“Prudence is a presumption of the future, contracted from the experience of time past.” – Thomas Hobbes
SOP 50 10 7 didn’t introduce the concept of SBA requirements being rooted in policies for similarly-sized, non-SBA guaranteed commercial loans, but it certainly expands and more heavily relies upon its use. A standard that SBA internally refers to as “do what you do,” now takes a more primary role in credit underwriting for express and small 7(a) loans, and even appears for some determinations for standard 7(a) loans. With respect to standard 7(a) loans, lenders can now base certain requirements for life insurance, refinance, financial statements and even equity injection on this “do what you do” standard, pursuant to the newly issued procedural notices that went into effect on May 11, 2023, and as reiterated in the SOP 50 10 7, taking effect on August 1, 2023.
The term “do what you do” is not used in the SOP, but “similarly-sized, non-SBA guaranteed commercial loans” is now formally described in the SOP 50 10 7 as:
Throughout this SOP, SBA provides guidance for 7(a) Lenders to evaluate, process, close, and disburse their 7(a) loans using the same reasonable and prudent practices and procedures that the Lender uses for its similarly-sized, non-SBA guaranteed commercial loans. Despite this requirement, the Lender may make a 7(a) loan if the Lender cannot make the loan under its conventional loan policy based on any of the factors that would enable the Applicant to demonstrate the need for credit in accordance with Section A, Ch. 2, Para. A. Demonstrate the Need for Credit.
I believe the motivation behind the increased reliance upon this standard is to make underwriting easier for lenders, but greater deference to standards that can differ from lender to lender has raised questions about the potential impact these changes will have on each participating lender’s marketability and competitiveness. If each lender’s underwriting standards can differ, does each lender’s prudent lending standard differ as well? Or is there an objective standard of what “the prudent SBA lender” would do? If a prudent lending standard can, in fact, be different from lender to lender, how does a lender demonstrate to SBA what it deems to be prudent? And what if SBA disagrees that the lender’s conventional standard is prudent? Or reasonable?
And what if the lender doesn’t have a non-SBA portfolio? SOP 50 10 6 indicated that “When this SOP states that Lenders are to follow their own policies and procedures on their similarly-sized, non-SBA guaranteed loans, SBLCs must follow the written policies and procedures that have been reviewed by SBA.” This provision was removed from SOP 50 10 7 along with the rest of Section 1, however, I would imagine we will see the same or a similar provision in the upcoming SOP 50 56.
As lenders get acclimated to this new environment of SBA lending that gives greater deference to conventional prudent lending standards, I can’t help but think of the vast range of scenarios I have watched lenders face and the ways that I have seen them develop their lending practices to be better partners to SBA. At the mid-year conference, the representatives of NAGGL really put it best when they said that when navigating “do what you do,” lenders should be thinking “do what you should do.” SBA lenders are tasked with protecting the interest of the SBA and taxpayers while also responsibly providing as many small businesses as possible access to credit. We all know that accomplishing this goal is a balancing act. Past experience will help guide us through the ever-changing SBA lending world because it is through these experiences that we have learned, and continue to learn, what lenders should do to be successful partners to SBA.
For more information on SOP 50 10 7, contact Jessica Conn at firstname.lastname@example.org or 215-542-7070.