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Office of Financial Assistance Build Northeast Conference Worcester, Massachusetts

Office of Capital Access Final Rule and SOP 50 10 5 (G) Updates 504 Loan Program Eligibility and Corporate Governance Rules. Office of Financial Assistance Build Northeast Conference Worcester, Massachusetts 09/7/14 – 09/09/14. OCA Final Rule. Final Rule Published 3/21/2014

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Office of Financial Assistance Build Northeast Conference Worcester, Massachusetts

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  1. Office of Capital AccessFinal Rule and SOP 50 10 5 (G) Updates504 Loan ProgramEligibility and Corporate Governance Rules Office of Financial Assistance Build Northeast Conference Worcester, Massachusetts 09/7/14 – 09/09/14 Confidential and Proprietary

  2. OCA Final Rule • Final Rule Published 3/21/2014 • Revises and Finalizes the Proposed Rule • of 2/25/2013 • Improves access to 504 loan program • Enhances job creation through expanded eligibility • Increases the number of potential participants • Strengthens CDC operations and management Confidential and Proprietary

  3. OCA Final Rule and SOP 50 10 5 (G)504 Program EligibilityPolicy Revisions Confidential and Proprietary

  4. OCA Final Rule and SOP 50 10 5 (G) Updates • Regulations Effective April 21, 2014: • Updates to 504 Program Eligibility Incorporated into SOP 50 10 5 (G) • Elimination of the Personal Resource Test • Elimination of the 9-Month Rule • Updated definition of Bridge Financing from “land” to “all project costs directly attributable to the project” • Update to allow Third Party Lender to take collateral outside the 504 project with certain conditions. (See also revised Third Party Lender Agreement – Form 2287 ) Confidential and Proprietary

  5. Other 504 Program Updates Confidential and Proprietary

  6. Other 504 Program Updates • Updates to 504 Program in SOP 50 10 5 (G) to add Certificate of Occupancy or its Equivalent to the Streamlined Closing Checklist • New - 504 Authorization Wizard – coming soon Confidential and Proprietary

  7. CDC Governance RulesPolicy Revisions Confidential and Proprietary

  8. OCA Final Rule • Regulations Effective April 21, 2015: • CDCs may need/wish to amend the By-Laws • SBA will develop a recommended sequencing schedule to assist in review of any new By-Laws content • Distributed widely through SBA District Offices and NADCO • Changes to be incorporated into SOP 50 10 6 Confidential and Proprietary

  9. CDC Corporate Governance - Policy • CDC Corporate Governance Updates include: • Elimination of Mandatory Membership • Increased CDC Board size/Composition • Board Requirements (Boards and Committees) • For Profit CDC compliance • Community Advantage participation allowed (by request) • Prohibition of CDC affiliation with other CDCs • Contracting Issues • Expansion of Board Oversight • Expenditure Review and Approval • Reporting Requirements Confidential and Proprietary

  10. Elimination of Mandatory Membership • §120.822 Membership – Requirement is Deleted • No longer a Mandatory Membership Requirement • CDCs may have a Membership • Some CDCs may need Membership to comply with other programs in which they participate Confidential and Proprietary

  11. Increased CDC Board Size §120.823(a) Board Size • CDC must have at least 9 Voting Directors • Fewer may be approved by D/FA for good cause • In Isolated Geographic Areas • In rural areas with limited pool of eligible persons • SBA Recommends no more than 25 Board Members Confidential and Proprietary

  12. CDC Board Composition §120.823(a) & (b) CDC’s Board Composition • No longer limited to financial, business, government, and community groups • Must have Directors with expertise in: • Internal controls • Financial risk management • Commercial lending • Legal issues relating to commercial lending, and • Corporate Governance • Must have at least one (1) voting director representing the economic, community or workforce development field • Must have at least two (2) voting directors that represent commercial lending Confidential and Proprietary

  13. CDC Board Composition (cont.) §120.823(a) Retirees represented in Board composition • Directors may be currently employed or retired • If retired, may represent or viewed as providing expertise in the field from which they retired • Former job title and specific experience are important in determining the board composition requirement of a retiree Confidential and Proprietary

  14. CDC Board Requirement Revisions §120.823(c) Board Meetings, Quorums & Attendance • Board must meet at least quarterly • A Quorum must be present to transact business • Quorum > 50% of voting Board Members • Meeting may be any format permitted by State law • e.g., Teleconference, E-mail, Fax, Web Conference, and Video Conference • Board is responsible for the actions of the CDC and any Committees • CDC Manager is still the only CDC staff who can be a Voting Director Confidential and Proprietary

  15. CDC Board Requirement Revisions §120.823 (c)(5) Restricting Service on Other Boards • No Board Member may serve on another CDC’s Board • No more than one Director may be employed by, or serve on the Board of, another single entity, including the entity’s affiliates, unless: • The entity is a Civic, Charitable, or Comparable Organization; and • The entity is not involved in Financial Services; and • The entity is not involved in Economic Development • If a CDC relationship with another entity is permitted under 120.820 (see also slide 20), it is not prohibited by 120.823(c)(5) and there is no limit on board overlap in these circumstances. Confidential and Proprietary

  16. CDC Board Requirement Revisions §120.823(d)(4)(i) Executive Committees • CDC may establish an Executive Committee if Authorized in the By-Laws • Executive Committee must: • Meet Organization and Representation Requirements • Have at least 5 Voting Members present to conduct business Confidential and Proprietary

  17. Loan Committees §120.823(d)(4)(ii) Loan Committees The Loan Committee must: • Be chosen by the Board or Shareholders • Consist of individuals who live/work in the Area of Operations of the 504 project • Have a Quorum of at least five (5) Members • Have at least two (2) members with commercial lending experience • Multi-state CDCs must have a loan committee in each state Confidential and Proprietary

  18. For-Profit CDC Compliance §120.818 – Applicability to Existing For-Profit CDCs • Any Program Requirement that applies to Non-Profit CDCs also apply to For-Profit CDCs Confidential and Proprietary

  19. Community Advantage Participation §120.820 – CDC Affiliation • CDC may request approval as a Community Advantage participant • By application • Community Advantage Program Guide update available soon Confidential and Proprietary

  20. Clarifications on CDC Affiliation §120.820 – CDC Affiliation • CDC must be independent and not affiliated with any “Persons”* “Person” means any individual, corporation, partnership, association, unit of government, or legal entity, however organized • CDC may be affiliated with an entity who is: • Involved in Economic Development as its primary function • In the same Area of Operations as the CDC • A a non-profit entity or a State or Local Government or Political Subdivision (e.g. Council of Government) • EXCEPT for 7(a) lenders or another CDC Confidential and Proprietary

  21. Clarifications on CDC Affiliation • A CDC may remain affiliated with a for-profit entity if: • The affiliate is not a 7(a) Lender • The affiliation existed prior to publication of the Final Rule • The entity’s function is Economic Development in the CDC’s Area of Operations • Prior written approval required from Director/OFA Confidential and Proprietary

  22. Prohibition of CDC Affiliation with Other CDCs A CDC is prohibited from being affiliated with another CDC, or directly or indirectly investing in or financing another CDC. Confidential and Proprietary

  23. CDC Contracting With Another CDC(s) • Issues of concern for contracting would include, but are not limited to: • CDC as a shell of its contracting entity • Expansion by Contract • CDC providing Management and Marketing services for another CDC • Several CDCs contracting with the same entity in a dependency mode • Executive Director of a CDC providing services to another CDC when already serving as the full time manager of a CDC Confidential and Proprietary

  24. CDC Governance RulesOversight Revisions Confidential and Proprietary

  25. CDC Corporate Governance - Oversight • Expansion of Board Oversight • Clarified Insurance Requirements • Enhanced Internal Controls • Revised By-laws Requirements • Revised Reporting Requirements • CDC Annual Reports • Economic development investments, • Executive compensation, and • Job Creation/Retention Documentation • New Reports Confidential and Proprietary

  26. Expansion of Board Oversight §120.823(d) Board Oversight and Roles • The responsibilities of the Board include, but are not limited to the following: • Approving the Mission and Policies for the CDC • Hiring, firing, supervising & evaluating the CDC Manager • Setting salary for CDC Manager and reviewing all other salaries • Establishing Committees Confidential and Proprietary

  27. Board Oversight of Loan Committee §120.823(d)(14) Loan Committee and Loan Policy • Updated Bylaws must include any Delegations of Authority to Loan and Executive Committees • CDC’s Approval Authority (Prior to Application to SBA): • <$1 Million: The Loan Committee approves • >$1 Million to $2,000,000: Approved by Loan Committee and ratified by the Board • > $2 Million: Approved by Board or Executive Committee Confidential and Proprietary

  28. Revised CDC Insurance Requirements • ALL CDCs must maintain: • Directors’ and Officers’ Liability Insurance, and • Errors and Omissions (E&O) Insurance • In amounts established by SBA • By CDC portfolio size and other factors • SBA will establish Insurance Scale for CDCs • SBA will coordinate with CDCs • SBA will coordinate with Insurance Underwriters • Addresses higher risks associated with the statutory increases in the 504 loan amounts Confidential and Proprietary

  29. Enhanced Internal Controls §120.823(d) Board Oversight and Roles - Oversight • Board must engage in oversight regarding: • Ensuring expenses are reasonable & customary • Directly hiring an Independent Auditor • Monitoring the CDC’s portfolio performance • Reviewing a Semi-Annual Performance Report • Ensuring establishment and maintenance of adequate reserves Confidential and Proprietary

  30. Enhanced Internal Controls §120.823(d) Board Oversight and Roles • The responsibilities of the Board include (cont.): • Establishing/revision By-Laws of the CDC • Retaining accountability for all actions of CDC • Maintaining updated By-Laws • Updating Loan Policies and Procedures • Maintaining satisfactory written Internal Control Policies • Certifying Board Compliance annually Confidential and Proprietary

  31. Annual Reports Composition Audited or Reviewed Financial Statements • Required for the CDC and any affiliates or subsidiaries • Audited Financial Statements must include: • Audited Balance Sheet • Audited Statement of Income and Expenses • Audited Statement of Source and Application of Funds • Footnotes as necessary to understand the financials • Auditor’s letter to management on internal control weaknesses; and • Auditor’s Report Confidential and Proprietary

  32. Economic Development Investments §120.823(d)(10) Board Oversight and Roles - Oversight • Board must ensure CDC invests in Local Economic Development: • In Each State in its Area of Operations • Board must approve each investment • If Investment is in the CDC’s Annual Budget: • Board’s Budget Approval is deemed Approval • Interim changes must be reported in Quarterly Meetings • If investment is not in the CDC’s Annual Budget: • Board must separately approve the investment Confidential and Proprietary

  33. Executive Compensation 120.830 - Report on Compensation - Details on Total Compensation • Salary, Bonuses and Expenses • Paid within the CDC’s most recent tax year • For Current and Former Officers and Directors • For Current and Former Employees • For Independent Contractors earning >$100k • IRS Form 990 (for Non-Profit CDC) or similar format (For-Profit) Confidential and Proprietary

  34. New CDC Reports 120.830 - Annual Reports (Continued): • Written Certification of Board of Directors • Each individual certifies they have read and understand Requirements of the Board • Written Report on economic development investments • For all investments in economic development activities • For each State CDC has an outstanding 504 loan Confidential and Proprietary

  35. Jobs Created/Retained Documentation • The GAO report also recommends SBA should review CDC job creation and retention follow-up documentation after the 2 year reporting period. • This documentation requirement should be discussed with the small business borrower at the closing. Instructions on reporting formats and timeframes should be provided to the small business so the CDC can obtain documentation when it is needed • CDC currently provides estimates of job creation and retention in the 504 loan application and report actual small business job creation and retention in CDC annual reports Confidential and Proprietary

  36. SMART Regulations Confidential and Proprietary

  37. Program Contacts For questions on the OCA Final Rule and SOP 50 10 5 (G) contact: Linda Rusche, Director, OFA 202-205-6396linda.rusche@sba.gov Linda Reilly, Chief, 504 Loan Program 202-205-9949 linda.reilly@sba.gov Bob Carpenter, 504 Financial Analyst 202-205-7654 robert.carpenter@sba.gov John Miller, Director, OFPO 202-619-0647 john.a.miller@sba.gov Richard Taylor, Director, SLPC 916-735-1221 richard.taylor@sba.gov Brent Ciurlino, Director, OCRM 202-205-6538 brent.ciurlino@sba.gov Paul Kirwin, 504 Team Leader 202-205-7261 paul.kirwin@sba.gov Confidential and Proprietary

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