Best Practices: SBA Form 912 -
Truthful or not?
By Kimberlee Knopf, Esq.
As most SBA lenders are aware, a Small Business Applicant is not eligible for SBA assistance if the business has an Associate of Poor Character. SOP 50 10 5(D) pp. 110. An individual with Poor Character includes a person who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude. 13 CFR 120.110(n).
In order to be assured that a Small Business Applicant is eligible under this section, lenders must require every proprietor, general partner, officer, director, managing member of a limited liability company (LLC), owner of 20% or more of the equity of a Small Business Applicant, Trustor (if the Small Business Applicant is owned by a trust), and any person hired by the Applicant to manage day-to-day operations of the business to complete and sign an SBA Form 912, Statement of Personal History ("912"). The critical questions on the 912 are, numbers 7, 8 and 9, which include information regarding past or present arrests, convictions, probation or other adjudications for any criminal offenses other than minor motor vehicle violations.
Whether an individual answers "yes" or "no" to each of these questions determines, in part, if the loan is eligible or how the loan is processed. Any "yes" response requires that the individual provide further detail.
If an individual answers no to questions 7, 8 and 9 then the lender may proceed with its normal processing but if an individual answers "yes" to number 7 then, without exception, the loan is not eligible. A "yes" answer to 8 and/or 9 requires further investigation or a background check and character determination. The procedures in response to various "yes" answers are set forth in SOP 50 10 5(D) at pp. 110-117.
While SOP 50 10 5(D) is relatively clear on how a lender should proceed when there is a "yes" response to any or all of questions 7, 8 and/or 9, what happens when an applicant, knowingly or unknowingly, answers "no" instead of "yes" to any of these questions and the lender finds out these answers are incorrect after the loan is disbursed?
SOP 50 10 5(D) does not mandate that a lender conduct independent background checks of those individuals required to furnish a 912 in connection with an SBA guaranteed loan. Recently, however, one of our lenders conducted such a background search in anticipation of funding an SBA loan to a Small Business Applicant and discovered that a principal of the Small Business Applicant was convicted of a crime constituting a felony approximately 20 years ago. The individual had answered "No" to questions 8 and 9 on the 912.
This lender previously obtained a clean background check in connection with a separate SBA guaranteed loan so the results of the second search came as a surprise to the lender. Interestingly the results of the second search did not come as a surprise to the individual. This individual claimed that his record was expunged and that his attorney advised him to answer "No" to the applicable questions. Even if an applicant believes the record is sealed, expunged or otherwise unavailable, the applicant must, without exception, answer "yes" to the pertinent question and provide adequate proof of the status of such record.
In any event, the lender is obligated to report this discrepancy to the SBA and submit a new 912 from the individual. After further consideration of the new 912, the SBA may refer the matter to the SBA Office of Inspector General ("OIG") or other department for further investigation as knowingly furnishing false information on a 912 is punishable under federal law and the OIG is prosecuting these cases. For example, during the second and third quarters of 2011, the OIG reported that it won a conviction against the owner of a Maine medical supply company who, when applying for a $1.3 million SBA-guaranteed loan, falsely indicated on the 912 that he had no prior criminal convictions. See SBA Office of Inspector General's Semiannual Report to Congress, Fall 2011, Appendix X: Legal Actions Summary April 1 - Sept. 30, 2011 at page 51. In addition, the OIG, jointly with other federal agencies, obtained an indictment against an individual who failed to disclose on the 912 that he had been arrested 22 times and, based on this misrepresentation, he received an SBA-guaranteed loan of $1,724,800 to build a restaurant and gas station. Id. at page 54.
While lenders may not be able to adequately protect themselves from individuals who are not truthful on the 912, especially if background checks are not reliable, lenders should certainly familiarize themselves with how the questions on the 912 should be answered, as well as the procedures for 912 processing in the event of any "yes" answers to questions 7, 8 and/or 9. So long as lenders conduct due diligence for each loan in a prudent manner, and comply in all respects with the SOPs and accompanying rules and regulations, such lenders should not jeopardize the SBA guaranty on such loan, even if an individual (knowingly or unknowingly) does not correctly answer the questions on the 912.
For questions about SBA Form 912, contact Kim at 215-542-7070 or kknopf@starfieldsmith.com
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