TECHNICAL ISSUES MEMO 44-11

Transcription

1 TECHNICAL ISSUES MEMO To: NADCO Members (Please disseminate to all appropriate personnel) From: Mike Arlinsky, Director of Regulatory Affairs Subj: Escrow Closings for Temporary Debt Refinancing NADCO Sample Escrow Agreement Date: June 27, 2011 On April 8, 2011, SBA released Policy Notice , which provided further guidance on temporary debt refinancing, including the use of an escrow account when refinancing Same Institution Debt (13 C.F.R (g)(15)). Recently, SBA began issuing Authorizations for Debenture Guarantee with language for escrow closings in Section B.2. This Tech Issues Memo provides guidance on the requirements for such escrow closings. At this time, interim financing is not an option when refinancing Same Institution Debt, although NADCO has asked that SBA reconsider that position. With Same Institution Debt, an escrow account must be used. When refinancing other institution debt, interim financing must be used despite language implying differently at the top of Page 2 of Notice The procedure for an escrow closing is generally as follows: An escrow account is established with the Escrow Agent (see below for further information and tips on who may serve as Escrow Agent). If the Borrower needs to make a cash contribution to the Refinancing Project because of insufficient equity in the Eligible Fixed Assets, then that cash contribution is deposited into the escrow account at the time of 504 Loan Closing. Both the Third Party Loan and 504 Loan are closed by having all loan documents signed, all lien instruments recorded and, as applicable, title insurance policies (or marked up commitments depending on state practice) issued and postrecording UCC lien searches obtained. On the debenture sale funding date, the Net Debenture Proceeds are wired to the escrow account. If anyone other than the Third Party Lender serves as Escrow Agent, then the Third Party Loan proceeds also are wired to the escrow account on the debenture sale funding date. When all conditions have been met, the CDC then gives notice to the Escrow Agent to release the Escrowed Funds to the Third Party Lender to pay off the Refinanced Loan. A. Escrow Closing Language in Authorization for Debenture Guarantee When you receive an Authorization to refinance Same Institution Debt, check that the correct language appears in Section B.2. The correct language for temporary debt refinancing escrow closings is: 2. Escrow Closing (No Interim Financing) for Refinancing of Same Institution Debt under the Temporary Debt Refinancing Program: The project will not require interim financing. The following will be required for an escrow closing: a. Escrow Account:

2 (1) SBA must approve the escrow agreement. Escrow agent must be approved by CDC and SBA and follow escrow instructions provided by CDC and SBA. (2) Debenture sale funds must be wired directly into the escrow account. (3) The funds in escrow may not be distributed and the escrow account may not be dissolved until CDC is satisfied that all collateral documents have been properly filed, lien positions properly perfected, and a final title policy (or other evidence of title if no title policy is required) issued showing required title and lien position. (4) The escrow must close no later than 6 months from the date of loan approval, which is the Approval Date on the first page of the Authorization for Debenture Guaranty [sic]. If it does not, the escrow funds will be used to pay off the Debenture in full. (5) Borrower must deposit its cash contribution to Refinancing Project, if any, in the Escrow Account b. SBA Form Third Party Lender must execute and submit to the CDC at the time of closing SBA Form 2416, Lender Certification for Refinanced Loan. If your Authorization does not have the correct language (instead, it has the language for an escrow closing for simultaneous purchase), contact the SLPC for an amendment. B. Escrow Agent SBA Notice provides that the Escrow Agent may be the CDC attorney, Title Company or other party approved by SBA District Counsel. Other party includes the Third Party Lender. Having the Same Institution Third Party Lender serve as Escrow Agent is the simplest choice. On the debenture sale funding date, the Net Debenture Proceeds will be wired directly to the escrow account held by the Third Party Lender. Upon receipt of the notice from the CDC to release the escrowed funds, the Third Party Lender can disburse both its Third Party Loan and the monies in the escrow account (Net Debenture Proceeds and Borrower cash contribution, if any) to pay off the Refinanced Loan by an internal transfer. This avoids the delay and cost of having a different Escrow Agent receive both the Net Debenture Proceeds and Third Party Loan proceeds, have those wires clear and then wiring the monies back to the Third Party Lender for payoff of the Refinanced Loan. C. Escrow Agreement NADCO has developed a sample Same Institution Debt Refinancing Escrow Agreement which is available for download by clicking the link at the end of this Tech Issues Memo. This sample Agreement has been vetted by SBA. On May 5, 2011, an was distributed to SBA District Counsel providing guidance on escrow closings and which notes that NADCO has created the necessary boilerplate. A copy of that guidance is set forth at the end of this Tech Issues Memo. CDCs may use the NADCO sample Agreement or any other escrow agreement approved by SBA District Counsel. All CDCs, whether using the NADCO sample Escrow Agreement or another form, must have both the Escrow Agreement as to form and content and the Escrow Agent approved in advance by SBA District Counsel. CDCs should accomplish this by ing the proposed escrow agreement and the name and identity (Third Party Lender, Title Company, etc.) of the proposed Escrow Agent to SBA District Counsel for approval. If the CDC is doing multiple temporary debt refinancing loans with escrow accounts and will be using the same form of escrow

3 agreement each time, the CDC should request a one-time approval of the form of escrow agreement from SBA District Counsel and then obtain approval each time of the proposed Escrow Agent. D. Closing the 504 Loan The only differences between an escrow closing and a regular 504 Loan closing are: The Escrow Agreement signed by the Borrower, Third Party Lender, CDC and Escrow Agent The Form 2416, Lender Certification for Refinanced Loan) signed by the Same Institution Third Party Lender (check that you have the final 4-11 version posted on the NADCO and SBA websites) There is no Interim Lender Certification (SBA Form 2288TR) because there is no interim financing with an escrow closing The wire instructions on Page 4 of the Servicing Agent Agreement (SBA Form 1506) must be to the Escrow Agent for deposit into the escrow account All 504 Loan documents are signed, all lien instruments are recorded and, depending on your state practice, a title insurance policy(ies) or marked-up commitments and post-recording UCC lien search(es) is obtained. E. Third Party Loan Documents Because Same Institution Debt is being refinanced, the Third Party Lender has the option of modifying the loan documents for the Refinanced Loan in lieu of creating new Third Party Loan documents. This should be a cost savings for the small business because the Third Party Loan would retain the same lien position and date of perfection, new title insurance would not be necessary and there would no recording taxes in states where such taxes are charged. Regardless of whether the Third Party Loan has modified or new loan documents, those documents must comply with the requirements for Third Party Loans in 13 C.F.R and and Paragraphs 5-6 of the Third Party Lender Agreement (SBA Form 2287). F. Closing Submissions to SBA District Counsel The closing package submitted to SBA District Counsel (whether an expedited or regular closing package) must include the fully-executed Escrow Agreement and the executed SBA Form The 504 Debenture Closing Checklist (SBA Form 2286) has not been amended to include these forms because this is a temporary program. Once the CDC s closing package is approved, the CDC gives prior notice to the Escrow Agent, Borrower and Third Party Lender of the date that the CDC debenture and 504 Loan will fund. This is particularly important if an Escrow Agent other than the Third Party Lender is used so that the Third Party Lender also wires the Third Party Loan proceeds on the same date.

4 G. Debenture Funding, Release of Escrowed Funds and Payoff of Refinanced Loan As noted above, on the debenture sale funding date, the Net Debenture Proceeds (and perhaps the Third Party Loan proceeds depending on who serves as Escrow Agent) are wired to the escrow account. SBA gives its approval to release the escrowed funds through SBA District Counsel s approval of the CDC s closing package/authorization to send documents to Central Servicing Agent for debenture sale. The CDC then must give notice to the Escrow Agent to release the escrowed funds to the Third Party Lender for payoff of the Refinanced Loan. The CDC will give that notice if the following conditions have been met: (1) CDC has determined that the liens on collateral securing the 504 Loan are in the lien positions required by the Authorization subject to payoff of the Refinanced Loan lien instruments were recorded as part of the 504 Loan closing and lien positions are evidenced by the title insurance policy(ies) or marked-up commitment(s) and postrecording UCC lien search(es), but the CDC also must determine that there have been no intervening liens such as property or other tax liens recorded thereafter (2) CDC has determined that there is no unremedied substantial adverse change in the condition of Borrower and Operating Company again this is done as part of the 504 Loan closing subject to any adverse change thereafter. Upon receipt of the CDC s notice, the Escrow Agent will release the escrowed funds to the Third Party Lender. The Third Party Lender will then promptly pay off the Refinanced Loan. The escrow account must be broken or dissolved and the Refinanced Loan paid off within 6 months of the 504 Loan Approval Date unless SBA has approved an extension for good cause per SBA Notice (6/20/2011). If for any reason disbursement from the escrow account cannot occur within that time, then the Escrow Agent must notify the CDC and return the Net Debenture Proceeds to SBA as instructed by the CDC. If the escrow account included either the Borrower s cash contribution or the Third Party Loan proceeds, those monies would be returned respectively to the Borrower and Third Party Lender. Because the debenture has funded, if payoff of the Refinanced Loan cannot occur, then the Borrower remains liable for repaying the 504 Loan pursuant to the terms of the Note (SBA Form 1505). If you would like to access this TI Memo, SBA Notice , the NADCO sample Escrow Agreement or the SBA Form 2416 via the NADCO website, please click below. TI Memo 44-11, SBA Notice , NADCO Sample Escrow Agreement, SBA Form 2416

5 Contact NADCO for More Information: If you have additional questions or comments on this Technical Issue Memo, please contact Mike Arlinsky, Director of Regulatory Affairs at (703) , For past TI Memos, please go to the Technical Issue Memos page on the NADCO website, May 5, 2011 May 5, 2011 Guidance to SBA District Counsel Re: Guidance on Escrow Closings for the Temporary Debt Refinancing Program When a 504 loan approved under the Temporary Debt Refinancing Program is for the repayment of Same Institution Debt, the 504 loan may be closed without using an Interim Lender. As set forth in SBA Policy Notice issued on April 8, 2011, an escrow account is required when no Interim Lender is used. The CDC must create an escrow account prior to or at the time of the 504 loan closing. NADCO has created a boilerplate for the Escrow Agreement, but the CDC may use any agreement approved by SBA Counsel. Prior to approving the sale of the Debenture, SBA Counsel must: Approve the Escrow Agreement as to form and content; and Approve the Escrow Agent (the CDC attorney, a title company or other party such as the Third Party Lender); and Assure that the wiring instructions in the Servicing Agent Agreement provide for the net debenture proceeds to be wired to the Escrow Agent. The Escrow Agreement must: Be funded with Borrower s cash contribution, if any. Provide that the funds in the escrow may not be disbursed until CDC is satisfied that o the liens on collateral securing the 504 Loan are in the lien positions required by the Authorization, and o there has been no unremedied substantial adverse change in the condition of Borrower and Operating Company; Provide that escrowed funds must be disbursed within six (6) months of the approval date of the 504 loan or returned to SBA for prepayment of the debenture. The CDC must submit executed copies of the SBA Form 2416, Lender Certification for Refinanced Loan and the Escrow Agreement, with the closing package for both expedited and regular closings. There will be no Interim Lender Certification since there will be no interim loan. The 504 Debenture Closing Checklist will not be amended since this is a temporary program.