By Shauna Itri
Basics of the Small Business Association 504 Loan Program
The Small Business Association (“SBA”) 504 Loan Program offers small businesses long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization. A Certified Development Company (“CDC”) is a nonprofit corporation certified by the SBA that generates, closes, and services 504 loans.
Financing 504 projects typically consists of (1) a contribution from the borrower covering approximately 10 percent of the project costs; (2) a loan obtained from a CDC and assigned to the SBA, covering approximately 40 percent of the project costs and certain administrative costs, collateralized by a second lien on the project property; and (3) a loan secured from a private sector lender covering the remainder of the project costs (approximately 50 percent) and collateralized by a first lien on the project property. 13 C.F.R. § 120.801, § 120.900.
In general, a borrower applies for 504 financing through a CDC. If the SBA approves the loan application, the SBA issues a loan authorization agreeing to guarantee part of the financing for the project if certain conditions are met. After the loan authorization, projects usually require interim financing before the completion of the 504 project. This interim financing is often provided by the same private sector lender that provides a portion of the permanent financing. Once the 504 project is completed, the CDC is responsible for closing the 504 loan. If all the requirements of the loan authorization are met, the loan is bundled with other loans and sold on the public market as a debenture. The debenture is guaranteed 100 percent by the SBA with the full faith and credit of the United States. Proceeds from the sale of the debenture fund the 504 loan and pay off the interim loan.
Before the debenture is issued, the interim lender must certify the amount disbursed. The CDC must certify that the project was completed in accordance with the final plans and specifications. 13 C.F.R. § 120.891.
Following the completion of the project, certifications must be made before the 504 loan closing, the interim lender, the borrower, and the CDC must certify that since the date of the loan application, there has been no unremedied substantial adverse change in the borrower’s financial condition or ability to repay the 504 loan. 13 C.F.R. § 120.892.
The SBA may decline to close the debenture, direct the transfer of the 504 loan to another CDC, or cancel its guarantee of the debenture prior to sale if the CDC, third party lender, or the borrower failed to disclose or misrepresented a material fact to the SBA regarding the project or the 504 loan, or if the SBA determines that there has been an unremedied material adverse change since the 504 loan was approved. 13 C.F.R. § 120.960.
SBA 504 Loan False Certifications That Can Violate the False Claims Act
Prior to the SBA 504 Loan closing, the bank must make the following certifications to the SBA:
-Bank executed the Interim Lender Certification certifying that (1) it had no knowledge of any unremedied substantial adverse change in the Borrower’s financial condition since the date of the application for the SBA 504 Loan; and (2) the Bank had disclosed to the SBA all material information known to it and necessary to ensure that the Interim Lender Certification was not misleading.
-The Bank executed a Third Party Lender Agreement certifying that all the information that it provided to the SBA, including all information regarding the Borrower’s financial condition, is accurate and that the Bank had not withheld any material information.
Prior to the SBA 504 Loan closing, the CDC must make the following certifications to the SBA:
-CDC executed an Authorization certifying that (1) there has been no substantial unremedied adverse change in the Borrower’s financial condition, organization, operation, or assets, as set forth on the CDC Certification (SBA Form 2101), and (2) all elements of Project Costs have been paid in full and that the Interim Lender, Third Party Lender, Borrower, and CDC have each contributed to the Project in the amount and manner authorized by SBA.
-CDC executed a CDC Certification certifying that (1) it has obtained all necessary agreements and certifications set forth in the Authorization, which have been properly completed and executed without modification; (2) since the date of Borrower’s application to CDC for this loan, there has been no unremedied substantial adverse change in the financial condition of Borrower and no change in the operation or assets of Borrower; (3) Borrower currently occupies, or with the prior approval of SBA, will occupy within a reasonable period of time, the percentage of the Project required by the Authorization; and (4) CDC has disclosed to SBA all material information known by CDC and necessary to ensure that this Certification is not misleading.
Relying on these types of representations and certifications, the SBA transmits money to banks and borrowers. If the borrower subsequently experiences material (had a natural tendency to influence CDC’s decision to close the SBA 504 Loan and the SBA’s decision to fund the SBA 504 Loan) unremedied substantial adverse changes, and the bank intentionally fails to inform the SBA, then the bank potentially made false representations and certifications to the SBA to induce the SBA to close the SBA 504 Loan for the borrower to collect the SBA 504 Loan proceeds.