acceptable based on its credit policy for
similarly‐sized, non‐SBA loans;
• Footnote about the word “brief.”
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SBA Leadership
What’s the Big Picture?
• SBA takes “financial” risk off the table, if
lender will roll dice with 15‐25% exposure;
• Take credit memorandum prep seriously;
• SBA is cracking down on sloppy underwriting
and poor documentation.
QUESTIONS?
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MANAGING UNIQUE RISKS
AFFILIATES
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SBA Leadership
Affiliated Businesses
• Affiliation exists when one individual, entity or
third party controls (or has means to) another.
• SBA considers ownership, management,
previous relationships or contractual relations
when evaluating affiliations;
• Their examinations are more thorough with
franchises and gasoline sales contracts.
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SBA Leadership
Underwriting Must Consider Affiliates
• 7(a) eligibility must take affiliates into account
when determining annual revenues or
employee count;
• 504 eligibility must take affiliates into account
when determining net worth or 2 yr. avg. net
income;
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SBA Leadership
Underwriting Must Consider Affiliates
• When determining eligibility, maximum loans
and guarantee fees, affiliates must be viewed
collectively with subject business;
• BTW, re EPC/OC, if not affiliated, both must
qualify as ‘small;’
• Loans may not be extended to benefit ineligible
affiliated companies.
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SBA Leadership
Underwriting Must Consider Affiliates
• Underwriting should evaluate effect affiliates
may have on repayment ability of applicant;
• Global cash flow analysis must account for
impact on cash flow from/to affiliate business;
• Record? 17 affiliates to small business concern
spread—analysis proved it was eligible for SBA
financing.
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MANAGING UNIQUE RISKS
THIRD‐PARTY
AFFILIATIONS
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SBA Leadership
What Terms Create Affiliation? • Terms where other party sets net profits;
• Terms that require payment of excessive fees;
• Terms where other party controls employees,
including hiring or termination;
• Terms requiring applicant to deposit revenues
into an account controlled other party;
• Terms where other party controls billing.
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SBA Leadership
What Terms Create Affiliation? • Terms requiring sale of RE upon expiration or
breach of agreement;
– Requiring RE lease on reasonable terms for
agreement term remaining is acceptable;
• Terms where other party controls price to buy
assets upon agreement expiration/breach;
– ‘First right of refusal’ is allowed on reasonable terms.
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SBA Leadership
Transfer/Independence Terms
• Provisions requiring consent to transfer business
must include phrase “consent will not be
unreasonably withheld or delayed;”
• Under agreement, applicant must maintain an
independent contractor relationship w/other;
• Other party may not terminate RE lease unless
an uncured lease default has occurred.
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MANAGING UNIQUE RISKS
LOAN BROKERS
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SBA Leadership
Loan Brokers
• TPOs can be a valuable source of good leads &
active partner in creating opportunities;
• Some banks go into business w/TPOs on a
handshake & zero due diligence;
• Loan brokers are vendors too.
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SBA Leadership
Loan Brokers
• Like all service providers, bank should know
who they’re doing business with, their
competencies, and at what price;
• Background check/references are common for
most vendors, even if you’ve known them;
• Setting expectations in writing assures that they
will do business as you expect.
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SBA Leadership
Loan Brokers
• Meaning? What information are you expecting?
When does client get handed over? What
conditions trigger obligation to pay?
• What consent is needed to cover bank’s
communication w/3rd party about prospect?
• Cutting corners can only create problem for
bank, not to mention borrower.
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SBA Leadership
Loan Brokers—Best Practices
• Use written agreement that defines procedures,
protocols and practices;
• Once application accepted, bank should deal
directly with prospect, broker can be copied;
• Relationship s/b observed for inconsistencies,
contrived responses and fictitious content.
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SBA Leadership
SBA Has Had Issues…
• Storied past with loan broker problems;
• Maintains list of banned agents—submit their
deal and it’s dead;
• All parties paid to package or broker loan must
enter into Form 159 and disclose fees;
• Purposely ignoring non‐compliant borrower gets
lender in trouble too.
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SBA Leadership
Require Form 159
• Best practice is full transparency for everyone
borrower pays, even if applicability in question;
• SOP says lenders have obligation to report any
suspicions of fraudulent acts by brokers to OIG;
• Promote responsible practices and cultivate
trusted relationships among best TPOs.
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MANAGING UNIQUE RISKS
CITIZENSHIP
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SBA Leadership
Citizenship Status
• SOPs are fairly exact about requirements for
citizenship/immigration status, with lender
determination in the middle;
• Bank needs to hedge its own protection to
ensure staff compliance;
• Misrepresentations/failure to discover can lead
to guarantee repair/cancellation.
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SBA Leadership
Citizenship Status
• Build citizenship determination around
identification verification—establish protocols
to catch errors and omissions;
• Americans have to prove citizenship status to
vote, get food stamps and a driver’s licenses in
many states—why not SBA loans?
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SBA Leadership
Non‐Citizenship Eligibility?
• Be aware there are conditions where a non‐
citizen can get approved for SBA financing;
• Loans must be secured with unconditionally
certain full liquidation value of collateral;
• Read more in the SOP.
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QUESTIONS?
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SBA Leadership
In Summary:
• SBA lenders must justify performance within
guidelines established by public policy;
• SBA manages some risks w/higher degree of
attention than normal—lenders must conform;
• Tangible opportunities can be profitable if
lender recognize/comply w/responsibilities.
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Charles H. Green ● [email protected] ● blog: SBFI.org/Advice-On-Loan/
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SBA LENDING LEADERSHIP MANAGING SBA LENDING* IN SYNC w/PUBLIC POLICY GOALS
PART 2
*Presentation assumes you’re reasonably proficient on SBA expectations re: borrower
eligibility, 4506‐T verification/review, credit memorandums, etc.
2
1
SBA Leadership
Today’s Presentation Will Cover:
• SBA portion of ‘process’ and importance of Loan
Authorization & Form 1920;
• Adding paperwork—how to lower loan risks in
ways not required by SBA;
• Secondary mkt. for 7a & 504 loans offer income
& clients potential beyond general lending.
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MANAGING PROCESS
LOAN AUTHORIZATION
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2
SBA Leadership
Loan Authorization Boilerplate
• Loan authorization is detailed list of conditions
agreed by SBA & participating lender that must
be met to qualify for loan guaranty to lender.
• Boilerplate of master agreement may be
personalized by each lender, but must be
customized for each new loan.
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SBA Leadership
Loan Authorization Limits
• Authorization not a ‘loan agreement’ and
doesn’t include borrower as a party—strictly
between SBA and lender;
• Lenders must meet SBA requirements/policies;
• Should lender request loan guaranty to be
honored, they must demonstrate compliance
with all terms of authorization.
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3
SBA Leadership
Repayment Terms
• Lenders must not replace repayment language
contained in authorization, including terms
relating to initial interest rate adjustment;
• SBA provides all 7(a) options that are acceptable
to secondary market; Any specific deviations
must be approved by SBA counsel.
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MANAGING PROCESS
SBA FORM 1920
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4
SBA Leadership
SBA Form 1920
• Lender’s Application for Loan Guaranty provides
info re lender, loan terms, use of proceeds,
eligibility info & job creation/retention;
• Form 1920 is applicable to all 7(a) loan
programs and must be completed/submitted by
lenders to LGPC (retained by PLP lenders).
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SBA Leadership
Loan Terms‐Pages 1‐3
• Borrower/lender ID along with loan amount,
guaranty request, loan term and interest rate;
• Borrower demographics, nature of business,
location, industrial classification, and info if
previous SBA loan;
• Use of loan proceeds for requested guaranty.
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SBA Leadership
Loan Terms‐Pages 1‐3
• For change‐of‐ownership, details re sources/uses
of funds, breakout of purchase & valuation basis;
• Lenders must disclose qualifications of appraiser
& whether business broker was paid in
transaction.
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SBA Leadership
Eligibility Info: Size & Affiliation
• Confirm lender’s review of NAICS table, review
scope of borrower + affiliate business to
determine eligibility;
• Confirm lender’s review/submission of third
party agreements that may exist for franchise/
gasoline resell agreements.
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SBA Leadership
Eligibility Info: Associates
• Confirm lender’s receipt/review of applicant’s
form 1919;
• Confirm lender’s consideration of ‘credit
elsewhere’ rule;
• Confirm lender’s attention to who is required to
provide personal guarantees;
• Confirm lender’s attention to citizenship status.
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SBA Leadership
Eligibility Info: Type of Business
• Confirm lender’s attention to the nature of
business operation and whether it’s eligible for
program assistance;
• Additional questions to set forth compliance
with rules concerning eligible passive
companies, if applicable.
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SBA Leadership
Eligibility Info: Use of Proceeds
• Detailed series of questions intended to define
nature of transaction & confirm lender’s
understanding of eligibility;
• Establish transaction elements that may define
which program lender uses or specific program
requirements.
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SBA Leadership
Eligibility Info: Special Requirements • Detailed questions to determine that lender
complies with various restrictions concerning
several program options;
• Lender indicates recognition of limitations of
delegated authority, based on responses to
section questions.
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8
SBA Leadership
Eligibility Info: Conflicts/Ethics
• Lender must represent that their involvement
with applicant does not present a conflict/
appearance of conflict.
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SBA Leadership
C‐E‐R‐T‐I‐F‐I‐C‐A‐T‐I‐O‐N:
• Two paragraphs bind signer/lender to every
representation made on document concerning
applicant, transaction & procedure;
• Lender acknowledges that misrepresented
eligibility will result in guaranty denial;
• Lender specifically certifies ‘credit elsewhere
rule,’ eligible applicant & absence of conflict.
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SBA Leadership
Why So Many Details?
• Commercial lending is complicated. Add federal
agency providing credit enhancement within
scope of dozens of regulations 000s pages of
procedures…. • Onus is on lender to sort program requirements,
not submit half‐baked application that may be
declined due to overlooked details.
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SBA Leadership
But Remember…
• You sign it, you own it.
• Signature of authorized bank representative is
same as company affirming the ‘whole truth;’
• Good idea to establish check and balances
ahead of putting ink on paper.
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QUESTIONS?
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MANAGING PROCESS
COVENANTS
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SBA Leadership
Loan Agreement
• SBA does not require lender to use ‘loan
agreement,’ rather requires closing loan in
accordance w/authorization terms & to obtain
valid, enforceable documents.
• Borrowers are required to provide specific
certifications in writing.
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SBA Leadership
Loan Agreement
• Sample loan agreement included in boilerplate
(Appendix D) provides acknowledgment of SBA
authorization by borrower;
• Appendix D also includes sample ‘Borrower
Certification,’ which is specifies SBA’s required
list of borrower representations.
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SBA Leadership
Borrower Certification
• Borrower is required to represent that they will
comply w/certain legal obligations of assistance
recipients;
• Agree to covenants to provide future financial
information, occupy financed property and pay
their taxes.
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SBA Leadership
Loan Covenants
• SBA tolerant of most terms to manage borrower,
except w/punitive fees & interest rate flexibility;
• Covenants are more difficult to impose and
enforce on smaller borrowers;
• Lack of stronger financial reporting means F/S
sometimes lags end of period for 6‐8 months.
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SBA Leadership
Loan Covenants
• Nonetheless, covenants imposing financial
restrictions are important to set tone of lender
expectations & rights under loan default;
• Have SBA counsel review your docs?
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SBA Leadership
SBA Suggested Loan Covenants
• SBA suggests covenants to ensure funds used
for eligible purpose, negative pledges’ to not
distribute too many corporate assets, change
ownership, transfer or acquire assets/locations;
• Prudent lender’s restrict capital distributions,
investments & owner comp detrimental to
business finances;
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SBA Leadership
Common Sense Loan Covenants
• Other suggested covenants could restrict
borrower from making or repaying S/H loans
w/o lender consent;
• Lender can set $ limit on capital expenses,
‘consultants’ and specific liquidity/leverage
limits as well.
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SBA Leadership
Common Sense Loan Covenants
• Other covenants are useful to convey
restrictions in specific lending situations;
• Franchise agreement terms, modifications or
renewal terms;
• Construction loan terms are urgently important
to ensure lender’s collateral or loan repayment
is not impaled through failed project.
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SBA Leadership
Construction Loan Covenants
• Lender should require build contract to include
requirement of lender approval to contract
changes, draw retainage, and specific builder
insurance requirements;
• Lenders should require borrower equity & loan
proceeds be managed by lender fund control
throughout construction.
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MANAGING PROCESS
SELF‐PRESERVATION
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SBA Leadership
SOP vs. Lenders Self Preservation
• SBA loan programs represent a public policy
designed to encourage private banks to lend
more to small business sector;
• Specific guidelines, previously assumed to be
covered w/banker’s common sense, are now
incorporated in SOP to discourage bad judgment
exhibited by some participating lenders in past.
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SBA Leadership
SOP vs. Lenders Self Preservation
• Q: Why should SBA set a floor to DSCR, or
define maximum leverage in programs?
• A: Because the absence of minimum standards
led to expensive program abuses;
• Before deciding that SBA’s maximum allowances
should be your policy, decide first what’s in best
interest of bank and its shareholders.
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SBA Leadership
Lender Ethics
• Ethics is topic most people acknowledge as
important, but don’t want to dwell on;
• In commercial lending, ethics can be in eye
of beholder, and bad behavior is sometimes
ignored/tolerated.
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SBA Leadership
Lender Ethics
• Individual ethics shaped to be consistent
with organization’s culture;
• If staff sees managers make questionable
decisions, tolerate dishonest acts, or skirt
rules, they are inclined to do same.
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SBA Leadership
Lender Ethics
• Historically, bankers held to higher ethical
standard due to fiduciary responsibilities
with other parts of economy;
• Institutions w/FDIC insurance or SBA
lending agreement answer to a higher
authority.
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SBA Leadership
Lender Ethics
• Best practice: conscientiously conduct
personal & company affairs above reproach;
• That includes calling out bad behavior by
others, declining loan applications from tax
cheats, and abusive loan brokers.
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SBA Leadership
SBA Office of the Inspector General
• In addition to common sense, responsibility to
bank, and good ethics, plenty of good reasons
to adhere to spirit & letter of SOP;
• OIG is SBA watchdog that investigates &
prosecutes lender/borrower violations of trust;
• Heard of False Claims Act?
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SBA Leadership
SBA Office of the Inspector General
• Congress amended FCA to include inappropriate
claims for gov’t loan guarantee reimbursement;
• Participating lenders that flagrantly violate SBA
guidelines may face prosecution in addition to
loss of guarantee.
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QUESTIONS?
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MANAGING INVESTMENTS
7(a) LOAN SALES
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SBA Leadership
What’s SBA 7(a) Secondary Market?
• Secondary market is where SBA 7(a) lenders can
sell guaranteed interests in loans to investors;
• Lenders usually receive a premium over par, as
well as a servicing income for life of loan;
• Guaranteed portion of SBA 7(a) loans are
unconditionally guaranteed by SBA, therefore
the federal government.
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SBA Leadership
What’s SBA 7(a) Secondary Market?
• To protect participants & monitor process, SBA
appoints single transfer agent to manage flow of
sales/servicing between lenders and investors;
• Fiscal & Transfer Agent (FTA) for the 7(a)
program is currently Colson Services;
• Settlement docs, purchase proceeds to lenders
and P&I pyts. to investors clear through Colson.
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SBA Leadership
Why Do Investors Buy Loans?
• Unconditional federal guarantee of 7(a) loans is
financial equivalent of a U.S. Treasury bond;
• Majority of 7(a) loans/pools adjust w/ Prime
Rate, significantly reducing interest rate risk;
• Scheduled P&I pyts. pass‐through monthly or
quarterly loan payments to investors.
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SBA Leadership
Why Do Investors Buy Loans?
• Resultant cash flow creates opportunities for
regular reinvestment/compounding;
• SBA 7(a)‐guaranteed asset pools possess low
risk weighting for financial institutions: 0%;
• Portfolio P&I pyts. w/single disbursement and
detailed statement for each loan/pool.
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SBA Leadership
Why Do Investors Buy Loans?
• SBA loan/pool certificates generally pledgeable
as collateral for Public Funds, Fed, FHLB
advances, and TT&L accounts;
• Investing in 7(a) loans is considered CRA‐
positive for banks;
• SBA loans/pools historically have provided yields
that outperform similar ST & LT investments.
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SBA Leadership
What’s a Loan Pool?
• ‘Pool Assemblers’ are licensed by SBA to form
pools with guaranteed loans;
• Pool Assemblers purchase individual loans from
lenders & group them into pools;
• A large majority of loans sold in the secondary
market are eventually pooled.
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SBA Leadership
What’s Pooled Security?
• Guaranteed portion is considered a loan, but
pool is considered a security, with cusip number
& ability to settle through Depository Trust
Company (DTC), increasing its liquidity;
• For most investors, holding pools is more
efficient and cost‐effective than owning
individual loans.
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SBA Leadership
Best Loan Structure to Sell Loans?
• Most common loan maturities sold are 25 years,
followed by 10 years;
• Most prominent interest rate adjustment
favored by investors is quarterly reset of Prime
Rate (monthly Prime reset is second);
• Libor is infrequently used by 7(a) lenders;
• LG. loans, lower premiums due to investor risk.
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SBA Leadership
Who/Why Investor Community
• Assemblers are largest buyer of 7(a) loans;
• Currently 13 SBA‐approved pool assemblers, all
broker dealers;
• Assemblers buy guaranteed loans to form SBA
pools, which are sold to institutional investors.
• Banks/credit unions purchase guaranteed loan
in secondary market as well.
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SBA Leadership
Several 7(a) Loan Sale Offers
• Full Premium w/1% Servicing Right:
• Most common method of selling 7(a)
guaranteed loan portions;
• Accounting rules prevent a bank from getting
‘True Sale’ treatment guaranteed loan if
servicing strip is greater than 1%.
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SBA Leadership
Several 7(a) Loan Sale Offers
• Par Sale:
• Sells guaranteed portion at par (100% face
value) while receiving a very large servicing
strip, in lieu of premium income;
• Accounting rules prevent banks from using this
method if they wish to use ‘True Sale’
accounting.
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SBA Leadership
Several 7(a) Loan Sale Offers
• 110 Sale:
• Limits sale price to 110 (110% of par) while
receiving a larger servicing strip;
• Lender avoids sharing ½ premium over 110
w/SBA, in exchange for larger svc. income;
• Like Par Sale, banks do not get ‘True Sale’
treatment for loans if using this bid method.
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SBA Leadership
Soliciting 7(a) Loan Sale Bids
• Key to getting best bid is to solicit as many bid
participants as possible;
• Most loan sellers use “Secondary Market
Brokers’ Standardized Bid Sheet,” found on
Colson’s website;
• When completed, e‐mail to potential bidders
with a deadline to respond.
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SBA Leadership
Soliciting 7(a) Loan Sale Bids
• When selling lender gets all bids back, they
choose winning bidder of each loan;
• If one bid stands out as excessive, good idea to
verify that bidder didn’t make an error;
• Never good idea to take advantage of bidder’s
calculation error‐‐buyer may decide not to bid
on your future loans, possibly limiting results.
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SBA Leadership
Soliciting 7(a) Loan Sale Bids
• After confirming loan sale, seller sends out
winning bid, plus “cover” bid (second highest
bid) to their list of bidders;
• Due to otherwise lack of transparency in
secondary market, considered proper etiquette
to reveal winning/cover bids to all participants.
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SBA Leadership
Settlement Docs/Settling Sale
• Loan sales into secondary market require an
SBA Form 1086 aka ‘Secondary Participation
Guaranty Agreement’ be executed by lender
and investor;
• Form is available on Colson Services website
www.colsonservices.com.
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SBA Leadership
Terms
Conventional SBA‐Hold
SBA‐Sold
Loan Amount (@6.25%)
$1,000,000
$1,000,000
$250,000
Sale Premium—10%
n /a
n/a
$75,000
Loan Fee / Servicing Fee
$10,000
n/a
$594
First year’s Interest
$61,323
$62,014
$15,504
Cost of Funds*
‐$10,000
‐$10,000
‐$2,500
ALLL*
‐$12,500
‐$3,125
‐$3,125
Net 1st Yr. Income**
$39,823
$48,889
$17,972
Rate of Return*
3.98%
4.89%
7.19%
* Assumes 1% cost of funds & 1.25% ALLL contribution.
** Assumes loan fee / premium contributes 1/10 sum to 1st yr. income.
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SBA Leadership
Terms
SBA‐Hold
SBA‐Sold
Yr. 2 Net Income / ROR
$51,083 / 5.20%
$20,864 / 8.49%
Cumulative Earning‐Yr. 2
$99,972
$38,837
Yr. 3 Net Income / ROR
$50,092 / 5.19%
$20,617 / 8.55%
Cumulative Earning‐Yr. 3
$150,064
$59,453
Yr. 4 Net Income / ROR
$49,037 / 5.19%
$20,353 / 8.61%
Cumulative Earning‐Yr. 4
$199,101
$79,806
Yr. 5 Net Income / ROR
$47,914 / 5.18%
$20,072 / 8.68%
Cumulative Earning‐Yr. 5
$247,014
$99,878
* Assumes 1% cost of funds
** Assumes loan fee / premium contributes 1/10 sum to 1st yr. income.
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SBA Leadership
SBA‐Hold
SBA‐Sold
Yr. 2 Net Income / ROR
Terms
$51,083 / 5.20%
$20,864 / 8.49%
Cumulative Earning‐Yr. 2
$99,972
$38,837
Yr. 3 Net Income / ROR
$50,092 / 5.19%
$20,617 / 8.55%
Cumulative Earning‐Yr. 3
$150,064
$59,453
Yr. 4 Net Income / ROR
$49,037 / 5.19%
$20,353 / 8.61%
Cumulative Earning‐Yr. 4
$199,101
$79,806
Yr. 5 Net Income / ROR
$47,914 / 5.18%
$20,072 / 8.68%
Cumulative Earning‐Yr. 5
$247,014
$99,878
SBA‐Sold: Cash
$98,837
$111,953
$124,806
$137,378
* Assumes 1% cost of funds
** Assumes loan fee / premium contributes 1/10 sum to 1st yr. income.
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SBA Leadership
Terms
SBA‐Hold
SBA‐Sold
Yr. 2 Net Income / ROR
$51,083 / 5.20%
$20,864 / 8.49%
Cumulative Earning‐Yr. 2
$99,972
$38,837
Yr. 3 Net Income / ROR
$50,092 / 5.19%
$20,617 / 8.55%
Cumulative Earning‐Yr. 3
$150,064
$59,453
Yr. 4 Net Income / ROR
$49,037 / 5.19%
$20,353 / 8.61%
Cumulative Earning‐Yr. 4
$199,101
$79,806
Yr. 5 Net Income / ROR
$47,914 / 5.18%
$20,072 / 8.68%
Cumulative Earning‐Yr. 5
$247,014
$99,878
Cum. Earnings‐Yr. 5 x 4
SBA‐Sold: Cash
$98,837
$111,953
$124,806
$137,378
$549,512
* Assumes 1% cost of funds
** Assumes loan fee / premium contributes 1/10 sum to 1st yr. income.
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MANAGING INVESTMENTS
504 FIRST MTG. LOAN SALES
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SBA Leadership
Interim Loans
• Interim loans present challenge to banks due to
high advance rate.
• Interim loan term range from 60+/‐ days to two
years for ground‐up construction;
• SBA won’t start debenture funding until major
construction completed & proceeds disbursed;
• Interim loan may be funded by same first lien
lender, but often funded by a third party;
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SBA Leadership
Think Unconventionally
• There are numerous third party alternatives for
any/all portions of the financing necessary to
complete a 504 transaction, including:
• Funding a fully‐disbursed interim loan;
• Funding a construction interim loan subordinate
to lead lender’s first mortgage.
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SBA Leadership
Think Unconventionally
• Funding both first & interim loans involved with
lead lender funding first at completion of
construction;
• Participation of first and/or second, during
construction or beyond;
• Co‐originating the first mortgage;
• Whole loan sales with retained servicing.
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SBA Leadership
Outsource or Partnering
• Lender can outsource/partner w/bank, other
financial institution, or even non‐bank lender;
• Typical outsourcing example is lead lender
funding first mortgage & work w/third‐party to
fund interim second;
• Partnering is most often utilized when lead
lender wants to remain the face to borrower.
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SBA Leadership
Outsource or Partnering
• Loan docs are typically drawn w/lead lender’s
name, & loan typically serviced by lead lender;
• Partnering is usually deeper involvement than a
referral, i.e. participation or co‐origination;
• Another example is for lead bank to utilize third
party’s construction management expertise.
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SBA Leadership
Outsource or Partnering
• Partner lender works behind scenes, but
heavily involved in U/W, conditions, docs, fund
control, svc. decisions, & if required, liquidation;
• Outsource /partner lenders will charge more
than lead lender for riskiest portion of deal;
• Fees/rates are commensurate w/risk & higher
for construction projects than full‐disbursement
purchase.
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SBA Leadership
Referral vs. Wholesale
• Some lenders, i.e. Zions & Avana, accept loan
referrals;
• ‘Referral’ is where lender refers/hands off loan
applicant to the loan buyer;
• Referring entity assists w/packaging & applicant
communication, but normally doesn’t provide
credit memo or facilitate CDC/SBA approval.
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SBA Leadership
Referral vs. Wholesale
• Bank acts as a broker, which may have less value
to borrower than the lender;
• This ‘light touch’ option is for banks that decide
not to use resources for 504 funding;
• Banks can earn 1‐3% referral fee, not premium;
• Secondary buyers accept pkgs. from banks,
CDC’s & mortgage brokers, etc.
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SBA Leadership
Referral vs. Wholesale
• ‘Wholesale buyers ’ i.e. Morgan Stanley & 504
Fund, don’t accept referral transactions;
• Sellers must complete virtually all transaction
work necessary to fund loan themselves;
• Sellers assist w/process, including loan
structuring, issuance of letter of interest,
CDC/SBA approval & funding interim loan.
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SBA Leadership
Referral vs. Wholesale
• For additional involvement, sellers benefit from
loan premium vs. referral fee, which can be
substantially higher value;
• Loan sellers also benefit from direct relationship
maintained w/borrower over broker‐only.
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SBA Leadership
Loan Sale Options
• Many options to sell 504 first mtg. production;
• Some require no funding by selling lender;
• Options usually fall into one of four categories:
– Direct funding by buyer w/docs in buyer’s name;
– Table‐funding by buyer w/docs in seller’s name;
– Funding by seller w/subsequent sale to loan buyer;
– Participation of minor/major portion w/loan buyer.
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SBA Leadership
Loan Sale Options
• Loan sale option depends on seller’s preference
whether to remain face to client, bank policies,
risk tolerance & B/S capacity;
• There’s an option for any situation.
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QUESTIONS?
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MANAGING INVESTMENTS
HUMAN RESOURCES
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SBA Leadership
Challenge the Trash Talk
• SBA lending may still require fighting the myths:
– If loan is guaranteed, everybody qualifies;
– SBA will bring IRS/government into my company;
– Too much paperwork & bureaucracy, too slow;
– Government has no business guaranteeing loans;
• Prepare your staff to respond to these questions
succinctly & in unison.
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SBA Leadership
Use Advantages to Your Advantage
• Be prepared to compete with conventional
competition with advantages & benefits of SBA
products;
• Both 7(a) & 504 provide lender with option to
expand credit policies, portfolio concentration &
leverage, which if done, should be advertised.
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SBA Leadership
Stop Complaining about SBA
• It’s hard to sell appeal of SBA (or your bank) if
BDOs complain about process, program or work;
• SBA lending is bank’s choice, not mandate—
embrace it or get out of it;
• Train staff regularly on program guidelines to
ensure they can navigate products accurately &
easily.
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SBA Leadership
Preferences Have Advantages
• Be preferred—PLP lenders get competitive
advantages earned with participation &
demonstrated competence;
• Making commitment to using program offers
delegated authority on loan approval &
servicing actions—enhances participation;
• Turning deals faster is on You.
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SBA Leadership
Be a Better Lender
• Average bank loan takes 90 days to approve—
that’s a culture problem you can change;
• Creating an efficient application gathering, u/w
grid, approval‐due diligence‐closing process CAN
be done, if determined leader takes it on;
• Staff buy‐in will require empowering them
training, authority & motivation.
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SBA Leadership
Embrace Technology
• Off‐the‐shelf technology can remove weeks out
application processing, & improve underwriting,
security, compliance & administration.;
• Make it easy for borrower’s to apply & abandon
1980 tools used to make credit decisions;
• Review processes top‐to‐bottom, removing
redundancies & outdated burdens.
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SBA Leadership
Target Prospects You Want
• Instead of catering to whoever asks, decide who
you want to be customer and go to them;
• Look for underserved markets, capitalize on
specialized expertise, or regional advantages;
• SBA enhances foray into franchise lending,
micro‐companies & single purpose property
loans.
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SBA Leadership
Don’t Go Crazy
• Every deal can’t be fit into an SBA guarantee—
and shouldn’t;
• Mismatching solution loan with financing
request is booking a problem loan.
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QUESTIONS?
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SBA Leadership
In Summary
• Process must include attention to loan
authorization & obligations in form 1920;
• Splurge! w/unilateral loan agreement/covenants
to lower risks not required by SBA;
• Secondary mkt. sales open options for income &
client outside your business plan‐consider it;
• Go forth and be a profitable/compliant lender.
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Charles H. Green ● [email protected] ● blog: SBFI.org/Advice-On-Loan/
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