Best Practices: SOP 50 10 7 – “All That Glitters Is Not Gold”

This famous line from Shakespeare’s Merchant of Venice seems an odd way to begin an article on SBA lending.  Nevertheless, SBA released the long-awaited SOP 50 10 7 (“SOP”) on May 10, 2023.  Like the Affiliation Rule and SBLC Rule, which became effective on May 11 and 12, respectively, the SOP brings wholesale changes to the SBA’s flagship 7(a) loan program with the intent of streamlining the program to make it accessible to more businesses.  Generally, a new SOP is a glittery, bright, shiny object for me, and when I sat down to write this article, I had planned to provide a high-level summary of the changes contained therein.  I quickly realized that such a task was beyond a single article.  The changes are comprehensive, far-reaching, and all-encompassing.  Accordingly, it is our plan to bring you a series of weekly articles focusing on one particular section of the SOP, in an effort to digest these significant changes in manageable portions.  This week, we will focus on preliminary eligibility determinations.

The SOP begins with a significantly revamped Chapter 1 addressing eligibility entitled: “Primary Applicant Eligibility Requirements Certified By Applicant And Validated By SBA.”   This is significant from the title forward – Applicants certifying their eligibility, and SBA validating eligibility, were hallmarks of the Paycheck Protection Program from 2021 (remember hold codes, everyone?).  Indeed, the opening paragraph of Chapter 1 unequivocally states:  “Due to its importance, lessons learned from the Paycheck Protection Program (PPP), and SBA’s need to control both speed and certainty, SBA will make the final determination as to the eligibility of the Applicant.” SBA then goes on to describe a process by which lenders, regardless of the authority under which they are processing the loan (delegated or non-delegated), will need to submit information regarding the applicant and any 20% or more owner, including: Name, Address, TIN/SSN, and SAM.gov UEI (if available).  From this, SBA states that it will determine certain eligibility requirements for the applicant, including whether “the Applicant is an operating business, organized for profit, located in the U.S., is small in accordance with SBA size standards, and is not one of the ineligible businesses in 13 CFR § 120.110 and 31 CFR § 285.13.”  SBA states that “If the eligibility compliance checks return a compliance check error code for the Applicant, the SBA Lender must work with SBA’s loan processing centers to clear the code (regardless of whether the SBA Lender is processing the loan via delegated or non-delegated authority).”  Yep, hold codes.   This new process suggests that SBA lenders processing loans under delegated authority will need to submit applications earlier in the closing process to ensure that any hold codes will not delay their closings.

The SOP then goes on to indicate that an Applicant, by signing the application, certifies that it meets all eligibility requirements (see above), and that an SBA lender “processing a loan under delegated authority may accept as true the Applicant is eligible as certified.”  The SOP continues stating that the SBA will not deny the guarantee if the Applicant eligibility certification “is determined to be invalid.”  Once again, this new process has strong echoes of PPP and the Borrower certification as to eligibility.  While this self-certification process was borne of necessity in the PPP, one has to question how this will work in the traditional 7(a) program.  Notwithstanding the statement that SBA will not deny the guarantee if eligibility certifications turn out to be invalid (hold-harmless, anyone?) it is unclear how this will actually operate.  It is advisable to be cautious as PPP lenders are currently having guarantees denied because of good-faith mistakes and other origination issues which are being called out by SBA with the benefit of time and hindsight.  Additionally, it is important to remember that the SOP cannot contradict regulations.  13 CFR 120.524 authorizes SBA to deny a guarantee in the following instances: “(1) The Lender has failed to comply materially with any Loan Program Requirement for 7(a) loans; (2) The Lender has failed to make, close, service, or liquidate a loan in a prudent manner; (3) The Lender’s improper action or inaction has placed SBA at risk; (4) The Lender has failed to disclose a material fact to SBA regarding a guaranteed loan in a timely manner; (5) The Lender has misrepresented a material fact to SBA regarding a guaranteed loan…”  How does the “hold harmless” language in the SOP jibe with the CFR?  If a borrower certifies that they are eligible, but the lender knows or should have known that the certification of eligibility was inaccurate,  SBA has a direct pathway to deny the guarantee.  Will this happen?  No one can predict for sure, but to paraphrase Taylor Swift – we’ve seen this film before, and we didn’t like the ending.

Savvy SBA lenders will wait for additional clarity from the SBA around these issues and other questions arising from this new SOP before acting.  Lenders should be cautious of relying too completely on the self-certifications of applicants and realize that truly “all that glitters is not gold.”  This brings some other Shakespeare quotes to mind from Hamlet: “Neither a borrower nor a lender be” and “to thy own self be true” — at least until the risks of this brave new world of SBA lending become clear.

For more information regarding SBA’s recent rule changes and the SOP 50 10 7, contact Ethan at 267-470-1186 or esmith@starfieldsmith.com.