November 6, 2018
By Mary Miller
Contributing Editor, SBA Hot Topic Tuesday
SBA Hot Topic Tuesday — 76% Disagree with SBA Proposed Personal Resource Test
There were a total of 141 survey participants in last week’s poll regarding the SBA’s proposed changes. Survey participants were broken down into the following groups:
SBA Lender/CDC 48%
SBA Employee 5%
Small Business Owner 5%
Credit Elsewhere and the Personal Resource Test
When an owner of 20 percent or more has liquid assets that exceed stated thresholds, SBA is proposing to require an injection of cash from any such owner to reduce the SBA loan amount.
(The resources of an owner who is an individual include the resources of the owner’s spouse and minor children.)
$350,000 or less — Applicant must inject liquid assets 1 ¾ times above the loan amount, or $200,000.
$350,001 to $1 million — Applicant must inject liquid assets 1 ½ times above the loan amount, or $1 million.
Over $1 million — Applicant must inject liquid assets 1 times above the loan amount, or $2.5 million.
Total Responses: 139
No Opinion 5%
- Prior to 2008, SBA lenders did everything they could to max out buyer assets and take all available proceeds, leaving little if anything for unforeseen personal or business expenses. The results were disastrous and many of my clients lost everything in personal and business assets.
- Leave as is because sometimes you need a stronger guarantor that does not want a cavity exam, but is needed to get the loan approved and protects the loan from going into default.
- Not really excited about the PRT coming back, but it sure beats the guessing game we have been dealing with in 2018 which created the question, “How much cash is too much cash?”
- I believe the resource test to be too limiting. Cost of living, child care, education, support to the business, the opportunity for other projects and cash support to the business being financed need funding. It limits growth to the community.
- The math makes no sense. If you have a borrower with $1.1 million looking for a $1.0 million loan, they need to inject $100,000 or $2.5 million, whichever is greater? This automatically disqualifies the borrower, even though this person would need to exhaust all assets to fund the project? Either this is worded incorrectly or not fully thought through.
- SBA needs to be specific about what they consider a liquid asset.
- There needs to be more definition around exceptions like liquid money set aside for other personal expenses. Is it up to the lender to determine what add backs can occur? Would like to avoid the SBA second guessing the lender’s decision. If someone has that much liquidity, chances are they are not going to apply for an SBA guaranteed loan. This is probably not a major issue other than a few isolated incidences.
- This was an onerous, burdensome rule when it previously existed. Re-instating it is counter intuitive. We will end up excluding a lot of qualified projects and either chasing after weaker deals or seeing a drop in 504 volume.
- We should have the test again, but think the smaller loans should have a larger amount that they’re able to keep that is liquid (i.e.; 2X the loan amount).
- A return to what we had before is no big deal. However, the SBA needs to be reminded that when this eliminated the first time, the reason given was that the SBA said they liked having borrowers who could repay their notes. Different administration.
- Would like to see the $350,000 or less be adjusted to 2x loan amount (or $200,000).
- This will further limit capital for small business ventures because minority owners will have to invest more than they do now.
- The Personal Resource Test was taken out of the SOP in the past as it didn’t work, so it shouldn’t be brought back now. If reinstated, allow limited to majority owners (only 51% or more owners) as 20% is not enough ownership to put additional funds into the project.
- This gives a clear test of what is required and takes the subjectivity out of the lending decision.
- You failed to add that it is the greater of the two numbers. This is better than guessing, “How much is too much?”
- I would like to understand what particular loan(s) caused this issue to be put back on the table as it is an affront to prudent lending and weakens the overall quality of the portfolio. Entrepreneurs who are successful and have amassed some liquidity are the types of people we want starting new businesses and creating jobs. These borrowers offset risk attributed to traditional, first time start-up business owners. Furthermore, despite their affluence, a 25-yr fixed rate and 90% LTV is not available in conventional banking circles. To have some downside protection (i.e. personal liquidity) in the face of an economic tailwind or unforeseen business risk is a good thing!
- I agree with the proposed rule as it relates to SBA 7(a) loans. However, the 504 program promotes economic development and job growth and shouldn’t be subjected to liquidity restrictions.
- It’s good to have the Personal Resource Test back, but the requirements as outlined above are not clear.
- What has been the issue with the most recent change to the PRT? Why is the SBA concerned if the borrower has excess liquidity making her/him a stronger applicant? Having the liquidity helps to ensure that the borrower will have access to cash in case of an emergency.
- Smaller loans should have a much higher threshold.
- Start-ups must conserve liquidity up front in order to survive the initial opening. If you deplete liquidity in front-end and they falter, they will opt to borrow and start a death-spiral. Owners will hold back resources and this will create and adverse selection situation = more and earlier defaults.
- This makes sense on larger loan amounts, but on loans sub $350K, this will kill smaller borrowers’ ability to get access to SBA guaranties, limit lending to this audience, and push folks who could have qualified for the sub $350K 7(a) product into higher cost lending options.
- It was better when there was no rule. However, given the choice between a formula, and something so vague as “consider,” a formula is preferred.
Lender Packaging Fees
Regardless of what the fee is called (e.g., a packaging fee, application fee, etc.), the Lender would be permitted to collect a fee from the applicant that is no more than $2,500 for a loan up to and including $350,000 and no more than $5,000 for a loan over $350,000.
Total Responses: 140
No Opinion 5%
- Don’t make small SBA loans harder to get!
- If the fee is going to be strictly driven by the loan amount, and not the amount of work performed, it should be more variable, perhaps a percentage rather than only two set dollar amounts.
- Limiting these fees will deter lenders from spending sufficient resources to make these loans.
- This will cause SBA loan providers to exit the market which will reduce SBA loans available, especially for $350k and under.
- This new proposal will reduce costs to small business owners, however, will make the SBA lending business much less attractive to the lenders/service providers. The result will be less SBA lenders and less access to cash through this program to small businesses, who will end up paying much more to the daily payment lenders and other alternative lenders that charge very high “origination” fees or provide loans with enormous APR that may get over 100% in some cases.
- I like the increased fees allowed. However, SBA needs to clearly define what is acceptable as a packaging service.
- Concerned about the documentation to support the fee.
- The SBA should just make it simple by stating a flat fee of $2,500 or less is acceptable.
- Will hurt community banks that rely on packagers.
- The size of a transaction often does not match with the complexity and time associated with the underwriting and processing of a request. This rule may inadvertently result in a decline in smaller loan applications and frankly, these are the ones which most often need the program in order to obtain financing.
- In many cases, there is a great deal of time and energy that goes into putting a deal together – some deals more complex than others. The lender should be fairly compensated. This would discourage many lenders from participating in the program.
- No need to change as we are getting killed on the secondary market because of premium slide. How does a bank make money for the risk? Yes it’s more, but if we have to account for every hour, that becomes an administrative nightmare.
- The fee increase is good, but having to document anything under these amounts is just creating work. Most lenders agree that the cost to put together a $10,000 loan isn’t significantly less than a $5,000,000 loan given the same collateral and structure.
- If the borrower uses a standard fee, a breakout of the fee should not be required. $2500 or $5000 is a small fee for the amount of time spent on SBA deals.
- The SBA has always been concerned about how much money lenders are charging borrowers. It costs a lot of money to maintain an efficient SBA shop. The packaging fees we charge cover only a fraction of our cost.
- Concerned about the amount of paperwork required to document the fee.
- #1 Preference would be to index any fee/cost limitation to an inflation index, or the rule becomes out-of-date within 2-3 years. #2 As seasoned lenders know, it’s not the size of the loan, but the complexity that governs the time involved by a lender.
- The fee should be $2500 (or 1% of the loan amount) on smaller deals and $5000 (or 1% on larger deals). 1% of the loan amount is very common for a business lending fee and given the risk of SBA loans, this is warranted.
- Packaging fees should be calculated based upon the actual time it takes to complete the services provided, not capped based upon loan amount. SBA is attempting to implement a policy which will force lenders to do exactly what SBA tells lenders not to do.
Loan Agent Fees
SBA proposes to limit loan agent packaging and referral fees paid by the applicant.
Less than $350,000 — 2.5% of the loan amount of $7,000, whichever is greater.
$350,001 to $1 million — 2% of the loan amount or $15,000 which is greater.
Over $1 million — 1.5% of the loan amount or $30,000, whichever is greater.
Total Responses: 139
No Opinion 12%
- Agree, however, the SBA will never allow a $30,000 packaging fee. So, not sure why they say they will because previously, this has not been the case.
- It should be lowered to 1% maximum for over $350K up to $15K max.
- Any potential borrower should be allowed to “hire” an agent of his or her choosing and at an expense to be determined by that borrower. Higher talent levels demand higher costs, as attorneys, surgeons, etc. This should NOT be left to the SBA management to determine for any given borrower.
- Will hurt community banks that rely on referral agents.
- Why does a broker qualify for a higher fee for sourcing a request than the entity doing all the underwriting, submitting and closing work?
- The companies provide a valuable service and get capital to those who need it most. These caps will force these companies to discontinue their services to the borrowers, thus eliminating a valuable source of capital.
- This seems high for a referral fee.
- The SBA needs to address the issue of too many loans being driven by what is in the best interest of the broker and not the borrower.
- On loans < $350,000, there should be a 2% max.
The Two-Master Rule
SBA proposes to eliminate the limited exception to the ‘‘two master prohibition’’ and prevent an Agent, including an LSP, from providing services to both the Applicant and the SBA Lender and being compensated by both parties in connection with the same loan application.
Total Responses: 139
No Opinion 11%
- The SBA lender should decide whether they want to reduce their margin on their loans.
- Raise the fee limits on the packaging fee and the two master rule won’t be needed.
- If the LSP is providing specific services to both the lender and the applicant with no overlap, then there’s no reason to prohibit what they charge to whom.
- The gray area lies with which LSP services are provided to which parties.
- If different services are provided (i.e.; packaging vs. underwriting), an agent or LSP can justify fees to both the lender and applicant as part of the same loan.
- If agents can’t help small business owners prepare their SBA loan package, they’ll end up in higher cost products. SBA lenders who want to participate in smaller loan transactions don’t know how to source borrowers who are a good fit for their sub $350K product rely on referral sources (agents) to do this. If the SBA limits the agent to make only ONE fee from ONE party, they’ll drastically reduce SBA 7(a) loan production (sub $350K).
SBA proposes to take away a PLP lender’s right to approve agreements between a poultry farmer and a large poultry producer (integrator) in determining if an affiliation relationship exists.
“ . . .the determination of whether the farmer is an independent small business but, due to the complexity of the typical integrator agreement, SBA Lenders may be uncertain as to the correct outcome of the affiliation analysis for such a business relationship. SBA is considering reviewing these agreements and making the affiliation determination itself so that SBA Lenders will not be reluctant to make loans to small poultry farmers operating under such agreements.”
Total Responses: 138
No Opinion 46%
- Is this a reoccurring situation and if so, is a legal review in order? Who is responsible for paying any legal review fees?
- Rather than being decided solely by the SBA, it should be a joint effort between SBA and lender, who is more familiar with local AG community.
- Why does this apply strictly to the poultry lending industry? For other industries/companies that rely on one or two customers for the majority of their income, does this also classify them as eligible for an affiliation relationship?
- Could SBA create a Poultry Integrator Directory (similar to the franchise directory) and Integrator Addendum (similar to the franchise addendum)? This would eliminate confusion for lenders as to which Integrator Agreements are eligible and which are not.
The proposed rule includes changes to SBA Express, Export Express, loans to qualified employee trusts, microloan intermediaries, and the definition of affiliation.
Do you wish to comment on these or any other change?
- These changes may negatively impact a small business owner’s capability to obtain government-backed financing and potentially drive them to MCA lenders.
- Defining “affiliation” and its application/eligibility remains confusing and time-consuming to work through on front-end of loan process.
- SBA should not be sole authority in determining affiliate eligibility.
Thank you to all survey participants. For more specific information on the SBA’s proposed changes, click here.