This week SBA has published two new final rules that are scheduled to take effect in Mid-May, 2023. The final rule “Affiliation and Lending Criteria for the SBA Business Loan Programs” was published in the Federal Register on April 10, 2023 and takes effect on May 11, 2023 (RIN 3245-AH87) (the “Affiliation Rule”); and the final rule “Small Business Lending Company (SBLC) Moratorium Recission and Removal of the Requirement for a Loan Authorization” was published in the Federal Register on April 12, 2023 and takes effect on or about May 13, 2023 (RIN 3245-AH92) (the “SBLC Rule”). When effective, both of these rules will dramatically change the landscape of SBA lending. A summary of the significant changes in these rules follows and the full rules can be reviewed at www.regulations.gov:
The Affiliation Rule. Under the Affiliation Rule, SBA will be making the following changes to its Loan Program Requirements:
- SBA will be lifting its requirement that a change of ownership be a “complete” change of ownership, allowing for partial changes of ownership after May 11, 2023. Although no details were provided as to how this will work in practice, Sellers will now be able to sell a portion of their ownership in a business.
- SBA will reduce the number of factors that lenders must analyze in underwriting a borrower’s ability to repay the SBA loan, substituting the current requirements with “appropriate and prudent generally acceptable commercial credit analysis processes and procedures consistent with those used for their similarly-sized, non-SBA guaranteed commercial loans.” SBA will also permit business credit scoring models to be used.
- SBA is removing the requirement for hazard insurance for SBA loans up to $500,000 (an increase over the threshold of $150,000 in the proposed rule).
- SBA is changing the Affiliation Rules for its loan programs as follows:
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- Affiliation based upon Common Management, Identity of Interest, and Franchise Agreements are being eliminated. After May 11, 2023, businesses will not be found to be affiliated on these bases. However, it is important for SBA Lenders to note that they must still perform an eligibility analysis for all proposed applicants and business structures.
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- Businesses will only be found to be affiliated for purposes of SBA’s loan programs in the following circumstances:
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- When any business owns more than 50% of the applicant or the applicant owns more than 50% of another business, the two are affiliated.
- When any owner of an applicant owns more than 50% of the applicant and owns more than 50% of another business in the same 3-digit NAICS subsector, the applicant, the owner and all such businesses in the same 3-digit NAICS subsector are affiliated.
- When no owner owns more than 50% of an applicant, any 20% or more owner of the applicant that is a business in the same 3-digit NAICS subsector, or that owns more than 50% of a business in the same 3-digit NAICS subsector, in such cases the applicant, all such owners in the same 3-digit NAICS subsector, and all such businesses owned by such owners in the same 3-digit NAICS subsector are affiliated.
- The ownership interests of spouses and minor children will be combined to determine the amount of ownership.
- Stock options, convertible securities and agreement to merge are given present effect, unless they are incapable of fulfillment.
The SBLC Rule. Under the SBLC Rule, SBA will be making the following changes to its Loan Program Requirements:
- SBA will lift the cap on SBLCs and will admit three new SBLCs in the first year after the rule becomes effective.
- SBA will create a new class of SBLCs called Community Advantage SBLCs and will grant the SBA ad hoc discretion over the lending limits, capital requirements, loan loss reserves, fiduciary bond, and other requirements for such entities.
- SBA will grandfather all current Community Advantage Lenders (for-profit and non-profit) to be licensed as Community Advantage SBLCs.
- SBA will remove the requirement that SBLCs only engage in originating 7(a) loans and loans to intermediaries.
- SBA will eliminate the Loan Authorization but will “continue to require and provide a means for memorializing each loan’s terms and conditions and will provide further guidance for the procedures of providing the loan terms and conditions to SBA in Loan Program Requirements.”
For experienced SBA lenders, the changes set forth in the Affiliation Rule and the SBLC Rule represent a seismic change to the fundamental structure of the SBA loan programs which has been in place for decades. Many of the details on how these new rules will be implemented remain to be seen in guidance that has not yet been issued. In the coming weeks and months, we will bring you updates as SBA continues to clarify the implementation of these new rules.
For more information on SBA’s new Affiliation and SBLC Rules, contact Ethan at 267-470-1186 or esmith@starfieldsmith.com.