What you need to know about the new SBA SOP 50 10 5(f), which contains updated requirements for lenders and Certified Development Companies (CDCs) to participate in SBA lending programs. It takes effect January 1, 2014.

1. SBA SOP 50 10
5(F)
Pre s e nte d to s p o ns o ring
o rg a niz a tio n
Alison W. Rind
Arnold D. Spevack
Lerch, Early & Brewer, Chtd.
www.lerchearly.com
November 20, 2013

2. Today’s Program
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Overview
Credit Underwriting
Collateral Requirements
Eligibility
Miscellaneous
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3. Overview
3
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4. Pur pose of New SOP
 Streamline process
 Facilitate underwriting of small
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eligible loans to existing lender
process
Major revisions in
Credit underwriting
Collateral requirements
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5. Pur pose of New SOP
(con’t)
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5
What was previously referred to as
SLA (≤$350K) has one set of
underwriting criteria; move toward
underwriting – global cash flow
analysis
Loans > $350K have separate set of
underwriting criteria, based on DSC
ratio
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6. Credit Underwriting
6
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7. Loans ≤ $350K
→ SOP at p. 161
 Prescreen thru E-Tran If
acceptable, apply thru E-Tran
 If not
Submit for standard processing
(unlikely)
 Process with Express and 50%
guaranty via E-Tran
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7
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8. Loans ≤ $350K (con’t)
 Complete IRS verification before
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submitting thru E-Tran New Form
450T
Score calculated on consumer
and business bureau data,
borrower financials, application
data
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9. Minimum Scor e
 Based on lower end of risk profile
of current SBA profile
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Moving target
Posted on the website
www.sba.gov/for-lenders
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10. Cr edit Analysis – Demonstr ate
Ability to Repay with Cash
Flow
 Brief history of business
 Length of time under current
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management
DSC ratio of 1:10 on historical or
projected cash flow
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11. Credit Anal ysis (con’t)
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Owner/guarantor analysis –
consistent with similarly-sized nonSBA guaranteed commercial loans
May use own credit scoring criteria
to assess applicant consistent as
noted above
Equity and pro-forma debt to worth
determination based on above
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12. Loans >$350K
→ SOP at 163-165
 Demonstrate ability to repay loan
with cash flow
12
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13. Demonstr ating Ability to
Repay
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Brief history
Length of time in business under
current management
Financial analysis of repayment
ability based on historical financial
statements (balance sheet, debt
schedule, income statement) and/or
tax returns and projections
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14. New Definition
 New definition of operating cash
flow - EBITDA
14
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15. Anal ysis of Cash Flow
Impact
 Unfunded capital expenditures
 Non-recurring income
 Expenses and distributions
 Distributions for S Corp taxes
 Rent payments
 Owner’s draw
 Effect of affiliated businesses
15
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16. Debt Ser vice
 All principal and interest
payments on all SBA debt
inclusive of new SBA loan
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DSC Ratio (OCF/DS) must be 1.15:1 or
greater on historical and/or projected
basis
Document analysis of assumptions and
projected cash flow
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17. Collateral Requirements
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18. Major Changes
 What collateral must be taken
 SBA’s appraisal and business
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valuation standards
Requirements re: securing
personal guaranties
Required insurance
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19. Until Januar y 1, 2014,
Lender Must
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Take 1st lien position on assets
financed and
Fully secure all loans based on
liquidation value of collateral
Must not decline loan solely because
of collateral shortfall
Take personal collateral when
business collateral insufficient
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20. W hen 50 10 5(F) Takes
Ef fect → SOP at 168
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General requirements same as (E)
Must identify collateral and use
commercially reasonable and
prudent lending practices
Do not decline loans solely on
inadequate collateral
SBA guaranty ≠ available collateral
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21. W hen 50 10 5(F) Takes
Ef fect (con’t) → SOP at 168
 If loan proceeds used to
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purchase assets, lender must
have 1st lien
If used to refinance debt, must
have same collateral position
and line priority as debt being
refinanced
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22. Collateral Lender
Must Take
<$25K
 Not required to take collateral
22
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23. Collateral Lender
Must Take
≥$25K but ≤ $350K → SOP at
168
– Same as non-SBA BUT
 Must obtain lien on applicant’s fixed assets at
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minimum
May take lien on trading assets (using 10% of
book value) if does so for conventional loans
See SBA provision for when SBA deems loan
to be “fully secured” →SOP at 169
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24. Collateral Lender
Must Take
>$350K → SOP at 168
 Must collateralize loan to max possible
 If fixed assets do not fully secure, must
take equity in personal real estate of
principals
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No longer lien on other personal property
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25. Collateral Lender
Must Take
SBA Express, Patriot
Express, Export Express,
EWPC, International Trade
Loans
 No change in collateral
requirements
25
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26. Loan is “Full y-Secured”
→SOP at 169
 If lender has taken security
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interests in all available fixed
assets with a combined “net book
value” as adjusted up to the loan
amount.
“Net book value” = asset original
price less depreciation less
amortization →SOP at 169
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27. New Language r e
Spousal Guar antees
→SOP at 169
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“When individual alone or individual and his or
her spouse together own 20% or more of the
Small Business Applicant, the lender must
consider taking as collateral available equity in
personal real estate that is owned individually,
by the applicant owner as well as available
equity in personal real estate owned jointly.
Real estate transferred by the applicant to the
non-owning spouse within 6 months of the date
of the application will not be exempt from
consideration as available collateral.”
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28. Valuation of M&E
→SOP at 169
New
Used
 75% of net book
 50% of net book
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value OR
80% with an Orderly
Liquidation Appraisal
minus any prior liens
for the calculation of
“fully-secured”
value OR
80% with an Orderly
Liquidation Appraisal
minus any prior
liens”
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29. Valuation of Real Estate
→SOP at 169
 85% of value for the calculation
of “fully secured” and the value in
accordance with SBA appraisal
requirements
29
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30. Valuation of Fixed
Assets
→SOP at 169
 If loan will be secured by fixed
assets and valuation of fixed
assets is greater than
depreciated value (net book
value), lender must obtain
independent appraisal to support
higher valuation
30
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31. A ppr aisal & Business
Valuation
→SOP at 171
 Loans >$250K secured by real
property – NO CHANGE in
appraisal requirement
 Federally regulated lenders
31
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32. Feder all y-Re gulated
Lender s
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Must obtain appraisal by state
licensed or certified appraiser and
follow primary regulators’ FIRREA
requirements for real estate
USPAP-compliant
Dated within 12 months of application
for guaranty
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33. Non-FRLs and SBLCs
 Continue to adhere to prior SOP
appraisal requirements
33
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34. A ppr aisal & Business
Valuation (con’t)
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New SOP revises Qualified Source
List to delete a CPA, unless also
holds listed designation →SOP at
174
Version 5(F) deletes requirement for
business valuation when refinancing
change of ownership “except for
seller notes” →SOP at 115
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35. Equity Injection
Requirements →SOP at
161
Loans > $350K
≤$350K
 Begin with pre
35
screening for credit
score
Is equity and proforma debt-to-worth
acceptable based on
similar non-SBA
loan?
 Up to $5 million
 No changes to
SOP →SOP at
166-168
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36. Express, Expor t Express,
Patriot Express Loans →SOP at
165
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Credit decision left to business
judgment of lender (includes
consideration of past bankruptcy and
any equity injection requirement)
If requires for non-SBA, must do so
for these
Owners of ≥20% must inject liquid
assets above certain thresholds
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37. Per sonal Guarantees and Guarantor
Collateral →SOP at 168-170
 Owners of ≥20% must provide
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unlimited personal guaranty
New language at beginning of
Collateral Requirements
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38. Collateral Shor tfall with
Inadequate Business Fixed Assets
→SOP 169
 Required to take equity in
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personal residence (lien may be
limited to amount of shortfall)
Lien against
residence/investment real estate
may be limited to 150% of equity
if there are tax consequences
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39. Collateral Shor tfall with
Inadequate Business Fixed Assets
(con’t)
 No change in prior requirement
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that non-owner spouse must
provide limited guaranty needed
to perfect lien on joint collateral
Real estate transferred within 6
months of application not exempt
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40. Insur ance
Requir ements
→SOP at 187-188
 Hazard insurance required on
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assets pledged as collateral
Flood insurance forms changed
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41. Life Insur ance
→SOP at 188 and 189
 SLA Loans, SBA Express, Export
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41
Express and Patriot Express –
May follow similar to non-SBA
Loans >$350K – new language
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42. Life Insur ance on Loans
>$350K
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May use similar non-SBA policies EXCEPT
If not fully secured, life insurance required
for principals of sole proprietorships, single
member LLCs or for businesses otherwise
dependent on one owner
Amount and type of collateral may be
factored into amount of life insurance
If lender determines principal is
uninsurable, must obtain documentation
from licensed insurer
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43. Eligibility
43
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44. Fr anchise Requirement
Changes →SOP at 78
 Language added re
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determination for affiliation
purposes
Language added to permit PLP
lenders to submit franchise
agreement to SBA for eligibility
determination
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45. Revisions re Ineligible
Businesses →SOP at 89, 92
 Financial advisors →SOP at 89
 Involved in gambling →SOP at
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92
Promoting religion →SOP at 92
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46. 912 Clear ance →SOP at 93
 Principals are incarcerated, on
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probation, on parole or under
indictment
“Deferred prosecution” record
Obtain “complete understanding”
for any “yes” response
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47. “Yes” Response Can Be
Cleared If
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Single minor (misdemeanor) offense
or arrest
Up to 3 minor offenses concluded
more than 10 years ago
Prior offense cleared by Director of
Office of Financial Assistance (but
only good for 6 months) →SOP at 96
912 Appeals → SOP at 98
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48. Refi of Existing 504 with
7a
→SOP at 117
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48
May refinance a 504 loan with a 7a loan
if the transaction meets the requirements
in the SOP
Both Third Party Loan and 504 being refi’d OR
Third Party Loan paid in full and 504 needs refi as
part of larger transaction to provide funding for
expansion or renovation of Project Property
 Must document justification
 Applicable 504 prepayment penalties apply
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49. Application Process
49
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50. A pplication New For ms
→SOP at 197
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Form 1919 (Borrower’s Info) and
Form 1920 (SX) – IDs eligibility
issues: Use for all 7(a) loan types
Forms not completed yet
Form1919 includes Forms 601, 1261,
1624 and 912
1920(SX) does not include eligibility
worksheets (save old for reference and
save in each loan file)
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51. E-Tran ≤$350K →SOP at
202
 DUNS # required – Startups
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51
must apply for DUNS # for ETran submission
If credit scoring acceptable,
complete app to get PLP # (or
then submit CLP for credit
underwriting)
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52. E-Tr an >$350K
→SOP at 202
 Forms 4 and 4(I) no longer to
be used
 Collateral list not included in
new forms – must still collect
collateral listing
 May want to use template
52
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53. Miscellaneous Changes
53
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54. CAPLine – Wor king Capital
Lines Disbur sement →SOP at
217-226
 Borrowing base OR
 1:1 collateral ratio clarification
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Includes valuation of real estate
owned at 85%
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55. CAPLine – Pr oceeds of
Collections →SOP at 217226
 Must pay down the line
 Consistent with borrower’s
operating cash cycle
55
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56. CAPLine – Inclusion of
Receivables →SOP at 217226
 Subcontracts that are foreign AR
issued by Export-Import Bank or
major private insurer can
increase advance rate to 90%
56
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57. CAPLine – Annual
Review
→SOP at 217-226
 If maturity coincides with
scheduled annual review, lender
may advance on line up to
maturity in conjunction with
similar non-SBA loans
57
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58. Financial Statements
→SOP at 198
 Business financials – 180 days
 Personal financials – 90 days
58
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59. Loan Documentation
 Form 1050 no longer required for
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≤$350K (still document
disbursements)
May use own forms with
language added (Form 147, 148)
If it ain’t broke, don’t fix it
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60. 504 Credit Standar ds
→SOP at 237
 Clarification: Credit reports only
required for
 Small business concern
 Owners
 Guarantor affiliates
60
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61. 504 Credit Standar ds
(con’t)
 Documentation required for Third
Party Loan →SOP at 239
 LOI
 Term sheet
 Commitment letter
61
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62. 504 Credit Standar ds
(con’t)
 If Third Party Loan provides
preference in commitment/term
sheet, issuance of Authorization
is considered prior written
consent to preference
62
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63. 504 Credit Standar ds
(con’t)
 SBA may now participate in
projects financed with obligations
exempt from state and local
taxes →SOP at 243
 Industrial development bonds
 Industrial revenue bonds
63
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64. Speaker s
 Alison Rind is a lending attorney at Lerch,
(301) 657-0750
awrind@
lerchearly.com
Early & Brewer who represents
commercial lenders in loan transactions
and other commercial matters. These
include participants in SBA and other
government-guaranteed lending programs.
 Arnie Spevack is an attorney at Lerch,
(301) 657-0749
adspevack@
lerchearly.com
64
Early & Brewer who represents individuals,
businesses, lenders and borrowers in
financings, closings, negotiations and in
the courts.
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65. For mor e infor mation
Lerch, Early & Brewer, Chtd.
3 Bethesda Metro Center
Suite 460
Bethesda, MD 20814
(301) 986-1300
www.lerchearly.com
Thank you for your participation
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66. www.lerchearly.com
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