The Lender's Advantage - November 2013
SBA Eliminates Fees for Loans Under $150K
Good news for entrepreneurs using SBA financing to purchase or grow a small business. Effective October 1, 2013, the SBA waived all fees paid by the borrowers for the guaranteed portion of 7(a) loans of $150,000 or less. Previously, borrowers utilizing the SBA guarantee through participating lenders would pay up to two percent of the guaranteed portion on these loans, which would commonly cost a small business owner up to $2,550 in fees.
However, if two or more SBA guaranteed loans are approved to the same borrower within 90 days of each other, the guaranty fee is determined based on the aggregate amount of the loans. Thus, if the total amount of multiple loans approved within 90 days is greater than $150,000, the normal fees will apply. Lenders are not permitted to split loans for the purpose of avoiding fees for their small business owners.
Participating lenders will also see a break with this change; the SBA will eliminate the yearly servicing fee paid the lender each month on loans $150,000 or less, where they previously paid 0.55 percent on the outstanding guaranteed portion of the loan.
In Fiscal 2013 there were 116 SBA guaranteed loans approved to West Virginia small businesses in the amount of $150,000 or less, representing 73 percent of the total loan approvals in the Mountain State.
For 7(a) loans greater than $150,000 approved in FY2014:
- The yearly fee will be 0.52 percent (52 basis points) of the guaranteed portion of the outstanding balance of the loan. Lenders will need to manually adjust this fee in the current Authorization wizard.
The upfront guaranty fee will continue to depend on the loan amount and the maturity of the loan.
For loans with a maturity that exceeds 12 months, the applicable guaranty fees remain:
- For loans $150,001 to $700,000: 3% of the guaranteed portion
- For loans of $700,001 to $5,000,000: 3.5% of the guaranteed portion up to $1,000,000 PLUS 3.75% of the guaranteed portion over $1,000,000
- For loans with a maturity of 12 months or less that are over $150,000, the guaranty fee remains 0.25% of the guaranteed portion
- For loans with a maturity that exceeds 12 months, the applicable guaranty fees remain:
- For guidance on when these fees are due, see SOP 50 10 5(E), Subpart B, Paragraph V and VI.
For 7(a) loans in the amount of $150,000 or less approved in FY2014:
- Both the yearly fee and the upfront guaranty fee will be zero! As the fees charged to the lenders will be zero, lenders may not charge a guaranty fee to the borrower in connection with these loans. Lenders will need to manually adjust these fees in the current Authorization wizard.
- If two or more SBA-guaranteed loans are approved within 90 days of each other, the guaranty fee is determined based on the aggregate amount of the loans. Thus, if the total amount of multiple loans approved within 90 days is greater than $150,000, the normal fees will apply.
New SOP 50 10 5(F) Brings Big Changes to SBA Loan Program Requirements
by Ethan W. Smith, Esquire, as taken from Starfield and Smith, PC newslettee
On September 25, 2013, SBA released SOP 50 10 5(F) to the SBA lending community. This SOP will become effective on January 1, 2014 and contains several significant changes to SBA’s requirements in connection with its loan programs. Many of the revisions reflect a continuation of SBA’s stated goals to streamline, standardize and simplify its loan program requirements and alter many long-standing program requirements. A brief summary of the more significant changes follows:
- All loans under $350,000 will be underwritten and processed utilizing the criteria for Small Loan Advantage (‘SLA’) loans;
- The application forms (SBA Forms 4 and 4i) will be replaced by SBA Forms 1919 and 1920SX;
- SBA will provide eligibility reviews for franchises not on the franchise registry for PLP lenders
- PLP lenders will be authorized to clear minor 912 issues;
- The requirement for business valuations for the refinance of change of ownership transactions has been eliminated;
- SBA has clarified its policy on utilizing 7(a) loans to refinance 504 loans when both the permanent loan and the 504 loan are refinanced;
- For loans over $350,000, SBA requires a debt service coverage of at least 1.15 on both a historical and projected basis;
- SBA has significantly modified its collateral requirements to only require principals to pledge personally owned real estate when a loan is not otherwise fully secured. The requirement for pledge of securities and other non-real estate assets of the principals has been eliminated;
- SBA has made SBA Forms 147 (Note), 148 (Unconditional Limited Guarantee) optional, giving lender the option to use these forms or their own forms;
- For determining if a loan is fully secured, SBA will now allow lenders to value equipment at up to 80% of orderly liquidation value and real estate at 85% of appraised value;
- Lenders must obtain life insurance in conformance with their internal policy for similarly-sized non-SBA loans. SBA only requires life insurance for loans to sole proprietors, single member LLC’s or other businesses that depend on one owner’s active participation. SBA will allow for waivers if the lender documents its file that the individual is uninsurable;
- Financial statements must now be current within 180 days of application instead of 120;
- SBA has articulated a process for utilizing Industrial Development Bonds in connection with 504 projects; and
- Electronic processing through ETran has become mandatory for numerous changes and notices to SBA.
The above list is illustrative, not exhaustive, but demonstrates the magnitude of the changes that are on their way. SBA continues to strive to simplify its lending requirements to make access to capital easier for small businesses.
New Procedure for Franchise Lending
SBA tracks and reports the performance of loans to franchises, so it is important that franchise loans are identified as such. This includes loans to businesses operating under franchise, license, dealer, jobber or similar agreements.
To make this process easier, beginning October 1, 2013, SBA will be using a new coding system to identify each franchise: the FRANdata Unique Numbering System (FRUNS). The FRUNS number will replace the “franchise codes” previously used by SBA.
Lenders are required to identify any loans to franchises on the SBA application forms. For loans submitted electronically, ETran will prompt lender to provide the necessary information. SBA Notice 2000-840 provides detailed ETran instructions, as well as what to do if unable to find a FRUNS on ETran.
Remember, the existence of a FRUNS number does not indicate it’s an SBA-eligible franchise. Franchise eligibility documentation is the lender’s responsibility. Please monitor www.franchiseregistry.com, view the entire SBA Notice 2000-840, or contact the WV Lender Relations team with questions.