On September 28, 2018, the SBA published a proposed rule which will amend various regulations governing its business loan programs. The public commentary period was originally scheduled to expire November 28, 2018. On November 16, 2018 the SBA extended the public commentary period through December 18, 2018. A copy of the easy to read version of the proposed rule can be found at https://federalregister.gov/d/2018-20869.
Key changes incorporated within the proposed rule are summarized as follows:
- SBA Express & Export Express Programs:
- Loan Processing, Underwriting, Closing, Servicing, Liquidation & Litigation Requirements – The SBA proposes adding regulations that set forth the requirements for loan processing, underwriting, closing, servicing, liquidation, and litigation. Currently, the regulations are peppered throughout the Standard Operating Procedures and there is considerable ambiguity regarding minimum program requirements. The proposed rule will incorporate additional clarity relative to minimum requirements specific to Express loans.
- Loan Sales – The proposed regulation provides that Lenders may sell the guaranteed portion of Express & Export Express term loans in the secondary market, but may not sell revolving lines of credit.
- Credit Elsewhere & Personal Resources of Small Business Applicant Owners:
Effective April 21, 2014, the SBA removed the “Personal Resource Test” from the regulations. The regulation required owners of the Applicant to inject personal liquid assets into the business to reduce SBA-guaranteed funds otherwise needed. The SBA eliminated the requirement because it was found some borrowers whose principals had significant resources may have been unable to obtain long-term fixed asset financing from private sources at reasonable rates. The SBA is now concerned that borrowers with substantial amounts of personal assets are receiving government backed loans. The SBA proposes re-instating a “Personal Resource Test” which includes:
- Analyzing the resources of individuals and entities that own 20% or more of the Applicant.
- Requiring an injection of funds if the total financing package:
- Is $350K or less, each 20% owner must inject liquid assets in excess of 1.75x the total financing package, or $200K, whichever is greater.
- Is between $350K and $1MM, each 20% owner must inject liquid assets in excess of 1.5x the total financing package, or $1MM, whichever is greater.
- Exceeds $1MM, each 20% owner must inject any liquid assets that are in excess of 1x the total financing package, or $2.5MM, whichever is greater.
- Permissible Fees a Lender or Agent may collect from an Applicant:
- Lender Fees – The SBA proposes to limit Lender fees to an Applicant, regardless of what it is called (i.e. packaging fee, application fee, etc.) to $2,500 for a loan up to and including $350K and $5,000 for a loan over $350K. Lenders will still be permitted to charge an extraordinary servicing fee in connection with monitoring construction loans and Caplines.
- Charging the Lender & Applicant: The SBA proposes eliminating the current policy exception which allows an Agent to charge an Applicant for packaging services and the Lender a referral fee on the same application.
- Agent Fee Limitations: The SBA also proposes incorporating a fee limitation schedule which provides the maximum fee an Applicant can be charged on a single application. This maximum threshold caps all Agent fees on a combined basis charged to the Applicant:
- Loans up to and including $350K, a max of 2.5% of the loan amount, or $7K, whichever is less;
- Loans $350K-$1MM, a max of 2% of the loan amount, or $15K, whichever is less;
- Loans over $1MM, a max of 1.5% of the loan amount, or $30K, whichever is less.
The SBA proposes reinstituting the “newly organized concern” and “totality of circumstances” analysis to affiliation evaluation and determination. This is to prevent situations where there are individuals or firms that have identical or substantially identical business or economic interests (such as close relatives, individuals, or firms with common investments, or firms economically dependent through contractual or other relationships) from exceeding the SBA’s statutory maximum lending limit, or size standard.
Stay tuned for SBA’s final determination as to which rules become formal policy and those that are amended based on public feedback. We encourage you to submit comments by December 18, 2018 to https://federalregister.gov/d/2018-20869. As we hear further on these changes, we will be issuing final guidance.
By: Christopher A. Meccariello
Chief Operating Officer