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September 23, 2015

Best Practices: NEW Credit Elsewhere Rules Effective 10/1/2015

by Ethan W. Smith

This is a reprint of our newsletter article which originally ran on July 29, 2015. A friendly reminder of the new Credit Elsewhere rules that become effective next week.

Over the past weeks, SBA lenders have been anxiously watching as the SBA 7(a) program approached, and then hit, the congressional limit of $18.75 billion of authorized 7(a) loans, temporarily halting 7(a) loan approvals with more than 60 days remaining in fiscal year 2015. Fortunately, thanks to the hard work of the National Association of Government Guaranteed Lenders and the quick action of the SBA, Congressional leadership, and the President, H.R. 2499 was quickly passed and signed into law, increasing the authorized lending limit from $18.75 billion to $23.5 billion for the remainder of FY 2015, and thereby averting a prolonged interruption to the flow of capital to America’s small business community. 7(a) loan approvals resumed the afternoon of July 28, 2015. NAGGL, the SBA and the political leadership should all be applauded for their swift, decisive action in resolving this matter.

In addition to the increase in the loan level authorization, H.R. 2499 also contains provisions that amend the provisions of the Credit Elsewhere Test, effective as of October 1, 2015. The Credit Elsewhere Test, which is set forth at 13 CFR ยง120.101, provides that “SBA provides business loan assistance only to applicants for whom the desired credit is not otherwise available on reasonable terms from non-Federal sources.” Historically, circumstances that would satisfy the Credit Elsewhere Test included items such as i.) the borrower requiring a longer maturity than permitted by lender’s policy; ii.) the loan exceeding the lender’s legal lending limit; iii.) the lender’s liquidity depending upon its ability to sell into the secondary market; iv.) a collateral shortfall; or v.) the lender’s policy restricting loans to startups or businesses in a particular industry. See SOP 50 10 5(H), Subpart B., Chapter 2, Paragraph III.C.4.

H.R. 2499 changed the acceptable credit elsewhere requirements to restrict lenders from relying upon the legal lending limit or the liquidity from sale into the secondary market provisions as the sole justifications for meeting the Credit Elsewhere Test. Accordingly, beginning October 1, 2015, lenders must provide a credit elsewhere justification other than the liquidity and lending limit justifications set forth above to meet the Credit Elsewhere Test. Because credit elsewhere is one of the fundamental underpinnings of eligibility for a 7(a) loan guaranty, lenders that fail to comply with these new rules may be subject to a denial of the SBA guaranty in the event of default or an enforcement action for failure to comply with program requirements.

For more information regarding the revisions to the SBA Credit Elsewhere Test, please contact Ethan at 267-470-1186 or at esmith@starfieldsmith.com.