NADCO’s Spring Summit is always a special conference. Where else can you meet so many SBA leaders in one place? After all, the Summit is held in Washington, D.C., so they’re in the neighborhood! With great networking with CDC colleagues, getting the latest updates from SBA brass, and opportunities to educate members of Congress on the CDC/504 program, I’d say our time in D.C., May 6-9 was productive indeed!
Here’s a recap of the sessions I attended:
Debt Refi Without Expansion. There was a lot of interest in the changes to this program, which should open the doors a bit wider for eligible projects. Details on how SBA may approve a refinancing project of a qualified debt that doesn’t involve an expansion are covered in SOP 50 10 5(J) Subpart C, Chapter 2, IV. E., pg. 300. Permissible Debt Refinance without Expansion (13 CFR § 120.882(g).
SBA’s New Franchise Determination Process.SBA reports that this new process is working well for borrowers whose franchise is listed. Yet for those not listed, it still takes time to review the franchises and associated documents. This is especially true with auto dealerships, which can take up to six weeks to review. Generally Dealership Agreements themselves take little time. But they are associated with a “Terms and Conditions” document that needs to be thoroughly reviewed and, at times, adjusted to meet SBA’s requirements.
Timing of Annual Third Party Loan Reviews. SBA guidance requires that a review be performed every 12 months. Yet in some cases “guidance” has become “requirement” and the 12- month clock is being interpreted strictly. Now, some CDCs are being criticized when their reviews take place 14 months after the previous review. Best practice: Play it safe. Plan for your annual loan review in advance so you can meet a 12-month window.
Amendment to the Interagency Guidance on Appraisals and Evaluations for Financial Institutions.* Issued on April 2, 2018, this amendment raises the threshold for when an appraisal is required from $250,000 to $500,000. Unfortunately SBA cannot change its threshold to match the new one because SBA’s $250,000 threshold was established by statute and change requires congressional approval. This will lead to situations in which the participating financial institution doesn’t require an appraisal, although the CDC will be required to order one. So although a financial institution can do a $400,000 conventional real estate loan without an appraisal, if it chooses to make a $400,000 7(a) loan instead, an appraisal is required. And in theory, for a 504 project of $650,000 with the TPL of $325,500 and a 504 net debenture of $260,000, the federal government wouldn’t require the institution to get an appraisal, but SBA requires the CDC to have one. FYI: Informational handouts were distributed at NADCO and the recent NAGGL Conference.
Community Advantage Expires as a Pilot Program in 2020. This program has been around long enough to be considered seasoned, and SBA can now see where the challenges are. One challenge will be borrower performance in an increasing rate environment. The OCRM has initiated on-site reviews, starting with the largest lenders, and results have shown some aggressive underwriting, causing portfolio stress. There has been discussion about increasing the cap on Community Advantage loans, yet it was noted that this would cause the program to compete with standard 7(a) loans, which is not the program’s goal or intent.
Associate, CDC/504 Program
*Interagency Guidelines on Appraisals and Evaluations were issued originally on December 12, 2010 by The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) (the Agencies) The same agencies issued new guidelines on April 2, 2018. SBA was not a party to either of these and it wouldn’t matter if it was. SBA’s requirement is that any loan greater than $250,000 requires an appraisal (for 504 loans: SOP 2010 5 J Subpart C III 2. 1 a for 504 loans; Subpart B I4. a. 1. For 7(a) loans). This is the threshold in both the Small Business Act which is the legislation that governs 7(a) loans and the Small Business Investment act that governs 504 (Sections (3)(E)(ii) and section 502 (3)(E)(ii) (II) respectively).