Presented by Ethan W Smith Esq HOW TO

Agenda: p Eligibility p PLP Abuse p Conflict of Interest p Financials p Environmental

Guiding Principle 3 © 2014, Starfield & Smith, P. C. , All Rights Reserved

Eligibility p Affiliation n Loan Structuring to exceed program maximums n Lender failure to perform sufficiently detailed affiliation analysis n FULL DENIAL p Ineligible Business n Loan to purchase CRE and convert use to Brazilian Restaurant n Existing use at time of closing – ineligible n Lender failure to monitor UOP and change of use n FULL DENIAL 4 © 2014, Starfield & Smith, P. C. , All Rights Reserved

Eligibility p 912/1919 Issues: n Principal answers “No” to questions 7, 8 & 9 on 912 Form n Principal convicted of 2 misdemeanors (sexual assault) in 1993 and had felony arrest (battery) in 2002 (charges dropped) n Lender performs criminal background search prior to closing – no records found n Lender discovers misrepresentation on subsequent conventional loan application 5 © 2014, Starfield & Smith, P. C. , All Rights Reserved

PLP ABUSE p Lender refinance its own debt n $350 k interim loan for equipment purchase n SOP does not allow PLP processing to refi same lender debt, unless an interim loan approved within 90 days of PLP # n Delay caused by fire n Lender obtains PLP 10 mos. after interim loan approval and closing n $350 k REPAIR 6 © 2014, Starfield & Smith, P. C. , All Rights Reserved

Conflict of Interest p Bank officer part owner of CRE developer p Bank approves loans to CRE purchasers p Potential conflict of interest not disclosed to SBA p FULL DENIAL 7 © 2014, Starfield & Smith, P. C. , All Rights Reserved

Financials p Early Default/Problem Loan p Lender unable to produce 4506 Transcripts p Logic conundrum – difficult to prove a negative p Often lenders underwrite Change of Ownership as startup when seller refuses to provide financials – beware! p “Materiality” standard is not always followed p FULL DENIAL 8 © 2014, Starfield & Smith, P. C. , All Rights Reserved

Environmental p Gas station loan p Environmental consultant recommends additional testing p Lender does not require additional testing p Contamination at default n Lender cannot prove CRE was “clean” at closing p REPAIR – cost of cleanup 9 © 2014, Starfield & Smith, P. C. , All Rights Reserved

Use of Proceeds p Lender has burden to prove proper UOP p Lender does not reallocate proceeds in LA p Proceeds designated for one purpose used for another purpose (i. e. : inventory $ used for working capital; renovation $ used for debt refi. , etc. ) p REPAIR i/a/o improperly disbursed proceeds 10 © 2014, Starfield & Smith, P. C. , All Rights Reserved

Refinance p Lender refinances several debts of Borrower n Ineligible purpose – 1 debt refinanced the buy-in of 1 principal p“Creeping control” – ineligible n Ineligible debt – same debt was also owed to SBIC p REPAIR i/a/o line item allocated to refinance the ineligible debt 11 © 2014, Starfield & Smith, P. C. , All Rights Reserved

Collateral p Wrong lien position is #1 reason for repairs! 12 © 2014, Starfield

Insurance p Life – loan to sole proprietor n Failure to obtain life insurance n Borrower dies n REPAIR i/a/o loan balance less collateral recovery p Casualty – Acord Certificate n Failure to get copy of binder n Insurance company contests claim for coverage after fire destroys business n REPAIR i/a/o difference between replacement cost and litigation settlement amount 13 © 2014, Starfield & Smith, P. C. , All Rights Reserved

Recommendations/Best Practices p Begin with the end in mind p Submit “close calls” for GP processing p Use 10 Tabs as post-closing audit checklist p Independent loan level risk based reviews p Constant improvement in front-end practices p Avoid GIGO 14 © 2014, Starfield & Smith, P. C. , All Rights Reserved

Questions ? ? ? 15 © 2014, Starfield & Smith, P. C. , All

Thanks! 1300 Virginia Drive Suite 325 Ft. Washington, PA 19034 P: 215 -542 -7070 F: 215 -534 -9023 Ethan W. Smith, Esq. esmith@starfieldsmith. com 1101 North Lake Destiny Road, Suite 105 Maitland, FL 32751 P: (407) 667 -8811 F: (407) 667 -0020 www. starfieldsmith. com 16 © 2014, Starfield & Smith, P. C. , All Rights Reserved