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October 3, 2018

Best Practices: Proposed Rule: Potential Reinstatement of the Personal Resource Test

by Jessica L. Conn

On September 28, 2018, SBA issued proposed rule RIN: 3245-AG74 (“Proposed Rule”), which proposes changes to several aspects of SBA’s current regulations. Lenders have 60 days, or until November 28, 2018 to submit comments to the Proposed Rule for consideration. One notable proposal is the reinstatement of the personal resource test.

Prior to 2014, the credit elsewhere test required Lenders to consider the personal resources of the applicant’s owners. Liquid assets over a certain threshold were required to be injected ahead of guaranteed loan funds. In 2014, this rule was removed over a concern that certain small business may not have access to credit as a result of their owner’s liquidity. The Proposed Rule recommends reinstating the personal resource test in an effort to “ensure that SBA financial assistance is provided only to those small businesses that are unable to obtain credit from alternative sources without a government guaranty.”

Under the Proposed Rule, applicants would need to provide additional injection when the financing package (which includes SBA loans and other loans requested by the applicant at or about the same time):

“(1) Is $350,000 or less, each 20 percent owner of the Applicant must inject any liquid assets that are in excess of one and three-quarter times the total financing package, or $200,000, whichever is greater;

(2) Is between $350,001 and $1,000,000, each 20 percent owner of the Applicant must inject any liquid assets that are in excess of one and one-half times the total financing package, or $1,000,000, whichever is greater;

(3) Exceeds $1,000,000, each 20 percent owner of the Applicant must inject any liquid assets that are in excess of one times the total financing package, or $2,500,000, whichever is greater.”

These figures are a significant departure from the personal resources test of the past. Under SOP 50 10 5 (F), the last SOP to contain the test, the lowest amount of injection required would have been on a financing package of $250,000 or less, when the owner had liquid assets in excess of the greater of two times the financing package or $100,000.00. On the higher dollar loans, injection was required for financing packages over $500,000.00 when the liquid assets exceeded one times the financing package or $750,000.00, whichever was greater. So the Proposed Rule is certainly more flexible than the earlier rule, but will require injection from higher net worth individuals.

Similar to the old rule, the Proposed Rule would require a lender to consider the resources of the owner’s spouse and minor children, which are deemed to be included in the owner’s resources for the purposes of performing the above-described analysis. Under SOP 50 10 5 (F), the SBA could require the injection of personal resources of the owner’s minor children. SOP 50 10 5 (F) stated that while the personal resources of the spouse could be considered for eligibility, the lender would not require injection of the spouse’s resources. The Proposed Rule is silent as to whether the new regulations would mirror the same analysis/requirements, except to say that SBA in its sole discretion may permit exceptions to the required injection of the owner’s excess liquid assets only in extraordinary circumstances (i.e. medical expenses for a family member or education/college expenses for children).

The reinstatement of the personal resource test is only one change outlined in the Proposed Rule. Lenders are encouraged to review the Proposed Rule in its entirety to see what others changes SBA is considering at this time.
For assistance with SBA matters, please contact Jessica at 267.470.1188 or at jconn@starfieldsmith.com.