Tip of the Week

How to Live with the new SBA SOP 50 10 (5)

Gosh!   Some of the changes made through the recent release of the new standard operating procedure for processing (originations) SOP 50 10 version 5 have given lenders heartburn and frustration.  It’s to the point that the industry is asking SBA to reconsider their approach on multiple issues with the next revision (due out by the end of the calendar year).  However, whether SBA agrees with the lender concerns and makes wanted changes or not, lenders must still comply with what is currently in force.   Life goes on.

So how do we deal with the questions being asked and how do we make loans impacted by the changes in some of the requirements?  Common questions include:

• Interest only lines of credit are considered “reasonable”. Can we still term out a line of credit if scheduled payments of principal and interest are made? What if the use of the line of credit was for the purchase of term equipment, rather than used as a true operational line of working capital?
• The PLP 90% financing rule has been eliminated. So does that mean SBA allows 100% financing now? How much equity is enough? How do we address outside income to pay personal debt utilized as equity?
• Life insurance is now “required”. How do we define “viability” of the business on key people? What if the principals are uninsurable? Can PLP lenders waive the requirement if there are other mitigating factors? Are all key personnel subject to the life insurance requirement?
• Third party business valuations are required for the larger loans. What if the entire amount of the purchase price is being allocated to real property and we have a real estate appraisal that appraises the land and building (no going concern) equal to or exceeding the purchase price; are we still required to obtain an independent business valuation? Must the business valuation confirm that the purchase price of the business is within the range defined by the valuation or simply to make sure the loan amount does not exceed the value of the business?

These are just some of the more prevalent questions that SBA lenders and CDC’s are asking themselves (and us) every day.  This is the “real world” of living in the SBA trenches, so to speak.   Our approach is to first listen, try to understand the whole picture.  Don’t lock in on just one piece (because you then effectively lock out other possible solutions).   Develop a smooth, consistent and thoughtful internal process to assess the facts and then determine the best approach.

Often there is not a cut and dried answer.  It’s usually not black and white.  So manage that gray area to develop a reasonable argument (if there is one) and bounce it off trusted, reasonable folks.   Remember, non PLP processing is now encouraged in those situations where there is lots of gray to sort through.  And finally, (and you’ve heard this before), document clearly and well.  We’re not talking about “War and Peace” here, just the opposite.  Identify the issue (make sure the reader will understand that you didn’t just gloss over it).  Make a cogent, well reasoned statement to mitigate the concern and if necessary, back up your approach with an outside, and informed opinion.  We, at sbaAccess, are here for you and your team as you grapple with day to day realities of the SOP 50 10 (5).  Consider our “Lifeline” service that will give you additional perspective and experience on challenging gray area issues.

For more good discussion on how to live with the new SOP, please join Karen McHugh when she presents with Lynn Ozer (with Susquehanna Patriot Bank and NAGGL Technical Issues committee chairperson) a two-hour NAGGL WebExpress course next Thursday, November 20, 2008.  For more information and to register, go to www.naggl.org

Take the right approach

Karen McHugh and Brian Burke

740 E. Campbell Road, Suite 900 | Richardson, TX 75081 | (214) 507-7710 | (214) 507-7720
kmchugh@sbaAccess.com | bburke@sbaAccess.com | www.sbaAccess.com