SBA sop 50 10 5(e) 2012 06-12

Editor's Notes

• #3: SOP 50 10 (E) applies to all applications received by the SBA on or after June 1, 2012.
• #4: SBA notices related to the changes:5000-1239 details key revisions E of SOP 50 10(5)5000-1240 details changes to Small Loan Advantage5000-1241 details revisions to Export lending programs
• #5: SOP 50 10(5)E on websiteTo download a copy of the SOP, go to http://www.sba.gov/lender-documentation-tool?type=sops&order=field_sopno_value.There are two versions:Document with “tracked changes” which shows what was updated in this recent revisionDocument without tracked changes.
• #7: Revisions:Expansion to all SBA participating lenders (not just PLP lenders) with an SBA Form 750 on file;Maximum loan size increased from $250,000 to $350,000;Revolving lines of credit are prohibited under SLA (use CAPline instead).Use credit-scoring by SBA prior to loan approval (or issuance of a loan number for applications submitted by PLP lenders);
• #8: Change in forms from the S/RLA forms (SBA Forms 2301 Parts A, B and C) and PLP Eligibility Checklist (SBA Form 7) to the forms used in the SBA Express and Pilot Loan Programs (SBA Forms 1919 and 1920 Parts B and C);
• #9: Must submit applications electronically- E-Tran has been updated to include SLA as a choice (notify your vendors);Lenders will continue to have option of using their own notes and guaranty forms rather than SBA Forms (just like Express);Lenders to follow same closing and disbursement procedures and documentation as it uses for its similarly-sized non-SBA guaranteed commercial loans.
• #10: Credit score is a combination of consumer credit bureau data, business bureau data, borrower financials and application data – minimum score to be posted at www.sba.gov/for-lenders . Currently at 140
• #11: All SLA applications will begin with a pre-screening for a credit score. Lender will enter certain information into E-Tran (specific information is described below) and a credit score will be issued. If application receives an acceptable credit score, application may be submitted under SLA via E-Tran. If loan application does not receive an acceptable credit score, lender may submit a standard 7(a) loan application through the LGPC or, if the lender is an SBA Express lender, an SBA Express application via E-Tran for a 50% guaranty.
• #12: If loan application does not receive an acceptable credit score, lender may submit a standard 7(a) loan application through the LGPC or, if the lender is an SBA Express lender, an SBA Express application via E-Tran for a 50% guaranty.
• #13: All Lenders will start with the instant credit screen.After the credit screen:Non-Preferred Lenders Program (PLP) Lenders:Will enter certain information about applicant and the loan into E-Tran and then will submit additional documentation electronically to the Standard 7(a) Loan Guaranty Processing Center (LGPC) for review of creditworthiness and eligibility (Form 1919 plus any other forms required based on a “yes” response to the 1919 (ie, 912), Form 1920SX Parts B and C and lender’s credit memorandum
• #14: PLP lenders submitting SLA loans: Lender will continue completing the application via E-Tran. SBA will not conduct an eligibility review prior to issuing a loan number. Lender must retain in its loan file documentation supporting its eligibility determination and SBA will review this documentation as part of any guaranty purchase request or when conducting lender oversight activities.
• #15: PLP lenders submitting SLA loans: Eligibility requirements for SLA are the same as Standard 7(a) as set forth in SOP 50 10 5(E), Subpart B, Chapter 2. Applications that cannot be processed under a lender’s PLP authority (for example, they include refinancing same institution debt) may be submitted using the non-delegated procedures described more fully below.
• #16: Lender must retain copies of the documentation identified in B above in its loan file for all SLA loans whether submitted under delegated or non-delegated authority.
• #17: SLA lenders must perform a thorough and complete credit analysis of applicant in order to ensure that loan is of such sound value as to reasonably assure repayment and this credit analysis must be documented in the loan file.
• #18: SLA lender’s credit memorandum must, at a minimum, include:A combination of factors for underwriting and credit decision consistent with its similarly sized, non-SBA guaranteed commercial loans, including;
• #19: Cash flow analysis to determine adequacy, duration and dependability of cash flow or in the case of a small business applicant doing business less than two years, projected cash flow analysis; andOwner/Guarantor analysis.
• #20: Lenders may use their own credit scoring criteria to assess the character, reputation, and credit history of the applicant (and the Operating Company, if applicable), its Associates, and guarantors, including historical performance as well as the potential for long term success. This may include a business credit scoring model (such a model cannot rely solely on consumer credit scores), as long as lender uses the business credit scoring model for its similarly-sized, non-SBA guaranteed commercial loans. Although SBLCs do not make non-SBA guaranteed loans, SBA has determined that they may use credit scoring. Lenders must validate (and document) with appropriate and accepted statistical methodologies that their business credit scoring model is predictive of loan performance and they must provide that documentation to SBA upon request. The business credit scoring results must be documented in each loan file and available for SBA review.
• #21: Lender’s credit decision must consider the length of time in business under current management and, if applicable, depth of management experience in this industry or a related industry. Such analysis should include a brief description of management team of the company.Lenders must review strength of business including systematically analyzing key characteristics of the account such as internal Credit/Deposit behavior data, current consumer credit bureau data, and Small Business Financial Exchange data to determine ongoing creditworthiness such as the probability of an account reaching 90 days past due in the next 6 months. This may be conducted using a risk management or credit scoring model if the lender uses such a model to review its similarly-sized, non-SBA guaranteed commercial loans. If the lender does not have the ability to systematically analyze the borrower, the lender must collect and analyze business tax returns.Lenders must verify the accuracy of applicant’s financial data against income tax data by submitting IRS Form 4506-T, Request for Transcript of Tax Form to the Internal Revenue Service (IRS) as required in SOP 50 10 5(E), Subpart B, Chapter 5, Paragraph III.Lenders must demonstrate Small Business Applicant’s ability to repay loan from cash flow of the business by documenting that:Small Business Applicant’s debt service coverage ratio exceeds 1:1 on a projected basis; andWith the exception of loans under $50,000, the Small Business Applicant’s global cash flow coverage ratio exceeds 1:1 on a projected basis. Lender must document in the loan file the definition or formula used to calculate global cash flow.
• #22: Equity RequirementsAdequate equity is important to ensure the long term survival of a business.Lender must determine if equity and pro forma debt-to-worth are acceptable based on their policies and procedures for their similarly-sized, non-SBA commercial loans.If lender requires an equity injection and, as part of its standard processes for similarly-sized, non-SBA guaranteed commercial loans verifies the equity injection, it must do so for SLA loans.
• #23: Collateral PolicyFor SLA loans of $25,000 or less, lenders are not required to take collateral. For SLA loans over $25,000 and up to and including $350,000, the lender must follow the collateral policies and procedures that it has established and implemented for its similarly-sized non-SBA guaranteed commercial loans, but at a minimum the lender must obtain a lien on the borrower’s business assets to secure the SBA-guaranteed loan. In addition, for those loans that are more than $250,000 and collateralized by commercial real estate, lenders must comply with the appraisal requirements set forth in SOP 50 10 5(E), Subpart B, Chapter 4, Paragraph II.C. With respect to collateral taken, lenders must use commercially reasonable and prudent practices to identify collateral items, which would include conformance with procedures at least as thorough as those used for their similarly-sized non-SBA guaranteed commercial loans.
• #24: Life Insurance & Environmental PoliciesLife InsuranceLenders may follow their internal policy for similarly-sized non-SBA guaranteed commercial loans.Environmental PolicyFor all SLA loans, lenders will follow the environmental policies and procedures set forth in SOP 50 10 5(E), Subpart B, Chapter 4, Paragraph III that apply to SBA Express loans.
• #25: Closing and DisbursementLender must use the same closing and disbursement procedures and documentation as it uses for its similarly-sized non-SBA guaranteed commercial loans. Lender must obtain all required collateral and must meet all other required conditions before loan disbursement, including obtaining valid and enforceable security interests in any loan collateral. These conditions include requirements identified in the loan write-up, such as standby agreements, appraisals, business licenses, and cash/equity injections.Lenders have the option of closing SLA loans with the lender’s own note and guaranty agreements rather than SBA Forms.Lender must use the same closing and disbursement procedures and documentation as it uses for its similarly-sized non-SBA guaranteed commercial loans.
• #26: If lender uses its own note form, the lender must ensure that note:is legally enforceable and assignable; has a stated maturity; andis not payable on demand. In addition, if lender uses its own note form, it must include the following language:“When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.”If lender uses its own guaranty form, it must include the following language:“When SBA is the holder, the Note and this Guarantee will be construed and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Guarantee, Guarantor may not claim or assert any local or state law against SBA to deny any obligation, defeat any claims of SBA, or preempt federal law.”Lender should not send any closing documentation to SBA after closing an SLA loan but should retain all documents in the loan file.
• #27: Franchise IssuesFranchise Information (Pages 95-96 for 7(a) Loans and pages 274-275 for 504 Loans)No change to Franchise Registry processRemains mandatory that when franchise is NOT on the Franchise Registry, lender must check the Franchise Findings List to determine whether there have been any findings for a particular franchise or similar agreement which, if still in the Agreement, would make the Agreement ineligibleBut, lenders may (no longer mandatory) go to the Franchise Findings List when the franchise is listed on the Registry -- http://www.sba.gov/content/franchise-findings (See SOP p. 94)
• #28: Franchise Eligibility (Page 97 for 7(a) Loans and page 277 for 504 Loans)Continues to prohibit a franchise agreement provision that requires the franchisee or EPC owner to sell the real property to the franchisor upon expiration or breach of the Agreement.But, SOP now allows a franchise agreement to require franchisee to lease the real property to the franchisor on reasonable terms for the remainder of the term of the franchise agreement.Provision can be in the franchise agreement itself or recorded as a deed restriction or a purchase option. (See SOP p. 97)
• #29: Cooperatives – Eligibility (Page 109-110 for 7(a) Loans and page 290 for 504 Loans)Adds guidance regarding eligibility of certain types of cooperativesClarifies that an agricultural cooperative under certain circumstances can be considered to be a producer cooperative and therefore eligible if it meets the requirements for eligible producer cooperativesClarifies that a worker cooperative, in which the employees of the small business own the company as a cooperative, is eligible if it meets all other SBA eligibility requirements.
• #30: EPC Loans (Pages 124-125)Incorporates a final rule to allow the common practice of allowing loan proceeds for a loan made in an EPC/OC structure to be used for multiple purposes.Clarifies the requirement that if the OC is a co-borrower with the EPC, part of the proceeds may be used for working capital or purchase of other assets for use by the OC. Significantly, the loan proceeds can be used for the purchase of stock or intangible assets.But, the OC must be a co-borrower if it receives any loan proceeds as working capital and/or for the purchase of other assets, including intangible assets for the Operating Company’s use.The rule remains unchanged that an EPC may not use loan proceeds to acquire a business, acquire stock in a business or any intangible assets of a business or to refinance debt that was incurred for those purposes.It is now clear that an EPC/OC structure can be used for any eligible business purpose so long as the loan is structured such that both the EPC and OC are co-borrowers.These regulatory amendments took effect as of May 17, 2012
• #31: Policies regarding Debt Refinancing (Page 133)Previous SOP stated that SBA loan proceeds may not be used to refinance debt in the personal name of the owner(s), with a limited exception for credit card debt in the owner’s name that was used for business purposes. SBA is now allowing the refinancing of other debt in the personal name of the owner(s), such as a HELOC, that was used for business purposes. Borrower must certify that amount being refinanced was used exclusively for business purposes and provide appropriate documentation, such as a copy of the note and/or current loan statement, to demonstrate that debt was, in fact, used for business purposes. For example, a sole proprietor may demonstrate that debt was used for business purposes by providing a copy of the note and documentation that shows debt is reflected on business balance sheet and/or the interest deduction is reported on Schedule “C” not the Schedule “A” of the proprietor’s tax return. If the interest deduction reported on the Schedule C includes multiple debts, then the applicant must provide a copy of the appropriate IRS Form 1098 related to the debt being refinanced.There was no change on how to document credit card debt in personal name. Lender must still obtain certification from the applicant that the debt was incurred for business purposes, must review the credit card statements to determine which charges were business related, obtain receipts for items over $100 and obtain copies of all statements evidencing the debt to be paid.
• #32: CAPLines (pages 136-137)Debt refinancing under Working Capital CAPLines: Clarification in new SOP that only short-term revolving debt can be refinanced with a Working Capital CAPLine. If the application includes refinancing of same-institution, SBA-guaranteed short-term revolving debt, in addition to requirements outlined below, the lender’s exposure to applicant will not be reduced. Short-term revolving debt must be terminated after it is paid off with the CAPLine; Refinancing does not put SBA in a position to sustain a loss which the existing lender is presently facing;Borrower has a sufficient borrowing base to support the Working Capital CAPLine plus any other short-term debt that is not being refinanced; Refinancing is specifically identified in the Use of Proceeds section of the Authorization; and If application includes the refinancing of same institution short-term debt:Application must be submitted to the LGPC (Loan Guaranty Processing Center) for processing; such applications may not be processed under delegated authority; andIf applicant defaults on the SBA-guaranteed CAPLine within 90 days of initial disbursement, there will be a presumption that the loan proceeds were used to pay a creditor in a position to sustain a loss causing a shift of all or part of the loss to SBA in violation of 13 CFR 120.201 and SBA may deny liability on its guaranty of the line. Disbursement on Contract CAPLinesSBA is clarifying length of time interest only payments may be required on a Contract CAPLine to reflect that final payment on the contract typically is not received until 30-60 days after contract completion.New SOP: (1) Interest only payments for any period exceeding the borrower’s cash cycle, seasonal cycle, contract final payment date, or project completion date are not permitted. This change reflects that final payment on the contract typically is not received until 30-60 days after contract completion.Old SOP said: (1) Interest only payments for any period exceeding the borrower’s cash cycle, seasonal cycle, contract completion date, or project completion date are not permitted.
• #33: Change of Ownership Transactions Involving Stock Purchases (pages 139-140)SBA requires the business to be the borrowerLoan cannot be made to an individual purchasing stock in the business, even if the individual is identified as a co-borrower with the business.For example, if a change of ownership involves one or more individuals:In a change of ownership between existing individual owners, applicant business will use loan proceeds to purchase the stock from the departing owner(s) (a stock redemption) resulting in the remaining stockholder(s) owning 100% of the stock outstanding.In a change of ownership where an individual wants to purchase all of the stock of a corporation, applicant business will use loan proceeds to purchase the stock of all existing owners (a stock redemption) and simultaneously issue the stock to the new owner(s), who will purchase the stock from the company using his/her own funds (but not with an SBA-guaranteed loan). The amount paid for the stock is determined by the business/new owner(s) (not SBA).Incorporate into stock redemption agreement, a provision whereby the new owner is simultaneously purchasing stock from the corporation as its equity injection.If the buyer of the stock is a business entity and that business is acquiring/merging with the selling business, then the buyer may use an SBA-guaranteed loan to purchase all of the stock and absorb the selling business and retire the purchased stock. In this case, it appears that there would be a co-borrower situation whereby the business buying the stock and the business where the stock will be purchased will be co-borrowers. Post closing, the business buying the stock could merge with the selling business to form 1 entity.
• #34: Clarification of Interest Rate Policy on Variable Rate Loans (Page 159)Previous SOP allowed lender to delay the initial adjustment period on a variable rate loan, but also stated that “[w]henever a lender delays the initial adjustment period, the spread over the base rate used to calculate the initial Note rate must remain the same once the interest rate begins to fluctuate.” That language was inconsistent with other language in the SOP so SBA is deleting the sentence quoted above. Bottom line: for a loan with a delayed initial adjustment period, a Lender may change the spread over the base rate, provided the lender complies with the requirements of subparagraph 2 on page 158 of the new SOP (can’t exceed maximum allowable interest rate in effect at time of application)
• #35: Payment of Guaranty Fee (Pages 164-166) Must submit fee electronicallyVia pay.govSBA-approved bulk CH method (new)Increases in LoansFee to be paid within 30 days from the date the increase was approved - electronicallyFailure to pay within 30 days will cause the entire guaranty to be cancelledExtensions of Maturity Beyond 1 YearFee to be paid within 30 days from the date the increase was approved - electronicallyFailure to pay within 30 days will cause the entire guaranty to be cancelled
• #36: Fees for Packaging and Other Services (Page 169-171)SBA is revising its policy to permit lenders or third parties, including lender service providers (LSPs), to charge a fee based on a percentage of the loan amount for packaging and other services. If a lender or third party charges a fee for loan packaging or other services that is based on a percentage of the loan amount, in no event may the fee:exceed 3% on loans of $50,000 or less, and for loans over $50,000, 2% on the first $1 million and an additional ¼% on amounts over $1 million, with a maximum fee of $30,000.Fees must be reasonable and customar customary for the services actually provided and must be consistent with those fees charged on the lender’s similarly-sized, non-SBA guaranteed commercial loansStandard Fee charged to all applicants is not acceptableClarifies that fees paid by lender to a lender service provider may not be passed on to Small Business Applicant. Reminds lenders that if they permit a lender service provider to access E-Tran on their behalf, lender is responsible for all entries and certifications made on its behalf into the E-Tran system.Direct costs of in-house counsel associated with loan may be charged to borrower On an hourly basisServices must actually be performedSBA is changing that policy to allow lenders to be reimbursed for direct costs (including reasonable overhead) of legal services provided by lender’s in-house counsel in connection with an SBA guaranteed loan, but in no event may lender be reimbursed for an amount that would exceed the reasonable cost of outside counsel. In addition, such charges must be reasonable and customary for the services performed. These fees may be reviewed at any time and lender must refund any fee considered unreasonable by SBA. Reminder – SBA 159 forms to be submitted to Colson after initial disbursement (retain originals in file)
• #37: Fees for Packaging and Other Services (Page 169-171)SBA is revising its policy to permit lenders or third parties, including lender service providers (LSPs), to charge a fee based on a percentage of the loan amount for packaging and other services. If a lender or third party charges a fee for loan packaging or other services that is based on a percentage of the loan amount, in no event may the fee:exceed 3% on loans of $50,000 or less, and for loans over $50,000, 2% on the first $1 million and an additional ¼% on amounts over $1 million, with a maximum fee of $30,000.Fees must be reasonable and customary for the services actually provided and must be consistent with those fees charged on the lender’s similarly-sized, non-SBA guaranteed commercial loansStandard Fee charged to all applicants is not acceptable
• #38: Clarifies that fees paid by lender to a lender service provider may not be passed on to Small Business Applicant. Reminds lenders that if they permit a lender service provider to access E-Tran on their behalf, lender is responsible for all entries and certifications made on its behalf into the E-Tran system.Direct costs of in-house counsel associated with loan may be charged to borrower On an hourly basisServices must actually be performedSBA is changing that policy to allow lenders to be reimbursed for direct costs (including reasonable overhead) of legal services provided by lender’s in-house counsel in connection with an SBA guaranteed loan, but in no event may lender be reimbursed for an amount that would exceed the reasonable cost of outside counsel. In addition, such charges must be reasonable and customary for the services performed. These fees may be reviewed at any time and lender must refund any fee considered unreasonable by SBA. Reminder – SBA 159 forms to be submitted to Colson after initial disbursement (retain originals in file)
• #39: Post-Approval Loan Modifications (Page 230)SOP has been revised to inform lenders that, for all loans that have not been closed or fully disbursed:requests for post-approval loan modifications or notifications of unilateral actions are to be submitted to the LGPC. after a loan is closed and fully disbursed, such requests or notifications are to be submitted to the appropriate CLSC (Little Rock). In addition, the SOP has been revised to advise lenders that if a change is made using E-Tran Servicing, no further notification to SBA is necessary.
• #40: Eligible 504 Project Costs (Page 307)Prior SOP permitted costs incurred by the Borrower, prior to the loan application, for the purchase of land without a building to be included in the project costs. SBA is amending the policy permitting the inclusion of short term debt for land purchased prior to application as an eligible project cost to include not only land with no building, but also land with a building that will be razed prior to construction of the new building. SBA considers the destruction of the building on purchased land to be part of the costs of preparing the land for new construction. The value of the land and new construction must be supported by an appraisal as set forth in SOP 50 10 5(E).
• #41: 504 Appraisal Requirements (Page 319)Previous SOP required the appraisal report to identify the CDC and SBA as a client and/or an intended user. To avoid additional expense to the Small Business Applicant, SBA is removing the requirement that the CDC be identified on the appraisal report as the client or an intended user. SBA, however, must continue to be named as either the client or an intended user.See the SOP for fees.
• #42: Export Lending Programs- See SBA Information Notice 5000-1241 SBA request for SOP SuggestionsLenders, CDCs and other interested parties may continue to send suggestions concerning the SOP to SBA at SOP50-10Modernization@sba.gov.This e-mail box is set up to receive only.Issuance of SOP 50 53 (A) – June 1, 2012Lender Supervision and EnforcementIssuance of SOP 50 51 (4) – Combined Servicing/LiquidationDue out later this year