Tip of the Week
Going with the Flow Part II - Further Digesting the New SOP 50 10 5 B
Last week, with the revised SOP 5010 5 B hot off the press, we focused on some of the more notable changes. All of our weekly Tips are archived on our website if you ever want to refer back to something you saw here. So this week, we would like to continue the focus and hit on some more key changes, some of which are rather subtle but no less important to all SBA lenders, CDC's and private lenders alike.
Remember, the new version B will become effective on October 1, 2009. We always encourage our clients to retain access to older versions and note in your files which SOP version is applicable for easy reference later either in an audit or purchase scenario. Remember, the effective SOP is the current edition at the time you receive your loan number (date of SBA approval). Feel free to access our website for a link to the updated document.
Going deeper, further into key updates in the new 5010 5 B:
Lender Preferences and Conflicts of Interest - It is critical that SBA lenders take this very seriously. Taking any action that establishes a preference in favor of the lender (over SBA) will cause the loan to be ineligible. If there is ever a doubt that you may be doing this, NEVER send the loan through PLP processes. Get SBA's approval in writing by going GP or CLP to get the SBA loan number issued. Remember, a lender must not:
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Take any side collateral or guaranty that would secure only its own interest in the loan
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Require a borrower to purchase certificates of deposit
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Maintain a compensating balance not under the control of the borrower
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Have a piggyback structure (where SBA is in an inferior lien position)
SBA also expects lenders to act ethically and exhibit good character....and the conduct of a lender's associates (and staff) will be attributed directly to the lender. The lender must exercise care and judgment in determining whether a conflict of interest exists and document the file in detail. SBA will not guarantee a loan if the lender, its Associates, partner or close relative:
In the context of determining whether or not the lender is dealing with a conflict of interest, SBA is also introducing the Standards of Conduct Committee (and Counselor) with this version of the SOP.
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If an applicant has within 1 year prior to the SBA loan application employed (as employee, owner, partner, attorney, agent, officer, director, creditor or debtor) a SBA employee, the loan must be approved by the Standards of Conduct Counselor.
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If the applicant has an SBA employee with 10% or more ownership interest in the business, the application must be approved by the Standards of Conduct Committee (at Headquarters). This includes any household members of a SBA employee (spouse, minor children, blood relatives of employee or spouse who reside in the same place)
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This same rule applies if the employee is a Member of Congress, an appointed official of the legislative or judicial branch of the government, a member or employee of a Small Business Advisory Committee, or a SCORE volunteer.
When a Standards of Conduct approval is required, the application should be processed by the applicable Processing Center and be conditionally approved and forwarded by them to the Standards of Conduct Counselor or Committee. The Counselor will notify the SBA Processing Center of the final decision, who will then notify the lender.
Credit Elsewhere Emphasis - SBA has always required that the lender substantiate the factors that prevent financing from being accomplished without the SBA guaranty and to retain that information in their loan file. But now SBA emphasizes that the file MUST contain documentation that SPECIFICALLY identifies the factors in the present financing that meet the credit elsewhere test. We can only assume that SBA does not like "boilerplate" language and is wanting more MEAT to the explanation. Consider using the word "specific" in your written analysis.
Loan Increases - SBA clarifies that any increases to the loan must be approved by SBA in writing (regardless of lender status). Also, now SBA is allowing the consideration of an increase more than 20% of the original loan amount or more than 18 months after the original approval date. However, the lender must include an analysis showing that the purpose of the increase is the same as the original purpose of the loan and that the borrower's cash flow can support the increased payment amount.
Real Estate Appraisals - SBA makes it clear that the "use of proceeds" drives the requirement, not type of collateral. Verbiage has changed....for instance, if the loan will be used to finance new construction (rather than "when the collateral will be new construction), and If the loan will be used for an existing building (rather than "when the collateral will be an existing building).
After construction is completed, the lender must obtain a statement from the appraiser that the building was building with only minor deviations (if any) from the plans and specs upon which the original estimate of value was based. If the appraiser cannot provide a statement, then the lender may not close the loan without SBA's prior written permission.
Verification of Financial Information - 4506 -SBA is highlighting the IRS's expedited service called the Income Verification Express Services (IVES). IRS can electronically provide tax return transcripts within 2 business days with the consent of the taxpayer. A $4.50 fee is charged for each transcript requested. SBA expects that this process will replace the current process (manual pick up from 7 IRS centers) soon. Lenders need to register and identify employees to act as agents to receive electronic transcripts on the lender's behalf. A link to the registration website is provided in the SOP.
We consider this to be a high level summary intended as a service to the SBA lending community. You will likely find that you want to go deeper into many of these issues and more. Therefore, we have developed the SOP 5010 5 A & B Summary that you can download from Special Access on our website.
Beyond help on our website, consider contacting us directly to discuss your unique challenges. From training to helping you develop or refine your Policy and Procedures, to due diligence or review of your existing portfolio to expert and practical assistance on guarantee purchase issues, contact the professionals at sbaAccess.
Take the Right Approach
Brian Burke and Karen McHugh
SBA Access ©2009 - All Rights Reserved
All content is copyrighted and unauthorized use is strictly prohibited. If you would like to quote any part of this text, email bburke@sbaaccess.com or kmchugh@sbaaccess.com for permission.
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