New regulations make SBA lending easier

SBA 504 loans are co-lender transactions whereby a commercial lender teams with an SBA CDC (Certified Development Company) lender and a borrower in a 50 percent/ 40 percent /10 percent structure.
These loans are attractive for several reasons:
• They mitigate commercial lenders’ risk by giving those lenders first-lien priority on collateral assets (usually owner-occupied real property, but in 10-year deals also certain capital equipment) in a better-than 50 percent loan-to-value structure that facilitates an expanded, lower-risk loan portfolio.
• They offer low, fixed-rate, 20-year money (current rates with all fees amortized have been near 4 percent) on the 40 percent SBA loan (generally in second priority).
• They usually require only a 10 percent down payment from a qualified borrower.
For priority CDC lenders, and, consequently, for borrowers and commercial lenders, 504 deals have just been made easier. Under new regulations recently promulgated by the SBA, priority CDC’s (those SBA lenders having performing portfolios and passing grades on overall operations), closing and review procedures have been further streamlined.
Designated 504 closing counsels (lawyers trained to do these deals faster) now have greater responsibility for review of documents submitted to SBA district counsels, while district counsels, themselves, are required to review fewer documents. Certain of the documents SBA district counsel continue to review have been modified (including certain documents that commercial lenders must execute) and required closing-counsel legal opinions have been enhanced.
Moreover, perhaps the most practical change in the new regulations is the explicit SBA blessing of designated closing counsel also closing for commercial lenders on the same co-lending projects. The SBA has authorized a form waiver that can be used in these transactions, provided that the following requirements are met: • Dual representation will not adversely affect the attorney-client relationship between CDC closing counsel and CDC.
• Both the commercial lender and CDC have expressly waived, in writing, any conflict of interest arising as a result of such dual representation and any attorney-client privilege that might otherwise attach.
• CDC counsel has taken all actions necessary to comply with ethical requirements applicable to attorneys in the relevant jurisdiction(s) regarding dual representation and conflicts of interest.
• CDC closing counsel adds a mandatory paragraph on dual representation to his/her required legal opinion.
• After disbursement of the SBA 504 loan, neither CDC closing counsel nor any other member of his/her law firm shall represent the commercial lender or the CDC/SBA with respect to any issue arising out of the loan project, including but not limited to any related litigation, in the event that either the commercial lender or the CDC/SBA objects.
(Whether a CDC closing counsel can serve as the CDC’s approved debt-collection attorney or handle documentation in connection with various servicing actions, such as assumptions, will be decided on a case-by-case basis, dependent on the SBA CLSC’s and possibly SBA District Counsel’s consent as well as that of the commercial lender.)
As a practical matter, this means that an SBA-designated closing counsel can handle the commercial-lender portion of the loan project, together with the SBA/CDC portion, with enhanced efficiency, making the closing procedure easier for borrowers and commercial-loan officers alike. (In other states and regions, this has long been an informally recognized commonplace.) •


Thomas M. Madden is member/principal at Madden Brockman LLC in Providence.

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