Office of Financial Assistance Build Northeast Conference Worcester, Massachusetts

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 – 09/09/14Confidential and Proprietary

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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

OCA Final Rule and SOP 50 10 5 (G)

504 Program EligibilityPolicy Revisions


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 )

4 Confidential and Proprietary

Other 504 Program Updates


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


CDC Governance RulesPolicy Revisions


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


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

9Confidential and Proprietary

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


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


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


§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

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CDC Board Composition (cont.)


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

Director14



§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.



§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


Loan Committees

§120.823(d)(4)(ii) Loan CommitteesThe 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


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


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


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


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


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.


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


CDC Governance RulesOversight Revisions


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


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


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


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


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


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


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


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


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)


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


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


SMART Regulations

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SMART Component

Regulatory Citation

Regulatory Citation

•120.825 Financial Ability to Operate •120.823(d)(9) Board ensures CDC maintains adequate reserves•120.841 PCLP Reserve & Multi-State Accounting Requirement

•120.826(b) Board-approved internal control policy •120.820 Non-profit Status & Good Standing- independent loan review •120.822 Eliminate Membership-loan classification system •120.823(a) Emphasize Board Accountability

•120.820 Non-profit status & good standing •120.823(c) Oversight Responsibilities•120.824 Full time staff person to manage CDC •120.823(d)(3) Board sets salaries• 120.824(b) SBA must pre-approve Professional Service Contracts •120.823(d)(6) Independent Loan Reviews

•120.823(d)(12) & (d)(13) Board Accountability and Internal Controls•120.830(a)(2) Executive Compensation/IRS 990

•120.938 In cases of fraud, negligence or misrepresentation •120.823(d)(7)&(8) Board Monitors Portfolio/Semi-annual status reports• 120.970(b) CDC responsible for receipt & review •120.823(d)(14) Approvals of Loans over $2,000,000

• 120.830 Annual Report with Audited Financials (over $20MM) •120.816 CDC non-profit status and good standing• 120.820-830 Requirement that CDCs are in full compliance for ALP •120.823(d) Board oversees compliance with SBA requirements and bylaws

•120.828(a) Minimum level of activity •120.823(e) D & O/E&O Insurance - amount based on sliding scale• 120.828(b) Diversified by Business Sector •120.830(a)(3) Economic development activity/reinvestment• 120.829 Job Opportunity Average• 120.840(d)4 Documentation of any SBA required insurance (ALP)

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Description of Regulation

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Program Contacts

For questions on the OCA Final Rule and SOP 50 10 5 (G) contact:

Linda Rusche, Director, OFA 202-205-6396 [email protected] Reilly, Chief, 504 Loan Program 202-205-9949 [email protected] Carpenter, 504 Financial Analyst 202-205-7654 [email protected]

John Miller, Director, OFPO 202-619-0647 [email protected] Taylor, Director, SLPC 916-735-1221 [email protected]

Brent Ciurlino, Director, OCRM 202-205-6538 [email protected] Kirwin, 504 Team Leader 202-205-7261 [email protected]

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mailto:[email protected]







Documents

Office of Financial Assistance Build Northeast Conference Worcester, Massachusetts