December 18, 2013
NEW SOP 50 10 5(F) EFFECTIVE JANUARY 1, 2014: ARE YOU READY?
by Ethan W. Smith
On September 24, 2013, SBA released SOP 50 10 5(F) to the SBA lending community. This SOP becomes effective on January 1, 2014 and contains several significant changes to SBA’s requirements in connection with its loan programs. Many of the revisions reflect a continuation of SBA’s stated goals to streamline, standardize and simplify its loan program requirements and alter many long-standing program requirements. A brief summary of the more significant changes follows:
- All loans under $350,000 will be underwritten and processed utilizing the criteria for Small Loan Advantage (“SLA”) loans;
- The application forms (SBA Forms 4 and 4i) will be replaced by SBA Forms 1919 and 1920SX;
- SBA will provide eligibility reviews for franchises not on the franchise registry for PLP lenders;
- PLP lenders will be authorized to clear minor 912 issues;
- The requirement for business valuations for the refinance of change of ownership transactions has been eliminated;
- SBA has clarified its policy on utilizing 7a loans to refinance 504 loans when both the permanent loan and the 504 loan are refinanced;
- For loans over $350,000, SBA requires a debt service coverage of at least 1.15 on a historical and/or projected basis;
- SBA has significantly modified its collateral requirements to only require principals to pledge personally owned real estate when a loan is not otherwise fully secured. The requirement for pledge of securities and other non-real estate assets of the principals has been eliminated;
- SBA has made SBA Forms 147 (Note), 148 (Unconditional Guarantee) and 148L (Unconditional Limited Guarantee) optional, giving lenders the option to use these forms or their own forms;
- For determining if a loan is fully secured, SBA will now allow lenders to value equipment at up to 80% of orderly liquidation value and real estate at 85% of appraised value;
- Lenders must obtain life insurance in conformance with their internal policy for similarly-sized non-SBA loans. SBA only requires life insurance for loans to sole proprietors, single member LLC’s or other businesses that depend on one owner’s active participation. SBA will allow for waivers if the lender documents its file that the individual is uninsurable;
- Financial statements must now be current within 180 days of application instead of 120;
- SBA has articulated a process for utilizing Industrial Development Bonds in connection with 504 projects; and
- Electronic processing through Etran has become mandatory for numerous changes and notices to SBA.
The above list is illustrative, not exhaustive, but demonstrates the magnitude of the changes that will go into effect in a few short weeks. SBA continues to strive to simplify its lending requirements to make access to capital easier for small businesses. Lenders should make sure that they are fully versed in the changes to the SOP, and revise their internal policies and procedures to implement them effective January 1, 2014.