HUD LEAN Program Changes─Part 2: Top Five Ways New AR Financing Documents Could Affect Providers
The U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) Sec. 232 program, better known as HUD LEAN, recently adopted significant changes to its loan closing process. In a previous article, we examined the new borrower and operator agreements as well as loan monitoring changes. Now let’s take a closer look at new accounts receivable (AR) financing documents.
Borrowers that use AR financing
must have their AR lender agree to and execute these documents prior to submitting an application for HUD’s approval. However, the recent changes could present some challenges to both the AR lender and the borrower.
Funding the Gap
AR financing is relatively common for skilled nursing facilities (SNFs) and some assisted living facilities that accept Medicaid waivers. The AR lender, which is a bank or finance company, extends a revolving loan to a provider that is secured by government receivables. The loan proceeds help smooth the provider’s cash flows by providing immediate and reliable payments to offset delays in reimbursement.
Federal law prohibits payment for Medicaid and Medicare services to anyone other than a provider. Therefore, providers that wish to finance these receivables enter into an agreement with the AR lender that requires the provider to receive government payments into their own accounts. The deposits are then swept from the provider’s account to the AR lender’s account at regular intervals.
HUD Loans With AR Financing
While HUD has made amendments to the agreements between the FHA lender, AR lender and borrower, the borrower’s requirements for HUD to approve a loan on an AR financed facility remains largely unchanged.
At a minimum, HUD requires the following items from the borrower when considering projects with AR financing:
- The original AR loan agreement, with all amendments, between the borrower and AR lender as well as a copy of the loan note.
- Completed and signed Operator Security Agreement and other legal documents regarding the AR loan.
- Details and financial analysis of the terms, conditions, collateral, fees and rates for the AR loan. HUD will use these documents to ensure the AR lender’s collateral is secured only on eligible accounts per HUD’s new policies.
- Deposit Account Control or Deposit Accounts Instructions Service agreements are needed for all receivables. These documents include instructions for the depository bank regarding the receipt and disbursement of the receivables between the AR lender, HUD lender and borrower.
- Organizational documents that describe the legal structure of the borrower and operating entity, including a chart or diagram of the collection and flow of AR funds from the provider to the AR lender.
- Potential conflicts of interest among principals, borrower, depository banks, management agent or other related parties must be disclosed.
- The Intercreditor Agreement, discussed in the article, must be completed, signed and authorized by all parties involved in the facility applying for HUD approval. The agreement affects the AR lender, HUD lender, facility operator and borrower.
- The Authorized Accounts Receivable Certification, also discussed in the article, needs to be completed and signed by the borrower. This will certify that the information provided to HUD is factual. It also covers compliance with the requirements HUD places on AR financing lines and the collateralization used to secure the loans.
HUD's New AR Policies
Included in the new HUD LEAN documents are the revised Accounts Receivable Financing Certification and Intercreditor Agreement. The first addresses the comingling of funds and certification of the collateral used for the loans. The second outlines the relationship between the borrower, HUD lender and AR lender with respect to the provider’s AR cash flows. This agreement has precedence to the contract between the AR lender and borrower, and is required for HUD loan approval.
Below is a summary of five potentially challenging issues associated with HUD’s revised AR documents:
- Collateral Definitions─HUD’s new definitions for priority collateral limit what an AR lender can secure. AR lenders may be vulnerable to losing a portion of their collateral without warning. It could prove difficult for them to underwrite and price this risk, thereby preventing them from extending new loans with the same pricing and terms.
- Obligation Collection─The collection period now begins as soon as any default event occurs, even immaterial defaults under the AR loan that regularly occur with SNFs. This change forces the AR lender to halt loans immediately and wait for approval from the FHA lender to continue advancing funds in any default scenario. The delay in funding could lead to liquidity issues for a provider.
- Secured Collateral─When there is a default under the FHA loan, the obligations covered by the AR lender’s priority security interest will immediately decrease. The new obligations will only cover principal, interest and select fees owed under the AR loan, causing any premiums, late charges and other fees to become unsecured. As the size of the collateral shrinks, it becomes less likely a provider will be able to secure as large of an AR loan.
- Cut-Off Time─Maturity of the AR loan will now trigger a 30-day period in which the AR lender has to recover its full obligations. Similar to a default event, the AR lender will immediately lose collateral coverage for all obligations other than principal and interest if the AR loan has not been paid in full at the maturity date. This has the potential to impact the terms and pricing of the AR loan.
- Cross Collateralization─Some AR loans are cross collateralized with multiple facilities. HUD’s new collateral certification could force providers to take out AR loans for individual facilities, losing the benefits of borrowing with a larger collateral base. Providers forced to use single-facility financing could see AR loan costs rise or experience difficulty securing loans for their smaller facilities.
AR lenders are in the process of working with HUD to make the AR document requirements more agreeable to their existing business model. We anticipate HUD’s AR financing requirements will evolve as the effects of these new documents play out on actual HUD transactions that involve AR financing.
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Kevin C. Oakley, a 2013 Summer Associate with Lancaster Pollard, is a current MBA candidate at the University of Notre Dame. He may be reached at firstname.lastname@example.org.