March 6, 2018

 Portion Control
 ~ Michael Downes, TD Bank   

No more "creeping control" prohibition                         


Of course, I'm not talking about food. It's March and my New Year's resolution is still intact, so what I am talking about is SBA 7(a) loans involving a partner buy out.

SBA 7(a) loans give lenders the flexibility of providing financing to small businesses for a variety of reasons. One such reason is for a partner or shareholder of a business to buy out the interests of other partners or shareholders, as long as the purchaser ends up owning 100% of the entity.  

For example:  ABC Company is owned 

25% by John
25% by Mike
40% by Jane 
10% by Mary

The SOP allows John to obtain an SBA loan to buy out the 75% interests of Mike and Jane and Mary. Also eligible would be for John and Mike to obtain an SBA loan to buy out the 50% interests of Jane and Mary. The relevant sections of the SOP, which can be found on page 132 of 50 10 5 (J), are as follows:

a) The change of ownership will promote the sound development and/or preserve the existence of a small business;
b) Change of Ownership Between Existing Owners: A change of ownership between existing owners may be financed under the following circumstances:
i. An existing owner(s) of the small business is purchasing the ownership interest of another owner(s), resulting in 100% ownership of the business by the purchasing owner(s); or
ii. The small business is redeeming the ownership interest of an owner(s), resulting in 100% ownership of the small business by the remaining owner(s);

The examples above are simple. Let's make things more complicated; after all, SBA lending can get very complicated. Suppose John and Mike wish to buy out Jane; but Mary desires to stay at 10%. Is that eligible?  

My initial answer was 'no', it would not be allowed since I recalled an obscure SBA rule found in SOP 50 10 4—not even in the regular text!  Here is the excerpt: Individual wants to buy out one of any number of owners and increase just his interest to a greater share in relation to other owners.  Not permitted – SBA does not finance "Creeping Control." 

But a trusted colleague had told me SBA was no longer concerned with proportionality, and in SOPs 50 10 5 A through J, the "Creeping Control" language had been removed. So, I decided to send a request to SBA, OFA with a live example of a partner buy out of a majority owner with several minority owners' equity remaining static. The answer I received back, in writing, did not exactly answer my question, but it was enough to give me comfort that the scenario was, in fact, eligible. (ed. Any remaining owner that increases share to 20% or more as a result of the change of ownership, MUST be a co-borrower on the loan.)

My advice to you if you come across a similar request is to a) send the loan non-delegated to the Loan Guaranty Processing Center, or b) send a request for an eligibility determination to either or to someone at the OFA.  If you receive an affirmative answer, make sure you print it, attach it to your credit memo and keep it safe in your credit file.

NAGGL ed.: SBA headquarter policymakers have confirmed in writing that the old prohibition against “creeping control” – that is, situations where only one remaining owner will be acquiring the ownership of an exiting owner was intentionally removed from SOP 50 10 in August 2008. SBA decided that the proportion of the ownership after such a transaction was a business decision and that SBA did not need to be involved. BUT, any remaining owner that will increase its share to 20% or more as a result of the change of ownership must be a co-borrower on the loan. 

Michael F. Downes is a seasoned banking professional with 28 years of experience in all aspects of SBA Lending, including business development, underwriting, closing, servicing and workout.  He is currently the Market Commercial Credit Manager for the SBA department of TD Bank, responsible for all underwriting, servicing and monitoring of the SBA portfolio.  Downes served on the NAGGL board of directors from 2004-2010 and has been an instructor for the association since 2005. 

 SBLC / NRFLs -- Comment by March 28 

SUMMARY: SBA published Federal Register notice giving 30 days for public comment. 

DATES: Submit comments on or before March 28, 2018.

ADDRESSES: Refer to the information collection by name and/or OMB Control Number 83-1 and send to: Agency Clearance Officer, Curtis Rich, Small Business Administration, 409 3rd Street SW, 5th Floor, Washington, DC 20416; and SBA Desk Officer, Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Washington, DC 20503.

FOR FURTHER INFORMATION CONTACT: Curtis Rich, Agency Clearance Officer, (202)  A copy of the Form OMB 83-1, supporting statement, and other documents can be obtained from the Agency Clearance Officer.

SUPPLEMENTARY INFORMATION: Small Business Lending Companies (SBLC’s) and Non-Federally Regulations Lenders (NFRL’s) are generally non-depository lending instructions authorized by SBA primarily to make loans under sections 7(a) of the Small Business Act. As sole regulator of these institutions, SBA requires them to submit audited financial statements annually as well as interim, quarterly financial statements and other reports to facilitate the agency’s oversight lenders.

Solicitation of Public Comments -- Submit comments on (a) whether the collection of information is necessary for agency to properly perform its functions; (b) whether burden estimates are accurate; (c) whether there are ways to minimize the burden, including through the use of automated techniques or other forms of information technology; and (d) whether there are ways to enhance the quality, utility, and clarity of the information.

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