April 2, 2014
Best Practices: Technical Corrections to SOP 50 10 5(F)
by Kimberly A. Rayer
Effective March 27, 2014, the SBA issued an SBA Procedural Notice on the technical corrections to SOP 50 10 5(F). While most of the technical corrections were to remove references to the defunct Patriot Express Pilot program and to correct typographical errors in the SOP, some of the technical corrections provide further explanation for changes in procedure or process under the SOP 50 10 5(F) which became effective January 1, 2014. Below is a summary of the more significant technical corrections when closing and documenting your next 7(a) Loan:
Use SAM – Lenders must consult with the System for Awards Management (SAM) to determine if employees or Agents have been debarred, suspended or otherwise excluded by SBA or other federal agencies.
7(a) Small Loans – The reference to the Small Loan Advantage Program or SLA have been replaced with “7(a) Small Loans”. The 7(a) Small Loan is any loan under $350,000, other than SBA Express, EWCP Express and Community Advantage.
Research Prior Loss – Lenders are responsible for accessing their own records through E-Tran to determine if their institution experienced any prior loss with respect to the Small Business Applicant. Also, Lenders must use CAIVRS to determine if there is any Delinquent Federal Debt, with respect to the Small Business Applicant.
Debt Refinancing Change of Ownership – Lenders may not refinance change of ownership debt from another institution within 6 months of the Borrower incurring such debt under delegated authority.
Refinancing Seller Notes – Lenders may not refinance a seller note within 24 months following the change of ownership. The seller note must be current for the past 24 months, and the refinancing must meet the other requirements for refinancing under the SOP.
Refinancing 504 Loans – Lenders may not refinance a 504 loan with a 7(a) loan under delegated authority.
Debt Service Coverage Ratio and Cash Flow – Language was added to clarify that the debt service coverage ratio and cash flow must be “equal to or greater than” 1.1 or 1.15 – depending on loan size.
Transcript of Account – Lenders only need the Transcript of Accounts when refinancing the Same Institution’s Debt (which must be for the prior 36 months or the life of loan, whichever is less).
New Definitions – The SBA added definitions of Fully Secured, Net Book Value and Fixed Assets, and provided clarity on valuing machinery and equipment.
Collateral Requirements – For 7(a) Small Loans (greater than $25,000 and less than $350,000), Lenders must adhere to the collateral polices and procedures on their non-SBA loans, but they must at least obtain a first lien on assets financed with loan proceeds and obtain a lien on fixed assets. For SBA loans over $350,000, Lenders must collateralize the loan to the maximum extent possible (up to the loan amount), including taking liens against fixed assets, trading assets and equity in personal residences. NOTE: while there is no requirement in the technical corrections to take cash collateral, such as a CD or money market account, or lien on marketable securities, unless a Lender would require that collateral on non-SBA loans, it is important to remember that the SOP sets forth the minimum standards to which lenders are held. SBA lending must always engage in prudent lending.
Personal Residence – Mortgages on personal residences can be limited to the loan collateral short fall. If there are tax implications for filing a mortgage in the full amount of the loan, Lenders may limit the mortgage to 150% of the equity in the personal residence.
Appraisal – SBA added a link to the Interagency Appraisal and Evaluation Guidelines dated December 2, 2010 to provide clarity to regulated lenders as to the circumstances when they may be able to use an appraisal prepared by another financial institution.
4506-T – SBA added a link to update the expedited 4506-T service and remind Lenders that they must reconcile financial information to tax transcripts for 7(a) Loans.
To review the SOP 50 10 5(F) with technical corrections, click here