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Regulatory Update - April 24, 2014

Posted By Kim Chuday, Friday, April 25, 2014

Regulatory Update / SBA Final Rule

April 24, 2014

Dear NADCO Members,

Many of us participated in informational SBA webinars on the Final Rule this week, beginning a process of implementing new regulations designed to strengthen the CDC community. Implementation of the new regulations is in the early stages, and discussions will be ongoing throughout the next year, at the end of which CDCs will be expected to have made any necessary changes to become compliant.

As we approach next week’s Annual Meeting with our SBA colleagues, it is important to remember that during this period of interpretation and early implementation, we are best served by maintaining a professional and collegial atmosphere in our discussions with agency officials. SBA has emphasized that the implementation period will be ongoing for the entire year, and every effort will be made to assist CDCs in becoming fully compliant.

Meanwhile, during this phase, and going forward, NADCO Board Members and staff have been in daily contact with SBA as issues and questions are identified and discussion is needed. Below is a brief summary of some of the major issues that have been discussed this week, as well as NADCO’s role:

Insurance Issue
During recent ALP renewal assessments, SBA’s Office of Credit Risk Management (OCRM) discovered an “SBA Exclusion” and a “504 Lending Exclusion” in many insurance policies currently held by SBA Certified Development Companies (CDCs). SBA has conveyed to NADCO that adequate insurance coverage for all CDCs is a priority both in light of new regulatory standards and for the long-term stability of the CDC network and 504 loan program.

Given the potentially significant nature of this regulatory change, including potential cost to CDCs, OCRM requested that NADCO establish an Insurance Task Force to work with the agency to resolve this issue. The Task Force includes Sally Robertson (NADCO Chair), Mary Mansfield (NADCO Vice Chair), Steve Dusek (NADCO Vice Chair/Regulatory), Sasha Globa (NADCO Board Member), Pat MacKrell (NADCO Board Member) and Kim Buttemer (COO, CDC Small Business Finance).

As the Task Force and OCRM work on a long-term resolution, Hays has secured agreement with Philadelphia to extend a $250,000 sublimit for claims brought directly by the SBA against a CDC for any insured that currently purchases at least a $1M D&O limit. This coverage is retroactive and is effective January 1, 2014. The endorsement will be added at no additional cost to the CDCs. This endorsement will replace the original endorsement issued previously with a lower sub limit. A separate sublimit of $250,000 will be applied to both the Hays D&O and E&O policies.

Meanwhile, the NADCO Insurance Task Force and SBA are working on a process to enable CDCs to establish adequate coverage at a reasonable cost. More detail will be offered at the Annual Meeting. NADCO appreciates OCRM’s hard work to develop a solution that is sensitive to the many models and sizes of CDCs, recognizing their desire to be compliant and adequately insured while maintaining the resources to serve their communities most effectively.

Board Composition/Outside Board Service
Questions have arisen regarding the ability of CDC board members to serve on economic development boards. The regulation states:

“(5) A CDC may not permit more than one of its Directors to be employed by or serve on the Board of Directors of any other single entity (including the entity's affiliates), unless that entity is a civic, charitable, or comparable organization that is not involved in financial services or economic development activities. No CDC Board member may serve on the Board of another CDC in accordance with §120.851(b) (emphasis added).

In discussions with NADCO this week, SBA has clarified this regulation as follows: CDC board members may not serve on the boards of other CDCs, but they may serve on the boards of other economic development organizations, including related organizations in a Council of Governments model or a local economic development organization -- not including another CDC.

The “Nine-Month Rule”
SBA has eliminated paragraph (a)(2) in Section 120.882(a) which limits project expenses eligible for 504 Loan Program financing to those incurred within nine months prior to receipt by SBA of a complete loan application. This change will permit financing of expenses toward a Project regardless of when they were incurred, so long as they are directly attributable to the Project. SBA will continue to determine whether expenses incurred prior to application were in fact incurred for a 504 project and steady progress on the project should have taken place prior to application. This change only affects the time frame for expenses that can be included in the project. Bridge financing is still considered as three years or less. If a project was eligible under the old nine-month rule, it is still eligible now.

However, the elimination of the nine-month rule did not reinstate the temporary debt refinancing program that expired in September, 2012. Borrowers may not take the equity out of the real estate and have SBA consider that to be the project. What they can do is be reimbursed for expenses that were paid more than nine months ago in anticipation of the project. For instance, if the borrower purchased land and incurred professional fees associated with the anticipated construction of a project, then the borrower can be reimbursed by the interim lender for amounts in excess of the borrower’s required contribution (typically 10%). What the borrower can’t be reimbursed for is the difference between the purchase price of the land and the current FMV of the property. That is considered cash-out and only eligible under debt refi.

NADCO will remain proactive on behalf of our members in the days, weeks and months to come, and continue to seek clarity and policy interpretations that strengthen the CDC community and our economic development efforts. Meanwhile, please send your questions and feedback to .

We appreciate your partnership and leadership, and the hard work of our SBA colleagues, as we look forward to a productive and positive meeting next week. See you in Colorado Springs!

Steve Dusek                                       Beth Solomon
Vice Chair of Regulatory Affairs         President & CEO
NADCO                                              NADCO

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