1

Documenting, Closing and Servicing

SBA 504 and 7(a) Loans

William C. Brown Heather E. Ward

Engel, Hairston & Johanson, P.C. Engel, Hairston & Johanson, P.C.

109 N. 20th

Street, 4th

Floor 109 N. 20th

Street, 4th

Floor

Birmingham, Alabama 35203 Birmingham, Alabama 35203

(205) 328-4600 (205) 328-4600

cbrown@ehjlaw.com hward@ehjlaw.com

TABLE OF CONTENTS:

Page

I. SBA Loans ...............................................................................................................4

A. Lending Programs ....................................................................................................5

1. The 504 Loan .........................................................................................5

2. The 7(a) Loan .........................................................................................6

II. SBA Loan Approval ...........................................................................................7

A. Borrower Eligibility .................................................................................................8

B. Franchise Eligibility ...............................................................................................11

C. Credit Analysis.......................................................................................................13

D. Use of Proceeds......................................................................................................13

E. Equity Injection ......................................................................................................15

F. The Loan Application ............................................................................................17

1. Contents of the Loan Application ........................................................17

2. Specific Application Forms .................................................................19

III. Closing .....................................................................................................................21

A. Lender’s Responsibility (7(a) Loans) ....................................................................22

B. CDC’s Responsibility (504 Loans) ........................................................................23

C. Borrower’s Responsibility ....................................................................................23

D. Issues, Fees and Forms ..........................................................................................24

1. Fees ......................................................................................................24

a. The SBA 7(a) Guarantee Fee ...................................................24

b. The Ongoing SBA 7(a) Servicing Fee .....................................25

c. Fees Associated with 504 Loans ..............................................25

2. Disbursements ......................................................................................26

3. Repayment ...........................................................................................26

4. Verification of Use of Proceeds ...........................................................27

5. Collateral/Lien Position .......................................................................28

6. Guaranties ............................................................................................28

7. IRS Tax Transcripts .............................................................................29

8. Environmental Investigation ................................................................29

9. Insurance ..............................................................................................30

10. Standby Agreements ............................................................................31

3

IV. Servicing .................................................................................................................32

A. Necessity of Lender Compliance ...........................................................................33

B. Servicing and Liquidation Action ..........................................................................34

1. Lender Documentation & Reporting ...................................................34

a. 1502 Reports ............................................................................34

b. Site Visit Reports .....................................................................35

c. Transcript of Account ..............................................................36

2. Monitoring Creditworthiness ...............................................................37

3. Servicing & Liquidation Approval ......................................................37

4. Liquidation & Litigation Plans ............................................................38

V. Pitfalls ......................................................................................................................40

A. Expiration after Maturity Issue ..............................................................................40

B. Lien and Collateral Issues ......................................................................................40

C. Unauthorized Use of Proceeds Issues ....................................................................41

D. Liquidation Deficiency Issues................................................................................41

E. Undocumented Servicing Actions Issues...............................................................41

F. Early Default Issues ...............................................................................................42

LIST OF EXHIBITS

A. SBA Form 1919 (Borrower Information Form 7(a) Loan) ................................................43

B. SBA Form 912 (Statement of Personal History) ...............................................................50

C. SBA Form 413 (Personal Financial Statement) .................................................................53

D. SBA Form 159 (Compensation Agreement 7(a) Loan) .....................................................59

E. IRS Form 4506-T (Request for IRS Tax Transcripts) .......................................................63

F. SBA Form 147 (Note in 7(a) Loan) ...................................................................................66

G. SBA Form 1505 (Note in 504 Loan) .................................................................................72

H. SBA Form 148 (Unconditional Guarantee) .......................................................................78

I. SBA Form 2287 (Third Party Lender Agreement in 504 Loan) ........................................84

J. SBA Form 2288 (Interim Lender Certification in 504 Loan) ............................................82

K. SBA Form 1050 (Settlement Sheet in 7(a) Loan) ..............................................................96

L. SBA Form 722 (EEO Poster and Notice) ..........................................................................98

M. SBA Form 1502 (Field Descriptions for Lender Reporting in 7(a) Loan) ......................100

N. SBA Servicing and Liquidation 7(a) Lender Matrix .......................................................108

I. SBA Loans

The Small Business Administration (SBA) is a federal agency that was created to assist

small businesses and protect the interests of small business concerns in order to preserve free

competitive enterprise and strengthen the overall economy.1 Specifically, SBA strives to help

start, build, and grow businesses in order to create jobs and stimulate the economy. SBA is

governed by the Small Business Act of 1953, which is codified in 15 U.S.C. § 633. Under this

Act, SBA is empowered to deliver loans, guarantee loans made by lenders, assist with

government contracts, counsel small businesses, offer entrepreneur development services, and

provide other types of assistance for small businesses.2

Among these functions, SBA is able to make loans3 and guarantee private lender loans to

qualified small business concerns. Regulations for SBA’s loan programs are found in Part 120

of Title 13 in the Code of Federal Regulations (C.F.R.). SBA lending assistance provides

benefits to borrowers by making funds available and assisting with long-term financing. These

transactions result in, among other things, improved cash flow, fixed maturity, and no balloon

payments. Whether under the 7(a) or 504 Loan Programs, borrowers can be eligible for up to $5

million in SBA-backed financing.

1 15 U.S.C. § 631

2 Id.; see U.S. Small Business Administration, “About SBA: What We Do,” http://www.sba.gov/about-

sba-services/what-we-do

3 Although authorized to make direct non-disaster business loans, SBA has not been funded to do so since

the mid 1990s.

5

A. Lending Programs

SBA currently has three main lending programs: the 7(a) loan program, the 504 loan

program and the disaster loan program.

1. The 504 Loan

The 504 loan program is typically used for long-term financing to attain

major assets for business development and expansion. 13 C.F.R. § 120.102.

Instead of guaranteeing the loan of a private lender, the SBA uses a Certified

Development Company (CDC) as a lender partner to actually finance the loan

secured by a 100 percent SBA-guaranteed debenture. A CDC is nonprofit

corporation set up to encourage economic development of its community. Of

the projected costs for the venture, a private non-CDC lender provides 50% of

the financing with senior lien position; the CDC contributes up to 40% of the

financing backed by a 100% SBA-guaranteed debenture with junior lien

position; and the borrower is expected to provide at least 10% of the

financing. Id.; see also 13 C.F.R. § 120.801. The SBA 504 Loan is typically

used for acquisition of land, or acquisition of land and existing buildings,

construction of improvements, major renovations to existing structures, or

purchases of capital equipment or heaving machinery. SBA participates

alongside third party lenders in making these loans by funding debentures

with terms of either ten (10) or twenty (20) years depending upon the useful

life of the assets being financed at fixed interest rates over the life of the SBA

loan. These loans benefit borrowers because of the long-term fixed rates and

typically lower equity requirements.

2. The 7(a) Loan

These loans are made wholly by the lender who submits application to

SBA for approval of the SBA guarantee against lender’s deficiency in the

event of default. Under the 7(a) Loan Program SBA will guarantee up to 85%

for loans up to $150,000 and up to 75% for loans exceeding that amount up to

$5,000,000.4 SBA will collect a guaranty fee on the guaranteed portion of the

loan, which is charged to lenders but can be collected from borrowers.5 The

funds of this fee are designed to reimburse lenders for borrowers who default

on repayment. Through SBA’s 7(a) eligible use of proceeds requirement,

financing can be guaranteed for a variety of business purposes, such as

working capital, inventory, machinery and equipment, leasehold

improvements, land and building (for purchase, renovation or new

construction), and debt refinancing.6 The loan maturity will depend on the

nature of the loan and the borrower’s ability to repay. Typically, it is up to 10

years for working capital & equipment and may be up to 25 years for fixed

assets, such as real estate.7 SBA requires the lender to collateralize the loan to

the maximum extent possible up to the loan amount, which may include

4 15 U.S.C. § 636(a)(2)-(3)

5 15 U.S.C. § 636(a)(18)

6 15 U.S.C. § 636(a); 13 C.F.R. § 120.120

7 15 U.S.C. § 636(a)(5); 13 C.F.R. § 120.212

7

personal assets if business assets do not fully secure the loan.8 The lender

must verify that the borrower has invested a certain amount of equity into the

business to ensure the borrower is committed and indebted to the business.9

II. SBA Loan Approval

To qualify, the borrower must be a for-profit business, meet SBA size requirements,

show good character, credit, management, and ability to repay, and must be an eligible type of

business.10

The key factors for eligibility are based on what the business does to receive its income,

the character of its ownership and where the business operates. In general, the businesses must

meet the following criteria to be eligible for SBA assistance: be a business operating for-profit;

be located, engaged, or propose to do business in the United States; qualify as a small business

under SBA size requirements; be able to demonstrate the need for the loan proceeds; have

reasonable invested equity; attempt to use alternative financial resources before seeking financial

assistance from SBA; have a plan to use the funds for a sound business purpose; and not be

delinquent on any existing debt obligation to the United States.11

Additionally, there must be no

apparent conflict of interest between the borrower and the lender.

8 U.S. Small Business Administration, “7(a) Loan Program Terms and Conditions,” http://www.sba.gov/content/7a-

terms-conditions

9 13 C.F.R. § 120.102

10 13 C.F.R. § 120.100

11 13 C.F.R. § 120.100-101

A. Borrower Eligibility

As mentioned above, one of the eligibility requirements is that the borrower must

be a “small business concern.” SBA determines a “small business concern” to be a

business that has a net after-tax operating income, averaged over a two-year period, of

less than $5 million and a net worth of less than $15 million. Additionally, the lender

may use size standard defined under the North American Industry Classification System

(NAICS).12

The Small Business Act defines a small business as a business that is owned

and operated and not dominant in its field of operation.13

The size standards vary from

industry to industry and are developed considering the economic characteristics

comprising the structure of an average firm size, start-up costs, entry barriers, and

distribution of firms by size.14

Additional considerations include technological changes,

competition from other industries, growth trends, historical activity within an industry,

unique factors occurring in the industry which may distinguish small firms from other

firms, and objectives of the business’ programs and the impact on those programs of

different size standard levels.15

Certain businesses are automatically ineligible to receive a SBA loan. The

following businesses are ineligible:

Non-profit businesses (a for-profit subsidiary will be eligible);

12

13 C.F.R. § 121.101; The codes can be found at North American Industry Classification System, “Introduction to

NAICS,” http://www.census.gov/eos/www/naics/.

13 15 U.S.C. § 632

14 13 C.F.R. § 121.102

15 Id.

9

Financial businesses primarily engaged in the business of lending (such as banks

and finance companies);

Passive businesses owned by developers and landlords that do not actively use or

occupy the assets acquired or improved with loan proceeds (other than eligible

passive companies defined in 13 C.F.R. § 120.111);

Life insurance companies;

Businesses located in a foreign country (a U.S. business owned by aliens may

qualify);

Pyramid sale distribution plans;

Businesses deriving more than one-third (1/3) of gross annual revenue (not

income) from legal gambling activities;

Businesses that are involved in any illegal activity;

Private businesses that limit the number of memberships for reasons other than

capacity;

Government-owned entities;

Businesses principally engaged in teaching, instructing, counseling or

indoctrinating religious beliefs;

Consumer and marketing cooperatives (producer cooperatives are eligible);

Loan packagers earning more than 1/3 of their gross annual revenue from

packaging SBA loans;

Businesses with an associate who is in jail, on probation, on parole, or has been

indicted for a felony or a crime of moral turpitude.

o SBA cannot provide assistance to associates who are presently subject to an

indictment, criminal information, arraignment, or other means by which

formal criminal charges are brought in any jurisdiction. 50 10 5 (F) Pg. 258.

o If a subject reveals that he/she is currently on parole or probation under

question 9 on a 912, the business is ineligible. 50 10 5 (F) Pg. 258.

o Electronic fingerprint submissions are permitted as a substitute for an FD-

258 Fingerprint Card where available. 50 10 5 (F) Pg. 259.

o If a small business applicant is owned by a trust, the trustor must be of

good character and is required to provide a Form 912. 50 10 5 (D) Pg. 284.

Businesses where the lender, CDC, or any of its associates own an equity interest;

Businesses which present live performances of a prurient sexual nature or derive,

directly or indirectly, more than de minimis gross revenue through the sale of

products, services, or presentation of a prurient sexual nature (revised SOP 50

(10)(F) has eliminated the “community standards” language);

Businesses that have previously defaulted on any federal loan or federally assisted

financing (unless waived by SBA for good cause):

o The definition of federal debt does not include unpaid/delinquent taxes or

loss incurred by the FDIC when it sells a loan at a discount [50 10 5 (D) Pg.

290] or loans purchased, held or securitized by Fannie Mae or Freddie Mac

[50 10 5 (F) Pg. 264].

o The prior loss/delinquent federal debt rules apply to Associates (as opposed

to principals of the small business applicant) and guarantors. 50 10 5 (D) Pg.

291. “Associate” includes an office, director, owner or more than 20%, key

3

11

employee, business owned or controlled (at least 20%) by any of the

foregoing, or individual, or entity that controls or is controlled by the small

business.

Businesses engaged primarily in political or lobbying activities; and/or

Speculative businesses (such as oil wildcatting per SBA’s example).16

B. Franchise Eligibility

SBA must review proposed franchise/license/jobber or other similar agreements

to determine if the business is eligible on the basis of whether the small business

applicant constitutes an affiliate of the franchise. A finding that the agreement is

acceptable means that the agreement does not impose unacceptable control provision on

the applicant which would result in affiliation. SBA may determine affiliation can exist

between the applicant and franchisor through common ownership, common management,

excessive restrictions on the sale/transfer of the franchise interest, or excess control of the

franchisor over the applicant’s business operations. SBA has compiled a list of eligibility

issue for franchises, called the Franchise Findings, to determine common requirements

found in franchise agreements that would cause the business to be ineligible.17 The lender

is responsible for ensuring the franchise meets the eligibility requirements in accordance

with SBA policies in effect at the time the application was filed. To facilitate this review

16

13 C.F.R. § 120.110

17 SOP 50 10 (5)(F), Subpart B, Chapter 1.9.a, et seq.

SBA makes available a list of franchise agreements (the “Registry”) that have been

approved for size/affiliation/control issues at www.franchiseregistry.com .18

In General, the CDC and/or SBA Lender must consider:

i. When there is a franchise/jobber agreement, the agreement must be

executed prior to submission of the closing package to SBA for

funding (rather than prior to first disbursement). 50 10 5 (D) Pg. 268.

ii. The fact that a jobber agreement is acceptable does not mean that the

small business is eligible. The CDC must still review for other

eligibility issues under the SOP. 50 10 5 (F) Pg. 243.

iii. Review of a franchise agreement is conducted by SBA for all loans

processed through the SLPC (rather than all regular and ALP loans).

50 10 5 (F) Pg. 244.

iv. When the franchise is on the franchise registry, the CDC’s file must

contain the following: (i) executed franchise agreement and any

approved attachments or exhibits, (ii) executed addendum (if

required), (iii) executed certification of franchise documents, and (iv)

compliance with any required eligibility notes. 50 10 5 (D) Pg. 270.

v. When a franchise is not on the registry or when the CDC chooses not

to use the registry, CDCs should consult with the Franchise Findings

List to determine if there have been any findings that would result in

a determination of affiliation and whether there are any fixes

18

Id.

13

available. 50 10 5 (F) Pg. 245.

vi. Procedures are set forth for a franchise to appeal the decision not to be

placed on the registry. 50 10 5 (F) Pg. 250.

C. Credit Analysis

In order to qualify for an SBA loan, a borrower must be creditworthy, contribute a

small portion of the equity, and provide reasonable assurance of repayment. Lenders are

required to assess the applicant’s credit factors to determine that the borrower is able to

reasonably assure repayment. The most important factor in assuring repayment is the

cash flow of the business, not the liquidation of collateral.19

A lender must review the

following to adequately evaluate the borrower’s creditworthiness: character, reputation,

and credit history; experience and depth of management; strength of business; past

earnings, projected cash flow, and future prospects; ability to repay the loan with

earnings from the business; sufficient invested equity to operate on a sound financial

basis; potential for long-term success; nature and value of collateral; and any affiliates’

effect on the applicant’s repayment ability.20

D. Use of Proceeds

Borrowers may use SBA Loan proceeds for a variety of sound business purposes,

including starting a new business or assisting in the operating, acquisition, or expansion

19

SOP 50 10 (5)(F), Subpart B, Chapter 1.III.9

20 13 C.F.R. § 120.150

of an existing business. The following are the specific uses that the borrower may use

loan proceeds for:

Use of Proceeds 7(a) Loans vs. 504 Loans

Acquire land and/or

purchase, construct or

renovate buildings

Yes Yes

Improve a site (e.g.

grading, streets, parking,

landscaping), up to 5%

for community

improvements

Yes Yes

Acquire and install fixed

assets such a capital

equipment or heavy

machinery

Yes Yes

Purchase Inventory Yes Cannot be used for

inventory financing

Supplies Yes No; unless to finance

items such as furniture,

fixtures and other

equipment that are

essential to and directly

related to the construction

project

Raw Materials Yes No

Working Capital Yes No; except if amount less

than 2% of gross

debenture as a part of new

construction including

contingencies (SOP 50

(10) (F) Subpart C. pg.

280)

Refinancing Yes; subject to SBA

policies regarding debt

refinancing (SOP 50

(10)(F) pgs. 114 ff. )

Yes when refinancing in

connection with an

expansion; or short term

bridge financing for

acquisition of vacant land

Business Acquisition Yes; subject to SBA

policies regarding change

of ownership and business

valuations 13 CFR

§120.202 (SOP 50 (10)(F)

pgs. 120 ff.)

Only if demonstrates that

job would be lost if not

for change of ownership

and only costs associated

with fixed assets. All

other costs (i.e. inventory,

goodwill, other

15

intangibles) must be

financed in some other

manner, including a 7(a)(

Loan (SOP 50 (10)(F) pg.

282)

Borrowers are prohibited from using proceeds for certain items. If loan proceeds

are used for the following purposes:

Effecting a partial change of business ownership or a change that will not benefit

the business;

Permitting the payments, distributions or loans to be paid to associates of the

applicant (except for ordinary compensation for services rendered);

Investing in real or personal property acquired and held primarily for sale, lease,

or investment;

Refinancing existing debt when the lender is in a position to sustain a loss, and

SBA would take over the loss by refinancing;

Repaying delinquent state or federal withholding taxes or any other funds that

should be held in trust or escrow; and/or

Paying for a non-sound business purpose.21

E. Equity Injection

Lenders are required to verify the borrower’s equity injection before disbursing

loan proceeds. The lender should maintain evidence of this verification in their loan files.

Lenders must use every reasonable and prudent effort to verify that equity is injected and

21

13 C.F.R. § 120.130

will be used in accordance with its intended purpose.22

If there is a cash injection,

verification should include documentation such as a copy of a check along with evidence

that the check was processed.23

For example, the lender could show one bank account

statement dated before the disbursement showing that the funds were available and

deposited into the borrower’s account. Also, the lender could use a copy of an escrow

settlement, as well as a bank statement showing the injection of equity into the business

prior to disbursement. Generally, a promissory note or financial statement is not

sufficient evidence of cash injection. If the equity injection is funded by assets, the lender

has a duty to carefully determine the value of non-cash assets.24

Additionally, the lender must determine if the equity injection is “material” to the

borrower’s operation. For this purpose, “material” means any equity injection that is

greater than 1/3 of the amount of the loan or $200,000. If the cash equity injection is

material, the lender must verify the existence of the injection, as described above, in

addition to the source of the cash equity injection. The purpose of verifying the source of

the injection is to ensure that the funds will be used for the intended business purpose.

Specifically, the lender must present evidence demonstrating that the borrower did not

use the proceeds of the loan to fund the equity injection.25

22

13 C.F.R. § 120.102; SOP 50 51 (2)(B), Chapter 13, Paragraph 24

23 Id.

24 SOP 5010 (5)(F) Chapter 4 (I)(F)(3)

25 SOP 50 51 (2)(B), Chapter 13, Paragraph 24

17

F. The Loan Application26

SBA requires an application for a business loan to contain certain forms and

documentation for approval of the guaranty application. The information contained

within the loan application package should give SBA a clear understanding of the

purpose for the financing request, the amount of financing requested, the subject matter

to be financed, the business repayment ability, the basis for repayment, and the nature of

the business. A primary consideration of the SBA is repayment ability from business

cash flow. Other factors to be considered include the ability and experience of the

management team, the collateral offered as security, the financial strength of personal

guarantees, the ability of the owner to contribute equity, and the strength of historical

financial ratios.

1. Contents of the Loan Application Package

The loan application package should include any of the following items

applicable to the particular facts of the financing request:

a. A description of the business, which may include the following:

i) Synopsis of company and background;

ii) Summary of industry and industry background;

iii) Summary of business operational aspects;

iv) Detailed description of physical facilities, office and plant

locations, size and equipment;

v) Product, employee, and marketplace reports;

vi) Service information, sales method, and territories;

26

See SOP 50 10 (5)(F) Subpart B, Chapter 6

vii) List of major customers;

viii) Number of employees;

ix) Whether union or non-union;

x) Current potential in terms of production, employee

numbers and expansion plans; and

xi) References from suppliers and trade organization.

xii) Industry analysis

b. Description of competition.

c. Purpose for credit request;

d. Amount of credit requested; and

e. Proposal for credit repayment.

f. Comprehensive and well organized financial records including:

i) Current interim financial statements (dated within 120

days);

ii) Financial statements for the past 3 fiscal years;

iii) Tax returns for the past three fiscal years;

iv) Aging of receivables and payables (including supplier and

customer terms); and

v) Personal financial statement(s) (current within 90 days).

g. Cash flow projections for the next 2 years (minimum) with the first

year itemized on monthly basis; and

h. Summary of assumptions for cash flow projections.

i. Appraisal of collateral.

j. Type of organization; and

k. Date of business’ inception.

l. Breakdown of business ownership (including):

i) Listing of officers and percent ownership;

ii) Listing of directors and percent ownership; and

19

iii) Listing of members / managers and percent ownership.

m. Resumes of management and owners;

n. Corporate or organizational documents;

o. Organizational chart; and

p. Other outstanding financing including leases.

2. Specific Application Forms

SBA requires specially designed application forms which are available

upon request from any CDC or by contacting the SBA directly. All SBA forms

are also available on the web in PDF format at www.sba.gov.

In general, the application must contain the following SBA forms:

7(a) Loans vs. 504 Loans

SBA Form 191927

, the Borrower

Information Form

SBA Form 1244 Part A,

Checklist of Application Exhibits

SBA Form 1920, Lender

Application Form

SBA Form 1244 Part B,

Application for 504 Loan

Lender’s Credit Memo SBA Form 1244 Part C,

Statements Required by Law and Executive

Order

Documents required Based on

Condition of the Loan

SBA Form 1244 Part D,

Third Party Lender Certification for Debt

Refinancing

SBA Form 912, Statement of

Personal History (required for all

principals, officers, directors and

owners of 20% or more of the

borrower);

SBA Form 912, Statement of Personal

History (required for all principals,

officers, directors and owners of 20% or

more of the borrower);

27

SBA Information Notice 5000-1306 issued February 7, 2014 announced the release of the updated Forms 1919

and 1920, which consolidated processing methods to one set of forms. Form 1919 replaces the former the former

SBA 7(a) Eligibility Questionnaire, while 1920 replaces the former Forms 4 Application for Loan and Form 4-I.

Personal Financial Statement, dated

within 90 days of submission to

SBA, with all owners of 20% or

more and any proposed guarantors

(lenders may use their own form or

SBA Form 413);

Personal Financial Statement, dated within

90 days of submission to SBA, with all

owners of 20% or more and any proposed

guarantors (lenders may use their own form

or SBA Form 413);

SBA Form 159, Fee Disclosure and

Compensation Agreement (must be

completed for each agent

compensated by the borrower or

lender);

SBA Form 159, Fee Disclosure and

Compensation Agreement (must be

completed for each agent compensated by

the borrower or lender);

Copy of IRS Form 4506-T, Request

for Copy of Tax Return;

Copy of IRS Form 4506-T, Request for

Copy of Tax Return;

SBA National 7(a) Authorization

Boilerplate language must be

complete; and if applicable:

SBA National 504 Authorization

Boilerplate, draft complete as applicable

for specific transaction

The following information may be required in order to complete the SBA forms for

loan application listed above:

Business Financial Statements dated within 90 days of submission (must consist

of year-end balance sheets for the last 3 years, year-end profit and loss statements

for the least three years, reconciliation of net worth, interim balance sheet, interim

profit and loss statements, affiliate and subsidiary financial statement

requirements, and cash flow projection);

Description of the business, list of principals, and the copy of the lease if

applicable;

Detailed list of all machinery and equipment to be purchased with loan proceeds

and cost quotes;

Equity Injection Form explaining type and source of applicant’s equity injection;

21

If real property is to be purchased with loan, need appraisal, lender’s

environmental questionnaire, cost breakdown, and copy of purchase agreement;

If an existing business is being purchased, need a copy of buy-sell agreement,

copy of business valuation, pro forma balance sheet for the business being

purchased as of the date of the transfer, copy of seller’s financial statements for

the last three complete fiscal years or for the number of years in business if less

than three years, interim statements no older than 90 days, and an alternate source

of verifying revenue if seller’s financial statements are not available; or

If business is a franchise, SBA requires a determination as to whether affiliation

exists. In all cases the franchise agreement and any addendums must be executed

prior to the first disbursement. To facilitate this review SBA makes a list of

franchise agreements available (the “Registry” at www.franchiseregistry.com ). In

order to rely on the Registry for its determination, the lender’s loan file must

include the executed franchise agreement (and any addendums), the Executed

Certification of Franchise Documents (available on the Registry website) and

compliance with any eligibility notes.28

III. Closing

The lender must comply with the Authorization, which lists the required conditions

which must be met for closing. A lender is expected to be able to carry out the necessary actions

to meet the conditions in the Authorization, including:

28

13 C.F.R. § 120.191; see also SOP 50 10 (5)(F) Subpart B, Chapter 1.III.9.d

A. Lender’s Responsibility (7(a) Loans):

1. Close the Loan in accordance with terms and conditions of the

Authorization;

2. Obtain valid and enforceable Loan documents, including obtaining the

signatures or written consent of any persons (e.g. spouses of obligors)

necessary to bind and create and valid lien on community or marital

property;

3. Retain all Loan closing documents, for audit as well as submitted to SBA

for request to honor guarantee.

B. CDC’s Responsibility (504 Loans):

1. Close Loan in accordance with the Authorization

2. Obtain valid and enforceable loan documents and all required lien

positions, along with the written consent of any persons (e.g. obligor’s

spouses) necessary to create a valid lien position on community or marital

property;

3. Obtain all necessary certifications;

4. Obtain a legal opinion from CDC counsel or borrower’s counsel if there is

one;

5. Certify to SBA that there has been no substantial unremedied adverse

change in the Borrower’s financial condition, organization, operation, or

assets (as set forth in CDC Certification, Form 2101);

23

6. Certify that all elements of Project Costs have been paid in full and that

the Interim Lender, Third Party Lender, Borrower and CDC have each

contributed to the Project in the amount and manner authorized by SBA;

7. Properly complete all closing documents using SBA Required Forms;

8. Submit Form 2286 and the 504 Debenture Closing Checklist and copies of

required documents to SBA for review and approval prior to debenture

sale deadlines

C. Borrower’s Responsibility

1. Comply with all conditions reasonably imposed by Lender or CDC, in

addition to those of the Authorization;

2. Cooperate with Lender or CDC in closing the Loan and obtaining

necessary certifications and documentation;

3. Execute all documents required by SBA;

4. Submit all documents required by CDC or Lender counsel sufficiently in

advance of loan closing;

5. Certify that all elements of Project Costs have been paid in full and how

they were paid;

6. Certify that any bankruptcy or insolvency proceeding involving, or

pending lawsuit against, Borrower, Operating Company or any of their

principals as been disclosed in writing to Lender or CDC.

D. Issues, Fees and Forms

A part of the responsibility of the parties to the transaction, as outlined above, is

to obtain and use SBA required forms in closing the transaction. In addition to outlining

terms and conditions for the SBA loan, the Authorization lists which SBA forms should

be used. Specific forms typically listed in the SBA Authorization are as follows:

7(a) Loans 504 Loans

SBA Form 147 Note SBA Form 1505 Note

SBA Form 1050 Settlement Sheet SBA Form 1504 Debenture

SBA Form 159 7(a) Compensation

Agreement

SBA Form 159 (504) Compensation Agreement

SBA Form 148, Guarantee SBA Form 148, Guarantee

SBA Form 148L, Limited Guarantee, when

required

SBA Form 148L, Limited Guarantee, when

required

SBA Form 601, Agreement of Compliance,

when required

SBA Form 2101, CDC Certification

SBA Form 722, Equal Opportunity Poster SBA Form 722, Equal Opportunity Poster

SBA Form 1624, Certificate of Debarment SBA Form 1506, Servicing Agent Agreement

SBA Loan Agreement SBA Form 1528, CDC Board Resolution

Borrower and Operating Company

Certifications

SBA Form 2286, 504 Debenture Closing

Checklist

IRS Form W-9 SBA Form 2287, Third Party Lender Agreement

SBA Form 2288, Interim Lender Certification

SBA Form 2289, Borrower and Operating

Company Certification

Opinion of CDC Counsel

IRS Form W-9

1. Fees.

a. The SBA 7(a) Guarantee Fee.

To counteract the costs of the 7(a) loan program, SBA charges the lender a

guaranty fee and a servicing fee for each 7(a) loan. The guarantee fee is a one-time

charge that the lender is obligated to pay SBA. If the loan has a maturity of less than

twelve months, the guaranty fee must be submitted with the application, and the fee will

25

be 0.25 percent of the guaranteed portion of the loan. For loans with a maturity greater

than one year, the guaranty fee can be anywhere between 2 percent to 3.75 percent

depending on the amount of the guaranteed portion of the loan, and the fee must be paid

within 90 days of the loan’s approval.29

The lender can charge this fee to the borrower

once SBA gives a loan approval. If the lender does not pay the guaranty fee in a timely

manner, SBA can terminate the guaranty.30

b. The SBA 7(a) Ongoing Servicing Fee.

Unlike the one-time charge for the guaranty fee, the servicing fee is an on-

going charge paid annually. This fee will be a percent of the outstanding balance of the

guaranteed portion of the loan. The servicing fee will remain in effect for the life of the

loan. Contrary to the guaranty fee, the lender may not charge the borrower for this fee.31

c. Fees Associated with SBA 504 Loans.

Some of the fees that a Borrower may be charged at the time of closing

and are specifically associated with a 504 Loan are outlined below (13 CFR § 120.971;

13 CFR § 120.972; SOP 50 10(5)(F), Subpart C, Chapter 8, I.).

Processing Fee

(13 CFR § 120.971 (a))

Up to 1.5% of Net

Debenture

Paid by Borrower to CDC, financed as

part of Gross Debenture

Closing Fee

(13 CFR § 120.971 (a))

Up to $2,500 Fee that CDC may charge for its

expenses associated with closing and

costs of counsel; limited to a

maximum of $2,500 that may be

29

15 U.S.C. § 636(a)(18); 13 C.F.R. § 120.220(a)-(b)

30 13 C.F.R. § 120.220(e)

31 13 C.F.R. § 120.220(f)

financed into the Debenture proceeds

Underwriter’ s Fee

(13 CFR § 120.971 (c))

0.4% at closing for

20-year Debentures

Paid by Borrower to CDC, financed as

part of Gross Debenture

Underwriter’s Fee

(13 CFR § 120.971 (c))

0.375% at closing for

10-year Debentures

Paid by Borrower to CDC, financed as

part of Gross Debenture

SBA Guaranty Fee

(13 CFR § 120.971 (d))

0.5% of Net

Debenture collected

at closing

Paid by Borrower to CDC, financed as

part of Gross Debenture

Funding Fee

(13 CFR § 120.971 (d))

0.25% of Net

Debenture collected

at closing

Paid by Borrower to CDC, financed as

part of Gross Debenture

Participation Fee (Third Party Lender Fee)

(13 CFR § 120.972)

0.50% of the amount

of the mortgage held

in senior lien position

– One-time fee

Fee from Third Party Lender to CDC;

fee may be paid by Borrower, CDC or

Third Party Lender

2. Disbursements.

As far as disbursing the loan, the lender can establish its own disbursement

schedule, but all proceeds must be disbursed within 48 months after the date of the

approval.32

Also, the lender has the option of calculating the loan maturity date from

either the date of the note or the date of the initial disbursement. However, a lender must

abide by the maximum maturity dates, which are 25 years for real estate and up to 10

years for equipment, machinery, and inventory loans.33

3. Repayment.

When using the SBA Note (Form 147) to document for documenting a SBA

7(a) Loan, the repayment terms must contain the exact boilerplate language for the

32

SOP 50 10 (5)(F), Subpart B, Chapter 7.IV.A

33 15 U.S.C. § 636(a)(5); 13 C.F.R. § 120.212

27

conditions in the Authorization.34

The lender has no option to enter its own specific

language for the repayment terms, without approval from SBA. Generally, 7(a) term

loans are repaid on a monthly basis with principal and interest from the loan. For any

variations that occur between agreed upon repayment terms and the language of the

Authorization, lender must request SBA modify the SBA Authorization to conform.

For variable rate loans, the lender can require different payment amounts as

the interest increases; whereas, a fixed-rate loan will require the same payment

throughout the life of the loan because the interest rate is constant. If the maturity is less

than 15 years, the lender may not charge the borrower if the loan is paid off before

maturity. The lender must be sure that it abides by these conditions when structuring the

terms of the loan.

4. Verification of Use of Proceeds

Lenders are responsible for verifying that loan proceeds are being used in

accordance with its authorized purpose. SBA Form 1050 Settlement Sheet requires

lenders to document disbursement of loan proceeds through the issuance of joint payee

checks. If the lender does not use joint payee checks to evidence use of loan proceeds, the

lender should provide copies of paid receipts, paid invoices or other supporting

documentation clearly showing that the proceeds were used in accordance with the loan

34

U.S. Small Business Administration, “7(a) Loan Repayment Terms,” http://www.sba.gov/content/7a-loan-

repayment-terms

authorization. Prudent lending standards mandate that the lender take reasonable

measures to verify the use of loan proceeds.35

5. Collateral/Lien Position

The lender must obtain proper lien position on collateral. The lender should

collateralize the loan to the maximum extent possible. If business assets do not fully

secure the loan, the lender should take/require available personal assets to be used as

collateral. Typically, the lender should create a list of significant collateral securing the

loan. The list of collateral should be kept with a UCC financing statement to ensure that

the lender will be able to establish priority of its secured position on the specified

collateral.36

Additionally, the collateral list with the UCC financing statement will greatly

assist the process in the event of default and consequent liquidation of the collateral.

6. Guaranties

The lender must obtain at least one individual or corporate guaranty for each

loan. If there is any entity that owns at least 20% of the borrower entity, this entity must

provide an unlimited full guaranty. If an individual owns 20% or more of the borrower

entity, the lender must obtain an unlimited full personal guaranty from this individual.

Additionally, the spouse of the personal guarantor must sign a guaranty on any interest

that he or she has in the collateral. In order to determine the assets available to support

35

SOP 50 51 2B, Chapter 13, Paragraph 22

36 SOP 50 51 2B, Chapter 13, Paragraph 27

29

the guaranty, the lender must obtain financial statements from all necessary individuals

and entities.37

7. IRS Tax Transcripts

Lenders must verify the financial information submitted with a loan

application using IRS Form 4506.38

IRS Form 4506 can be downloaded from IRS

website at IRS.gov. The IRS requires a fee for processing IRS Form 4506. However IRS

Form 4506-T can be downloaded from the SBA website at SBA.gov and the processing

fee will be waived. Even if this requirement is not specified in the Authorization, the

lender must verify the financial information to be sent to SBA against the information

sent to the IRS to ensure there are no discrepancies. Also, it is important to ensure the

borrower is up to date on taxes because the borrower is prohibited from using any of the

loan proceeds to pay past-due taxes.39

8. Environmental Investigation

The lender is required to get an environmental investigation on all commercial

property offered as security for the loan. The lender must check the NAICS to ensure that

the property is not in an environmentally sensitive area. Once the lender determines that

it is not likely that the property has environmental contamination, the lender must submit

an environmental questionnaire to SBA with recommendations and request SBA send an

37

SOP 50 10 (5)(F), Subpart B, Chapter 4.II.B

38 SOP 50 10 (5)(F), Subpart B, Chapter 5.III

39 13 C.F.R. § 120.160

environmental approval.40

If there is evidence of contamination, the lender must get a

Phase I and/or Phase II Environmental Site Assessment (ESA) and take necessary actions

depending on the assessment results.41

9. Insurance

The Loan Authorization will contain the insurance requirements from

origination of the loan. The Authorization will always require hazard insurance to insure

the collateral.42

Also, the lender should always get a title commitment (and associated

policy of title insurance) on the property to insure the required lien position on the

property.43

Additionally, the lender must get a Standard Flood Hazard Determination

(FEMA Form 81-93) done on the property.44

If the property is in a special flood hazard

area, the lender should require the borrower to get flood insurance through the National

Flood Insurance Program (NFIP).

As opposed to insuring the collateral with hazard and flood insurance, life

insurance is actually considered collateral. When the viability of the business and

repayment ability is directly attached to one individual, the lender should require an

assignment of life insurance. If the loan is fully collateralized otherwise, life insurance

may not be necessary, but it should be obtained if possible to protect the lender’s interest

in a key individual of the entity. In addition to the common insurance requirements

40

SOP 50 10 (5)(F), Subpart B, Chapter 4.III

41 SOP 50 10 (5)(F), Subpart B, Chapter 4.III

42 13 C.F.R. § 120.160(C)

43 SOP 50 57, Chapter 9, Paragraph B

44 13 C.F.R. § 120.170

31

mentioned above, the lender may also need to require other insurance suitable to the loan,

such as liability insurance, disability insurance, and worker’s compensation insurance.45

It is crucial that the lender monitor the status of the insurance. If the insurance

lapses and the property is destroyed or the insured dies, the lender will be accountable for

the loss. As soon as the lender becomes aware of a lapse in the insurance, the lender must

determine what action is considered prudent and reasonable. In some instances, the

prudent and reasonable action may be to force the insured to guarantee that the lender and

SBA are protected under the insurance policy, either by reinstating the insurance or

signing a new policy.46

10. Standby Agreements

A lender must obtain a Standby Agreement (SBA Form 155) if there are other

creditors involved in the secured property. The standby creditor must agree to

subordinate any lien rights in collateral securing the loan to the lender’s rights in the

collateral, or if applicable subordinate, in full or in part, any payment rights due standby

creditor to lender’s rights to payment. The standby creditor must also agree not to take

any action against the borrower or any collateral without lender’s consent.47

This

agreement is essential to ensure that the lender obtains the necessary lien and debt

position.

45

SOP 50 10 (5)(F), Subpart B, Chapter 5.II

46 U.S. Small Business Administration, “Helpful Hints for Navigating the National Guaranty Purchase Center,”

http://www.sba.gov/sites/default/files/Helpful_Hints_Guide_20120504.pdf

47 SOP 50 10 (5)(F), Subpart B, Chapter 5.IV

IV. Servicing

All lender actions must comply with SBA loan program requirements.48

While the lender

is servicing or liquidating a loan, there are many actions which require prior SBA approval or

notification.49

The Office of Financial Program Operations (OFPO) has developed a Servicing

and Liquidation Actions 7(a) Lender Matrix to ensure SBA lenders are able to find and comply

with Agency Loan Program Requirements.50

While servicing a loan, the lender is responsible for

actions necessary to support the growth of the business, as well as evaluating and responding to

problems which may arise.51

There are red flags indicating potential problems that must be

addressed when servicing loans, including: payment default notices; requests for relief in loan

terms or conditions; cash flow problems; adverse changes; cancellation of life or hazard

insurance policies; death or illness of a principal; tax problems; substantive changes in

management or control of the business; fire or loss of collateral due to natural disasters; legal

actions; loss of contracts; borrower’s failure to submit financial statements timely; and/or loan

delinquencies in excess of 60 days.52

The lender’s handling of the abovementioned situations in

the servicing process is crucial to the final review of the guaranty purchase.

48

See SOP 50 10 5, Subpart B and SOP 50 57; 13 C.F.R. § 120.535; 13 C.F.R. § 120.536

49 13 C.F.R. § 120.536

50 U.S. Small Business Administration, “7(a) Servicing and Liquidation Actions Matrix,”

http://www.sba.gov/content/servicing-and-liquidation-actions-7a-lender-matrix

51 SOP 50 50 4A

52 Id.

33

A. Necessity of Lender Compliance

In order to safeguard the SBA guaranty and interest, loans must be structured in

accordance with SBA loan requirements, comply with the SBA loan authorization, and certify

that all matters were performed with due diligence.53

It is imperative for lenders to understand

that the SBA authorization is not a contract to make a loan, so there is not an actual “guaranty”54

against loss or commitment to fund at the time the Authorization is issued. Nor can a potential

borrower force a lender to make a loan to a borrower merely because SBA has issued a loan

authorization. The making of the loan remains a credit decision of the lender. If a loan is made

by a lender under the SBA loan authorization, it is an agreement between SBA, as an agency of

the United States Government, and the lender. The borrower is not a party or a third party

beneficiary to any loan authorization. SBA has established Standard Operating Procedures

(SOPs) as practical requirements for lenders based on sound lending practices for all steps of the

loan process. In addition to complying with statutory and regulatory law, lenders must abide by

the SOPs to ensure that the borrower is creditworthy and the loan proceeds will be disbursed

according to the authorization, so that the guaranty will be realized.55

In the event of any conflict

between a loan Authorization and the guidelines established by the SOP, the SOP controls (SOP

50 10(5)(F), page 298, super priority of SOP versus loan authorization boilerplate).

53

13 C.F.R. § 120.410

54 Id.

55 U.S. Small Business Administration, “Standard Operating Procedures,”

http://www.sba.gov/about-sba-services/7481

B. Servicing and Liquidation Actions

1. Lender Documentation & Reporting

SBA is concerned with materiality and harm.56

The lender should

proactively approach any issues because early identification could lead to possible

solutions to ensure the guaranty. Therefore, the lender should ensure all actions

are properly documented and prudent to minimize the effect of an adverse action

on SBA’s decision to purchase.57

The lender’s actions will be reviewed to

determine if they were prudent, lawful and commercially reasonable, and

consistent with the lender’s practice on its non-SBA loans.58

Therefore,

documentation is crucial to evidence justifications for decisions.

a. 1502 Reports

In addition to documenting all actions, all SBA loans must be reported

on the SBA 1502 report to the Fiscal Transfer Agent (FTA) once a month.59

When the loan is transferred into liquidation status, the lender must change the

status code on the monthly 1502 report to “5” for liquidation status. After

purchase of the guaranty, quarterly liquidation reports must be submitted to

SBA at sbachargeoff@sba.gov.60

Once the lender becomes reasonably aware

that the loan is ready for charge off, the Wrap-Up report should be sent, but

56

SOP 50 57, Chapter 24, Subpart B

57 U.S. Small Business Administration, “Sale-Release of Collateral,” http://www.sba.gov/content/sale-release-

collateral

58 13 C.F.R. § 120.535

59 SOP 50 57, Chapter 3, Subpart F; U.S. Small Business Administration, “Lender Reporting,”

http://www.sba.gov/category/lender-navigation/lender-reporting

60 Id.

35

only after the lender has made a final determination that the loan will not be

fully repaid after all worthwhile collateral has been liquidated and no further

recoveries are anticipated within a reasonable time.61

This report should

address the status of the borrower, guarantors, collateral, workout or

restructuring plans, and liquidation activities, including sale of collateral,

foreclosures and litigation.62

b. Site Visit Reports

Additionally, the lender must submit a Site Visit Report after every

visit to the borrower’s business premise.63

All lenders are required to make

timely site visits to assess the value of the property. Additionally, lenders must

take inventory of loan collateral to assess workout possibilities and develop a

significant liquidation plan. A site visit is generally considered timely within

15 calendar days of the occurrence of an event that would cause the loan to be

placed in liquidation, such as abandonment of the business, bankruptcy of the

borrower when loan is in default and substantial collateral exists, litigation

against the borrower that may have a substantial adverse effect on the lender’s

interest, or foreclosure by a prior lien holder on substantial collateral. If there

is significant collateral that could be removed or the value could be depleted,

61

SOP 50 57, Chapter 26

62 SOP 50 57, Chapter 3, Subpart F

63 Id.

the site visit should be made as soon as possible. A current appraisal or third

party inspection is acceptable to assess the current collateral value.64

Once all the requirements for collection and liquidation are satisfied,

the lender must submit a Wrap-Up Report for each loan.65

Before sending a

Wrap-Up Report, the lender must be reasonably aware that the loan is ready

for charge off because loans cannot be sent to Treasury for further collection

if the lender is still servicing the loan.66

A lender must comply with all

reporting requirements to realize the guaranty.

c. Transcript of Account

A lender should document all transactions to the borrower’s account.

If the loan is in default, the lender must submit a certified transcript of account

to SBA when the lender requests guaranty purchase.67

The transcript must

adequately reflect all transactions on the borrower’s account. Specifically, the

lender must include the payment receipt dates, next due date, interest rates in

effect throughout loan’s term, application of payments and sale of collateral

proceeds, and the interest paid to date.68

The lender must carefully document

all information because the lender has to certify that it is a true and accurate

reflection of the account.

64

SOP 50 51 (2)(B), Chapter 13, Paragraph 28

65 SOP 50 57, Chapter 26

66 Id.

67 SOP 50 50 (4)(D)

68 Id.

37

2. Monitoring Creditworthiness

The lender is required to continually monitor the borrower’s

creditworthiness. The lender is responsible for ensuring the borrower maintain a

steady financial and operational condition. The lender can monitor credit by

requiring the borrower to submit financial statements, maintaining constant

contact with the borrower on the status of the business, and reviewing credit

reports, credit scores, or tax information when needed to verify the borrower is

still creditworthy.69

3. Servicing & Liquidation Approval

As mentioned earlier, the lender should refer to the Servicing and

Liquidation Action 7(a) Lender Matrix before any action to determine whether it

requires prior SBA approval or notification.70

Generally, the lender will need

written approval from SBA for the following types of servicing activities:

Altering substantially the terms or conditions of any loan

(including an increase in principal amount or change in interest

rate);

Releasing collateral having a cumulative value in excess of 20

percent of the original loan amount;

Accelerating the maturity of the note;

69

SOP 50 57, Chapter 3, Paragraph E

70 U.S. Small Business Administration, “7(a) Servicing and Liquidation Actions Matrix,” www.sba.gov/content/7a-

servicing-and-liquidation-actions-matrix

Bringing a suit upon any loan;

Compromising or waiving a claim against any borrower, guarantor,

obligor, or creditor arising out of the loan; and/or

Increasing the amount of any prior lien by the lender on collateral

securing the loan.71

If any servicing or liquidation action does not require prior approval,

lenders should document all justifications for their decisions with supporting

documentation in their file.

4. Liquidation & Litigation Plans

All Lenders are expected to liquidate and conduct debt collection litigation

for 7(a) loans in their portfolio no less diligently than for their non-SBA portfolio.

This includes liquidating in a prompt, cost-effective, and commercially reasonable

manner, consistent with prudent lending standards, and in accordance with Loan

Program Requirements. All collateral should be liquidated and all worthwhile

avenues of collection should be pursued until loans can be charged off. Lenders

must take precaution in liquidation actions to ensure that no actual or apparent

conflict of interest will result from the lender’s actions. For instance, if the lender

has any loans that are not guaranteed by SBA, the lender may not take any action

which confers a preference to the lender over recovery on the SBA loan.72

71

13 C.F.R. § 120.513

72 U.S. Small Business Administration, “Helpful Hints for Navigating the National Guaranty Purchase Center,”

http://www.sba.gov/sites/default/files/Helpful_Hints_Guide_20120504.pdf

39

Lenders should prepare a liquidation plan based on the facts known and

reasonable assumptions. This practice is considered prudent and commercially

reasonable to maximize recovery. SBA Form 1979 can be used to properly

prepare your liquidation plan.73

Further, lenders must liquidate all business

personal property that secures the loan before the lender submits a purchase

package to SBA, unless the borrower has filed for bankruptcy.74

In addition to a liquidation plan, lenders should prepare a litigation plan to

include any work to be performed and fees to be charged. Depending on the

anticipated cost and the nature of the work, lenders must obtain SBA’s prior

approval of a litigation plan before entering into any non-routine litigation. Non-

routine litigation includes factual or legal issues in dispute that require resolution

through adjudication; legal fees that are estimated to exceed $10,000; lender has a

potential or actual conflict of interest with SBA; or lender has made a separate

loan to the borrower, which was not a loan by SBA.75

Practice Tip: If a lender engages in non-routine litigation, incurs legal

expenses, and then submits its litigation plan and invoices for legal work already

performed, these legal expenses could be challenged and might be disallowed.

73

U.S. Small Business Administration, “SBA Form 1979, Liquidation Plan Format,”

www.sba.gov/sites/default/files/bank_sba1979.pdf

74 13 C.F.R. § 120.520(a)

75 U.S. Small Business Administration, “Litigation Plans,” www.sba.gov/content/litigation-plan

V. Pitfalls

SBA does not have to honor a guaranty purchase request in full or in part on a 7(a) loan if

the lender failed to comply materially with a loan program requirement; failed to make, close,

service, liquidate or litigate the loan in a prudent manner; placed SBA at risk through improper

action or inaction; failed to disclose a material fact to SBA in a timely manner; or misrepresented

a material fact to SBA regarding the loan.76

The following are the common reasons cited by SBA

for which a guaranty is repaired or denied:

A. Expiration after Maturity Issue

If the lender does not request purchase within 180 days after loan maturity, SBA

is not obligated to purchase the guaranty.

B. Lien and Collateral Issues

Lien and collateral issues may result in a missed recovery. Examples of lien and

collateral issues that may arise are as follows:

· Failure to obtain required lien position;

· Failure to properly perfect security interest; and/or

· Failure to fully collateralize loan at origination when additional collateral was

unavailable.

76

13 C.F.R. § 120.524(a)

41

C. Unauthorized Use of Proceeds Issues

Recovery can be repaired or denied when proceeds are disbursed for purposes

inconsistent with the loan authorization or subsequent modifications without a

business justification. Typically, if proceeds are distributed in a manner not consistent

with authorization, the guaranteed amount may be repaired. However, a complete

denial will result when early default and improper use of the proceeds cause the

failure of the business.

D. Liquidation Deficiency Issues

Liquidation deficiency will generally result in a repair. However, a denial may occur

when harm is the full value of the outstanding balance. The following situations are

examples of liquidation deficiencies:

· Failure to conduct a “Site Visit” which resulted in a missed recovery;

· Improper safeguarding or disposition of collateral which resulted in missed

recoveries; and/or

· Misapplication of recoveries to lender’s loan when SBA-guaranteed loan has lien

priority.

E. Undocumented Servicing Actions Issues

An undocumented servicing action will generally result in a repair of recovery

under the following situations:

· Liens not properly renewed during servicing on worthwhile collateral;

· Release or subordination of collateral without documented business justification;

· Allowing hazard insurance to lapse on major collateral when collateral is

subsequently destroyed; and/or

· Failure to maintain life insurance on principal when principal subsequently dies.

F. Early Default Issues

Early default can result in a denial if it is determined to be the reason for business

failure under the following circumstances:

· Missing or unsupported verification of required equity injection, which will include

verification of source in certain cases; and/or

· Missing or unsupported documentation of verification of borrower financial

information with IRS when financial information was relied on in lender’s credit

analysis.

43

EXHIBIT “A”

SBA Form 1919

(Borrower Application for 7(a) Loan)

45

47

49

EXHIBIT “B”

SBA Form 912

(Statement of Personal History)

51

53

EXHIBIT “C”

SBA Form 413

(Personal Financial Statement)

55

57

59

EXHIBIT “D”

SBA Form 159

(Compensation Agreement for 7(a) Loan)

61

63

EXHIBIT “E”

IRS Form 4506T

(Request for Tax Transcript)

65

EXHIBIT “F”

SBA Form 147

(Note for 7(a) Loan)

67

U.S. Small Business Administration

NOTE

SBA Loan # @@

SBA Loan Name

@@

Date September @@, 2014

Loan Amount $@@

Interest Rate @@Prime + @@%; Adjusting every @@ years from the date of the Note

Borrower @@

Operating Company

@@N/A

Lender

@@

1. PROMISE TO PAY:

In return for the Loan, Borrower promises to pay to the order of Lender the amount of @@ AND @@/100--

-($@@) ------ Dollars, interest on the unpaid principal balance, and all other amounts required by this Note.

2. DEFINITIONS:

“Collateral” means any property taken as security for payment of this Note or any guarantee of this Note.

“Guarantor” means each person or entity that signs a guarantee of payment of this Note.

“Loan” means the loan evidenced by this Note.

“Loan Documents” means the documents related to this loan signed by Borrower, any Guarantor, or anyone

who

pledges collateral.

“SBA” means the Small Business Administration, an Agency of the United States of America.

3. PAYMENT TERMS:

Borrower must make all payments at the place Lender designates. The payment terms for this Note are:

@@This Note will mature in 10 years from date of Note.

@@The initial interest rate is 6.00% per year for 3 years. This initial rate is the prime rate in effect on the first business day of the

month in which SBA received the loan application, plus 2.75%. The interest rate on this Note will then begin to fluctuate as described

below. The initial interest rate must remain in effect until the first change period begins.

@@Borrower must pay principal and interest payments of $4,497.00 every month, beginning one month from the month this Note is

dated; payments must be made on the first calendar day in the months they are due.

@@Lender will apply each installment payment first to pay interest accrued to the day Lender receives the payment, then to bring

principal current, then to pay any late fees, and will apply any remaining balance to reduce principal.

@@The interest rate will be adjusted every 3 years from the date of the Note (the "change period").

@@The "Prime Rate" is the prime rate in effect on the first business day of the month (as published in the Wall Street Journal) in which

SBA received the application, or any interest rate change occurs. Base Rates will be rounded to two decimal places with .004 being

rounded down and .005 being rounded up.

@@The adjusted interest rate will be 2.75% above the Prime Rate. Lender will adjust the interest rate on the first calendar day of each

change period. The change in interest rate is effective on that day whether or not Lender gives Borrower notice of the change.

@@Lender must adjust the payment amount at least annually as needed to amortize principal over the remaining term of the note.

@@If SBA purchases the guaranteed portion of the unpaid principal balance, the interest rate becomes fixed at the rate in effect at the

time of the earliest uncured payment default. If there is no uncured payment default, the rate becomes fixed at the rate in effect at the

time of purchase.

Loan Prepayment:

@@Notwithstanding any provision in this Note to the contrary:

@@Borrower may prepay this Note. Borrower may prepay 20% or less of the unpaid principal balance at any time without notice. If

Borrower prepays more than 20% and the Loan has been sold on the secondary market, Borrower must:

a. Give Lender written notice;

b. Pay all accrued interest; and

c. If the prepayment is received less than 21 days from the date Lender receives the notice, pay an amount equal to 21

days' interest from the date lender receives the notice, less any interest accrued during the 21 days and paid under

subparagraph b., above.

@@If Borrower does not prepay within 30 days from the date Lender receives the notice, Borrower must give Lender a new notice.

@@All remaining principal and accrued interest is due and payable 10 years from date of Note.

@@Late Charge: If a payment on this Note is more than 10 days late, Lender may charge Borrower a late fee of up to 5.00% of the

unpaid portion of the regularly scheduled payment.

69

4. @@DEFAULT:

Borrower is in default under this Note if Borrower does not make a payment when due under this Note, or if

Borrower or Operating Company:

A. Fails to do anything required by this Note and other Loan Documents;

B. Defaults on any other loan with Lender;

C. Does not preserve, or account to Lender’s satisfaction for, any of the Collateral or its proceeds;

D. Does not disclose, or anyone acting on their behalf does not disclose, any material fact to Lender or

SBA;

E. Makes, or anyone acting on their behalf makes, a materially false or misleading representation to Lender

or SBA;

F. Defaults on any loan or agreement with another creditor, if Lender believes the default may materially

affect Borrower’s ability to pay this Note;

G. Fails to pay any taxes when due;

H. Becomes the subject of a proceeding under any bankruptcy or insolvency law;

I. Has a receiver or liquidator appointed for any part of their business or property;

J. Makes an assignment for the benefit of creditors;

K. Has any adverse change in financial condition or business operation that Lender believes may materially

affect Borrower’s ability to pay this Note;

L. Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without

Lender’s prior written consent; or

M. Becomes the subject of a civil or criminal action that Lender believes may materially affect Borrower’s

ability to pay this Note.

5. @@LENDER’S RIGHTS IF THERE IS A DEFAULT:

Without notice or demand and without giving up any of its rights, Lender may:

A. Require immediate payment of all amounts owing under this Note;

B. Collect all amounts owing from any Borrower or Guarantor;

C. File suit and obtain judgment;

D. Take possession of any Collateral; or

E. Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without

advertisement.

6. @@LENDER’S GENERAL POWERS:

Without notice and without Borrower’s consent, Lender may:

A. Bid on or buy the Collateral at its sale or the sale of another lienholder, at any price it chooses;

B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or any other Loan

Document, and preserve or dispose of the Collateral. Among other things, the expenses may include

payments for property taxes, prior liens, insurance, appraisals, environmental remediation costs, and

reasonable attorney’s fees and costs. If Lender incurs such expenses, it may demand immediate

repayment from Borrower or add the expenses to the principal balance;

C. Release anyone obligated to pay this Note;

D. Compromise, release, renew, extend or substitute any of the Collateral; and

E. Take any action necessary to protect the Collateral or collect amounts owing on this Note.

7. @@WHEN FEDERAL LAW APPLIES:

When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA

regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving

notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal

immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or

assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt

federal law.

8. @@SUCCESSORS AND ASSIGNS:

Under this Note, Borrower and Operating Company include the successors of each, and Lender includes its

successors and assigns.

9. @@GENERAL PROVISIONS:

A. All individuals and entities signing this Note are jointly and severally liable.

B. Borrower waives all suretyship defenses.

C. Borrower must sign all documents necessary at any time to comply with the Loan Documents and to

enable Lender to acquire, perfect, or maintain Lender’s liens on Collateral.

D. Lender may exercise any of its rights separately or together, as many times and in any order it chooses.

Lender may delay or forgo enforcing any of its rights without giving up any of them.

E. Borrower may not use an oral statement of Lender or SBA to contradict or alter the written terms of this

Note.

F. If any part of this Note is unenforceable, all other parts remain in effect.

G. To the extent allowed by law, Borrower waives all demands and notices in connection with this Note,

including presentment, demand, protest, and notice of dishonor. Borrower also waives any defenses

based upon any claim that Lender did not obtain any guarantee; did not obtain, perfect, or maintain a

lien upon Collateral; impaired Collateral; or did not obtain the fair market value of Collateral at a sale.

71

10. @@STATE-SPECIFIC PROVISIONS:

@@NONE – @@

[Initialed - @@:________ ]

[Initialed - @@:________ ]

11. BORROWER’S NAME(S) AND SIGNATURE(S):

By signing below, each individual or entity becomes obligated under this Note as Borrower.

@@

By: @@

@@

By:

@@

@@

@@dba @@

By: @@

@@

By:

@@

@@

DATE:_______________________

EXHIBIT “G”

SBA Form 1505

(Note for 504 Loan)

73

SBA Loan # @@

SBA Loan Name @@

Date September @@, 2014

Loan Amount $@@

Borrower @@

Operating Company @@

CDC @@

Funding Date: @@ * Interest Rate: _____________ %

First Payment Due: @@ * P&I Amount: $____________

Note Maturity Date: @@ * Monthly Payment: $ ________

(* blank at signing)

1. PROMISE TO PAY:

In return for the Loan, Borrower promises to pay to the order of CDC the amount of @@ ---

($@@) --- Dollars, interest on the unpaid principal balance, the fees specified in the Servicing

Agent Agreement, and all other amounts required by this Note.

2. DEFINITIONS:

"Collateral" means any property taken as security for payment of this Note or any guarantee of this

Note.

"Debenture" means the debenture issued by CDC to fund the Loan

"Guarantor" means each person or entity that signs a guarantee of payment of this Note.

"Loan" means the loan evidenced by this Note.

"Loan Documents" means the documents related to this loan signed by Borrower, Guarantor, or

anyone who pledges collateral.

"SBA" means the Small Business Administration, an Agency of the United States of America.

"Servicing Agent Agreement" means the agreement between the Borrower and the CDC that,

among other things, appoints a servicing agent ("Servicing Agent") for this Note.

3. INTEREST RATE AND PAYMENTS:

The terms of the Debenture sale will establish the interest rate, P & I amount, and Monthly Payment

for this Note. Borrower acknowledges that these terms are unknown when Borrower signs this

Note.

A. Once established, the interest rate is fixed. Interest begins to accrue on the Funding Date.

B. Monthly Payments are due on the first business day of each month, beginning on the First

Payment Date and continuing until the Note Maturity Date, when all unpaid amounts will

be due. Borrower must pay at the place and by the method the Servicing Agent or CDC

designates. The Monthly Payment includes the monthly principal and interest installment

(P & I Amount), and the monthly fees in the Servicing Agent Agreement. The Servicing

Agent will apply regular Monthly Payments in the following order: 1) monthly fees, 2)

accrued interest, and 3) principal.

4. LATE-PAYMENT FEE:

CDC charges a late fee if the Servicing Agent receives a Monthly Payment after the fifteenth day of

the month when it is due. The late fee is five percent of the payment amount, or $100.00,

whichever is greater. The late fee is in addition to the regular Monthly Payment.

5. RIGHT TO PREPAY:

Borrower may prepay this Note in full on a specific date each month set by the Servicing Agent.

Borrower may not make partial prepayments. Borrower must give CDC at least 45 days' prior

written notice. When it receives the notice, CDC will give Borrower prepayment instructions. At

least 10 days before the payment date, Borrower must wire a non-refundable deposit of $1,000 to

the Servicing Agent. The Servicing Agent will apply the deposit to the prepayment if Borrower

prepays. In any prepayment, Borrower must pay the sum of all of the following amounts due and

owing through the date of the next semi-annual Debenture payment:

A. Principal balance;

B. Interest;

C. SBA guarantee fees;

D. Servicing agent fees;

E. CDC servicing fees;

F. Late fees;

75

G. Expenses incurred by CDC for which Borrower is responsible; and

H. Any prepayment premium.

6. PREPAYMENT PREMIUM;

If Borrower prepays during the first half of the Note term, Borrower must pay a prepayment

premium. The formula for the prepayment premium is specified in the Debenture and may be

obtained from CDC.

7. DEFAULT:

Borrower is in default under this Note if Borrower does not make a payment when due under this

Note, or if Borrower or Operating Company:

A. Fails to do anything required by this Note and other Loan Documents;

B. Defaults on any other loan made or guaranteed by SBA;

C. Does not preserve or account to CDC's satisfaction for any of the Collateral or its proceeds;

D. Does not disclose, or anyone acting on their behalf does not disclose, any material fact to

CDC or SBA;

E. Makes, or anyone acting on their behalf makes, a materially false or misleading

representation to CDC or SBA;

F. Defaults on any loan or agreement with another creditor, if CDC believes the default may

materially affect Borrower's ability to pay this Note;

G. Fails to pay any taxes when due;

H. Becomes the subject of a proceeding under any bankruptcy or insolvency law;

I. Has a receiver or liquidator appointed for any part of their business or property;

J. Makes an assignment for the benefit of creditors;

K. Has any adverse change in financial condition or business operation that CDC believes may

materially affect Borrower's ability to pay this Note;

L. Reorganizes, merges, consolidates, or otherwise changes ownership or business structure

without CDC's prior written consent, except for ownership changes of up to 5 percent

beginning six months after the Loan closes; or

M. Becomes the subject of a civil or criminal action that CDC believes may materially affect

Borrower's ability to pay this Note.

8. CDC'S RIGHTS IF THERE IS A DEFAULT:

Without notice or demand and without giving up any of its rights, CDC may:

A. Require immediate payment of all amounts owing under this Note;

B. Collect all amounts owing from any Borrower or Guarantor;

C. File suit and obtain judgment;

D. Take possession of any Collateral; and,

E. Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without

advertisement.

9. CDC'S GENERAL POWERS:

Without notice and without Borrower's consent, CDC may:

A. Bid or buy at any sale of Collateral by Lender or another lienholder, at any price it chooses;

B. Incur expenses to collect amounts due under this Note, enforce the terms of this Note or

any other Loan Document, and preserve or dispose of the Collateral. Among other things,

the expenses may include payments for property taxes, prior liens, insurance, appraisals,

environmental remediation costs, and reasonable attorney's fees and costs. If CDC incurs

such expenses, it may demand immediate repayment from Borrower or add the expenses to

the principal balance;

C. Release anyone obligated to pay this Note;

D. Compromise, release, renew, extend or substitute any of the Collateral; and

E. Take any action necessary to protect the Collateral or collect amounts owing on this Note.

10. FEDERAL LAW:

When SBA is the holder, this Note will be interpreted and enforced under federal law, including

SBA regulations. CDC or SBA may use state or local procedures for filing papers, recording

documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA

does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this

Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation,

defeat any claim of SBA, or preempt federal law.

11. SUCCESSORS AND ASSIGNS:

Under this Note, Borrower and Operating Company include the successors of each, and CDC

includes its successors and assigns.

12. GENERAL PROVISIONS:

A. All individuals and entities signing this Note are jointly and severally liable.

B. Borrower authorizes CDC, the Servicing Agent, or SBA to complete any blank terms in

this Note and any other Loan Documents. The completed terms will bind Borrower as if

they were completed prior to this Note being signed.

C. Borrower waives all suretyship defenses.

D. Borrower must sign all documents necessary at any time to comply with the Loan

Documents and to enable CDC to acquire, perfect, or maintain CDC's liens on Collateral.

E. CDC may exercise any of its rights separately or together, as many times and in any order it

chooses. CDC may delay or forgo enforcing any of its rights without giving any up.

F. Borrower may not use any oral statement to contradict or alter the written terms of, or raise

a defense to, this Note.

G. If any part of this Note is unenforceable, all other parts remain in effect.

H. To the extent allowed by law, Borrower waives all demands and notices in connection with

this Note, including presentment, demand, protest, and notice of dishonor. Borrower also

waives any defenses based upon any claim that CDC did not obtain any guarantee; did not

obtain, perfect, or maintain a lien upon Collateral; impaired Collateral; or did not obtain the

fair market value of Collateral at a sale.

77

13. STATE-SPECIFIC PROVISIONS:

NONE -- @@

14. BORROWER'S NAME(S) AND SIGNATURE(S):

By signing below, each individual or entity becomes obligated under this Note as Borrower.

IN WITNESS WHEREOF, we have hereunto set our hands and seals on the date first above written.

@@

By:______________________________________

@@

EXHIBIT “H”

SBA Form 148

(SBA Unconditional Guarantee)

79

SBA Loan # @@

SBA Loan Name @@

Guarantor @@

Borrower @@

Lender @@

Date September @@, 2014

Note Amount $@@

1. GUARANTEE:

Guarantor unconditionally guarantees payment to Lender of all amounts owing under the Note.

This Guarantee remains in effect until the Note is paid in full. Guarantor must pay all amounts due

under the Note when Lender makes written demand upon Guarantor. Lender is not required to seek

payment from any other source before demanding payment from Guarantor.

2. NOTE:

The "Note" is the promissory note dated this date , in the principal amount of @@ --- ($@@) ---

Dollars, from Borrower to Lender. It includes any assumption, renewal, substitution, or

replacement of the Note, and multiple notes under a line of credit.

3. DEFINITIONS:

"Collateral" means any property taken as security for payment of the Note or any guarantee of the

Note.

"Loan" means the loan evidenced by the Note.

"Loan Documents" means the documents related to the Loan signed by Borrower, Guarantor or any

other guarantor, or anyone who pledges Collateral.

"SBA" means the Small Business Administration, an Agency of the United States of America.

4. LENDER'S GENERAL POWERS:

Lender may take any of the following actions at any time, without notice, without Guarantor's

consent, and without making demand upon Guarantor:

A. Modify the terms of the Note or any other Loan Document except to increase the amounts

due under the Note;

B. Refrain from taking any action on the Note, the Collateral, or any guarantee;

C. Release any Borrower or any guarantor of the Note;

D. Compromise or settle with the Borrower or any guarantor of the Note;

E. Substitute or release any of the Collateral, whether or not Lender receives anything in

return;

F. Foreclose upon or otherwise obtain, and dispose of, any Collateral at public or private sale,

with or without advertisement;

G. Bid or buy at any sale of Collateral by Lender or any other lienholder, at any price Lender

chooses; and

H. Exercise any right it has, including those in the Note and other Loan Documents.

These actions will not release or reduce the obligations of Guarantor or create any rights or claims

against Lender.

5. FEDERAL LAW:

When SBA is the holder, the Note and this Guarantee will be construed and enforced under federal

law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers,

recording documents, giving notice, foreclosing liens, and other purposes. By using such

procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or

liability. As to this Guarantee, Guarantor may not claim or assert any local or state law against

SBA to deny any obligation, defeat any claim of SBA, or preempt federal law.

6. RIGHTS, NOTICES, AND DEFENSES THAT GUARANTOR WAIVES:

To the extent permitted by law,

A. Guarantor waives all rights to:

1) Require presentment, protest, or demand upon Borrower;

2) Redeem any Collateral before or after Lender disposes of it;

3) Have any disposition of Collateral advertised; and

4) Require a valuation of Collateral before or after Lender disposes of it.

81

B. Guarantor waives any notice of:

1) Any default under the Note;

2) Presentment, dishonor, protest, or demand;

3) Execution of the Note;

4) Any action or inaction on the Note or Collateral, such as disbursements, payment,

nonpayment, acceleration, intent to accelerate, assignment, collection activity, and

incurring enforcement expenses;

5) Any change in the financial condition or business operations of Borrower or any

guarantor;

6) Any changes in the terms of the Note or other Loan Documents, except increases in

the amounts due under the Note; and

7) The time or place of any sale or other disposition of Collateral.

C. Guarantor waives defenses based upon any claim that:

1) Lender failed to obtain any guarantee;

2) Lender failed to obtain, perfect, or maintain a security interest in any property

offered or taken as Collateral;

3) Lender or others improperly valued or inspected the Collateral;

4) The Collateral changed in value, or was neglected, lost, destroyed, or underinsured;

5) Lender impaired the Collateral;

6) Lender did not dispose of any of the Collateral;

7) Lender did not conduct a commercially reasonable sale;

8) Lender did not obtain the fair market value of the Collateral;

9) Lender did not make or perfect a claim upon the death or disability of Borrower or

any guarantor of the Note;

10) The financial condition of Borrower or any guarantor was overstated or has

adversely changed;

11) Lender make errors or omissions in Loan Documents or administration of the

Loan;

12) Lender did not seek payment from the Borrower, any other guarantors, or any

Collateral before demanding payment from Guarantor;

13) Lender impaired Guarantor's suretyship rights;

14) Lender modified the Note terms, other than to increase amounts due under the

Note. If Lender modifies the Note to increase the amounts due under the Note

without Guarantor's consent, Guarantor will not be liable for the increased amounts

and related interest and expenses, but remains liable for all other amounts;

15) Borrower has avoided liability on the Note; or

16) Lender has taken an action allowed under the Note, this Guarantee, or other Loan

Documents.

7. DUTIES AS TO COLLATERAL:

Guarantor will preserve the Collateral pledged by Guarantor to secure this Guarantee. Lender has

no duty to preserve or dispose of any Collateral.

8. SUCCESSORS AND ASSIGNS:

Under this Guarantee, Guarantor includes heirs and successors, and Lender includes its successors

and assigns.

9. GENERAL PROVISIONS:

A. ENFORCEMENT EXPENSES. Guarantor promises to pay all expenses Lender incurs to

enforce this Guarantee, including, but not limited to, attorney's fees and costs.

B. SBA NOT A CO-GUARANTOR. Guarantor's liability will continue even if SBA pays

Lender. SBA is not a co-guarantor with Guarantor. Guarantor has no right of contribution

from SBA.

C. SUBROGATION RIGHTS. Guarantor has no subrogation rights as to the Note or the

Collateral until the Note is paid in full.

D. JOINT AND SEVERAL LIABILITY. All individuals and entities signing as Guarantor

are jointly and severally liable.

E. DOCUMENT SIGNING. Guarantor must sign all documents necessary at any time to

comply with the Loan Documents and to enable Lender to acquire, perfect, or maintain

Lender's liens on Collateral.

F. FINANCIAL STATEMENTS. Guarantor must give Lender financial statements as

Lender requires.

G. LENDER'S RIGHTS CUMULATIVE, NOT WAIVED. Lender may exercise any of its

rights separately or together, as many times as it chooses. Lender may delay or forgo

enforcing any of its rights without losing or impairing any of them.

H. ORAL STATEMENTS NOT BINDING. Guarantor may not use an oral statement to

contradict or alter the written terms of the Note or this Guarantee, or to raise a defense to

this Guarantee.

I. SEVERABILITY. If any part of this Guarantee is found to be unenforceable, all other

parts will remain in effect.

J. CONSIDERATION. The consideration for this Guarantee is the Loan or any

accommodation by Lender as to the Loan.

10. STATE-SPECIFIC PROVISIONS:

NONE -- @@

83

11. GUARANTOR ACKNOWLEDGMENT OF TERMS:

Guarantor acknowledges that Guarantor has read and understands the significance of all terms of

the Note and this Guarantee, including all waivers.

12. GUARANTOR NAME(S) AND SIGNATURE(S):

By signing below, each individual or entity becomes obligated as Guarantor under this Guarantee.

IN WITNESS WHEREOF, we have hereunto set our hands and seals on the date first above written.

L.S.

@@ (Individually)

@@

By:

Name: @@

Title: @@

Witness

EXHIBIT “I”

SBA Form 2287

(Third Party Lender Agreement for 504 Loan)

85

THIRD PARTY LENDER AGREEMENT

THIS THIRD PARTY LENDER AGREEMENT (“Agreement") is dated this ______ day of

@@_________, 2014, by and between @@ (“Third Party Lender”) whose address is @@ and

@@ (“CDC”) whose address is @@

RECITALS

1. The Third Party Lender and CDC will provide separate loans to the Borrower and Operating

Company, if any (collectively “Borrower”), according to the terms in the Authorization for

Debenture Guarantee (SBA 504 Loan), as amended (“Authorization”). The Third Party Lender

will provide term financing (“Third Party Loan”), and the CDC will provide a loan (“504 Loan”)

funded by a debenture issued by the CDC and guaranteed by the U.S. Small Business

Administration (“SBA”), for purposes of financing the Project described in the Authorization,

which involves the acquisition and/or improvement of the real and/or personal property

described below, and in Exhibit A attached hereto and incorporated herein by reference (“Project

Property”):

SBA Loan #: ______________________________@@

SBA Loan Name: __________________________@@

Borrower: ________________________________@@

Operating Company (if any): _________________@@

Third Party Loan Amount: ___________________@@

Term of Third Party Loan: ___________________@@

If Real Property -- Project Property Address:

Street address: _________________@@

City, State, Zip code: ___________@@

Attach Legal description as an exhibit.

If Personal Property: Describe property, including name of manufacturer, name of

equipment, and applicable serial number(s) or other identifying numbers for property

valued at $5000 or more. Attach a detailed description as an exhibit.

2. The parties have required the Borrower to grant liens on the Project Property to secure the

separate loans advanced by the parties (“Common Collateral”), and the lien of the CDC (“CDC

Lien”) will be junior and subordinate to the lien of the Third Party Lender (“Third Party

Lender Lien”), unless Third Party Lender, CDC and SBA agree otherwise in writing.

TERMS AND CONDITIONS

In consideration of the above, the mutual agreements set forth below, and for other

good and valuable consideration, the receipt and sufficiency of which are hereby

acknowledged, the parties agree as follows:

1. Amount of Third Party Loan. The Third Party Lender represents that the Third Party

Loan is fully advanced; does not exceed the amount stated in the Authorization; and, will not

exceed the amount allowed by the Authorization, plus reasonable costs of collection, maintenance,

and protection of the Third Party Lender Lien. Any amounts owed by Borrower to Lender in excess

of the Third Party Lender Lien amount stated in the Authorization cannot be secured by a lien on

the Common Collateral unless it is subordinate to the 504 Loan.

2. Subordination of 504 Loan. CDC agrees to make the 504 Loan to the Borrower, subject to

SBA’s approval, and accept a junior and subordinate lien position in the Common Collateral upon

the conditions that Third Party Lender executes this Agreement and disburses the Third Party Loan

according to the terms represented to CDC and SBA.

3. Accurate Information. The Third Party Lender warrants and represents that all information

provided by the Third Party Lender to CDC, including, without limitation, all information regarding

the Borrower’s financial condition, is accurate to the best of its knowledge and that Third Party

Lender has not withheld any material information. Third Party Lender acknowledges that for

purpose of this transaction, CDC is acting on behalf of SBA, an agency in the United States

Government, except that SBA accepts no liability or responsibility for any wrongful act or omission

by CDC. Third Party Lender further acknowledges that any false statements to CDC can be

considered false statements to the federal government under 18 U.S.C. §1001, and may subject the

Third Party Lender to criminal penalties, and that CDC and SBA are relying upon the information

submitted by the Third Party Lender.

4. Waiver of Provision Not to Encumber Common Collateral. Third Party Lender waives

its rights to enforce, as against CDC and SBA, any provisions in its documents that prohibit

Borrower from further encumbering the Common Collateral or which restrict Borrower’s

ability to assign its lease on, or rents, income or profits from, the Common Collateral.

5. Compliance with 504 Loan Program Requirements. Third Party Lender agrees that all

documents evidencing the Third Party Loan and the Third Party Lender Lien will comply with

the 504 Loan Program Requirements as established by SBA, including those identified in the

following subparagraphs, and, in the event one or more of the provisions in such documents do

not comply with these 504 Loan Program Requirements, Third Party Lender waives any right to

enforce such provisions while the 504 Loan has any unpaid balance and agrees that it must act in

87

a commercially reasonable manner with regard to any enforcement action.

a. No Open-Ended Features and No Future Advances. The Third Party

Loan must not be open-ended. After completion of the Project, the Third Party Lender

may not make future advances under the Third Party Loan except for reasonable costs

of collection, maintenance, and protection of the Third Party Loan and Third Party

Lender Lien.

b. No Early Call or Demand Provisions. Third Party Lender agrees that

documents evidencing the Third Party Loan and the Third Party Lender Lien do not contain

an early call feature or any provision which allows Third Party Lender to make demand

under the Third Party Lender Loan other than when there is a material default under the

terms of its Third Party Loan documents, which shall include, but not be limited to, failure

to make timely payments on the Third Party Loan, failure to pay taxes when due or

violation of any financial covenants which would cause a prudent lender to believe that the

prospect of payment or performance of the Third Party Note is impaired.

c. No Cross-Collateralization. Third Party Lender agrees that the Common

Collateral will only secure its Third Party Loan and the Common Collateral is not

currently, and will not be used in the future, as security for any other financing provided

by Third Party Lender to Borrower that purports to be in a superior position to that of

the CDC Lien, unless authorized in writing by CDC and SBA.

d. No Cross-Default. During the term of the 504 Loan, Third Party Lender

will not exercise any cross-default, "deem at-risk," or any other provisions in documents

evidencing the Third Party Loan or Third Party Lender Lien which allow Third Party

Lender to make demand on the Third Party Loan prior to maturity unless the Third Party

Loan is in material default.

e. Maturity and Balloon Payments. The Third Party Loan must have a term

of at least 7 years (when the 504 loan is for a term of 10 years), or a term of at least10

years (when the 504 loan is for 20 years). If the Third Party Lender has made more

than one loan, then an overall loan maturity must be calculated, taking into account the

amounts and maturities of each loan. Any balloon payment for the Third Party Loan

must be clearly identified and disclosed to SBA and approved at application or

subsequently approved by SBA.

f. Reasonable Interest Rate. The Third Party Loan has a reasonable

interest rate which does not and will not exceed the maximum interest rate for Third

Party Loans from commercial financial institutions as published periodically by SBA

in the Federal Register and in effect as of the date of this Agreement.

6. Marshaling of Assets. If the Third Party Lender takes additional collateral as

security for the Third Party Loan, in the case of liquidation, any proceeds received from

such additional collateral, must be applied to the Third Party Lender's Loan prior to the

proceeds from the liquidation of the Common Collateral held by the CDC/SBA and the

Third Party Lender. If the additional collateral no longer exists at the time of

liquidation, or has insufficient value to justify the cost of collection, then the Third

Party Lender is not required to liquidate such collateral, provided the Third Party

Lender notifies CDC/SBA.

7. Notice of Default under the Third Party Loan. Within thirty (30) days after the

expiration of any cure period for any continuing material default of the Third Party

Loan or Third Party Lender Lien, Third Party Lender must provide written notice

(referencing SBA’s loan number for the 504 Loan) of the default to CDC and SBA. At

least sixty 60 days prior to any legal proceedings against or liquidation of the Common

Collateral (not including sending a demand letter), Third Party Lender must provide

SBA with written notice of its intent to do so.

8. Limitation on Default Interest Rate. Third Party Lender may not escalate the rate

of interest upon default to a rate greater than the maximum rate published by SBA in the

Federal Register. SBA will only pay the interest rate on the note in effect before the

date of Borrower’s default.

9. Subordination to 504 Loan and/or CDC Lien, of Amounts

Attributable to Default Provisions.

a. The term "Default Charges" used in this paragraph includes, but is not

limited to, prepayment penalties, late fees, other default charges, and escalated

interest after default due under the Third Party Loan.

b. To the extent the Third Party Lender Lien secures any amounts

attributable to Default Charges, which may exist in the Third Party Loan and Third

Party Lender Lien, Third Party Lender Lien is and will be subordinate to the 504 Loan

and the CDC Lien. This subordination applies only to CDC and SBA and their

successors and assigns, and shall not inure to the benefit of Borrower or any guarantor

of the Third Party Loan.

c. In the event of default under the Third Party Loan, CDC or SBA may

bring the Third Party Loan current or may acquire the Third Party Loan secured by the

Third Party Lender Lien. Third Party Lender agrees that in either of these

circumstances, the amount to bring the Third Party Loan current or the purchase price of

that loan will be net of all amounts attributable to the Default Charges so subordinated to

the 504 Loan and the CDC Lien. Third Party Lender further agrees that if it receives from

CDC or SBA any amounts attributable to such Default Charges, Third Party Lender holds

such funds in trust for SBA and will remit such funds to SBA as soon as possible. In

addition, Third Party Lender shall charge as against SBA only the interest rate on the

Third Party Loan that was in effect before the date of Borrower’s default. Should CDC or

SBA not purchase the Third Party Loan but rather bring the Third Party Loan current,

Default Charges on the Third Party Loan may remain due and owing from the Borrower.

d. The Third Party Lender agrees:

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(1) If the Third Party Lender sells its Note (other than when liquidating

the Third Party Loan), then the Third Party Lender must provide CDC/SBA, within

fifteen (15) days of the sale, with written notice of the purchaser's name, address

and telephone number and confirmation that the purchaser has received a copy of

the executed Third Party Lender Agreement.

(2) If the Third Party Loan is in default and the Third Party

Lender, as part of its liquidation strategy,

(i) proposes to sell its note, or

(ii) receives an offer from a third party, then

the Third Party Lender must provide CDC/SBA with the

option to purchase the note at the same price offered by

the potential purchaser, net any Default Charges per

paragraph 9(c). SBA will have forty-five (45) days from

receipt of the notice from the Third Party Lender to

exercise its option to purchase the note. If SBA does not

exercise its option and the Third Party Lender sells its

note, then the Third Party Lender must provide

CDC/SBA, within fifteen (15) days of the sale, with

written notice of the purchaser's name, address and

telephone number, and must provide the purchaser with a

copy of the executed Third Party Lender Agreement.

e. If the Third Party Lender sells or otherwise transfers its note to a

third party, then any Default Charges, including, but not limited to, prepayment

penalties, late fees, other Default Charges, and escalated interest after default

due under the Third Party Loan must be subordinate to the amounts outstanding

on the 504 Loan and/or CDC Lien.

f. If the Third Party Lender loan documents contain a swap component

or hedging contract (hereinafter defined as “swap agreement), all costs associated

with this swap agreement, which may be termed swap fees, termination fees,

default fees or other related fees, shall be subordinate to the amounts outstanding

on the 504 Loan and/or CDC Lien.

10. Liquidation. In the event that either the Third Party Loan or the 504 Loan is declared in

default, Third Party Lender and CDC and SBA agree to cooperate in liquidating and/or selling

the Common Collateral. Third Party Lender agrees to (a) accept a U.S. Treasury check(s) in

connection with any purchase of Third Party Lender’s note or any foreclosure or liquidation bid

by CDC or SBA; (b) to provide CDC and SBA with the loan payment status, loan payment

history, and an itemized payoff statement of the Third Party Loan; (c) to provide CDC and SBA,

at no charge (except for reasonable charges for photocopies) with copies of any appraisals,

environmental investigations, or title examinations or searches of the Collateral conducted by or

for Third Party Lender; and (d) to provide any other information about Borrower or the Third

Party Loan requested by CDC and SBA in writing.

11. Waiver of Right to Indemnification by SBA or CDC. If Third Party Lender's

documents contain provisions granting Third Party Lender the right to indemnification by

subsequent owners of the Project Property, then Third Party Lender waives its right to enforce

such provisions against SBA or CDC in the event SBA or CDC acquires title to the Project

Property through foreclosure of the CDC Lien, acceptance of a deed in lieu of foreclosure, or

otherwise.

Paragraph 12 is optional and should be marked if CDC uses Third Party Lender to perform

Customer Identification.

12. Bank Regulatory Issues. If Third Party Lender is regulated by one of the

Federal functional regulators (Comptroller of the Currency, Federal Deposit Insurance

Corporation, or National Credit Union Administration), Third Party Lender represents that it

is subject to the Joint Final Rule on Customer Identification Programs (CIP) in 31 C.F.R.

103.121 and that it or its agent will perform with respect to the Borrower the specified

requirements of its CIP.

13. No Implied Third Party Beneficiaries. To the extent there is a conflict between this

Agreement and any provision in any agreement either Party may have with a third party,

including but not limited to, Borrower, the terms and conditions in this Agreement shall

supersede any such provision. The parties agree that SBA may enforce this agreement as a third

party beneficiary, and further agree that this Agreement shall not grant any right, benefit,

priority, or interest to any other third party, including but not limited to, Borrower and

Guarantor(s).

14. Successors and Assigns. This Agreement will inure to the benefit of and bind the respective

parties to this Agreement, and their successors and assigns, including any party acquiring the Third

Party Loan and Third Party Lender Lien by sale, assignment, or other transfer from Third Party

Lender. Third Party Lender agrees that CDC may assign this Agreement to SBA, and waives all

rights to contest such assignment.

15. Federal Law. When SBA is the holder of the loan instruments evidencing the 504 Loan and

any security for that loan (including but not limited to the CDC Lien on the Common Collateral),

this Agreement and all such instruments will be construed in accordance with Federal law. CDC or

SBA may use local or state procedures for purposes such as filing papers, recording documents,

giving notice, foreclosing liens, and other purposes, but by using these procedures, SBA does not

waive any federal immunity from local or state control, penalty, tax, or liability. The Third Party

Lender may not claim or assert against SBA any local or state law to deny any obligation of

Borrower, or defeat any claim of SBA with respect to the 504 Loan.

16. Termination: This document will be released and terminated upon the payment in full

of either the Third Party Loan or the 504 loan and all costs related thereto.

17. Counterparts. This Agreement may be executed in any number of counterparts, each of

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which will be deemed an original, and all of which together constitute one and the same

instrument.

18. Validity of Provisions. In the event that any provision of this Agreement is deemed

invalid by a court of competent jurisdiction, all other provisions of this Agreement shall remain

valid and enforceable.

19. Revision of this Agreement. Both Third Party Lender and CDC agree that this

Agreement is a standard SBA Form, and, as such, neither party has authority to modify or

delete any provision in this Agreement, or add any additional provisions, without prior

written authorization from the SBA.

20. Authority to Execute Agreement. The persons signing below certify that they have

been duly authorized to execute this Agreement on behalf of their respective party.

LENDER:

@@

CERTIFIED DEVELOPMENT COMPANY (CDC):

@@

[INSERT SIGANTURES AND NOTARIAL ACKNOWLEDGEMENT AS APPROPRIATE]

EXHIBIT “J”

SBA Form 2288

(Interim Lender Certification)

93

U.S. Small Business Administration

INTERIM LENDER CERTIFICATION

SBA Loan # @@

SBA Loan Name @@

Borrower(s) @@

Operating Company @@

CDC @@

Interim Lender @@

Address of Project Property @@

Date of Certification

(No more than 60 days prior to proposed

Debenture funding)

@@

CDC has agreed to make a loan (the 504 Loan) to Borrower and Operating Company, if applicable

(collectively, “Borrower”) for purposes of financing the Project described in the “Authorization for

Debenture Guarantee (SBA 504 Loan),” as amended (the Authorization). The 504 Loan will be funded

by a debenture issued by CDC and guaranteed by the U.S. Small Business Administration (SBA). One of

the conditions for the 504 Loan is that Interim Lender executes this Interim Lender Certification not

more than 60 days prior to debenture funding. Interim Lender acknowledges that CDC will rely upon

this Interim Lender Certification in making the 504 Loan and that SBA will rely upon this Interim

Lender Certification in guaranteeing the debenture.

Interim Lender certifies, to the best of its knowledge, information and belief, that:

1. The Interim Loan in the amount of $@@ has been fully advanced except for $@@, which will

be placed in escrow until completion of the Project.

2. The Interim Loan has been disbursed in reasonable compliance with the Authorization.

3. Borrower has contributed to the Project the cash, land or other property required by the

Authorization.

4. If the Interim Loan includes construction financing, the Project has been completed in accordance

with the final plans and specifications.

5. Project cost overruns, if any, have been paid by Borrower with cash, representing additional

injection of equity; or with proceeds of a separate note secured by additional collateral which is not a

part of the Interim Loan; or by other source described here:

.

6. Interim Lender has no knowledge of any unremedied substantial adverse change in the condition of

Borrower and Operating Company (if any) since the date of loan application to Interim Lender. Borrower

is current on its payments to Interim Lender and not otherwise in default on the Interim Loan.

[Choose one of the following options for paragraph 7 by checking the paragraph that applies.]

[Option 1: Use if Interim Lender is different from Third Party Lender referred to in the

Authorization.]

___ 7. Upon receipt, Interim Lender will apply the Net Debenture Proceeds to pay off Interim

Lender’s share of Interim Financing stated in the Authorization. Within 30 days of receipt of the Net

Debenture Proceeds, Interim Lender then will record or cause to be recorded releases of any recorded

lien instruments (including without limitation mortgages, deeds of trust, deeds to secure debt, trust

indentures, UCC financing statements) in favor of Interim Lender and securing the Interim Loan; will

provide CDC with recorded copies of these releases; and will cancel, mark as paid, or release the note

evidencing the Interim Loan, any guarantees, and all other documents securing the Interim Loan.

[Option 2: Use if Interim Lender is the same as the Third Party Lender referred to in the

Authorization.]

7. Upon receipt, Interim Lender will apply the Net Debenture Proceeds to pay off Interim Lender’s

share of Interim Financing stated in the Authorization, and Interim Lender will reduce the principal

balance of Interim Lender’s debt to an amount not to exceed the amount of the Third Party Lender Loan

stated in the Authorization or cancel the Interim Loan note, as appropriate, and will provide CDC

evidence of such reduction or cancellation. Within 30 days of receipt of the Net Debenture Proceeds,, Interim Lender will record or cause to be recorded partial or full releases of any recorded lien

instruments (including without limitation mortgages, deeds of trust, deeds to secure debt, trust

indentures, UCC financing statements) in favor of Interim Lender and securing the Interim Lender’s

share of Interim Financing, and will provide CDC with recorded copies of these releases.

[Option 3: Use only if SBA has approved allowing Interim Lender to assign its note and lien

instrument to CDC, regardless of whether Interim Lender is the same as the Third Party Lender

referred to in the Authorization.]

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Interim Lender’s share of Interim Financing stated in the Authorization. Interim Lender then

will assign to CDC the note evidencing the Interim Loan, any guarantees, the lien instruments

(including without limitation mortgages, deeds of trust, deeds to secure debt, trust indentures,

UCC financing statements) in favor of Interim Lender and securing the Interim Lender’s

share of Interim Financing, and other documents securing the Interim Loan.

8. Interim Lender warrants and represents that all information above, and all information

provided to CDC, including without limitation, all information regarding the Borrower’s and Operating Company’s, if any, financial condition, is accurate to the best of its

knowledge and that Interim Lender has not withheld any material information. Interim

Lender acknowledges that for the purpose of this transaction, CDC is acting on behalf of

SBA, an agency of the United States Government, except that SBA accepts no liability or responsibility for any wrongful act or omission by CDC. Interim Lender also

acknowledges that CDC and SBA are relying upon the accuracy of the responses above

and of all information submitted by the Interim Lender to CDC in determining whether to

approve financing to Borrower and Operating Company, if any, that will be used to repay a loan made by Interim Lender. Interim Lender further acknowledges that submission of

false information to CDC, or the withholding of material information from CDC, can

result in criminal prosecution under 18 U.S.C. § 1001 and other provisions, liability for

treble damages under the False Claims Act, 31 U.S.C. §§ 3729-3733, debarment and suspension, and other consequences.

INTERIM LENDER:

@@

___ 7. Upon receipt, Interim Lender will apply the Net Debenture Proceeds to pay off the

96

EXHIBIT “K”

SBA Form 1050

(SBA Settlement Sheet - 7(a) Loan)

97

98

EXHIBIT “L”

SBA Form 722

(EEO Poster and Notice)

99

100

EXHIBIT “M”

SBA Form 1502

(Field Descriptions and Information)

101

102

103

104

105

106

107

108

EXHIBIT “N”

SBA Unilateral Servicing and Liquidation Matrix

(7(a) Lender Matrix)

109

110

111

112