SOP 50 10 5 (G) Update Clarifies Many Lender Requirements for SBA Loans
The Small Business Administration issued updated SOP 50 10 5 (G) on September 25, 2014, with an effective date of October 1, 2014. This is the current version of the SOP 50 10, which each lender must refer to for all loans not authorized by the SBA by October 1, 2014. Most of the changes in this version of the SOP incorporated regulatory changes made by final rule issued March 21, 2014 (and effective April 21, 2014). Below are some highlights to the revisions to SOP 50 10 5 (G). See also SBA Notice 5000-1321.
Elimination of Personal Resource Test
As adopted under the final rule, the SBA removed the Personal Resource Test from all areas of the SOP relating to 7(a) loans and 504 loans. Since the effective date of the final rule, lenders no longer have to review the personal resources of any owner of a 20 percent or more interest in the SBA applicant, their spouses or dependent children. And while a lender still must demonstrate credit is not available elsewhere, the personal resources of the parties to the loan transaction no longer need to be incorporated in the underwriting analysis.
Other Eligibility Issues in 7(a) and 504 Loans
The SOP added clarifying language regarding businesses such as barber shops, hair salons, nail salons and similar businesses, noting that landlords and developers who do not actively use or occupy the real property acquired or improvements financed with loan proceeds are not eligible for SBA guaranteed loans. The key test is whether the business is perceived by the public to be a single business operated by the business owner or whether it is perceived as separate businesses. The lender must be able to document this in its approval, and if a lender is processing the loan PLP, it can be challenged and denied at the time of loan repurchase. It is important to remember that even if the personal service business is on the franchise registry, this means only that there are no unacceptable control provisions; it does not mean that the applicant is otherwise eligible. (Pages 87, 249). See also SBA Notice 5000-1322. Given the lack of clarity in the SOP and the implementing notice, lenders might more appropriately submit a loan for these types of business for standard processing.
For an EPC/OC transaction, the SBA added language to clarify that a spouse owning at least 5 percent or more of either an EPC or OC must guaranty the loan, if his or her total ownership when combined with his or her spouse, is at least 20 percent of the EPC or OC. (Pages 103, 279)
SBA 7(a) Loans
Credit Standards, Collateral and Environmental Policies
The SBA added a new option for delegated lenders for the screening of small loans up to $350,000. If the applicant does not receive an acceptable credit score, a delegated lender still may process the loan using its delegated authority so long as the lender underwrites and closes the loan utilizing the procedures for loans over $350,000 instead of submitting it to the LGPC for approval. A similar revision was made in Chapter 6 addressing the same issue.
With respect to tax verifications, the SOP clarifies that while tax returns need to be verified prior to submitting an application to SBA, PLP lenders may defer verification of tax returns so long as this is accomplished prior to the first disbursement.
The SOP also clarifies that Environmental Reports must be submitted to the SBA Center processing the application. PLP lenders, as well as lenders making 7(a) Small Loans, SBA Express Loans and Export Express Loans need not submit Environmental Reports to the SBA Center.
Submission of SBA Application
The SBA added clarifying language regarding who must sign the SBA Form 1919, providing that any partner that is involved in the management of the business (as well as 20 percent owners of the partnership) must complete the SBA Form 1919.
The SBA clarified an ambiguity in the prior SOP by deleting inapplicable information regarding loans up to $350,000 (Paragraph 1.A.2.t regarding IRS verifications) because the section applied only to loans over $350,000.
With respect to eligible use of proceeds of Export Express Loans, the SBA clarified that a lender must maintain in its loan file documentation that at least 70 percent of the first full disbursement of the loan (100 percent of the approved loan amount) was used for export purposes. This was added to ensure that lenders understand that, while borrowers may use portions of the line of credit for domestic purposes, borrowers may utilize no more than 30 percent of the loan amount for domestic purposes as documented in the initial funding.
SBA 504 Loans
Third Party Lender Preference
The SBA revised the preference rules to delete any reference to “preferences.” Instead, a Third Party Lender may take additional collateral so long as, in the event of a liquidation, the additional collateral is liquidated no later than the disposition of the Project Property and the proceeds are applied to the balance of the Third Party Loan prior to the disposition of proceeds from the sale of the Project Property (unless otherwise approved in writing by the Director of OFPO or their designee).
Elimination of the 9 Month Rule
The nine month rule (when determining eligible project costs) was eliminated under the OCA Final Rule effective April 21, 2014). Therefore, when looking at expenditures for land, building, machinery and equipment, furniture and fixtures and professional fees, any expenditures made more than nine months ago may still be included in the calculation (including expenditures financed with short term debt).
A clarification to eligible projects added the words “and other lodging facilities” after hotels and motels.
Collateral, Appraisals and Environmental Policies
The revised SOP clarifies that CDC lenders processing PCLP loans do not have to submit the Environmental Investigation Reports to the SBA Center; but, they must still keep a copy in each loan file. Also, any request for an exception to Agency Environmental Policies and Procedures must be directed to the Environmental Committee, regardless of how the loan is processed.
The 504 Debenture Closing Checklist (Form 2286) has been revised and now there are 13 items to be provided for regular closings and eight items to be provided for expedited closings. The 504 Closing Checklist for Complete File Review (Form 2203) also was revised. Construction documents were moved to Item 8 on both forms and this documentation must be submitted for both regular and expedited closings.
Other Recently Announced Matters
An expansion of the upfront guarantee fee waivers for fiscal year 2015 was announced in SBA Notice 5000-1319. For Express Loans, there is no fee. Non-SBA Express 7(a) loans have a 50 percent reduction from $150,001-$5 million. There is no corresponding reduction in the lender’s ongoing servicing fee and the 90-day rule remains in effect (SBA Notice 5000-1318). The announcement for upfront and ongoing fees to be charged effective October 1, 2014 is found in SBA Notice 5000-1318.
Alison Rind is an SBA lending attorney at Lerch, Early & Brewer who represents commercial lenders in loan transactions and other commercial matters. These include participants in SBA and other government-guaranteed lending programs. For more information about SBA lending, contact Alison at contact Alison at (301) 657-0750 or email@example.com.