Good morning NADCO Region IX Members. Hope everyone is doing well. I just got back from the NADCO Board meeting in Baltimore and wanted to share what I learned.
Not so Final Rule/Regulatory Update – In the wake of the Colorado Springs Annual Conference the NADCO Board established impact committees to tackle the regulatory challenges the industry is facing. There has been substantial progress on issues such as the 9 month rule and insurance, but a great deal of work remains.
Regarding the 9 month rule, the SBA has issued guidance to SLPC and it appears the rule is now being interpreted as it should. Unfortunately the SBA is not providing guidance to CDC’s directly and are planning on including additional information in the rewrite of the SOP (no specific date provided). If any of you are still facing problems with interpretation, please let me know.
NADCO recently sent out an update regarding insurance. Hays D&O policies are now in-line with SBA’s new requirements. This required a change in underwriters but the price should remain comparable. If Hays is your provider we recommend that you check in with them, particularly if your policy is up for renewal.
Among the other issues the impact committees are working on is the “Anti Deficiency Act” issue. For the uninitiated that’s an issue with easements for instance tied to properties we are looking to finance. Some District Counsels have asked CDC’s to get waivers or subordinations to those easements. Assuming that’s even a possibility it can delay fundings several months. Ann Marie Mehlum stated the SBA is considering waivers if the CDC can demonstrate they have exhausted all options and reached an impasse (This is not the official position of the Office of Capital Access and the Office of General Counsel – it is merely a proposal that is being debated). This would only be a temporary fix. NADCO is exploring other ways to finally put this issue to bed. It wasn’t an issue for decades, why now?
SLPC Update – We’ve long sense passed a tipping point here. Headquarters is sympathetic to the industry and NADCO is going to reopen the dialogue with the center’s staff in an effort to enhance the delivery mechanism
There are a couple of different issues here. The first is the screen-out rate. John Miller stated the screen-out rate is app. 40% industry wide. He cited the increased complexity of the transactions we are working on as a primary reason. That only tells part of the story. Let’s face it some CDC’s are better than others at addressing and clearing up complex loan scenarios. There have also been changes in interpretations that the industry hasn’t been made aware of in advance. The second issue is turnaround time. Even without screen-outs processing times are double what they were just a short time ago. Staffing issues at the center are partly to blame. Like all of us they are being asked to do more with less. The solution to both issues will come only after both sides sit down at the table and talk it through. Thankfully for us there appears to be a greater willingness from SBA to do so.
OCRM Update – Many of you that have been involved in ALP reviews know firsthand that the process has changed dramatically over the last year. CDC’s are being asked to prepare internal control policies that include “independent” loan reviews. One important distinction is that independent doesn’t mean you need to hire a third party provider. These loan reviews can happen across your CDC’s departments, provided those with an interest in the original loan file aren’t a party to the review. CDC’s have submitted vastly different internal control policies with loan review requirements and fortunately OCRM is giving the industry some latitude. Once there is a reasonable sample that flexibility will undoubtedly diminish. NADCO is working on putting together some guidance (possibly a template) for CDC’s but a cross section of approved policies is needed to facilitate that. I’m involved with an impact group that is doing just that.
Potential harm is a relatively new issue facing CDC’s and Brent provided some additional details. Some CDC’s received letters from OCRM referencing loans they made had either a material misrepresentation, some form or neglect or even fraud. These loans are being reviewed further to see what the actual or potential losses are, if any. Expect more on this front in the coming months.
On Thursday afternoon OCRM published the new CDC audit contract requirements. There are some interesting insights into how we will be reviewed going forward. For those of you who are interested in reviewing it, it can be found at https://www.fbo.gov/index?s=opportunity&mode=form&id=cf81d41808614ba8725caf826eed06ef&tab=core&_cview=1s
Loss of volume to competing programs – Clearly 504 is losing traction in the market place. From fixed rate 7(a)’s, to narrow interpretations and delivery issues we are getting squeezed from all angles. Our industry, with SBA’s assistance, need to address several issues for us to slow the bleeding. NADCO in conjunction with DCF are looking into ways to expand the programs reach. With the subsidy shrinking, the prospect for debt refi returning is gaining traction. In addition, we are putting a case together that we should be able to refi our existing loans. The 504 is one of the only federally backed programs that can’t refi one of its own loans. This would certainly help improve volume and slow the portfolio runoff. I wouldn’t get my hopes up but it’s certainly worth exploring more.
Expanding economic development beyond the 504 is not only a program requirement but it may also be a necessity for some of us. Some in congress are considering making program changes that would define exactly what we should offer. Clearly the industry should not wait for that as it’s liable to be less than palatable. I’ll admit our CDC has done very little beyond education/training and the 504 program. We’ve done several programs in years past but that needs to be a focus going forward. Working with our board we set aside funds to offer other loan programs and that will help in two areas. It provides additional revenue streams and furthers our economic development mission. NADCO strongly recommends you consider something similar before we are either told what to do, or worst deemed irrelevant.