Exhibit_2_SMART_Pre-Plan.pdf

Exhibit 2

U.S. Small Business Administration

Office of Credit Risk Management

504 Loan Program

SMART Execution Guidance

THIS DOCUMENT IS STRICTLY CONFIDENTIAL

This review plan is the property of the U.S. Small Business Administration, Office of Credit Risk Management. Under no circumstances shall any recipient of this plan disclose or make public this document or any portion thereof. Unauthorized disclosure of any of the contents of this document is subject to the penalties in 18 USC 641. The Office of Credit Risk Management must be notified immediately if the examined entity receives a subpoena or other legal process calling for the production of this document.

Review Plan

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Table of Contents

Subject Page

CDC Review Background 3

SCOPE 4

Prior Review Results & Areas of Concern 6

SCHEDULE, RESOURCE ESTIMATES AND AUTHORIZATIONS 6

ATTACHMENTS:

A - LEADSHEET SUMMARIES

1. Solvency and Financial Condition 8

2. Management and Board Governance: 9

3. Asset Quality and Servicing 14

4. Regulatory Compliance 20

5. Technical Issues and Mission 22

B – LOAN SAMPLE 25

C – Board of Directors Questions 26

D – File Deficiency and CDC Response 27

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CDC Review Background

The purpose of this review plan is to outline the background, scope, objectives and approach for reviewing [CDC NAME] the week of [DATE].

[CDC NAME] is an SBA Certified Development Company (CDC) located in [CITY, STATE]

NH. In addition to [STATE], [CDC NAME] has a multi-state lending authority or local economic area expansion in [STATE].

As of [DATE], [CDC NAME] [provide description of SBA portfolio].

Active Balance by Delivery Method

Delivery

Method

Gross

Loans # Gross Loans $

Total

This was previously reviewed by the Office of Credit Risk Management on the week of [DATE] resulting in an assessment of [Assessment].

CDC has [PCLP and/or ALP] authority that expires on [DATE]. [Describe level of delegated authority].

SCOPE

The Review of [CDC NAME] is considered a [Full Risk Based Review or Targeted Risk Based

Review] that it is focus on the [ # of SMART components]: [Select Component to be Reviewed:

1) Solvency and Financial Condition, 2) Management and Board Governance, 3) Asset Quality and

Servicing, 4) Regulatory Compliance, and 5) Technical Issues and Mission]. The review will specifically focus on the following areas regarding:

SOLVENCY AND FINANCIAL CONDITION– aka financial ability to operate, including the following areas

Profitability

Net Asset Position

Adequacy of Reserves

Funds generated from 504 loans after payment of staff and overhead

Contributions from government or other sponsors

Cash Management

PCLP Loan Loss Reserve Amount

Authorize signers on Operating Account and other accounts

MANAGEMENT AND BOARD GOVERNANCE

Does the board properly govern the CDC?

Does board maintain an awareness of CDC’s performance?

Does board appear independent of management?

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Did board establish an approved Internal Control Policy in accordance with

13 CFR 120.826(b)?

Are board and management receiving sufficient training on CDCs and the

SBA 504 program to properly fulfill their role and responsibility?

Is CDC management actively involved in day-to-day operations of CDC?

Are there conflicts of interest, self-dealing, or self-promoting form the taxpayer supported CDC (or board)?

Loan committees

ASSET QUALITY AND SERVICING

Are performance metrics representative of acceptable risk?

Does the CDC have the proper systems for marketing, underwriting, processing, closing, servicing and liquidating 504 loans?

Does CDC have prudent underwriting practices?

Are internal controls implemented to ensure SBA loan program requirements are met regarding requesting, obtaining and analyzing annual financial statements? Are they sending additional request letters and obtaining credit reports?

Are policies, procedures and internal controls effectively implemented to ensure compliance with all eligibility issues regarding EPC/OC eligibility?

Does the CDC have written credit policies?

Is the CDC proactive in managing its outstanding loan portfolio?

Was the underwriting repayment analysis adequate?

If debt service ability relied on sales projections, were the sales projections reasonable and did the CDC question them?

Is there adequate analysis to justify deferments?

Were the “No Adverse Change” notices accurate for the three Early

Default loans?

REGULATORY COMPLIANCE

Is the CDC submitting all required reports to SBA in an accurate and timely manner?

Is the CDC in compliance with SBA regulations concerning its 504 lending activities and operations?

Are policies, procedures and internal controls in place to ensure SBA Loan

Program Requirements are met?

Did CDC establish a periodic loan review function for its SBA loan portfolio, to ensure management of its SBA loans in accordance with SBA

Loan Program Requirements?

Was the economic impact of loans adequately analyzed?

Is CDC in good standing with the IRS and all states in which it does business (Check License)?

Are policies, procedures, and internal controls in place regarding the annual risk rating of loan (timeliness) and CDC liquidation policy?

Were other compliance issues adequately addressed such as equity injection verifications, the 51% occupancy requirement, environmental assessments, and relevant owners guaranteed the loan?

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Does the CDC’s D&O Insurance policy meet the requirements? Does it exclude

SBA? Is there a 20 day cancelation notice requirement?

Does the CDC have designated attorneys? Do they meet SBA requirements

(malpractice insurance, SBA training, proof of license in the state, etc.)?

TECHNICAL ISSUES AND MISSION

Is classifying its SBA loan in accordance with prudent lender practice?

Does the CDC adequately document its jobs created/retained numbers for all of its loans?

Does the CDC participate in other economic development?

Does the CDC act as an LSP for other lenders?

Does the CDC have Professional Services Contracts?

Are there concentrations in the CDC’s portfolio? Does the CDC monitor and manage these concentrations (Reporting to the Board)?

Does the CDC have a business plan for SBA lending, including SBA loan program goals?

EVALUATIVE CRITERIA

Reviews will be conducted within the general parameters established by SBA’s Standard

Operating Procedures 51 00 – On-Site Lender Reviews/Reviews (SOP 51 00). SOP 51 00 will be supplemented by other authoritative guidance, such as accounting standards or practices, or auditing principles, as appropriate. The CDC’s operations will also be measured against other

SBA Standard Operating Procedures (SOPs), and sound business practices, as well as any agreements between SBA and the CDC. The SBA’s SOPs are available online at www.sba.gov under the library link.

Attachment A contains leadsheets that outline the specific objective, scope and approach, and criteria for each Review area. Adjustments to the Review scope may be made, as determined necessary by the contractor with concurrence of the SBA 504 oversight manager. As conditions warrant, the Review scope and approach may be modified by the Reviewer in Charge, so long as conclusions may be reached that adequately address the leadsheet objectives. Individual loan findings and conclusions will be documented on an electronic workpaper. This workpaper will be sent to each examiner before the pre-Review meeting.

Prior Review Results: The last Review was performed in [Year]. The summary assessment of

[CDC NAME] was [Assessment]. The Review identified [Findings] that needed management’s attention.

Documentation Requirements: This Review will focus on the lender’s credit administration processes (gathering, verifying, analysis, documentation, and/or controls and servicing processes) on new loans.

Loan Selection: The loan portfolio is composed of [#] loans and SBA has chosen to review a sample of [#] loans. [#] loans were [Judgmentally or Randomly] selected based on [Criteria].

ASSIGNMENTS AND WORKPAPER ORGANIZATION

The following table shows lead staff assignments and a workpaper index for this Review. The staff assignments may be changed at the sole discretion of the Examiner in Charge (“EIC”). The http://www.sba.gov/

Page | 6 of 27 workpaper index will be used to organize the workpapers; however, flexibility exists to modify this as circumstances dictate; however, workpapers will be cross referenced as prescribed in SOP 51

00. Any desired changes should be communicated to the EIC for concurrence.

Lead-sheet

Work

Paper

Section

Assignment

Examiner(s)

Examiner in Charge

A Report of Review

B Review Planning

C Correspondence & other misc. materials

1 D Solvency and Financial Condition

2 E Management and Board Governance

3 F Asset Quality and Servicing

4 G Regulatory Compliance

5 H Technical Issues and Mission

6 I Loan workpaper support

7 J Quality Assurance

8 Supervisory Review

SCHEDULE, RESOURCE ESTIMATES AND AUTHORIZATIONS

The onsite Review schedule is based on a one-week onsite Review conducted by [#] contract reviewers [Name of Contractors] from [Contracting Company], two representative from SBA’s

Office of Credit Risk Management [Name of SBA Employees], SBA District Counsel [Name] from [State] District Office, and [Name] who is [Title] in SBA’s [Department Name] Servicing

Center.

The first onsite date will be [DATE] and the last onsite date is expected to be [DATE]. The expected delivery date for the Risk Based Review Report (Report) to SBA is [DATE].

Adjustments to the schedule may be made, as determined necessary by [Contracting Company], with concurrence of SBA.

Key Review dates are as follow:

ACTIVITY DUE DATES

Advance Letter

Draft Review Plan to Contractor

Approved Review Plan

Call with Contractors to go over PrePlan

Entrance Conference

Onsite Review Work

Exit Conference

Complete Section Summaries

Draft of Report Prepared by [Contracting

Company]

Draft Report from [FA] to [Supervisor]

Draft of Report to [OCRM Director]

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Issue Report

[CDC NAME]Contact Info:

[CDC NAME]Board Members selected for Interviews:

[CDC NAME]Staff to interview:

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Attachment A - Lead Sheets

(Black = Report; Blue = Plan only; Red = Questions to Investigate, as applicable)

SOLVENCY AND FINANCIAL CONDITION

Operating Plan and Performance 13 CFR 120.825

A CDC must be able to sustain its operations continuously, with reliable sources of funds

(1) Review annual financial statements of CDC (audited required when portfolio size exceeds $20 million. Request and review interim financials as well, if available.

(2) Review any contributions made from government or other sources.

(3) Analyze other sources of funding – does the CDC have lines of credit? If so, what is used to secure the lines? What is credit limit on the line and what is outstanding balance. What are proceeds from line used for? Is CDC’s line of credit considered current or it in default

(including technical default)?

(4) Does the CDC recognize a “servicing right asset” on their balance sheet? If so, how is it being valued (in compliance with FAS 156)?

(5) Meet with CFO to discuss any issues. Meet with 2 members of the board to discuss their awareness of financial condition of CDC. Inquire with board about any compensation committees. Are there formal written compensation policies?

(6) Analyze if the CDC has sufficient cash flow to support ongoing operations and reserve requirements.

(7) What is the net asset (net worth) position of CDC? What are the trends?

(8) How much of servicing fee goes to actually servicing the loans (CDCs receive a minimum 50 basis points on performing 504 loans, estimate actual servicing costs and compare to servicing fee received in a given period).

(9) Describe and analyze materials and methods employed to periodically compile and communicate the SBA financial results, production data, portfolio performance, repurchase and liquidation information to senior CDC management. Obtain reports (or copies) of reporting which demonstrates this reporting.

(10) Determine whether reporting is sufficient to manage SBA lending operations.

(11) Determine whether financing is sufficient to manage SBA lending operations.

(12) Check Operating Account and Investing Account for authorize signature.

(13) Does the operating account meets FDIC insurance requirement?

(fill in tables below)

Selected Data from CDC’s 9/30/2013 Audited Financial Statements

Cash $x

Current Assets $x

Current Liabilities $x

Working Capital $x

Fixed Assets $x

Long Term Liabilities $x

Total Unrestricted Net Assets $x

Dollar Change in Net Assets (Income) $x

SBA 504 Servicing Fee $x

SBA 504 Processing Fee $x

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504 Interest Income (Float) $x

Other income: $x

Total Revenue $x

Salary of CDC Manager (form 990) $x

Total CDC Salaries $X

Professional Service Contracts $X

Other Economic Development $x

Total Expenses $x

PCLP Lenders

(1) For Premier Certified Lender Program (PCLP) CDCs, obtain the loan loss reserve accounting report(s) for the most recent three months, and compare to CDC’s loan transaction record to identify and reconcile any discrepancies, in accordance with SBA Loan Program

Requirements. As necessary, contact the applicable SBA office to fully determine nature of discrepancies.

(2) For defaulted PCLP loans, determine that all required loan loss payments from reserve fund have been made to SBA, in accordance with SBA Loan Program Requirements.

(3) Does the CDC owe reimbursement to SBA? If yes, how much.

(4) Does the CDC have capital plan that detail action plan to raise additional capital if needed?

Total Debenture of Active PCLP Loans

Required PCLP/Loan Loss Reserve Amount

MANAGEMENT AND GOVERNANCE

CDC Organization

(1) Review organizational chart and identify the chain of command from highest level of

CDC management to the SBA department management.

(2) How does Board of Directors/senior management maintain their awareness of and direction over SBA operations through the chain of command?

(3) Identify what meetings, reports and other methods of communication are conducted to accomplish direction of SBA operations, and obtain documentation or records of these meetings, reports, and methods.

(4) Are there any policy or procedural weaknesses which must be corrected by CDC in the direction of the SBA 504 loan program?

(5) Does the Board of Directors (“Board”) meets on a (monthly/bimonthly, quarterly) basis and is responsible for the overall operation of the CDC?

(6) Is the Board ware of all facets of the operation via the audited financial statements, monthly and quarterly reports that cover operations, delinquency, loan activity, portfolio status, audits and operations?

Regulatory Organizational Requirements

(7) Identify that CDC membership meets SBA Loan Program requirements, including but not limited to number of members (25), annual meetings, control of voting membership, CDC employee and staff restrictions from membership, representation by industry groups, and

Page | 10 of 27 multi-state requirements. 13 CFR 120.822. Get list of CDC Members that shows membership type and if the member is voting or non-voting.

(8) Identify that Board of Directors meet SBA Loan Program requirements, including but not limited to membership group composition, control issues, no CDC staff except for CDC manager, commercial lending experience requirements, quarterly meeting requirements, quorum requirements, and/or Loan Committee requirements. 13 CFR 120.823

a. A CDC must have a Board of Directors chosen from the membership by the members and representing at least three of the four membership groups.

b. No person who is a member of a CDC’s staff may be a voting member of the

Board except for the CDC manager.

c. At least one member other than the CDC manager must possess commercial lending experience.

d. When the Board votes on SBA loan approval or servicing actions, at least one

Board Member with commercial loan experience acceptable to SBA, other than the CDC manager, must be present and vote. There must be no actual or apparent conflict of interest.

e. The Board may establish a Loan Committee of non- Board members that reports to the Board. Loan Committee members must include at least 1 member with commercial lending experience.

Get list of CDC Board Members that shows board membership type and if the board member is voting or non-voting.

(9) Is there a loan committee or executive committee? If yes, does it meet 13 CFR 120.823?

(10) Identify that the professional management and staff meet SBA Loan Program requirements, including but not limited to Executive Director requirement and professional staff requirements and qualifications. 13 CFR 120.824

a. Members must be responsible for actively supporting economic development in the Area of Operations and must be from one of the following groups:

government organizations responsible for economic development in the Area of

Operations; financial institutions that provide commercial long term fixed asset financing in the Area of Operations; community organizations dedicated to economic development in the Area of Operations such as chambers of commerce, foundations, trade associations, college, universities, or small business development centers; businesses in the Area of Operations

b. CDC must have at least one salaried professional employee who is employed directly full time to manage the CDC. The CDC manager must be hired by the

CDC’s board of directors and subject to termination only by the board.

(11) Determine that the Operating CDC has met SBA Loan Program requirements, including but not limited to professional staff requirements, SBA pre-approval for any contract relationships, operating requirements, maintenance of records and documents and changes in operations or location.

(12) Determine that the Operating CDC has met SBA Loan Program requirements regarding

Resumes, “Statement of Personal History” SBA Form 1081 and fingerprint cards Form

FD 258 on all associates and staff

(13) Identify that the CDC has filed quarterly service reports on each loan 60 days or more past due.

(14) Determine CDC is in good standing in state incorporated, and any other state in which

CDC does business.

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a. CDC must comply with all laws, including taxation requirements in the state in which the CDC is incorporated or where it conducts business.

b. CDC must have satisfactory SBA performance as determined by SBA in its discretion (e.g. consider CDC’s risk rating). Other factors include historical performance measures (e.g. default rate, purchase rate, and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information

(15) Identify any other deficiencies with regard to regulatory requirements.

(16) For Non-Profit CDCs: Determine if CDC meets the requirements of the Single Audit Act

Amendments of 1996 (31 USC 7501-7507) and revised OMB Circular A-133, Audits of

States, Local Governments, and Non-Profit Organizations.

(17) Determine if any long-range planning demonstrates a significant change to the CDC’s approach to its SBA program. Describe the proposed change(s) and management’s intent.

Is it prudent?

(18) Determine if management is knowledgeable of SBA lending requirements.

Delegations of Authority

(19) Determine that delegations related to the SBA program for loan approval and servicing authority are approved by the BOD or senior management, and that documentation related to the delegations confirms this.

(20) Determine that the CDC is complying with its loan approval process. Senior

Management has to approve the loan before it’s presented to the Loan Committee and Board.

(21) Analyze the approval timeline by the Senior Manager, Loan Committee and Board.

(22) Determine that CDC management communicated its delegations to the SBA portfolio staff to meet the goals and objectives of senior direction?

(23) Assess what internal controls exist to ensure that exceptions to delegations are properly handled?

(24) Determine what the CDC does to train and maintain proficiency in lending for its SBA personnel.

Training

(25) What, if any, training opportunities does CDC offer to SBA personnel?

(26) How often, if ever, does CDC conduct training on its SBA program?

Legal Structure

(27) Current bylaws reviewed by the district and HQ?

(28) Current bylaws are in compliance?

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Internal Controls and Oversight 13 CFR 120.826

(29) Each CDC’s board of directors must adopt internal control policy which provides adequate direction for effective control over and accountability for operations, programs and resources. At minimum it must include:

a. Assignment of responsibility for internal control function to an officer or officers;

b. Adopt procedures for maintenance and periodic review of the internal control function;

c. Direct a program to review and assess the CDC’s 504-related loans, specifically including review standards, including standards for work papers and supporting documentation; loan quality classification standards; specific control requirements for oversight of Lender Service Providers; and standards for training.

(30) Determine the nature and frequency of the internal activities that provide oversight data and information to the SBA management.

(31) Determine that the CDC has an internal control policy which provides adequate direction for effective control over and accountability for operations, programs, and resources and meets SBA Loan Program Requirements, including but not limited to assigning responsibility for the policy to an officer/officers, containing procedures for periodic review of the policy, containing procedures for reviewing and assessing the 504-related loans, specifying review standards including loan quality classification standards, specifying procedures for the CDC’s oversight of Lender Service Provides, and specifying standards of training to implement the loan review program.

(32) Determine that the Board of Directors has adopted the internal control policy in accordance with SBA Loan Program Requirements.

(33) Determine whether CDC’s Board of Directors adopted an internal control policy which provides adequate direction to the institution for effective control over and accountability for operations, programs, and resources. Determine that the board adopting internal control policy satisfies the following requirements at a minimum:

a. Direct management to assign the responsibility for the internal control function

(covering financial, credit, credit review, collateral and administrative matters) to an officer of a CDC

b. Adopt and set forth procedures for maintenance and periodic review of the internal control function

c. Direct the operation of a program to review and assess the CDC’s 504-related loans.

(34) For the 504 review program, the internal control policies must specify the following:

b. Loan, loan-related collateral, and appraisal review standards, including standards for scope of selection and standards for work papers and related documents

c. Loan quality classification standards consistent with the standardized classification systems used by the Federal Financial Institution Regulators

d. Specific control requirements for the CDC’s oversight of Lender Service

Providers

e. Standards for training to implement the loan review program

(35) Identify the types of independent review being used to oversee the SBA lending program

(i.e. internal and external audits). (This is not reporting, but review independent of the loan program management).

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(36) Review any internal audit reports or compliance Reviews of SBA lending operation and review findings and recommendations for material deficiencies.

(37) Determine what action(s) have been taken by CDC to address any identified deficiencies.

Risk Rating System 13 CFR §120.826

(38) Determine whether CDC lender uses appropriate, prudent, and generally accepted industry credit analysis processes and procedures.

(39) Evaluate policies for internal grading and/or risk rating SBA loans, and practices for rating loans at regular intervals through life of loan (at least annually).

(40) Determine whether CDC lenders validate (and document) with appropriate and accepted statistical methodologies that their business credit scoring model, if any, is predictive of loan performance, and they must provide that documentation to SBA upon request.

(41) Determine how these rating systems affect CDC’s SBA portfolio management.

(42) Who is responsible for maintaining accurate risk ratings?

(43) Review management reports containing grades or risk ratings of all SBA loans.

(44) Determine whether CDC’s criteria for assigning each rating is clear and precisely defined using objective and subjective factors.

(45) Determine whether the ratings reflect the risks posed by both the borrower’s expected performance and the transaction.

(46) Determine whether assumptions implicit in the rating definitions accurately anticipate outcomes.

External Oversight

(47) To what extent are the SBA program and/or the SBA loan portfolio subjected to third party/independent Review, review or audit over past three years or since most recent SBA review?

(48) Obtain and review copies of available independent reports, reviews or audits on CDC’s

SBA portfolio. Review report findings and recommendations for material deficiencies.

Determine what action(s) taken by CDC to address deficiencies and results achieved.

(49) Determine that CDC has submitted annual audited financial statements in accordance with

13 CFR § 120.826(c) and § 120.830, as applicable.

f. Each CDC with a 504 loan portfolio balance of $20 million or more must have its financial statements audited annually by a certified public accountant that is independent and experienced in auditing financial statements

g. For CDCs with a portfolio balance of less than $20million, the CDC’s annual financial statements submitted to SBA must be reviewed by an independent

CPA in accordance with GAAP.

(50) Discuss all management and operations findings with CDC management.

(51) Note any relevant CDC input.

(52) Conclude on adequacy of SBA program management.

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CDC Service Provider

(53) Any contracts for the managing, marketing, packaging, processing, closing, servicing or liquidating functions at the CDC approved by SBA?

(54) Provide list of CDC Service Providers with name, job description, and when it was approved by SBA HQ.

(55) What contracts does the principal have with other CDCs? Provide the name of the CDCs and the work that is done.

(56) What time do they spend providing service for other CDCs?

Scott Gardiner got paid $55,706.98 on January 14, 2013 ($125 per hour total 446 hours)

Scott Gardiner got paid $49,325.48 on January 19, 2012 ($125 per hour total 395 hours)

Alan Abraham got paid $39,875.00 on March 30, 2012 ($125 per hour total 319 hours)

(57) Do you sign on any of these CDCs’ operating account or any other deposit account?

Findings and Corrective Actions

(1) Identify any Finding that requires a Corrective Action.

Identify the Corrective Action that corresponds to each Finding.

ASSET QUALITY AND SERVICING

Credit Underwriting Policies

(1) Determine that the CDC has established prudent underwriting practices for its SBA program.

(2) Determine that the CDC’s SBA loan purpose clearly reflects actual use of the proceeds.

(3) Determine that the CDC maintains prudent credit underwriting practices for its SBA program that meet the following criteria:

a. Are commensurate with the types of loans the institution will make and consider the terms and conditions under which they will be made.

b. Consider the nature of the markets in which loans will be made.

c. Consider the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed.

d. Determine whether loan approval documentation contains sufficient analysis of financial trends, industry trends, and risk mitigants.

e. Establish a system of independent, ongoing credit review of SBA loans and appropriate communication to management and to the board of directors.

f. Take adequate account of concentration of credit risk (geographic and industry).

g. Are appropriate to the size of the institution and the nature and scope of its activities.

h. Are appropriate to the size of the CDC’s SBA portfolio.

Creditworthiness 13 CFR §120.150

Applicant must be creditworthy. Loans must be so sound as to reasonably assure repayment. SBA will consider:

a. character, reputation, and credit history of the applicant, its associates, and guarantors;

b. experience and depth of management;

c. strength of the business;

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d. past earnings, projected cash flow, and future prospects;

e. ability to repay the loan with earnings from the business;

f. Sufficient invested equity to operate on a sound financial basis;

g. potential for long-term success;

h. nature and value of collateral (although inadequate collateral will not be the sole reason for denial of a loan request);

i. the effect any affiliates may have on the ultimate repayment ability of applicant.

(4) Determine whether CDC’s SBA loan procedures establish requirements for creditworthiness that, at minimum, include positive determination of repayment ability, sufficient cash flow to fund operations, adequate management ability, adequate capitalization and satisfactory credit history consistent with SBA Loan Program

Requirements.

(5) Determine whether CDC’s SBA credit policy demonstrates the ability to evaluate and process SBA loans in accordance with SBA Loan Program Requirements.

(6) Review sample of loans to determine whether CDC is adhering to all loan policies and all

SBA loan policy requirements, and identify and provide examples of any material deficiencies or patterns of deficiencies.

(7) Determine whether the CDC analyzes each application in a commercially reasonable manner, consistent with prudent lending standards. The CDC’s analysis must include the following:

b. A description of the history and nature of the business

c. A description of and comments on the business plan including financial condition of the business, need for the business in the area (if new) and competition.

d. A discussion of the owners’ and managers’ relevant experience in the type of business, as well as their personal credit histories.

e. A financial analysis of the Small Business Applicant’s current balance sheet before and after the loan to include any required adjustments such as any equity injection, including a discussion of its adequacy, or stand-by debt.

f. A financial analysis of repayment ability based on historical income statements and/or tax returns (if an existing business) and projections, including the reasonableness of the supporting assumptions.

g. A ratio analysis of the financial statements including comments on any trends and a comparison with industry averages.

h. A discussion of lender’s credit experience with the applicant and a review of business credit reports.

Eligibility

(8) Review each loan based upon applicant (borrower), project and lender file management.

Review issues include eligibility requirements, as applicable, to the type, delivery method, size, and any other parameters defined by SBA in accordance with SBA Loan Program

Requirements. Compile individual incidences of deficiency, and analyze to determine if any patterns of deficiency exist.

(9) Identify all compliance deficiencies in each sample file reviewed, and determine if there are patterns of deficiencies among all files, reviewing for the following:

h. Determine whether the business is for profit, domestic operation, and otherwise eligible in accordance with SBA Loan Program Requirements;

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a. Review Articles of Incorporation, Articles of Organization, Corporate By-

Laws, Partnership Agreements, Association By-laws, and Tax Returns to determine whether the business is for-profit.

i. Identify that the applicant business is small by SBA size standards;

a. The Small Business Applicant and its affiliates must have a maximum tangible net worth not more than $15 million; AND the average net income after Federal income taxes for the 2 full fiscal years before the date of the application is not more than $5 million.

j. Identify that any franchise financing is eligible;

k. Determine whether credit is not otherwise available on reasonable terms from non-Federal sources without guaranty provided by the SBA;

l. Determine whether some or the entire loan is not available from any of the following sources: (a) the resources of the applicant business; or (b) the personal resources of the principals of the applicant concern.

m. Determine whether desired funds are available from the personal resources of any owner of 20% or more of the equity of the applicant, including limits on outstanding personal liquid assets, and if available are injected;

n. Determine whether all principal owners of the business are eligible and of good character as demonstrated on “Statement of Personal History”, SBA Form 912;

AND whether the Lender obtained SBA Form 912, Statement of Personal

History, on all persons required;

o. Determine whether the applicant has ever caused prior loss to the Government from prior federal financial assistance;

p. Determine whether all principal owners of the business are U.S. citizens or eligible resident aliens;

q. Identify all use of proceeds of the loan as eligible, including funds used to purchase any portion of rental real estate, pay debts or change ownership of the applicant business;

r. Determine whether 504 project meets specified economic development goals and or job opportunity criteria in accordance with SBA Loan Program

Requirements;

a. At least one job for every $65,000 of project debenture ($100,000 for Small

Manufacturers)

b. A job opportunity does not have to be at the project facility, but 75% of the jobs must be in the community where the project is located.

s. Identify any actual or apparent conflicts of interest or preferences;

t. Determine whether all SBA delegated program-specific eligibility issues (e.g., ALP, PCLP, etc.) are met; and

u. Identify any other SBA statutory, regulatory or SOP violations of eligibility.

(10) Determine that CDC has verified any required borrower contribution prior to disbursement

SBA Loan Program Requirements.

(11) Determine that CDC has obtained any required appraisals, environmental assessments, flood insurance, or other required insurance, prior to disbursement in accordance with

SBA Loan Program Requirements;

(12) Determine that CDC required and reconciled IRS tax transcripts for any applicant when required in accordance with SBA Loan Program Requirements;

(13) Determine that CDC obtained executed SBA Form 1506 Servicing Agent Agreement;

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(14) Determine that CDC followed SBA requirement for site visit or other intensive servicing activity when loan is 60-days or more past due, or there is other reasons for concern in accordance with SBA Loan Program Requirements;

(15) As applicable to delegation of authority, determine that CDC has followed all SOP requirements regarding management of liquidation cases, including preparation of a liquidation plan, timely site visits, use of current appraisals, consideration of environmental issues, and preparation of a wrap-up report at conclusion of liquidation in accordance with SBA Loan Program Requirements; and

(16) Identify that CDC has forwarded all recoveries on repurchased loans with 15 days of receipt in accordance with SBA Loan Program Requirements.

(17) Compile a list of all eligibility deficiencies by issue type and by errors per file, and identify any trends of deficiencies which warrant lender attention.

(18) Compile a list of material eligibility deficiencies by loan file number and reason for deficiency. A material deficiency is one which calls to question the validity of part or the entire guaranty, if guaranty purchase should ever be requested, or which demonstrates increased financial risk to SBA.

Early Defaults [13 CFR §120.938]

Use the loan detail report regarding early defaulted loans along with assessment of one or more

Early Defaulted (payment problem within 18 months of disbursement) loans to analyze and address the following:

(19) Identify early debenture repurchases and analyze risk implications (early debenture repurchase defined as repurchase within 18 months of disbursement). Verify that the SBA borrower has not suffered any un-remedied adverse change since the 504 loan was initially approved.

(20) Identify trend with early defaults by delivery method, industry and/or geographic concentration (as data is available).

(21) Review one or more early defaulted loans and discuss credit underwriting observations in

Credit Administration section.

(22) If a CDC defaults on a Debenture, SBA generally shall limit its recovery to the payments made by the small business to the CDC on the loan made from the Debenture proceeds, and the collateral securing the defaulted loan.

(23) SBA will look to the CDC for the entire amount of the Debenture in the case of fraud, negligence, or misrepresentation by the CDC.

(24) Determine whether CDC cooperates with SBA to cure defaults and initiate workouts.

Collateral 13 CFR§120. 934

(25) Determine whether CDC’s loan procedures establish requirements for SBA collateral that, at minimum, meet all SBA collateral requirements contained in SBA Loan Program

Requirements.

(26) Review sample of loans to determine if CDC is adhering to SBA’s policy and requirements regarding collateral, and identify and provide examples of any material deficiencies or patterns of deficiencies.

Closing

(27) Determine whether the CDC’s policy and procedures define the requirements that must be met before closing and funding is allowed, including use of authorized closing attorney in preparation of all required closing instruments, obtaining all required executed loan documents, meeting all loan authorization conditions, identification that all requirements

Page | 18 of 27 of the first lien holder are met, identification that the interim lien holder payoff is funded appropriately, verification of borrower’s contribution, verification of correct use of proceeds, verification of perfection of all lien and guaranty requirements, obtaining all required insurance policies, including any applicable assignments and/or acknowledgements; and verification that first lien holder has executed all required agreements.

(28) Determine whether the CDC’s closing policy demonstrates the ability to close and disburse SBA loans in accordance with SBA Loan Program Requirements.

(29) Determine if CDC confirmed that borrower made all required cash or property contributions in accordance with SBA Loan Program Requirements.

(30) Review sample of loans to determine if CDC is adhering to loan policy and SBA requirements regarding closing and disbursement, and identify and provide examples of any material deficiencies or patterns of deficiencies.

(31) For each PCLP Loan, the PCLP CDC must document in its files the basis for its decisions with respect to loan processing, closing, servicing, liquidating, and litigating.

Regular Servicing & Assessment of Continued Creditworthiness –13 CFR §120.970

(32) Describe CDC practices for evaluating continued creditworthiness, (e.g., annual financial statement analysis, credit modeling for portfolio management purposes, etc.).

(33) Determine whether policy for continued monitoring of the SBA portfolio is, at minimum, in accordance with any loan authorization requirements.

(34) Determine whether CDC’s policy for loan servicing is consistent with SBA Loan Program

Requirements.

i. The CDC is responsible for routine servicing including receipt and review of the

Borrower’s or Operating Company’s financial statements on an annual or more frequent basis and monitoring the status of the Borrower and 504 loan collateral

(35) Determine whether adequate controls exist to ensure required insurance coverage in place, including any applicable assignments and/or acknowledgements are obtained, and all required insurance policies are renewed as necessary.

j. The CDC is responsible for assuring that the Borrower makes all required insurance premium payments and has paid all taxes when due.

(36) Determine whether adequate controls exist to ensure required lien positions are obtained and renewed, as necessary.

k. The CDC is responsible for filing renewals and extensions of security interests on collateral for the 504, as required.

(37) Describe and determine procedures for processing borrower servicing requests.

(38) Review sample of loans to determine if CDC is adhering to loan policies and SBA requirements, including those contained in SBA Loan Program Requirements regarding regular servicing and portfolio management, and identify and provide examples of any material deficiencies or patterns of deficiencies.

Intensive Servicing/Liquidation – 13 CFR §120.536

(39) The CDC must be approved by SBA to engage in workout, liquidation or litigation of 504 loans. Determine if the CDC lender has such authority, and if so, the following additional procedures apply.

(40) SBA must give its prior written consent before a CDC does any of the following:

l. Increases the principal amount of a loan above that authorized by SBA at loan origination

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m. Confers a Preference on CDC or engages in an activity that creates a conflict of interest

n. Compromises the principal balance of a loan

o. Transfers, sells, or pledges more than 90% of a loan

(41) Determine whether the CDC’s policy and procedure establish a basis upon which to evaluate CDC’s collection practices including collection procedures for past due and delinquent loans and procedures for collecting and deferring loans and for transferring loans from regular servicing to intensive servicing and/or liquidation, and are consistent with SBA Loan Program Requirements.

(42) Determine if CDC’s policy and procedures establish a basis upon which a loan will be subjected to intensive servicing or liquidation action, and such intensive servicing or liquidation includes workouts, site visits, liquidation plans, control, possession and/or protection of collateral; and access to counsel, and are consistent with SBA Loan Program

Requirements.

p. All authorized CDC liquidators must submit liquidation plans for approval.

(43) Review a sample of loans to determine if CDC is adhering to loan policy and SBA requirements regarding management of collections, intensive servicing and liquidation accounts, and identify and provide examples of any material deficiencies or patterns of deficiencies in accordance with SBA Loan Program Requirements.

(44) Determine whether authorized CDC liquidators are liquidating and conducting debt collection litigation for 504 loans in their portfolio no less diligently than for their non-

SBA portfolio and in a prompt, cost-effective, and commercially reasonable manner consistent with prudent lending standards. 13 CFR §120.535

(45) A CDC must not take any action in the liquidation or debt collection litigation of a 504 loan that would result in an actual or apparent conflict of interest between the CDC (or any employee of the CDC) and any Third Party Lender, associate of a Third Party Lender, or any person participating in a liquidation, foreclosure, or loss mitigation action

(46) Confirm that CDC received SBA consent before engaging in any of the following activities:

q. Substantially altering the terms or conditions of any loan instrument

r. Releasing collateral having a cumulative market value in excess of 10% of the

Debenture amount of $10,000 whichever is less

s. Accelerating maturity of the note

t. Compromising or releasing any claim against any borrower or obligor or against any guarantor, standby creditor, or any other person that is contingently liable for moneys owed on the loan

u. Purchasing or paying off any indebtedness secured by the property that serves as collateral for a defaulted 504 loan, such as payment of the debt(s) owed to a lien holder or lien holders with priority over the lien securing the loan

v. Accepting a workout plan to restructure the material terms and conditions of a loan that is in default or liquidation

(47) For all servicing/liquidation actions not requiring SBA’s prior written consent, CDCs must document the justifications for their decisions and retain these and supporting documents in their file for future SBA review to determine if the actions taken by the CDC were prudent, commercially reasonable, and complied with all Loan Program Requirements.

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Loans with Repurchased Debentures

(48) Determine that CDC’s policies and processes to manage purchased debentures are consistent with non-purchased debenture financings.

(49) Review a selection of loans with repurchased debentures to determine that CDC has well-defined action plan events for pursuit of payments, with timelines and responsibilities for various categories of intensive attention.

Consistency/Conflict with SBA Policy

(50) Identify if any stated CDC policy is in conflict with SBA regulations, policies and/or procedures. If any are so identified, what action(s), if any, must be taken to address the conflict(s)? Reviewer must be mindful of this while conducting analysis of all CDC policies and procedures related to the SBA loan portfolio and its individual SBA loans and their administration.

Effectiveness of Internal Controls

(51) Review any checklists or other practices which assist in ensuring that all files are managed consistently and correctly, and in accordance with policy.

(52) Describe any serious gaps in internal controls which indicate a material weakness.

Other Risk Characteristics

(53) Discuss all credit administration preliminary findings with management.

(54) Note any relevant lender input.

(55) Conclude on the effectiveness of Lender’s credit administration policies and practices. In making these conclusions, the reviewer should identify mitigating circumstances such as lending that, while being more risky, may further SBA’s mission in a positive manner.

However, additional risk in the SBA loan portfolio must be accompanied by more rigorous credit administration practices in servicing and oversight. The conclusions shall be presented to management at the exit conference along with an assessment of the seriousness of the preliminary findings relative to the lender’s SBA activities.

(56) Identify any Finding that requires a Corrective Action.

Identify the Corrective Action that corresponds to each Finding.

REGULATORY COMPLIANCE

Annual Financial Statements

(14) Identify that CDC meets SBA Loan Program requirements for annual audited or reviewed financial reports, any legal proceedings, any organizational status changes or any condition changes that affect CDC’s eligibility to continue to participate. Audited financial statements must at a minimum include:

Audited balance sheet

Audited statement of income (or receipts) and expense

Audited statement of source and application of funds

Auditor’s letter to management on internal control weaknesses

Auditor’s report

(15) Who is auditor? How long have they been the auditor? Does the board of directors receive a copy of the audited financials? If there is an audit committee, how frequently does the

Page | 21 of 27 auditor meet with that committee? If no audit committee, when is the last time the auditor met with the board of directors?

Reporting to SBA – 13 CFR §120.830

(16) Compare most recently submitted Annual Report to internal records and reports to determine that it accurately reflects the status of the management, operations and financial condition of the 504 CDC;

(17) Determine whether the Annual Report was submitted in accordance with time requirement of SBA Loan Program Requirements, and if not, why not;

a. CDC must submit an annual report within 180 days after the end of the CDC’s fiscal year (to include audited or reviewed financial statements of the CDC and any affiliates or subsidiaries of the CDC prepared in accordance with

§120.826(c) and (d).

(18) CDC must report involvement in any legal proceedings (this has an impact on risk rating)

(19) CDC must report changes in organizational status (what is time frame?)

(20) Obtain the CSA monthly “45-day delinquent report” for the most recent three months, to identify loans more than 45-days past due, and review a sample of these files to determine that CDC has notified SBA of required analysis, plan and steps to be taken to bring borrower current for any such 45-day delinquent accounts;

(21) Determine whether internal CDC records of servicing status of all problem loans (or a sample) has been reported to Colson in a timely fashion on all negotiated catch-up agreements;

State of Incorporation

(22) Which state is the CDC incorporated in?

(23) Is the CDC in good standing with state?

IRS

(24) Has CDC filed all its required tax returns?

Directors and Officers Liability Insurance

(25) Does CDC have appropriate D/O insurance?

Designated Attorney

(26) Who are the designated Attorneys for the CDC?

(27) Are they licensed in the State where the CDC conducts business?

(28) Is their SBA required training up-to-date?

(29) Do they have Professional Liability Insurance?

CDC Corrective Action Response from prior RBR

(30) Did CDC adequately address the Findings in the prior RBR?

(31) Did the CDC adequately implement the Corrective Actions outlined in its Response Letter?

(32) Identify any Finding that requires a Corrective Action.

Identify the Corrective Action that corresponds to each Finding

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TECHNICAL ISSUES AND MISSION

(1) Any funds generated from 503 and 504 loan activity by a CDC remaining after payment to staff and payment of overhead expenses must be retained by the CDC as a reserve for future operations and for investment in other local economic development activity in its

Area of Operations. Determine whether the CDC markets the 504 program, packages and processes 504 loan applications, closes and services 504 loans, and if authorized by SBA, liquidates and litigates 504 loan assets.

(2) Describe CDC’s business plan for SBA lending, including SBA loan program goals.

(3) Determine that CDC meets the annual approval requirements and/or portfolio average job opportunity requirements.

Use of Loan Agents

(4) Does the CDC routinely or on an ad hoc…