Best Practices: Change is Coming: A Brief Summary of the SOP 50 10 6

On August 28^th the Small Business Administration (“SBA”) released the SOP 50 10 6, which seeks to modernize and streamline the SBA’s rules and policies for 7(a) and 504 loans. To accomplish this, the SBA incorporated new navigation features, including bookmarks, built-in style headings, and a navigation pane. In addition, there are five new appendices, which include hyperlinks to SBA forms, acronyms, hyperlinks to regulatory citation, record retention requirements and email addresses for SBA notices and requests. 

Effective on October 1, 2020, the SOP 50 10 5 6 also incorporates various substantive changes to both the 7a and 504 loan programs. Overall, the new SOP is restructured into two parts:

• Part 1 (formerly known as Subpart A): Contains SBA Lender participation and portfolio requirements including: criteria for becoming an SBA Lender; delegated authorities; a brief overview of how SBA conducts oversight of SBA Lenders; and processes for loan reporting, loan transfers, secondary market transactions, and securitization.
• Part 2 (formerly known as Subparts B and C): Is divided into three sections.
  • Section A: Core Requirements for all 7(a) and 504 loans
  • Section B: 7(a) Loan program specific requirements
  • Section C: 504 Loan program specific requirements

Although not exhaustive, below are some of the key updates found in Part 2, Sections A and B that impact 7(a) Lenders: 

1. Clarified that, when determining whether credit is available elsewhere, SBA Lenders may not cite the Applicant’s inability to meet the SBA Lender’s or Third Party Lender’s conventional credit score policy as the sole reason that credit is not available elsewhere.
2. Provided detailed guidance on financing ESOPs, cooperatives and 401(k) plans, including rollovers as business start-ups.
3. Explained that businesses owned by non-U.S. citizens may be eligible only if the business is at least 51 percent owned and controlled by U.S. citizens or those who have Lawful Permanent Residence status from U.S. Citizenship and Immigration Services.
4. Clarified the requirement that all SBA Lenders are responsible for consulting the System for Awards Management’s (SAM) Excluded Parties List System on each loan for each of the following: SBA Lender’s employees, including Lender Service Providers (LSP) and LSP employees.
5. Clarified that the Prior Loss rule only applies to debt incurred by a business and not loans to individuals (e.g., student loan debt).
6. Provided the new SBA Form 2481, “Historic Property Borrower Certification,” which allows the Borrower, Co-Borrower, and/or Operating Company, as applicable, to self-certify for projects involving property or site acquisition where the Borrower, Co-Borrower, and/or Operating Company with a property listed or eligible to be listed on the National Register of Historic Places has no intention of altering, renovating, rehabilitating, restoring, and/or demolishing any part of the property or site.
7. Increased the threshold loan amount requirement for beginning an Environmental Investigation with a Records Search with Risk Assessment for loans where there is not a North American Industry Classification System (NAICS) code match to an environmentally sensitive industry from $150,000 to $250,000.
8. Updated guidance to remind Lenders that working capital loan proceeds may not be used to refinance existing debt or finance any ineligible purpose.
9. Clarification that when 50 percent or more of the loan proceeds will be used for working capital, the Lender must explain in its credit memorandum why this level of working capital is necessary and appropriate for the subject business.
10. Noted that the new minimum acceptable Small Business Scoring Service Score (SBSS) on small loan is increased to 155. Loans with an SBSS score lower than 155 must be fully underwritten and submitted under Standard 7(a) procedures.
11. Explained that at time of closing an Express loan, if the appraised value is less than 90 percent of the estimated value, lenders are permitted to close the loan but must include a written justification as part of its file that may be reviewed by SBA at time of guaranty purchase or when SBA is reviewing the Lender. The justification must include a thorough analysis by the Lender of the reasons for the appraisal being low and an explanation as to what steps the Lender took to offset the risk to SBA from the low appraisal such as additional equity or additional collateral.
12. Clarified, equipment, fixtures, or furniture loans should not exceed 10 years. However, the term may be up to 15 years if the IRS asset class useful life supports the term. Further, where machinery and equipment comprise 51 percent or more of the use of proceeds, the maximum maturity is the useful life of the machinery and equipment, not to exceed 15 years, plus an additional period reasonably necessary for installation, which may not exceed 12 months.
13. Incorporated guidance provided in SBA Policy Notice 5000-19007 that increased the loan size from $250,000 to $500,000 as the threshold that triggers the requirement of appraisals on collateral secured by commercial real property.
14. Added guidance on the phase-out of the London Inter-Bank Offered Rate (LIBOR) and the use of the LIBOR base rate as an option for the calculation of the maximum allowable variable interest rate.

Information of the changes in the new SOP 5010 6 impacting 504 lenders, and a closer look at some of the changes in the new SOP will be provided in future articles.  If you have questions regarding changes in the new SOP 5010 6, please reach out to Starfield & Smith at 215.542.7070.