On November 7, 2022 (Volume 87, No. 66963), the Federal Register contained a Notice of Proposed Rulemaking whereby the Small Business Administration (“SBA”) proposed to remove the requirement for an SBA Loan Authorization (“Authorization”) as a condition for closing a 7(a) or 504 loan. The goal of the SBA is to further streamline the lending process by eliminating a document which the Agency now deems cumbersome, outdated and unnecessary.
The Authorization sets forth the specific conditions required to be met by a lender before the SBA will honor its conditional guarantee in the event of default. Today, the National Authorization Boilerplate outlines the mandatory language for all 7(a) Authorization conditions across the country and acts as a great reference for lenders – and for the SBA – to ensure that loans are consistent with program requirements prior to closing.
The proposed rule recommends that the Authorization be dispensed with. Instead, lenders and the SBA are to rely on the terms and conditions of the loan application as submitted by the lender into E-Tran. Lenders are anxious to understand this new process so that they can manage risks and protect the guaranty, thereby promoting a feeling of confidence that they have achieved compliance with program requirements when loans are closed.
With such a titanic change, questions exist. For example, at this time, it is unclear which fields will be created in E-Tran, the amendment process, the timing of changes, and whether the fields will be so transparent that lenders will recognize compliance and consistency with their credit memos. If fields are incomplete or completed in error, what will the process be? If errors occur, including errors made by the SBA in accepting data, which party will bear responsibility? What terms and conditions will be generated from E-Tran and how will these align with the terms of lenders’ credit memos? Which terms from the current Authorization will SBA be discarding, and will E-Tran’s remaining terms and conditions include those necessary? Will the new process provide both lenders and the SBA with assurance that compliance may be achieved, and the guaranty protected?
Ultimately, finding a “goldilocks” balance between streamlining the program and creating a transparent standard for lenders and SBA may prove to be a tremendous challenge. To assist the SBA in this endeavor, all SBA lenders should review the proposed rule and provide the SBA with comments and feedback.
Comments can be submitted through www.regulations.gov using the identifier RIN 3245-AH92. All comments must be submitted within 60 days of the publication date, which is January 6, 2023.