This document summarizes revisions made in the SBA SOP 50 10 5(g) issued in November 2014. Key changes include eliminating the personal resource test for business owners, clarifying eligibility issues regarding franchises, required guarantors, and form 1919. Credit standards were adjusted for delegated lenders making small loans up to $350k. Environmental reports and tax verifications are no longer required to be submitted to the SBA processing center for certain loans. Revisions were also made to rules regarding 504 loans, eliminating the nine month rule and clarifying third party lender agreements.

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SBA SOP 50 10 5(g)
November 19, 2014
Alison W. Rind
Arnold D. Spevack
Lerch, Early & Brewer, Chtd.
www.lerchearly.com

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Overview
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Elimination of personal resource test
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Other eligibility issues
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Credit standards, collateral & environmental
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Other revisions
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SBA 504 loans
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SBA One
Today’s Program 2

3. © Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
Overview
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4. © Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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Purpose of New SOP
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Incorporate previously approved rules and policies that became effective after the last SOP was issued
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Clarify existing requirements 4

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Elimination of Personal Resource Test
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→ SOP At Pages 85, 238, 247
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Effective April 21, 2014
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See SBA Notice 5000-132
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Do not need to review personal resources of 20% or more owner, spouses or dependent children
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Does not eliminate the requirement to demonstrate credit is not available elsewhere 6

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Other Eligibility Issues
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Franchises (SOP at 87, 249)
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SBA Notice 5000-1322
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Key Test- whether a business is perceived by the public to be a single business or multiple businesses operating in the same space
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Characterization as business leasing to independent contracts (Salon Suites) – ineligible
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Franchises may be addressing these concerns 8

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Franchises con’t (SOP at 87, 249)
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Just because it is on the Franchise Registry does not mean that it is an eligible franchise
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Registry only clears size standards and affiliations
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Given lack of clarity, lenders might consider submitting these types of franchises for standard processing
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Cannot use proceeds to renovate leased space 9

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Required Guarantors (SOP at 103,297)
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Clarification
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EPC/OC- spouse owning at least 5% of either the EPC or OC must guaranty loan if, together with the owner, they own 20% or more. 10

11. © Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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Form 1919 (SOP at 190)
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Clarifying language
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Any partner that is involved in the management of the business, as well as all 20% owners of partnership, must complete SBA Form 1919. 11

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Credit Standards, Collateral, etc.
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New Option for Delegated Lenders (SOP at 154, 155 and 195)
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Small loans up to $350K
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Use same credit standards for loans >$350K (equity, 1.15x DSC, collateral)
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Other Alternatives:
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Process SBA Express
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Wait 90 days and resubmit
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Non-delegated lenders – submit to processing center as standard package 13

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At Guaranty Purchase
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7(a) Small Loans scored after July 1, 2014 will not be required to submit evidence of cash flow spreads with a request for purchase.
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Purchase requests submitted to:
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lrsc.servicing@sba.gov
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fsc.expresspurchases@sba.gov
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Tax Verifications (SOP at 192)
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For PLP lenders- must obtain IRS verification prior to 1st disbursement
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Non-PLP lenders – submit with application package 15

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Environmental Reports (SOP at 172)
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Environmental Reports must be submitted to SBA Center processing the application
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PLP lenders, lenders making 7(a) Small Loans, SBA Express and Export Express loans need not submit environmental reports to SBA Center 16

17. © Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
Other Revisions
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Export Express Loans (SOP at 118)
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Clarification
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Lender must maintain in its loan file evidence that at least 70% of the initial advance (up to the loan amount) was used for export purposes 18

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Credit Scoring (13 CFR 120.150)
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Credit scoring covers:
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Character, reputation and credit history
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Strength of business
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Past earnings, projected cash flow and future prospects
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Ability to repay the loan with earnings from the business
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Credit Scoring con’t
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Other items lender must address in credit analysis:
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Experience and depth of management
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Sufficient invested equity
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Potential for long term success
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Nature and value of collateral
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Potential impact of any affiliates 20

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Lender’s Small Loan Credit Memo (SOP at 155)
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Brief history of business
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Brief description of management team
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Owner/guarantor analysis including personal financial statements consistent with similarly sized non-SBA loans
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Collection of business tax returns and IRS verification
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Lender’s Small Loan Credit Memo (SOP at 155) con’t
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List of Collateral and estimated value
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Effect of affiliates upon repayment
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Equity injection and pro-forma debt to worth if required with similarly sized non-SBA loans
These items, plus acceptable credit score, complete the lender analysis.
Lender may require additional analysis.
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23. © Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
SBA 504 Update
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24. © Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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Elimination of Nine Month Rule (SOP at 235)
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Effective April 21, 2014
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When looking at expenditures for land, building, machinery, equipment and professional fees, any expenditures made more than nine months ago are included
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Including expenditures financed with short term debt 24

25. © Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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Third Party Lender Preference (SOP at 233)
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No longer any reference to “preference”
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Third party lender may take additional collateral but:
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Lender must dispose of additional collateral and apply proceeds to third party loan prior to final disposition of project property
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Better off taking additional collateral on interim loan only 25

26. © Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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Indemnification- Third Party Lender Agreement
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SBA Notice 5000-1320
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Open ended indemnification clauses in real estate documents
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Violation of Anti-Deficiency Act
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Indemnification- Third Party Lender Agreement con’t
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CDC must either:
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Obtain a waiver from the indemnified party
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Require addendum to Third Party Lender Agreement to defer foreclosure
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504 Closings (SOP at 302)
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504 Debenture Closing Checklist (Form 2286) – revised:
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13 items – regular closings
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Eight items – expedited closings
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Form 2203 (checklist for complete file review) also revised
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Construction documents moved 28

29. © Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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Speakers

Alison Rind is a lending attorney at Lerch, 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 a commercial transactions attorney at Lerch, Early & Brewer who represents individuals, businesses, lenders and borrowers in financings, closings, negotiations and in the courts.
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(301) 657-0750
awrind@
lerchearly.com
(301) 657-0749
adspevack@
lerchearly.com

30. © Lerch, Early & Brewer, Chtd. 2014 www.lerchearly.com
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For more information
Lerch, Early & Brewer, Chtd.
3 Bethesda Metro Center, Suite 460
Bethesda, MD 20814
(301) 986-1300
www.lerchearly.com
Thank you for your participation
This content is for your information only and is not intended to
constitute legal advice. Please consult your attorney before acting
on any information contained here.
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