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September 5, 2018

Best Practices: Additional Revisions Made to the 2018 SBA 7(a) Authorization Wizard

by Janet M. Dery

As discussed in last week’s article, on August 14, 2018, the Small Business Administration (“SBA”) released the new 7(a) Authorization Wizard for immediate download and use.  Following are some non-state specific revisions to the Wizard that may be of interest:

  • The SBA is no longer requiring the escrow account language be included in the Repayment Terms section of the Authorization when SBA loan proceeds are used to finance commercial real estate. The provision remains as an available option, but it is no longer mandatory.
  • In the Use of Proceeds section, the amount which can be disbursed as working capital if not spent for listed purpose has been revised from 10% or $10,000 to 20% or $50,000, whichever is less.
  • An SBA Form 1050 is not required to be completed and executed at time of first disbursement for SBA Express, Export Express and 7(a) Small Loans.
  • The SBA has revised the Assignment of Rents from Eligible Passive Company language in the Collateral Conditions section to make it clear that the lease must not only be subordinate to lender’s lien documents, but that the lease must be in writing.
  • To better reflect that changes of ownership are not always stock purchases, the applicable Use of Proceeds entry has been revised to read “purchase all outstanding ownership interest of ” and the Consideration for Stock Purchase provision has been revised to Consideration for Acquisition of Ownership Interest(s). Additionally, SBA has advised that the Consideration provision is to be used only in change of ownership transactions when the small business and an individual(s) acquiring the ownership interest are required to be co-borrowers on the loan.
  • A provision has been added that must be included in the Authorization for all loans involving a franchise that states the lender must obtain, prior to first disbursement, the executed Franchise Agreement, the SBA Addendum to Franchise Agreement (SBA Form 2462) or the SBA Negotiated Addendum (if applicable), and all other documents the franchisor requires the franchisee to sign.
  • A new sentence has been added to the end of the Cash Injection requirement which reads “The source of the cash is [insert source].” This revision requires Lender to identify the source of the injection in the Authorization.
  • Certain revisions were made to the Construction Provisions section. The first was to subsection c. clarifying that if an “as completed” appraisal was obtained prior to closing and the SBA loan was not used to cover the construction period, Lender must obtain a statement from the appraiser, general contractor, project architect, or construction management firm that built with only minor deviations from the plans and specifications used to provide the “as completed” appraisal.  Additionally, it states that if the Lender cannot obtain such a statement, it may not close the loan without SBA’s prior written permission.  The other revisions were to subsections f.(1) and (5) to make it clear that the contractor must be licensed.
  • A couple of additional mandatory certifications were added to address referral to CAIVRS upon default and no leasing of any real estate collateral to any business that is “engaged in any activity that is illegal under federal, state, or local law or any activity that can reasonably be determined to support or facilitate any activity that is illegal under federal, state, or local law”.

As stated by my colleague in last week’s newsletter and as noted above, there have been numerous changes to sections throughout the Authorization.  Lenders should take the time to familiarize themselves with all of the revisions included in the new Wizard to insure that any Authorizations they create comply with the SBA’s updated requirements.

For more information on revisions to the 7(a) Authorization Wizard, contact Janet at 267.470.1189 or at jdery@starfieldsmith.com.