One of the basic tenets of SBA lending is that an applicant must be an active operating business. SBA prohibits financing assets that are held for their passive income, with one exception – the Eligible Passive Company (EPC) Rule. Because the EPC Rule is an exception to SBA’s general policies, the SBA interprets it strictly. Any variation from the EPC Rule may result in a full denial of the SBA guaranty if the loan defaults.
Most SBA lenders are familiar with the following general requirements of the EPC Rule which are set forth in 13 CFR § 120.111:
One element of the EPC Rule that sometimes gets overlooked is the prohibition on the EPC engaging “in any business activity other than leasing the property to the OC.” See SOP 50 10 5 (K) page 124. In our experience, this restriction is sometimes forgotten. Accordingly, SBA lenders must perform their due diligence on a proposed EPC to make sure that the EPC does not own any other real or personal property or engage in any business activity other than leasing the subject property to the OC.
There are other caveats and nuances of the EPC Rule which SBA lenders should familiarize themselves with that are not discussed in this article. Because a misapplication of the EPC Rule could result in SBA’s denial of the SBA guaranty, it is imperative for lenders to understand and fully comply with the EPC Rule. For assistance with SBA compliance and loan closing matters, please contact the attorneys at Starfield & Smith, P.C. at 215.542.7070.
Earlier this year the SBA Office of Credit Risk Management (“OCRM”) assumed responsibility for and…
Pursuant to 13 CFR § 120.160(a), all SBA 7(a) loans must be guaranteed by at…
It is a fundamental tenet of SBA lending that businesses must be “active” small businesses…
The U.S. Small Business Administration’s 504 Loan Program was created to foster economic development and…
When: May 16, 2024 Where: Kalahari Conference Center, Wisconsin Dells, WI Registration Deadline: April 12,…
The U.S. Small Business Administration addresses its policies on enforcement of judgments in Chapter 22…