On June 21, 2018, the President signed into law the Small Business 7(a) Lending Oversight Reform Act of 2018 (Public Law No: 115-189, the “Reform Act”). The Reform Act, which received bipartisan support, strengthens the Small Business Administration’s lending program in several ways. First, it provides a statutory basis for the responsibility of the SBA’s Office of Credit Risk Management (“OCRM”) and the role of the OCRM director. Second, it enhances the SBA’s lender oversight review process, by increasing the office’s enforcement options. Third, it creates a new requirement for the SBA to detail its oversight budget and provide a full risk analysis on an annual basis. Finally, it clarifies the SBA’s “Credit Elsewhere Test” by providing factors that lenders can use when determining whether a borrower is able to obtain credit elsewhere. This article focuses on the Reform Act’s updates to the Credit Elsewhere Test.
The “Credit Elsewhere Test” requires a lender to analyze whether an SBA loan applicant is unable to obtain a loan on reasonable terms, without a Federal government guaranty, and whether some or all of the loan is not available from the resources of the applicant’s business or the personal resources of the principals of the applicant’s business (13 CFR 120.102). In its credit analysis, the lender must discuss acceptable factors that demonstrate an identifiable weakness. A lender must include in its loan file the specific reasons why the Applicant does not meet its conventional loan policy requirements (SOP 50 10 5(J), pages 97-98). Failure to comply with the SBA’s credit elsewhere requirements may result in a full denial of the SBA guaranty and possible enforcement action by the Office of Credit Risk Management.
The Reform Act, recognizing the broad array of businesses of SBA loan applicants, amends the definition of “credit elsewhere” in 15 U.S.C. 632(h) by setting forth a factor test. When analyzing whether an applicant could or could not obtain financing through the conventional loan application process, lenders should consider:
- the business industry of the applicant;
- whether the business has been in operation for less than two years;
- adequacy of collateral;
- the loan terms necessary to assure the repayment of the loan, and
- any other factors that cannot be overcome without a federal loan guarantee under prudent lending standards
These factors are not exhaustive, but provide lenders with some flexibility by allowing a lender to apply the credit elsewhere test in the context of an applicant’s industry. Additionally, when determining if an applicant is able to obtain credit on reasonable terms and conditions, a lender should take into consideration the “prevailing rates and terms in the community in or near where the applicant business concern transacts business, or the applicant homeowner resides, for similar purposes and periods of time” (H.R.4743 amending 15 U.S.C. Section 632(h)(2)).
Lenders should include an analysis of these factors, at a minimum, in all applicant loan files.
For more information about the SBA’s credit elsewhere requirements, please contact us at 215.542.7070 or at firstname.lastname@example.org.