Best Practices: Don’t Skimp on SBA Eligibility Determinations

“If you keep your eye on the profit, you’re going to skimp on the product. But if you focus on making really great products, then the profits will follow.”

-Steve Jobs

The SOP 50 10 7, which became effective on August 1, 2023, begins with the following statement: “[d]etermining whether an Applicant is eligible for an SBA guaranteed loan is one of the most critical steps in the lending process. Due to its importance . . . SBA will make the final determination as to the eligibility of the Applicant.” On first blush, this sounds like SBA lenders will completely cede all responsibility for determining an applicant’s eligibility to the SBA – that it will be impossible to make an ineligible loan. However, SBA lenders should be mindful of what the SBA’s “final” determination of eligibility does, and does not, cover.

Per the SOP and recent presentations from the SBA, the eligibility determination conducted by SBA should validate the following:

1. That the Applicant is an Operating Business;

2. That the Applicant is Organized for Profit;

3. That the Applicant is Located in the United States;

4. That the Applicant is Small Under SBA Size Requirements;

5. That the Applicant is not an Ineligible Business under 13 CFR §120.110 (eligible business type) or 31 CFR §285.13 (prior loss to the government/delinquent federal debt); and

6. That Businesses Owned by Non-U.S. Citizens are at least 51% owned by Legal Permanent Resident Aliens whose immigration status is validated by review of a “Green Card” (USCIS Form I-551).

To make these eligibility determinations, SBA has stated that it runs the applicant’s and all guarantors’ data against the following databases:

A. Criminal Record Databases;

B. Bankruptcy Databases;

C. Databases that flag potential Business Affiliation;

D. Office of Foreign Assets Control (OFAC);

E. Databases that track Decedents and Death Records;

F. State Databases to validate business names and active status;

G. Databases to validate SSNs/EINs/TINs;

H. Databases to validate large numbers of employees at a residential address;

I. Do Not Pay – TOP Education (student loans – they’re back, folks!);

J. Do Not Pay – TOP and CAIVRS;

K. Do Not Pay – SAM; and

L. Do Not Pay – Deceased.

While these database checks are useful for making certain basic eligibility determinations, often they merely raise “flags” that lenders must then submit information to SBA in order to “clear.” In these cases, it is still the lender that has the onus to make the eligibility determination and then present their findings to SBA. Additionally, despite the language of the SOP, there remain many eligibility determinations that SBA’s database searches are unlikely to be able to accurately

determine, and that lenders approving loans under their delegated authority (and GP lenders in many of the instances set forth below) must still make, such as:

i. EPC/OC Lease validation;

ii. Determining that a business is not passive;

iii. Businesses deriving revenue from legal gambling activities;

iv. Businesses leasing to tenants engaged in businesses illegal under federal law (i.e., marijuana);

v. Businesses that restrict patronage;

vi. Businesses in which an Associate of the Lender owns an equity interest;

vii. Speculative businesses;

viii. Eligibility of ESOP and 401(k) owned businesses;

ix. Eligible uses of proceeds;

x. Occupancy;

xi. Confirming tax filings through tax transcripts; and/or

xii. International Trade and Export program eligibility.

This non-exhaustive list is just an example of the fact that SBA lenders still have a great deal of work to do in validating the eligibility of their loans. While the SBA characterizes the eligibility determination that it makes as “final,” astute SBA lenders will understand that SBA’s determination is really just the beginning of fulfilling their larger responsibility to ensure that all aspects of their SBA loans are eligible.

Don’t skimp on this aspect of your SBA lending – focus on making great (and eligible) loans and the profits should follow. Just like Steve said. For more information on SBA eligibility determinations and SBA’s new guidelines, contact Ethan at 267-470-1186, or esmith@starfieldsmith.com.