A Discussion Following NAGGL Conference October 2019
You may have received information pertaining to the SBA’s protocol change in their reviewing process for borrowers utilizing the ROBS program. I recently was invited onto the Coleman Report to discuss the issues raised during the NAGGL conference in late October.
At the most recent NAGGL (National Associated of Government Guaranteed Lenders) Conference a few concerns were brought up discussing the use of ROBS for equity injections and lack of compliance by certain providers. In result of these concerns the SBA is now requiring the ROBS structures to be reviewed through the SBA’s General Process rather than the PLP process before the approval of using the program. This new review process for borrowers utilizing a ROBS plan will mean longer approval times as the lenders will need to submit these loan packages to the SBA for full review. This requirement is by all SBA lenders for borrowers utilizing the ROBS program. The lending process will not change for borrowers that are not utilizing the ROBS structure.
Click on the video below for the complete report.
In my discussion I spoke about:
- What is a ROBS?
- What are the issues?
- Diana Seaborn discussed the following in several
sessions:
- IRS had made a bold statement that businesses with ROBS plans attached fail more frequently than businesses that do not.
- SBA looked into researching their own database
and realized two things:
- There are a lot more of loans being done with a ROBS attached than SBA realized,
- Some lenders were not made aware there was a ROBS deal attached to the loan,
- There isn’t a “box to check” in etran or SBA1 to indicate it’s a ROBS deal, and 4) the SOP was being misinterpreted on the point of whether or not ROBS deals had to go GP vs PLP
- She believes the IRS is causing these businesses to fail when the plan is not kept in compliance which deems the use of retirement funds a distribution subject to tax which takes away all the cash of the small business.
- She feels that the ROBS client is not being made aware of the “strings attached” to having a 401k plan in their business.
- Questioned whether or not a ROBS provider should fill out Form 159 as a loan service provider. DRDA is not an LSP so a Form 159 is not required. Other providers that are LSPs must fill out the Form 159.
- What does the SOP say?
- SBA agrees the wording in the SOP could be misconstrued but they want what’s currently in the SOP to be adhered to – loans with ROBS plans attached must be processed GP not PLP regardless of the bank’s designation.
- Call with industry representatives and SBA on Friday November 22nd:
- Hosted by Rosemarie Drake 7(a) Chief, SBA, other SBA folks included Dianna Seaborn and Linda Reilly. Representatives from ROBS providers on the call were DRDA, Directed Equity, Guidant Financial as well as Stearns Bank.
- It became clear during the call that SBA does not have their arms around this issue. They were unfamiliar with Prototype Plans, Favorable Determination Letters, Attorney Opinion Letters and on-going compliance. DRDA has provided Rosemarie Drake and Dianna with white papers on ROBS in general as well as our White Paper on ROBS which lines out the compliance issues (attached).
- There is time to update the language in the SOP regarding this prior to the rollout of the updated SOP in 2020 – Dianna Seaborn stated that she understands the desire for these loans to be processed PLP as the bulk of them have been done all along. She said that there will be guidance in the SOP 50-10 6 which should roll out in Feb 2020.
- Recent experience with a loan going GP – not as bad as expected. A lending partner of DRDA has sent several deals to GP since the NAGGL in October. The first one sent took one week to process. Since then they’ve been turned around in 2-4 days.
- Important points – Make sure the shareholders are clearly defined out in the credit memo. If there is a ROBS plan with this deal it will be apparent by looking at the shareholders. The 401k plan becomes a shareholder in the operating business. Attach the Attorney Opinion Letter and Plan’s FDL with the file. Speak to the on-going compliance points that have been imparted to the borrower. Provide a copy of signed engagement letter or other document that points out the on-going compliance requirements.
- Quick Compliance Check for the Lender – request a copy of Form 5500 annually. We also request the 1120 (if we don’t provide that service to client) and a copy of the required Annual Valuation of the corporation.
DRDA has the resources in place to support our candidates, not just through the setup but through the continued operation of their business. While our guarantee is for the initial setup, as a business services company, our relationship does not end once our clients receive funding. We help keep our client’s files IRS-compliant and provide them with an annual business evaluation, and assist with inquiries and audits by the Internal Revenue Service (IRS) or the Department of Labor (DOL). Our professionals will continue to work with the Small Business Administration throughout the lending process while supporting the SBA with any concerns they may have with loans utilizing ROBS for cash injections.
We will continue to provide updates on these changes, If you have any questions about how this process changes the financing process for your clients, please do not hesitate to contact us.
