SBA SOP 50 10 5(K) Lender Loan Programs (Exhibit 1) — Political Consultants Assn. v. SBA

Summary

Excerpts of SBA Standard Operating Procedure SOP 50 10 5(K), Lender and Development Company Loan Programs, from the Office of Financial Assistance and effective April 1, 2019, filed as Exhibit 1, Document 17-1, on 04/18/20 in Case 1:20-cv-00970-RCL, Political Consultants Assn. v. SBA. The SOP updates SOP 50 10 5 to conform to revised regulations in 13 CFR Part 120 and to clarify policy for the 7(a) and 504 programs, incorporating the May 7, 2018 Final Rule on 504 debt refinancing (83 FR 19915), 504 Debentures with a maturity of 25 years, and SBA Policy Notice 5000-17057 on credit elsewhere, minimum equity in changes of ownership and marijuana- and hemp-related businesses. It is authorized by Associate Administrator William M. Manger. The filed pages run from the introduction through Subpart B eligibility rules to page 200 on leases.

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SBA SOP 50 10 5(K)

Lender and Development
Company Loan Programs

Office of Financial Assistance

U.S. Small Business Administration
Case 1:20-cv-00970-RCL Document 17-1 Filed 04/18/20 Page 3 of 41

Pon. >). SMALL BUSINESS ADMINISTRATION
alae [2 STANDARD OPERATING PROCEDURE
SUBJECT: S.0.P. REV
SECTION NO.
Lender and Development Company Loan Programs 50 10 5(K)
INTRODUCTION
1. Purpose: Update SOP 50 10 5(K) Lender and Development Company Loan Programs.
2. Personnel Concerned: All SBA Employees
3. SOP Canceled: None. Previous edition of SOP 50 10 will continue to have applicability to loans that

were approved during their effective time periods.

4. Updated Information: This full update of SOP 50 10 5 is necessary for the SOP to conform to recently
revised regulations in 13 CFR Part 120, and to provide guidance that clarifies and streamlines policy
and procedures affecting the 7(a) and 504 programs. This version, which will be SOP 50 10 5(K),
includes revised guidance in the following general areas:

a) Incorporates regulatory changes published in the May 7, 2018, Final Rule on Debt Refinancing in
504 Loan Program (83 FR 19915), effective June 6, 2018;

b) Incorporates the availability of 504 Debentures with a maturity of 25 years, in accordance with the
Federal Register Notice published April 4, 2018, available for 504 Projects approved on or after
April 2, 2018;

c) Incorporates policy changes published in SBA Policy Notice 5000-17057, effective April 3, 2018,
including:
i. Revised guidance on credit elsewhere for 7(a) and 504 loans;

ii. Clarified the minimum equity requirements for 7(a) loans involving change of ownership
transactions between existing owners;

ili. Provided additional guidance regarding the eligibility of marijuana-related businesses and
hemp-related businesses; and

iv. Reduced the minimum monitoring requirements for Working Capital CAPLines; and

d) Clarifies guidance for SBA Lenders (7(a) lenders and CDCs) on the delivery of 7(a) loans
(including SBA Express, Export Express, Export Working Capital Program and International
Trade) and 504 program loans.

5. Originator: Office of Capital Access

AUTHORIZED BY:

William M. Manger

EFFECTIVE DATE
April 1, 2019

Associate Administrator
Capital Access

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SOP 50 10 5(K)

Subpart B

Applicant does not have credit available elsewhere:

a. The maintenance or improvement of the Lender’s rating or performance evaluation
under the Community Reinvestment Act (CRA) or its implementing regulations; or

b. The improvement of the Lender’s collateral lien position.
Il. INELIGIBLE TYPES OF BUSINESSES

A. The Lender must determine whether the Applicant is one of the types of businesses listed as
ineligible in SBA regulations (13 CFR § 120.110). Certain business types appearing on this list
may be eligible under limited circumstances, as discussed below.

1. Businesses organized as a non-profit are ineligible (for-profit subsidiaries may be eligible).
(13 CFR § 120.110 (a))

2. Businesses Engaged in Lending (13 CFR § 120.110 (b)).

a. SBA cannot guarantee a loan that provides funds to businesses primarily engaged in
lending, investments, or to an otherwise eligible business engaged in financing or
factoring. This prohibits SBA loans to:

i.
ii.
ili.
iv.
Vv.

Vi.

Vii.

Banks;

Life Insurance Companies (but not independent agents);
Finance Companies;

Factoring companies;

Investment Companies;

Bail Bond Companies; and

Other businesses whose stock in trade is money.

b. The limited circumstances under which certain businesses engaged in lending may
be eligible are as follows:

i.

il.

iil.

iv.

A pawn shop that provides financing is eligible if more than 50% of its revenue
for the previous year was from the sale of merchandise rather than from
interest on loans.

A business that provides financing in the regular course of its business (such as
a business that finances credit sales) is eligible, provided less than 50% of its
revenue is from financing its sales.

A mortgage servicing company that disburses loans and sells them within 14
calendar days of loan closing is eligible. Mortgage companies primarily
engaged in the business of servicing loans are eligible. Mortgage companies
that make loans and hold them in their portfolio are not eligible.

A check cashing business is eligible if it receives more than 50% of its revenue
from the service of cashing checks.

A business engaged in providing the services of a financial advisor on a fee
basis is eligible provided they do not use loan proceeds to invest in their own

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SOP 50 10 5(K)

Subpart B

portfolio of investments.

3. Passive Businesses (13 CFR § 120.110(c)):

a.

Passive businesses owned by developers and landlords that do not actively use or
occupy the assets acquired or improved with the loan proceeds (except as Eligible
Passive Companies under 13 CFR § 120.111) are not eligible.

Businesses primarily engaged in subdividing real property into lots and developing it
for resale on its own account are not eligible.

Businesses that are primarily engaged in owning or purchasing real estate and
leasing it for any purpose are not eligible. For example, shopping centers, salon
suites, and similar business models that generate income by renting space to
accommodate independent businesses that provide services directly to the public are
not eligible.

Businesses that lease land for the installation of a cell phone tower, solar panels,
billboards, or wind turbine also are not eligible. However, the business operating the
cell phone tower, solar panel, billboard, or wind turbine is eligible.

Businesses that have entered into a management agreement with a third party that
gives the management company sole discretion to manage the operations of the
business, including control over the employees, the finances and the bank accounts
of the business, with no involvement by the owner(s) of the Applicant business, are
not eligible. (See paragraph I.D.7 of this chapter for additional guidance on
management agreements.)

Apartment buildings and mobile home parks are not eligible.

Residential facilities that do not provide healthcare and/or medical services are not
eligible.

The limited circumstances under which certain businesses engaged in renting or
leasing may be eligible are as follows:

i. Hotels, motels, recreational vehicle parks, marinas, campgrounds, or similar
types of businesses are eligible if more than 50% of the business’s revenue for
the prior year is derived from transients who stay for 30 days or less at a time
and the business complies with all zoning and other legal requirements. If the
Applicant is a start-up, the Applicant’s projections must show that more than
50% of the business’s revenue will be derived from transients who stay for 30
days or less at a time.

ii. | Businesses that are licensed as nursing homes or assisted living facilities and
provide healthcare and/or medical services are eligible.

iii. Businesses that are engaged in leasing equipment, household goods or other
items are eligible. (See subparagraph A.2 above regarding the eligibility of
businesses engaged in lending.)

iv. Businesses such as barber shops, hair salons, nail salons, and similar types of
personal services businesses are eligible, regardless of whether they have

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SOP 50 10 5(K)

Subpart B

employees or contract with individuals to provide the services. (See
subparagraphs a) and c) above regarding ineligibility of developers and
landlords.)

i. An ineligible passive business cannot obtain an SBA loan for any purpose, including
the purchase or construction of a building for its own use.

4. Life Insurance Companies (13 CFR § 120.110(d)):

Life insurance companies are not eligible.

b. A life insurance agent may qualify as an eligible independent contractor if the
business meets all of the following factors:

i.

il.

iil.

iv.

Vi.

Vii.

Vill.

ix.

The insurance agent is not subject to the control or direction of another agent in
conjunction with the sale and servicing of life insurance;

The insurance agent has full discretion over the means and method for
rendering services;

The insurance agent hires, supervises and pays employees needed to perform
his or her services;

The insurance agent performs services at his or her own place of business
rather than at the life insurance company’s place of business;

The insurance agent is paid by the job or on a commission basis, rather than by
the hour, week or month;

The insurance agent is responsible for paying his or her own business
expenses;

The insurance agent provides a significant amount of his or her own personal
resources and other equipment, even if the insurance company provides some
forms, manuals, or other materials;

The insurance agent invests in facilities that are used in performing services
and are not typically maintained by employees (such as the maintenance of an
office rented at fair market value from an unrelated party); and

The insurance agent can realize a profit or incur a loss as a result of his or her
services.

5. Business Located in a Foreign Country or Owned by Undocumented (Illegal) Aliens (13
CFR § 120.110 (e))

a. Businesses are not eligible for SBA assistance if the business is:

1.

il.

Located in a foreign country with no activities in the United States; or

Owned in whole or in part by undocumented (illegal) aliens.

b. Businesses owned by non-U.S. citizens may be eligible. See paragraph III.C of this
Chapter for details.

6. Businesses Selling Through a Pyramid Plan (13 CFR § 120.110(f))

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SOP 50 10 5(K)

Subpart B

Pyramid or multilevel sales distribution plans are not eligible for SBA assistance.

7. Businesses Engaged in Legal Gambling Activities (13 CFR § 120.110(g))

a.

Small businesses that obtain more than one-third of their annual gross revenue for
the prior year, including rental income, from legal gambling activities are not
eligible.

If the purpose of the business is gambling, such as a pari-mutual betting racetrack or
a gambling casino, the business is not eligible, regardless of the percentage of gross
revenue derived from gambling.

Circumstances exist in which businesses engaged in legal gambling activities may be
eligible, including if the Applicant obtains one-third or less of their annual gross
revenue, including rental income, from:

i. Commissions from official State lottery ticket sales under a State license; or

ii. | Gambling activities licensed and supervised by a state authority in those states
where the activities are legal.

8. Businesses Engaged in any Illegal Activity (13 CFR § 120.110 (h))

a.

SBA must not approve loans to Applicants that are engaged in illegal activity under
federal, state, or local law. This includes Applicants that make, sell, service, or
distribute products or services used in connection with illegal activity, unless such
use can be shown to be completely outside of the Applicant’s intended market.

Marijuana-Related Businesses:

i. | Because federal law prohibits the distribution and sale of marijuana, financial
transactions involving a marijuana-related business would generally involve
funds derived from illegal activity. Therefore, businesses that derive revenue
from marijuana-related activities or that support the end-use of marijuana may
be ineligible for SBA financial assistance.

ii. | Whether a business is eligible is determined by the nature of the business’s
specific operations. The following businesses are ineligible:

a) “Direct Marijuana Business” -- a business that grows, produces, processes,
distributes, or sells marijuana or marijuana products, edibles, or
derivatives, regardless of the amount of such activity. This applies to
recreational use and medical use even if the business is legal under local
or state law where the applicant business is or will be located.

b) “Indirect Marijuana Business” -- a business that derived any of its gross
revenue for the previous year (or, if a start-up, projects to derive any of
its gross revenue for the next year) from sales to Direct Marijuana
Businesses of products or services that could reasonably be determined to
aid in the use, growth, enhancement or other development of marijuana.
Examples of Indirect Marijuana Businesses include businesses that
provide testing services, or sell or install grow lights, hydroponic or other

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SOP 50 10 5(K)

lil.

Subpart B

specialized equipment, to one or more Direct Marijuana Businesses; and
businesses that advise or counsel Direct Marijuana Businesses on the
specific legal, financial/accounting, policy, regulatory or other issues
associated with establishing, promoting, or operating a Direct Marijuana
Business. However, for purposes of illustration, SBA does not consider a
plumber who fixes a sink for a Direct Marijuana Business or a tech
support company that repairs a laptop for such a business to be aiding in
the use, growth, enhancement or other development of marijuana.

Indirect Marijuana Businesses also include businesses that sell smoking
devices, pipes, bongs, inhalants, or other products if the products are
primarily intended or designed for marijuana use or if the business
markets the products for such use.

Consistent with the Agriculture Improvement Act of 2018 (Public Law No.
115-334), a business that grows, produces, processes, distributes or sells
products made from hemp (as defined in section 297A of the Agricultural
Marketing Act of 1946) is eligible.

9. Businesses Which Restrict Patronage (13 CFR § 120.110Q) and 13 CFR § 113.3(a))

a. Businesses that restrict patronage for any reason other than capacity are not eligible.
For example, a men’s or women’s only health club is not eligible, whether the
business is a franchise or not.

b. Circumstances exist in which certain businesses, like fitness centers that market to
one gender, may be eligible if they permit both men and women to join and/or use
the facility. Lenders must document the file with the following:

i.

il.

Affidavit signed by the Applicant that the business is open to both men and
women; and

Evidence that the facility is open to both men and women, such as appropriate
bath/locker rooms, or documented membership demographics.

10. Government-Owned Entities, Excluding Native American Tribes (13 CFR § 120.110())

Businesses owned by municipalities and other political subdivisions are not eligible.

b. Special Requirements Applicable to Native American Businesses:

i.

il.

A Native American tribe is a Governmental entity and is not eligible.

A small business which is owned in whole or in part by either a State or
federally-recognized Native American Tribe may be eligible, provided the
small business meets all other criteria set forth in SBA Loan Program
Requirements and:

a) Establishes that it is a separate legal entity from the tribe and submits the

documents authorizing its existence; and

b) For federally recognized tribes, the tribe waives sovereign immunity with

respect to the collateral pledged for the loan, and collection of the loan

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SOP 50 10 5(K)

Cc.

Subpart B

from the Applicant, OR agrees to a “sue and be sued” clause specifically
naming U.S. Federal courts as “courts of competent jurisdiction.”

c) Tribes that are recognized only by a state do not have sovereign immunity.
Therefore, the requirement identified in paragraph 1i.b) above is not
applicable.

Lenders may seek the advice and assistance of the Bureau of Indian Affairs (BIA)
personnel when dealing with loans collateralized by Indian lands held in trust.

11. Businesses Engaged in Promoting Religion (13 CFR § 120.110 (k))

a.

If it appears an Applicant may be connected, associated or affiliated with a religious
organization, or may have a religious component, the Lender must complete the
Religious Eligibility Worksheet (SBA Form 1971). Any questions regarding this
worksheet may be addressed to local SBA Counsel.

Prior to submitting an application to the LGPC (non-delegated) or requesting a loan
number (delegated), the Lender must submit the completed worksheet and
supporting documentation to the Associate General Counsel for Litigation at
Form1971Review@sba.gov for a final Agency decision on eligibility. Such
supporting documentation includes, but is not necessarily limited to, Lender’s Credit
Memorandum; the Applicant’s business plan; any mission statement of the
Applicant; and, where applicable, a detailed statement of Applicant’s curriculum.
SBA may request additional documentation as needed to complete the eligibility
review. Upon approval by SBA, Lender may proceed to submit the application to the
LGPC (non-delegated) or process the loan under its delegated authority. For non-
delegated applications, the Lender must submit a copy of SBA’s approval to the
LGPC with the application. The delegated Lender must retain the worksheet,
supporting documentation, and evidence of SBA’s approval in its loan file and must
submit all of the foregoing to SBA with any request for guaranty purchase. SBA also
may review the worksheet and supporting documentation when conducting Lender
oversight activities.

An Applicant is not ineligible merely because it offers religious books, music,
ceremonial items and other religious articles for sale.

12. Businesses Engaged in SBA Loan Packaging (13 CFR § 120.110(m))

13.

An Applicant that receives more than one third of its gross annual revenue from packaging
SBA loans, including as a Lender Service Provider, is not eligible.

Businesses with an Associate of Poor Character (13 CFR § 120.110(n))

The Agency requires that every proprietor, general partner, officer, director, managing
member of a limited liability company (LLC), owner of 20% or more of the equity of the
Applicant, Trustor (if the Applicant is owned by a trust), and any person hired by the
Applicant to manage day-to-day operations (“Subject Individual”) must be of good
character.

A Subject Individual may not reduce his/her ownership in an Applicant business within 6
months prior to the date of the application for the purpose of avoiding compliance with this

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SOP 50 10 5(K) Subpart B

section. The only exception to the 6-month rule is when a Subject Individual completely
divests his/her interest prior to the date of application. Complete divestiture includes
divestiture of all ownership interest and severance of any relationship with the Applicant
(and any associated Eligible Passive Company) in any capacity, including being an
employee (paid, unpaid, or contracted).

The Agency cannot provide financial assistance to businesses with Associates who are:

a. Incarcerated, on probation, or on parole, (an individual with a deferred prosecution,
conditional discharge, order of protection, or who is on a sex offender registry is
treated as if the individual is on probation or parole); or

b. Currently subject to an indictment, criminal information, arraignment, or other
means by which formal criminal charges are brought in any jurisdiction.

The character evaluation process to determine eligibility under this section begins with
Subject Individuals answering the applicable questions on SBA Form 1919, “Borrower
Information Form” or the EIB-SBA Joint Form 84-1 for Export Working Capital Loans.

(NOTE: A Subject Individual must respond “Yes” even when the individual believes the
record is sealed, expunged or otherwise unavailable. Lenders must keep this information
private and confidential. There are no exceptions or waivers to this policy.)

a. If all Subject Individuals respond “No” to Questions 17, 18, and 19 on SBA Form
1919 or Questions C.2.e.1, 2, or 3 on the EIB-SBA Joint Form 84-1, the SBA 7(a)
loan application may be processed and the SBA Form 912, “Statement of Personal
History” is not required.

b. If any Subject Individual responds “Yes” to Question 17 on SBA Form 1919 or
indicates in response to Question C.2.e.1 on the EIB-SBA Joint Form 84-1 that the

Subject Individual is currently under indictment, etc., the Applicant is not eligible
for an SBA 7(a) loan.

c. If any Subject Individual is currently on parole or probation (including probation
before judgment), the Applicant is not eligible for an SBA 7(a) loan.

d. If any Subject Individual responds “Yes” to Questions 18 or 19 on SBA Form 1919
or Question C.2.e.2 or C.2.e.3 on the EIB-SBA Joint Form 84-1, a character
determination for the Subject Individual is required to establish eligibility under this
section as follows:

i. SBA Form 912 Package:

The Subject Individual must provide the Lender with a complete SBA Form
912 Package, which must include:

a) Acompleted SBA Form 912, signed and dated within 90 days of
submission to SBA; and

b) A detailed written statement, which is separately signed and dated by the
Subject Individual, describing the events and circumstances of any “Yes”
response, which must include the following:

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SOP 50 10 5(K)

Subpart B

i) Date(s) of each offense;
ii) City or county and State where the offense(s) occurred;

iii) The specific charge(s) and final conviction(s) (e.g. DUI, assault,
forgery, etc.) and the level of each charge and conviction (either a
misdemeanor or felony); and

iv) Disposition of the charge(s) and conviction(s), including all sentencing,
conditions, or requirements of the court. This includes conditions, such
as registration on the Sex Offenders Registry, which provides for
incarceration upon failure to comply with the conditions.

Court documentation evidencing that any sentencing or other conditions of
the court have been met. If sentencing and other conditions of the court
have not been satisfied, then the Applicant is not eligible.

i) Court documentation may include but is not limited to:

(a) | Evidence of the status (paid/unpaid) of fines or restitution
imposed;

(b) | Evidence of attendance or completion of any class or workshop
required by the court;

(c) Jail time served; or

(d) Ifapplicable, the terms of probation including evidence and
dates of successful conclusion of the probation.

ii) If court documentation is not available, the Subject Individual must

submit:

(a) A written statement from the applicable court indicating
documents are not available; and

(b) Verification that there are no outstanding warrants, unpaid
fines, or other conditions of the court that have not been
satisfied.

ii. | Character Determination by the Lender:

The Lender may process the application without review of the SBA Form 912
Package by SBA if the Lender determines upon review of the court’s
disposition that the case(s) resulted in:

a) One or multiple misdemeanor convictions whose conditions were met

more than 6 months prior to receipt of the application, and the
convictions did not involve a crime against a minor (for example, child
abuse or endangerment, possession of child pornography, etc.);

b) Reduction of the original felony charge(s) to misdemeanor(s); or

c) Dismissal of the charges.

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SOP 50 10 5(K) Subpart B

The Lender must retain the supporting information and court documentation,
including the original complete SBA Form 912 Package in the file for the life
of the loan.

iii. Circumstances Requiring an FBI Fingerprint Background Check and a
Character Determination by SBA:

The Lender must submit to SBA a copy of the complete SBA Form 912
Package for a background investigation by SBA and the Subject Individual
must complete an FBI Fingerprint Background Check in accordance with the
following paragraph if the Lender determines upon review of the court’s
disposition that the case(s) resulted in:

a) Felony conviction(s);

b) Misdemeanor conviction(s) within 6 months of the date of the loan
Application;

c) Charge(s) filed and final disposition against the Subject Individual has
been completed within 6 months of the date of the loan Application;
and/or

d) Misdemeanor conviction(s) for crime(s) against a minor (for example,
child abuse or endangerment, possession of child pornography, etc.).

The Lender may not disburse the loan until it has received written
clearance from SBA.

iv. FBI Fingerprint Background Check:

SBA will conduct FBI fingerprint background checks via submission of the
Form FD-258 (fingerprint card) or electronic fingerprint submission (if
available) to the FBI. “Electronic fingerprint submission” means fingerprints
taken and reproduced in a machine-readable format by a fingerprint capture
system that complies with the FBI’s Electronic Biometric Transmission
Specifications. An electronic fingerprint submission must be compatible with
the FBI’s Automated Fingerprint Identifications System, or any successor
system in place for biometric identification. The electronic fingerprint
submission will generally be in paper format as produced by the fingerprint
capture system, which an individual may attach to SBA Form 912 to expedite
character check procedures. When using electronic fingerprint submission,
check local requirements, as some localities require individuals to bring one or
more Forms FD-258 to facilitate the electronic submission. Where an
electronic fingerprint submission is not locally available, Form FD-258 may be
used. Local law enforcement agencies will usually assist the individual with
the fingerprinting. Lenders may obtain the Form FD-258 from the local SBA
Field Office or order the cards from the FBI’s website at:
https://www.fbi.gov/services/cjis/fingerprints-and-other-biometrics/ordering-

fingerprint-cards-and-training-aids.
v. | Lender Submission to SBA:

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SOP 50 10 5(K) Subpart B

Lenders submit completed SBA Form 912 Packages to SBA via overnight mail
or courier to: 409 3" Street, SW., Washington, DC 20416. SBA Form 912
Packages with electronic fingerprint submissions may be submitted via email
to: oca912@sba.gov.

The Lender’s submission to SBA must include a coversheet with the Lender’s
contact information (Lender name, point of contact, title, phone number, email,
and mailing address). (NOTE: If any form is incomplete or illegible, the SBA
Form 912 Package will be screened out and returned to the Lender.)

vi. Character Determination by SBA:

The Director, Office of Financial Assistance (D/FA), or designee, will make
the character determination as follows:

a) Based on the information received from the FBI fingerprint check, OCA
will determine either that the Subject Individual has good character, or is
not eligible for SBA financial assistance; and

b) OCA will advise the Lender in writing of the Agency’s character
determination.

vii. File Retention: Lenders must retain a copy of the Agency’s character
determination in their loan file for the life of the loan.

e. Ifthe Subject Individual was cleared by the D/FA or designee on a previous
application submitted within 6 months of the date of the current application and the
Subject Individual certifies that no other offenses have occurred since the previous
application was cleared by the D/FA or designee, non-delegated Lenders may submit
a copy of the prior clearance and the Subject Individual’s certification with the
application. A Delegated Lender processing a loan under its delegated authority must
retain this documentation in the loan file and may proceed to process the application.

f. 912 Decision Appeals: A Subject Individual may request a reconsideration of an
adverse character determination within 6 months of the date of SBA’s decision.

i. | Any request for reconsideration must include additional information or
documentation supporting the request to reconsider the adverse character
determination. Factors that contribute to a favorable reconsideration include:

a) Additional information provided by the Subject Individual that
satisfactorily explains the circumstances of the prior offense(s);

b) The passage of time between the date of the disclosed offense(s) and the
date of the application, during which the Subject Individual has not
committed additional offenses and has generally led a responsible life and
made a contribution to the community; and/or

c) Any additional law enforcement and/or court documentation that supports
the request.

ii. The request for reconsideration should be submitted through the Lender to
SBA, either via email to: oca912@sba.gov, or via overnight mail to: U.S.

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SOP 50 10 5(K)

Subpart B

Small Business Administration, Office of Capital Access, Attn: 912
Processing, 409 3rd Street SW, 8th Floor, Washington, DC 20416.

ili. The Lender’s submission to SBA must include a coversheet with the Lender’s
contact information (Lender name, point of contact, title, phone number, email,
and mailing address).

14. Equity Interest by Lender or Associates in Applicant Concern (13 CFR § 120.110(0))

a.

A Lender or any of its Associates, may not obtain an equity interest, either directly
or indirectly, in the Applicant.

The only exception is when the Associate of the Applicant is a Small Business
Investment Company (SBIC), in which case the requirements of 13 CFR § 120.104
apply. See also 13 CFR § 120.140 for a list of ethical requirements that apply to
Lenders.

15. Businesses Providing Prurient Sexual Material (13 CFR § 120.110 (p))

a. A business is not eligible for SBA assistance if:

1. It presents live or recorded performances of a prurient sexual nature; or

ii. It derives more than 5% of its gross revenue, directly or indirectly, through the
sale of products, services or the presentation of any depictions or displays of a
prurient sexual nature.

SBA has determined that financing lawful activities of a prurient sexual nature is not
in the public interest. The Lender must consider whether the nature and extent of the
sexual component causes the business activity to be prurient.

If a Lender finds that the Applicant may have a business aspect of a prurient sexual
nature, prior to submitting an application to the LGPC (non-delegated) or requesting
a loan number (delegated), the Lender must document and submit the analysis and
supporting documentation to the Associate General Counsel for Litigation at
PSMReview@sba.gov for a final Agency decision on eligibility. Upon approval by
SBA, the Lender may submit the application to the LGPC or may proceed to process
the loan under its delegated authority. A non-delegated Lender must submit a copy
of SBA’s approval with the application to the LGPC. A delegated Lender must retain
its analysis, supporting documentation, and evidence of SBA’s approval in its loan
file and must submit the analysis and supporting documentation to SBA with any
request for guaranty purchase. SBA also may review such documentation when
conducting Lender oversight activities.

16. Prior Loss to the Government (13 CFR § 120.110 (q)) and Delinquent Federal Debt (31
CFR § 285.13)

a. Unless waived by SBA for good cause, SBA cannot provide assistance to an

Applicant if there has been a Prior Loss to the Government. “Prior Loss” means the
dollar amount of any deficiency on a Federal loan or federally assisted financing
which has been incurred and recognized by a Federal agency after it has concluded
its write-off and/or close-out procedures for the particular account including the

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following:

i.

il.

lil.

iv.

Loss on the sale or other disposition of collateral acquired after default;

Compromise, i.e., resolution or settlement of a loan’s principal balance for less
than the full amount due;

Bankruptcy by a Borrower and/or any guarantors; and

Any unreimbursed advance payments by a Federal agency.

b. Unless waived by SBA for good cause, SBA cannot provide assistance to an
Applicant if there is a Delinquent Federal Debt attributed to the Applicant:

i.

il.

lil.

A debt is considered “delinquent” when any Federal loan or federally assisted
financing has not been paid within 90 days of the payment due date. A debt is
considered “delinquent” even if the creditor agency has suspended or
terminated collection activity with respect to such debt.

A debt is not considered “delinquent” if:
a) The creditor agency has released the obligor from paying the debt;

b) The obligor is subject to, or has been discharged from the debt in a
bankruptcy proceeding;

c) The obligor has entered into a satisfactory written repayment agreement
and is current; or

d) The debt is in an administrative or judicial appeal process.

(Note: If there was a loss associated with any of these debts, however, the loan
remains subject to the rules governing a Prior Loss to the Government under
subparagraph 16.a. above.)

“Federal loan or federally-assisted financing” includes any loan made directly
or guaranteed/insured by any Federal agency, any unreimbursed advance
payments under 8(a) or similar programs operated by any Federal agency, and
federally-backed student loans. It does not include unpaid/delinquent taxes, any
loss incurred by the Federal Deposit Insurance Corporation (FDIC) when it
sells a loan at a discount, or any loan purchased, held or securitized by Fannie
Mae or Freddie Mac. For the purposes of Delinquent Federal Debt, “Federal
loan or federally-assisted financing” does not include disaster loans, but for the
purposes of Prior Loss, it includes disaster loans.

c. These rules apply to:

1.

il.

iil.

The Applicant that incurred the Delinquent Federal Debt or caused the Prior
Loss (either directly or as a guarantor);

Any business owned, operated or controlled by the Applicant or an Associate
of the Applicant that incurred the Delinquent Federal Debt or caused the Prior
Loss (either directly or as a guarantor); and

For Delinquent Federal Debt only, any individual or entity who will be

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guaranteeing the loan for the Applicant.

d. Delegated Lenders are responsible for accessing their records in E-Tran to determine
if any of the individuals or businesses identified in subparagraph c. above
experienced a Prior Loss.

e. Delegated Lenders are responsible for checking the Credit Alert Verification
Reporting System (CAIVRS) to determine if any of the individuals or businesses
identified in paragraph c) above have outstanding Delinquent Federal Debt or Prior
Loss.

1. CAIVRS allows the Lender to enter multiple tax id numbers (either SSN or
EIN) to search for an outstanding Delinquent Federal Debt in connection with a
loan application.

il. Lenders may access CAIVRS at https://entp.hud.gov/caivrs/public/home.html.

f. Waiver Requests:

i. | When there are compelling circumstances, the Lender may send a written
request for a waiver to the LGPC. The Lender must identify the Delinquent
Federal Debt or Prior Loss to the Government, explain the relationship of the
Applicant to the individual or business causing the delinquency or prior loss
and the circumstances justifying the waiver.

ii. For Delinquent Federal Debt, the SBA Chief Financial Officer (CFO) (who
may only delegate this authority to the Deputy Chief Financial Officer) will
make the final decision on the request.

iii. For Prior Loss to the Government, the D/FA or designee will make the final
decision on the request.

g. Ifthe Delinquent Federal Debt or Prior Loss to the Government is fully satisfied, the
application can be processed without a waiver from the CFO or D/FA, including
under a Lender’s delegated authority. The Lender must document its file as to how
the debt or loss has been fully satisfied.

h. All Lenders must inform the Applicant that if the small business defaults on the
SBA-guaranteed loan and SBA suffers a loss, the names of the small business and
the guarantors of the SBA-guaranteed loan will be referred for listing in the CAIVRS
database, which may affect their eligibility for further financial assistance from SBA
or other Federal agencies or departments.

17. Businesses primarily engaged in political or lobbying activities (13 CFR § 120.110 (r))

An Applicant that derives over 50% of its gross annual revenue from political or
lobbying activities is not eligible.

18. Speculation (13_CFR § 120.110 (s))

a. Speculative businesses are not eligible. This prohibits loans to an Applicant for:

i. The sole purpose of purchasing and holding an item until the market price
increases; or

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SOP 50 10 5(K)

ii.

Subpart B

Engaging in a risky business for the chance of an unusually large profit.

b. Speculative businesses include:

i.

il.

iil.

iv.

Vv.

Wildcatting in oil;

Dealing in stocks, bonds, commodity futures, and other financial instruments;
Mining gold or silver in other than established fields;

Research and Development; and

Building homes for future sale (except under the Builders CAPLines program).

Note: Construction of homes for future sale with no sales contract in place (spec
homes) is eligible under the Builders CAPLines program. (13 CFR § 120.391)

c. Non-speculative businesses which may be eligible include:

i.

ii.

iii.

iv.

A business, such as a grain elevator, that uses a commodity contract to lock in
a price;

A farmer who uses a commodity contract to lock in the sale price of his or her
harvest;

A business engaged in drilling for oil in established fields; and

A business engaged in building a home under contract with an identified
purchaser.

B. Small Business Lending Company (SBLC).

An SBLC may not make a loan to an Applicant that has received financing (or a commitment for
financing) from a Small Business Investment Company (SBIC) that is an Associate of the SBLC.
(13 CFR § 120.476)

C. Businesses Owned by Non-US. Citizens.

SBA can provide financial assistance to businesses that are at least 51% owned and controlled
by persons who are not citizens of the U.S., provided the persons are lawfully in the U.S. and
have an appropriate work visa. The processing procedures and the terms and conditions will
vary, depending upon the status of the owners as assigned by the United States Citizenship and
Immigration Services (USCIS).

SBA requires all participating Lenders, including SBLCs, to comply with the U.S. Department
of the Treasury regulations for Customer Identification Programs for banks, savings
associations, credit unions, and certain non-federally regulated banks found at 31 CFR §
1020.220.

1.

Businesses owned by Naturalized Citizens are eligible and the naturalized citizens are not
subject to any special restrictions or requirements. If an individual’s SBA Form 1919 (or
EIB-SBA Joint Form 84-1 for EWCP loans) reflects he or she is a U.S. Citizen no further
verification of status is required.

Businesses owned by Lawful Permanent Residents (LPRs) are eligible. LPRs are persons
who may live and work in the U.S. for life unless their status is revoked through an

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administrative hearing.

a. The USCIS Form I-551 (551), Lawful Permanent Resident Card, commonly referred
to as the “green card,” is evidence of LPR status. USCIS has two versions of the
551:

i. | Resident Alien Card (issued through 1997); and

ii. Permanent Resident Card. (This is the most recent version and has been issued
since 1997.)

iii. Because it can take up to a year for a newly arrived immigrant to receive a 551,
new immigrants are issued an immigrant visa with a Customs and Border
Protection (CBP) stamp evidencing their lawful permanent residence. This visa
with CBP stamp serves as evidence of LPR status, so long as the visa is not
expired.

b. Since 1997, USCIS has issued the 551 with a 10-year validity, at which time it
expires and must be renewed. A 551 issued between 1979 and August 1989,
however, does not have an expiration date.

Replacing the 551 may be necessary if the 551 is lost, the individual changes his/her
name, etc. Replacement of the 551 may take more than a year. The expiration of the
immigrant’s 551 does not affect the LPR status of the immigrant. Acceptable forms
of evidence when the 551 has been submitted to USCIS for replacement or renewal
upon expiration include the following:

i. | Temporary I-551 stamps. A temporary stamp, issued by USCIS to replace lost
or expiring 551s, either on the immigrant’s unexpired foreign passport (that
reads “Upon endorsement, serves as temporary I-551 evidencing permanent
residency for 1 year”), or in cases where there is no passport or it is expired, on
Form I-94 with passport photo (that reads “Processed for I-551 — Temporary
Evidence of Lawful Permanent Residence’);

it. USCIS Form IJ-327, “Re-entry Permit,” issued to LPRs in lieu of a visa, which
is valid for only 2 years (the I-327 is issued for LPRs who need to be overseas
for longer than 1 year); or

ii. USCIS Form I-797, Notice of Action. Aliens with Conditional LPR status
(those who married a U.S. citizen and were married for less than a year at the
time of being granted LPR status) must file Form I-751 to remove conditional
status within 90 days of their 551 expiration. LPRs awaiting approval of their
I-751 should be issued Form I-797, which along with the expired 551, is proof
of current LPR status. Please note that there are numerous types of Form I-797
(e.g., I-797A, I-797-B, I-797C, etc.). For purposes of removing conditional
status, only I-797 is acceptable.

c. SBA requires the 551 or an acceptable substitute be current at the time it is
submitted with an application or it will be returned and not processed. PLP, PLP-
EWCP, Export Express, SBA Express and Pilot Loan Program Lenders must have a
copy of the current 551 or acceptable substitute prior to requesting a loan number.

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3. Businesses owned by non-immigrant aliens residing in the U.S. may be eligible, subject to
specific restrictions. Applicant businesses owned by such individuals must also meet the
requirements of paragraph III.C.8 below.

Non-immigrant (documented) aliens are persons who are admitted to the U.S. for a specific
purpose(s) and for a temporary period of time with a current/valid USCIS document, such as
a non-immigrant visa. (An immigrant visa is issued to persons wishing to live permanently
in the U.S.) While any non-immigrant alien may generally own a U.S. business as a passive
investor, to control the business or be employed by it, the non-immigrant alien must have an
appropriate work visa. To be eligible, the non-immigrant alien must have current/valid
USCIS documentation permitting them to reside and work in the U.S. legally.

Lender must verify the documentation/status of each alien with USCIS.

Eligible non-immigrant categories. The following classes of non-immigrant aliens may be
eligible for SBA financial assistance (USCIS Entrepreneur Guide non-immigrant visa
categories):

a. B-1 Business Visitor;

b. F-1/OPT Optional Practical Training;

c. H-1B Specialty Occupation;

d. O-1A Extraordinary Ability and Achievement;
e. E-2 Treaty Investor; or

f. L-1 Intracompany Transferee.

If the Applicant has a different class of non-immigrant visa that the Lender believes may be
eligible, please contact the Office of Financial Assistance for further guidance.

Lenders must consider the period of stay afforded by a non-immigrant visa category (along
with possible extensions) relative to the loan term.

4. Asylees and refugees (persons who receive temporary refuge in the United States) with LPR
status.

Asylees and refugees are authorized to work because of their immigration status. Acceptable
forms of evidence for asylees and refugees include the following:

a. Unexpired EAD (Employment Authorization Document, Form I-766);
b. Form J-94/Form I-94A indicating asylee or refugee status; and

c. Expired EAD with Form J-797C Notice of Action from USCIS for Form J-765 (if
Form I-797C lists the same employment authorization category as the expired EAD).

5. Businesses owned by aliens who are subject to the Immigration Reform and Control Act of
1986 (IRCA) may be eligible under limited circumstances.

a. IRCA vests USCIS with the authority to grant illegal aliens lawful temporary
resident status. IRCA prohibits Federal financial assistance to businesses owned
20% or more by such individuals for a period of 5 years after USCIS grants lawful
temporary resident status.

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b. This disqualification does not apply to Cuban or Haitian entrants or alien entrants
subject to IRCA who are blind or disabled. The definition of blind or disabled is
equivalent to SBA’s criteria for determining eligibility for assistance to any small
business owned by disabled individuals.

c. All Applicants self-certify that they are eligible under IRCA by signing SBA Form
1919, which includes the “Statements Required by Law and Executive Orders.” This
includes a certification that IRCA does not apply to them or if it does apply, more
than 5 years have elapsed since they were granted lawful temporary resident status
pursuant to the 1986 legislation.

6. Documentation to evidence and verify an alien’s status.

a. At time of application, for any individual required to complete SBA Form 1919 (or
EIB-SBA Joint Form 84-1 for EWCP loans), who is not a U.S. citizen but is located

in the U.S., the following applies:

i.

il.

iil.

The individual must provide his or her alien registration number on SBA Form
1919, “Borrower Information Form” (for EWCP loans, the individual must
provide his or her alien registration number on EIB-SBA Joint Form 84-1). An
“alien” (whether immigrant-alien or non-immigrant alien) is someone who
resides in the U.S. but is not a US. citizen. If the individual is not residing or
working in the U.S., then he or she is not considered an “alien” and does not
have an immigration status or alien registration number that must be verified. If
the individual does not have an alien registration number, he or she may
provide an I-94 card/document which has a departure record number issued on
the card.

Lenders must obtain a copy of the individual’s USCIS documentation and
maintain all documentation in the case file.

Lender must request Document Verification from the Sacramento Loan
Processing Center (SLPC).

a) In order to request Document Verification from SLPC, all Lenders must
register designated personnel with the SLPC at
Sacramento504Register@sba.gov.

b) The SLPC will respond to such requests by providing instructions on how
to complete registration and to use the electronic verification process.

c) The Lender submits a USCIS Form G-845 (845), “Document Verification
Request,” with supporting information to the SLPC. The Lender must
state on the 845 that the request is for an SBA-guaranteed loan.

d) As required by USCIS, SBA will release information about the status of an
alien to Lenders or other non-governmental entities ONLY when a signed
and dated authorization from the alien is attached to and submitted with
the 845 on that alien providing name, address and date of birth.

e) As required by USCIS, SBA accepts either of the following authorization
statements:

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SOP 50 10 5(K) Subpart B

i) “I authorize the U.S. Citizenship and Immigration Services to release
information regarding my immigration status to [name of Lender],
because I am applying for a U.S. Small Business Administration loan.”

ii) “I authorize the U.S. Citizenship and Immigration Services to release
alien verification information about me to [name of Lender], because I
am applying for a U.S. Small Business Administration loan.”

iv. As required by USCIS, all verification requests must include an authorization
with the original signature of the alien for SBA to release information to
Lenders on the status of verification. The original Document Verification
Request (Form G-845) and authorization for release must be maintained by the
Lender in the Applicant’s file for review by SBA and USCIS, if requested.

v. The information provided to SBA by the USCIS system is intended solely for
the purpose of determining eligibility for SBA financial assistance. This
information is governed by the Privacy Act, 5 U.S.C. 552(a)(i)(1), and any
person who obtains this information under false pretenses or uses it for any
purpose other than for determining eligibility may be subject to criminal
penalties.

vi. The authorization statement must not be on SBA or Lender stationery.

b. Lenders must receive verification of the status of each alien required to submit
USCIS documents prior to submission of the application to SBA or, for delegated
processing, prior to submission of the request for loan number. The Lender must
document the findings in the loan file.

c. Verification of the status of an LPR is required if 6 months has elapsed since the last
verification with one exception: if the individual reported an offense on SBA Form
912, then verification would be required even if 6 months had not elapsed, as the
offense may put their status at risk. For non-LPRs, verification is required with each
loan application, as their status can be revoked at any time.

7. Businesses owned by Foreign Nationals or Foreign Entities may be eligible.

Businesses listed in Appendix 1 of this SOP, “Restrictions on Foreign Controlled
Enterprises,” that are owned and managed by Foreign Nationals, Foreign Entities or Non-
Immigrant Aliens are not eligible. If a business is not listed in Appendix 1, it may be
eligible.

8. Additional requirements for eligibility of businesses owned by non-citizens other than
LPRs, including foreign-owned businesses:

a. The application must contain assurance that management is expected to continue in
place indefinitely and have U.S. citizenship or verified LPR status.

1. Management must have operated the business for at least 1 year prior to the
application date. (This requirement prevents financial assistance to “start-up”
businesses owned by aliens who do not have LPR status.)

ii. | Lender must require the personal guaranty from management.

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b. The Applicant must pledge collateral within the jurisdiction of the U.S. with a
liquidation value equal to no less than the approved loan amount at the time of first
disbursement and, to the extent that the value of collateral declines during the life of
the loan, the Lender must require the Borrower to pledge additional collateral to
ensure a sufficient collateral coverage amount. If the Applicant owned by foreign
nationals, foreign entities or non-immigrant aliens residing in the U.S. does not have
sufficient collateral, the Applicant is not eligible for an SBA-guaranteed loan.

c. In order for a business not to be subject to these additional requirements, it must be
at least 51% owned by individuals who are U.S. citizens and/or who have LPR
Status from USCIS and control the management and daily operations of the
business. This can only be waived by the D/FA or designee.

D. Eligible Passive Company (“EPC”) Rule (13 CFR § 120.111).

The Eligible Passive Company (EPC) Rule is an exception to SBA regulations that prohibit
financing assets which are held for their passive income. (13 CFR § 120.130(d)) Because the
EPC rule is an exception, the EPC and the OC must comply with all of the conditions in 13
CFR § 120.111 and each condition is interpreted strictly. If all conditions are not complied
with, in the event of default, SBA may deny liability on the guaranty.

An Eligible Passive Company (EPC) must use loan proceeds only to acquire or lease, and/or
improve or renovate, real or personal property (including eligible refinancing), that it leases to
one or more Operating Companies (OCs) for conducting the Operating Company's business, or
to finance a change of ownership between the existing owners of the EPC. With the exception
of a change of ownership between existing owners of the EPC, an EPC may not use loan
proceeds to acquire a business, acquire stock in a business or any intangible assets of a business,
or to refinance debt that was incurred for those purposes. Further, an EPC may only use loan
proceeds to finance a change of ownership between existing owners when the real estate has
been held by the selling owner(s) for at least 36 months.

An EPC can take any legal form or ownership structure (e.g., corporation, partnership, LLC,
sole proprietor, etc.)

A tenancy in common is a form of legal ownership and does not create a new or separate legal
entity. If authorized by state law, legal entities can be a tenant in common with individuals.

1. There may be several individuals or entities in a tenancy in common, but the tenancy in
common is considered one (1) EPC.

2. The loan documents must be signed by all of the members of the tenancy in common, with
authorized individuals signing for the entity members.

Multiple OCs can be separately owned, however, multiple EPCs in one transaction are not
permitted.

1. Conditions that apply to all EPCs:

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The OC must be an eligible small business;

b. The proposed use of proceeds must be an eligible use as if the OC were obtaining the
financing directly;

c. The EPC (with the exception of a trust) and the OC each must be small under the
appropriate size standard of 13 CFR Part 121 (see paragraph 3 below);

d. The EPC must lease the project property directly to the OC;

1.

il.

iil.

iv.

Vi.

Vil.

The lease must be in writing;

The lease must be subordinate to the SBA’s mortgage, trust deed lien, or
security interest on the property;

The lease must have a term, including options to renew exercisable solely by
the OC, at least equal to the term of the loan;

The EPC (as landlord) must furnish as collateral for the loan an assignment of

all rents paid under the lease. An assignment of the lease is only required when
necessary to perfect the assignment of rents or to enable the Lender to exercise
the tenant’s rights upon default;

The rent or lease payments cannot exceed the amount necessary to make the
loan payment to the Lender, and an additional amount to cover the EPC’s
direct expenses of holding the property, such as routine maintenance, insurance
and property taxes.

The OC must lease 100% of the property from the EPC, but it can sublease a
portion of the property under the rules governing occupancy requirements with
which all SBA Applicants must comply.

If, in acquiring the property, the EPC becomes the beneficiary or owner of the
rights to an existing mineral lease on the property, the EPC must assign its
interest in the lease (together with its rights to all rental, mineral, royalty,
bonus, or similar lease payments that might accrue by virtue of the existing
mineral (oil and gas) lease) to the OC; and any such assignment must be
subordinated to all Deeds of Trust or Mortgages. In addition, the Lender must
take the following actions as applicable:

a) If subordination is not possible, the Lender must provide documentation to
that effect;

b) Ifthe mineral lease has been terminated, the Lender should attempt to have
it removed from the Title Policy;

c) Ifthe Lender is unable to have the mineral lease removed from the Title
Policy, the Lender must provide supporting documentation evidencing
the proper assignment of the lease to the OC and obtain a title
endorsement to protect SBA’s interest in the real property (i.e., California
Land Title Association (CLTA) 100.23 or 100.24).

viii. Non-delegated Lenders must submit a copy of the lease agreement between the

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EPC and OC in their request for loan guaranty to SBA. Delegated Lenders
must keep a copy of the executed lease in their loan file and must submit the
lease with any request to SBA to honor the guaranty.

e. An EPC (excluding a trust) may not engage in any business activity other than
leasing the property to the OC.

f. The OC must be a guarantor or a co-Borrower on the loan. The OC must be a co-
Borrower if it receives any loan proceeds as working capital and/or for the purchase
of other assets, including intangible assets, for the OC’s use.

i. | Each holder of an ownership interest constituting at least 20% of either the
EPC or the OC must guarantee the loan (if the holder is a trust, then the Trustee
shall execute the guarantee on behalf of the trust). Each spouse with an
ownership interest in the EPC or the OC must personally guarantee the loan in
full when the combined ownership interest of both spouses in the EPC or OC is
at least 20%. If a person has executed the Note as a Borrower in an individual
capacity, that person does not also have to execute a personal guaranty.

ii. | When deemed necessary for credit or other reasons, SBA or, for a loan
processed under a Lender’s delegated authority, the Lender, may require other
appropriate individuals or entities to provide full or limited guaranties of the
loan without regard to the percentage of their ownership interests, if any.

2. Conditions that apply when the EPC is owned in whole or in part by a trust.
The eligibility status of the Trustor will determine trust eligibility.
b. All donors to the trust will be deemed to have Trustor status for eligibility purposes.

c. The Trustee must warrant and certify that the trust will not be revoked or
substantially amended for the term of the loan without the prior written consent of
SBA.

d. The Trustor must guarantee the loan.

1. If an Employee Stock Ownership Plan trust agreement prohibits it from being a
guarantor or co-Borrower, then it cannot use the EPC form of borrowing.

ii. Beneficiaries that exercise any control over the actions of the trust also must
guarantee the loan.

e. The Trustee shall certify in writing to SBA that:
i. The Trustee has authority to act;

ii. The trust has authority to borrow funds, pledge trust assets, and lease the
property to the OC;

iii. The Trustee has provided accurate, pertinent language from the trust agreement
confirming the above; and

iv. The Trustee has provided and will continue to provide SBA with a true and
complete list of all trustors and donors.

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SOP 50 10 5(K) Subpart B

f. The trust itself does not have to be small by SBA size standards.
3. Size Determinations under the EPC rule.

a. Ifthe EPC and the OC are affiliated, the two companies are combined for
determining size.

i. If there is only one OC, use the OC’s NAICS code.

iil. Ifthere are multiple, unaffiliated OCs, use the NAICS code of the OC that
derives the most revenue. Note: Each OC must be small based on its own
NAICS code.

iii. Ifthe multiple OCs are affiliated, then use the rules detailed in 13 CFR
§121.107 for determining the primary industry of affiliated businesses. The
NAICS Code of the primary industry of the OC shall be the identifying NAICS
Code.

b. Ifthe EPC and the OC are not affiliated, each entity must be small under the size
requirement for its particular industry.

The existence of a lease between the EPC and the OC does not, in and of itself,
create an affiliation, even if the EPC and OC are co-Borrowers.

4. When sending data to SBA, use the same NAICS Code that was used to determine size for
the Applicant.

5. Submission of Financial Statements by the EPC and the OC:

a. Both the EPC and each OC must submit Financial Statements. The OC’s statements
are subject to tax verification.

b. The regular requirement for an Aging of receivables and payables is waived for
EPCs.

E. Special Requirements For Loans Where Collateral May Be Included In The National Register
Of Historic Places (Historic Properties).

Section 106 of the National Historic Preservation Act mandates Federal agencies undergo a
review process for all federally funded projects that potentially impact sites listed or eligible to
be listed on the National Register of Historic Places (“NRHP”). If a loan will in any way affect
such properties, the Lender (on delegated loans) and LGPC (on non-delegated loans) must
consult with local SBA counsel for further guidance. Local SBA counsel will then notify the
Associate General Counsel for Litigation or designee, and OFA.

If there is no potential to cause effect on historic properties, there are no further obligations
under Section 106. For example, if the proceeds of the loan are to be used solely to purchase the
property and no renovations or changes are anticipated, the SBA counsel may make the
determination that no further Section 106 review is required.

If the local SBA counsel determines that the undertaking is the type of activity that has the
potential to cause effects on historic properties, then SBA is required to consult with the
relevant State Historic Preservation Officer (“SHPO”) to determine if the use of the proceeds of
the loan will have an adverse effect on the historic nature of the property in question.

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If SBA finds no adverse effect and the SHPO agrees or does not object within 30 days, the
Agency can proceed with the approval of the loan. If, however, SBA finds that there will be an
adverse effect on the historic nature of the property, SBA must consult with SHPO to attempt to
resolve the issue. This consultation will result in Memorandum of Agreement between Agency
and SHPO regarding the resolution of the adverse effect.

Once local SBA counsel has made a no adverse effect determination or resolved any adverse
effect issues with the SHPO, the decision must be signed off by the Associate General Counsel
for Litigation or designee.

IV. ADDITIONAL ELIGIBILITY REQUIREMENTS FOR CERTAIN SBA 7(A) LOAN
DELIVERY METHODS

A. Export Express.

1.

Eligibility for Export Express is limited to businesses that meet SBA’s standard eligibility
requirements discussed above and that have been in operation, although not necessarily in
exporting, for at least 12 full months. However, Applicants that have been in operation for
less than 12 months are eligible if both of the following conditions are met:

a. The Applicant’s key personnel have clearly demonstrated export expertise and
substantial previous successful business experience; and

b. The Lender processes the Export Express loan using conventional commercial loan
underwriting procedures and does not rely solely on credit scoring or credit matrices
to approve the loan. Non-bank Lenders that do not have a conventional loan
portfolio must submit their underwriting procedures to the Office of Credit Risk
Management for written approval prior to making an Export Express loan.

Evidence of compliance with both of these requirements must be retained by the Lender in
its file.

Applicants with operations, facilities or offices overseas, other than those strictly associated
with the marketing and/or distribution of products/services exported from the U.S., are not
eligible for Export Express, although they may be eligible for other SBA 7(a) financial
assistance.

. Lender must maintain in its loan file information provided by the Applicant as it pertains to

the use of proceeds for export development activities and its projected impact on the
Applicant’s export sales along with an estimate of the Applicant’s export sales for the 12
month period following the date of the loan application. Required documentation is itemized
in Paragraph V.J.4 of this Chapter.

B. International Trade Loans.

The Applicant must demonstrate either 1 or 2, and 3 below in order to be eligible:

1.

The loan proceeds will expand existing export markets or develop new export markets. To
establish this, the Applicant must submit an export business plan, including both a
projection and narrative rationale that contains enough information to reasonably support
the likelihood of expanded export sales.

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Il. GUARANTIES AND COLLATERAL

A. Guaranties (13 CFR § 120.160(a)):
Each loan must be guaranteed by at least one individual or entity. If no one individual or entity
owns 20% or more of the Applicant business, at least one of the owners must provide a full
unconditional guaranty. In addition, if the guaranty will be provided by a trust, the requirements
of the paragraph II.A.3 below must be met.

1. Personal Guaranties:

a. Individuals who own 20% or more of an Applicant business must provide an
unlimited full guaranty. (SBA Form 148 or equivalent Lender’s form). If a person
has executed the Note as a Borrower in an individual capacity, that person does not
also have to execute a personal guaranty.

b. When ownership interest of an Applicant is held by a corporation, partnership or
other form of legal entity, the ownership interests of all individuals must be
disclosed.

c. When deemed necessary for credit or other reasons, SBA or, for a loan processed on
a delegated basis, the Lender, may require other appropriate individuals to provide
full or limited guaranties of the loan without regard to the percentage of their
ownership interests, if any. For example, an individual with a minority ownership or
no ownership interest in the Applicant or OC who is critical to the operation of the
business may be required to provide a personal guaranty.

d. Ifa limited guaranty is used, Lender must choose one of the payment limitation
options in SBA Form 148L (Unconditional Limited Guaranty) or equivalent
Lender’s form and specify the option in the Authorization.

e. Lender must obtain a personal financial statement from all individuals guaranteeing
the loan.

f. The guaranty may be secured or unsecured. If the loan is not fully collateralized by
fixed assets, available equity in personal real estate must be pledged to secure the
guaranty, up to the collateral shortfall as defined in section II.B.4.b of in this Chapter
below.

2. Guaranty of Spouse:

a. Each spouse owning less than 20% of an Applicant must personally guarantee the
loan in full when the combined ownership interest of both spouses is 20% or more.

b. For anon-owner spouse, Lender must require the signature of the spouse on the
appropriate collateral documents. The spouse's guaranty secured by jointly held
collateral will be limited to the spouse's interest in the collateral.

3. Corporate/Other Guaranties:

a. All entities that own 20% or more of an Applicant must provide an unlimited full
guaranty. If the entity that owns 20% or more of the Applicant is a trust (revocable
or irrevocable), the trust must guarantee the loan with the trustee executing the

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guaranty on behalf of the trust and providing the certifications required in Chapter 2,
Paragraph HI.D.2.c) and e) of this Subpart. In addition, if the trust is revocable, the
Trustor also must guarantee the loan.

Financial statements are necessary to determine the assets available to support the
guaranty.

When deemed necessary for credit or other reasons, SBA or, for a loan processed on
a delegated basis, the Lender, may require other appropriate entities to provide full
or limited guaranties of the loan without regard to the percentage of their ownership
interests, if any. This may include entities who manage the day-to-day operations of
the Applicant or OC through a Management Agreement without an ownership
interest in the Applicant or OC.

4. Reducing Ownership Interest:

a.

Any Person subject to the guaranty requirements 6 months prior to the date of the
loan application would continue to be subject to the requirements even if that Person
has changed their ownership interest to less than 20%.

The only exception to the 6-month rule is when that Person completely divests their
interest prior to the date of application. Complete divestiture includes divestiture of
all ownership interest and severance of any relationship with the Applicant (and any
associated Eligible Passive Company) in any capacity, including being an employee
(paid or unpaid).

5. Employee Stock Ownership Plans (ESOPs) and 401(k) Accounts:

When an ESOP or 401(k) owns 20% or more of an Applicant, the Plan or Account cannot
guarantee the loan. The Plan or Account must meet all applicable IRS, Treasury and
Department of Labor requirements. In addition, the following loan conditions must be met:

a.

The owner(s) of a 401(k) must provide his or her full unconditional personal
guaranty regardless of the individual ownership interest in the Applicant concern.
This guaranty must be a secured guaranty if required by SBA’s existing collateral
policies.

The members of the ESOP are not required to personally guarantee the debt;
however, all owners of the Applicant who hold an ownership interest outside the

ESOP are subject to SBA’s personal guaranty requirements, including paragraph
II.A.1.c) above.

The application cannot be structured as an EPC/OC. (13 CFR § 120.111(a)(6)) (SBA
regulations require each 20% or more owner of the EPC and each 20% or more
owner of the OC to guarantee the loan, and the regulation does not provide for an
exception.)

B. General Collateral Requirements:

1. With respect to collateral, Lenders must use commercially reasonable and prudent practices
to identify collateral, which conforms to procedures at least as thorough as those used for
their similarly-sized non-SBA guaranteed commercial loans. Decisions regarding what

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collateral must be taken to secure a loan are based on the circumstances of the individual
loan, including size, and must meet the minimum requirements set forth in this section.

2. Adequacy of Collateral

a. A loan request is not to be declined solely on the basis of inadequate collateral. In
fact, one of the primary reasons Lenders use the SBA-guaranteed program is for
those Applicants that demonstrate repayment ability but lack adequate collateral to
repay the loan in full in the event of default. However, SBA does not permit its
guaranty to be a substitute for available collateral.

b. When assessing the adequacy of collateral, the Lender must consider the impact that
covenants and other restrictions recorded against the collateral may have on its value
and marketability. (See Chapter 2, Paragraph II.D.8 of this Subpart for guidance on
covenants and other restrictions recorded against the collateral when the Applicant is
operating under a franchise agreement.) The Lender must document this analysis in
the file. Examples of items to review include:

i. Deed restrictions, covenants, easement provisions, reversionary interests,
subordinations, leases and options, and other provisions that restrict the use of
the property for the benefit of a third party (note: certain deed restrictions
pertaining to the use of the property, which are intended to protect the health
and safety of occupants, may be acceptable, e.g., deed restrictions based upon
environmental concerns including restrictions on residential use, use as a day
care center for children or seniors, use as a school, or use as a hospital); and

ii. Engineering Controls that require the Applicant or subsequent owners to install
costly devices or structures such as extraction wells or subsurface barrier walls
prior to constructing a building, remodeling, or otherwise improving the

property.
3. Collateral Requirements for 7(a) Small Loans.

a. For loans of $25,000 or less, the Lender is not required to take collateral. (personal
guaranties must still be obtained in accordance with paragraph A above); and

b. For loans over $25,000, up to and including $350,000, the Lender must follow the
collateral policies and procedures that it has established and implemented for its
similarly-sized non-SBA guaranteed commercial loans, but ata minimum:

i. Lender must take a first lien on assets financed with loan proceeds;

ii. | Lender must take a lien on all of the Applicant’s fixed assets, including real
estate, up to the point that the loan is fully secured, based on the collateral
valuations used in paragraph 4.a) below. Lender is not required to take a lien
against Applicant’s real estate when the equity is less than 25% of the fair
market value. The Lender may limit the lien taken against real estate to the
amount necessary to ensure the loan is fully secured; and

iii. Lender may secure Applicant’s trading assets if it does so for its similarly-
sized non-SBA guaranteed commercial loans. Lender may also take
personally-owned investment and/or residential real estate as collateral, and

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may limit the liens on that collateral in accordance with the provisions in
paragraph 4.b) below.

4. Collateral Requirements for 7(a) loans over $350,000 and 7(a) Small Loans that do not meet
the minimum credit score requirements (except SBA Express, Export Express, CAPLine
and EWCP):

a.

SBA considers a loan as “fully-secured” if the Lender has taken security interests in
all available fixed assets of the Applicant with a combined “net book value” as
adjusted below, up to the loan amount. For 7(a) loans, the term “fixed assets” means
real estate, including land and structures, machinery and equipment owned by the
business or an EPC. “Net book value” is defined as an asset's original price minus
depreciation and amortization.

i. | Newmachinery and equipment (excluding furniture and fixtures) may be
valued at 75% of price minus any prior liens for the calculation of “fully-
secured”;

ii. Used or existing machinery and equipment (excluding furniture & fixtures)
may be valued at 50% of Net Book Value or 80% with an Orderly Liquidation
Appraisal minus any prior liens for the calculation of “fully-secured”;

iii. Improved real estate can be valued at 85% and unimproved real estate can be
valued at 50% of the market value for the calculation of “fully-secured” and
the value must be determined in accordance with the requirements set forth in
Paragraph IV (Real Estate Appraisals) below; and

iv. Furniture and Fixtures may be valued at 10% of Net Book Value or appraised
value.

If there is a collateral shortfall (not “fully-secured”) on the SBA-guaranteed loan the
Lender:

i. | Must take available equity in the personal real estate (residential and
investment property) of the principals. Liens on personal real estate may be
limited to the amount of the collateral shortfall. In addition, liens on personal
real estate may be limited to 150% of the equity in the collateral, if there are
tax implications associated with the lien amount in the particular state where
the lien is filed.

ii. May include trading assets as necessary (using 10% of current book value for
the calculation).

For loans that are more than $250,000 and collateralized by commercial real estate,
Lenders must comply with the real estate appraisal requirements set forth in
Paragraph IV below.

SBA does not require a Lender to collateralize a loan with real estate (including
commercial, residential and investment properties owned by the Applicant or
personally by the owners) to meet the “fully secured” definition when the equity in
the real estate is less than 25% of the property’s fair market value. The Lender must
document in their loan file the source (other than the personal financial statement)

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for making the determination of less than 25% equity.

When loan proceeds from any 7(a) loan will be used to purchase or improve assets, a
first security interest in those assets must be obtained.

Assets owned by an owner of the Applicant and Spouse:

i. | When an individual alone or together with his or her spouse owns 20% or more
of the Applicant, the Lender must consider taking as collateral a lien on
personal real estate (including commercial and investment properties not
occupied by the Applicant business) that is owned individually by the
Applicant owner, or jointly owned by the individual and his or her spouse.

ii. 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.

5. When loan proceeds from any 7(a) loan will be used to refinance existing debt, the loan
must be secured with at least the same collateral and lien priority as the debt that is being
refinanced. When the debt being refinanced is considered as being over collateralized based
upon SBA collateral requirements and the SBA loan will remain fully secured, the Lender
may approve the release of excess collateral. Substitute collateral may be offered providing
it is of comparable value and useful life and is determined to be acceptable by SBA or
Lender under their delegated authority.

C. CAPLine Collateral Requirements:

The CAPLine programs listed below have specific collateral requirements as follows:
1. For Working Capital CAPLines:
a. Ifthe Lender will disburse the line based on a BBC, the Lender must obtain a first

lien on the Applicant’s working/trading assets (i.e., accounts receivable, inventory).

If the Lender will not use a BBC to disburse the line, the Lender must assume full
utilization of the revolving line of credit and secure the line with sufficient collateral
to ensure there is a 1:1 collateral ratio. Lender must obtain a first lien position on the
working/trading assets (accounts receivable and inventory) financed with the line. If
the working/trading assets are insufficient to provide a 1:1 collateral ratio, the
Lender also must take additional collateral to ensure there is a 1:1 collateral ratio. If
business assets do not fully secure the loan, the Lender must take available equity in
personal real estate owned by the principals as collateral to ensure there is a 1:1
collateral ratio. (See Chapter 7 of this Subpart for further guidance.)

2. For Builders CAPLines:

a.

SBA will accept no less than a second lien position on the property being
constructed or renovated if the purpose of the first lien was to acquire the property.

b. Ifthe property is part of a subdivision where the prime Lender for the subdivision

holds a first lien OR serves as partial collateral for a loan secured by more than one
parcel of real estate, the first lienholder must provide a “release clause” for transfer
of clear title to any eventual buyer of individual parcels upon receipt of a pre-

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established payment.

c. Lenders must not take a second lien position if the first lienholder requires that the
entire loan be paid in full before any property is released. Where Lender/SBA is ina
second position, the total amount necessary to release the first and second liens may
not exceed 80% of the fair market value (selling price) of the completed project.

3. For Contract CAPLines:

a. Applicants must be able to provide the Lender with a first lien position on the
contract(s) and the proceeds of the contract(s) financed with the line, by assignment
to the participating Lender and proper UCC filing. See Chapter 7 of this Subpart for
guidance on exceptions to when an assignment is required.

b. The Lender may take additional collateral in accordance with its policies and
procedures governing its similarly-sized, non-SBA guaranteed commercial lines of
credit.

c. All liens must be perfected and the lien position verified prior to the initial
disbursement of the line. For seasonal, contract or builder lines that revolve for more
than one season, contract or construction/renovation project, liens must be perfected
prior to the initial disbursement for each season, contract or project.

d. The requirements for personal guaranties are the same as for any other 7(a) program.
D. SBA Express and Export Express Collateral Requirements:
Lenders must use commercially reasonable and prudent practices to identify collateral items.
1. For loans of $25,000 or less, Lenders are not required to take collateral.

2. For loans over $25,000, the Lender must, to the maximum extent practicable, follow the
written collateral policies and procedures that it has established and implemented for its
similarly-sized, non-SBA guaranteed commercial loans, except for Export Express lines of
credit over $25,000 used to support the issuance of a standby letter of credit. The line of
credit must have collateral (cash, cash equivalent or project) that will provide coverage for
at least 25% of the issued standby letter of credit amount.

E. EWCP Collateral Requirements:

1. EWCP loans must be secured by no less than a first security interest in all collateral
associated with the transactions financed. This includes at least the export inventory and
receivables, assignment of credit insurance, letters of credit proceeds, and contract proceeds
as applicable. Collateral must be located in the United States, its territories or possessions.
An assignment of contract proceeds for an EWCP Asset Based Line of Credit may be
required at the discretion of the LGPC for non-delegated loans, or the PLP-EWCP Lender
for EWCP loans processed under delegated authority.

In general, the export-related inventory produced and the foreign accounts receivables
generated by the export sales financed will be considered to provide adequate collateral
coverage. SBA, for non-delegated loans, or the PLP-EWCP Lender, may require additional
collateral by requiring a lien on other business assets.

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2. Standby Letters of Credit: SBA requires additional collateral if EWCP loan proceeds are

used to support the issuance of a standby letter of credit. In such situations, the Applicant
must deposit cash into an account held by the Lender in an amount equal to 25% of the
standby letter of credit being issued. This deposit must remain in the account held by the
Lender for the term of the standby letter of credit. SBA, for non-delegated loans, or the
PLP-EWCP Lender may allow export inventory and/or foreign accounts receivable or other
acceptable collateral to replace the cash deposit requirement. However, if using an asset-
based loan (ABL) facility, the Lender must determine that the borrowing base for the ABL
will support at least 25% of the total of all standby letters of credit supported by the loan. In
addition, EWCP Authorization Boilerplate contains specific provisions related to standby
letters of credit. All Lenders must document the justification in their file.

. Receivables generated from sales to foreign purchasers are not considered a foreign asset

and may be taken as collateral.

Personal guaranties of all 20% or more owners is generally required, but may be waived by
the Director, International Trade Finance (D/ITF).

F. International Trade (IT) Loan Collateral Requirements:

The Lender is required to take a first lien on the assets financed with IT loan proceeds or
other assets of the Applicant. An IT loan can be secured by a second lien position on the
property or equipment financed by the IT loan or on other assets of the Applicant, if the
SBA determines that the second lien provides adequate assurance of repayment of the loan.

For example, when the IT loan is to improve business real estate (such as financing an
addition to an existing building) or to purchase equipment, and the collateral securing the IT
loan is subject to a first lien securing an existing loan used to acquire the business real estate
or equipment, the IT loan may be in a second lien position if:

a. The loan in the first lien position was not made at or about the same time as the IT
loan (“piggyback financing”), and

b. The Lender’s analysis identifies how the risk of a second lien position on the IT loan
is offset by other factors, such as other collateral has been taken to secure the IT loan
that in liquidation would pay the IT loan in full or the business has been operating
profitably and repaying its existing obligations in a timely manner and the
Borrower’s cash flow is sufficient to repay all of the Borrower’s debt, including the
IT loan.

c. Clear justification must exist when the interest rate for the first lien loan is
significantly higher than the IT loan and/or the maturity of the first lien loan is
significantly shorter than the IT loan. (See discussion in Subpart A, Chapter 1,
Paragraph II.E.2.b) vi of this SOP regarding “piggyback financing,” which is not
eligible.)

2. IT loans may not be processed under a Lender’s PLP authority when the IT loan will not

have a first lien on the assets being financed.

G. Collateral Insurance: (13 CFR § 120.160(c))

1.

Hazard Insurance — SBA requires hazard insurance on all assets pledged as collateral. The

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Applicant must also maintain a separate policy if the business is located in a state that
requires additional coverage such as wind, hail, earthquake, etc.

2. Real Estate:
a. Coverage must be in the amount of the full replacement cost.

b. If full replacement cost insurance is not available, coverage must be for the
maximum insurable value.

c. Insurance coverage must containa MORTGAGEE CLAUSE (or substantial
equivalent) in favor of the Lender. This clause must provide that any action or
failure to act by the mortgagor or owner of the insured property will not invalidate
the interest of Lender. The policy or endorsements must provide for at least 10 days
prior written notice to Lender of policy cancellation.

3. Personal Property
a. Coverage must be in the amount of full replacement cost.

b. If full replacement cost insurance is not available, coverage must be for maximum
insurable value.

c. Insurance coverage must contain a LENDER'S LOSS PAYABLE CLAUSE (or
substantial equivalent) in favor of Lender. This clause must provide that any action
or failure to act by the debtor or owner of the insured property will not invalidate the
interest of Lender. The policy or endorsements must provide for at least 10 days
prior written notice to Lender of policy cancellation.

4. SBA Express and Export Express: If the Lender does not require hazard insurance (for
example, if it would impose an undue burden on an Applicant given the small size of a
loan), the Lender must document the reason in its loan file.

5. Marine Insurance:

a. Coverage in the amount of the full insurable value on the vessel(s) with Lender
designated as "Mortgagee" must be obtained when the vessel is the collateral on the
loan.

b. The policy must contain a Mortgagee clause providing that the interest of Lender
will not be invalidated by any:

i. | Act, omission, or negligence of the mortgagor, owner, master, agent or crew of
the insured vessel;

ii. Failure to comply with any warranty or condition out of mortgagee’s control;
or

iii. Change in title, ownership or management of the vessel.

c. The policy must include Protection and Indemnity, Breach of Warranty, and
Pollution coverage.

d. The policy or endorsements must provide for at least 10 days prior written notice to
Lender of policy cancellation.

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6. Flood Insurance:

a.

SBA flood insurance requirements are based on the Standard Flood Hazard
Determination (FEMA Form 086-0-32). The mandatory purchase of flood insurance,
as set forth by the requirements of the National Flood Insurance Program (NFIP),
applies with equal force to condominium and cooperative units. Policies for such
units will consist of separate policies obtained by the individual unit owner for the
particular unit and the condominium or cooperative association for the exterior of the
entire building.

If any portion of a building that is collateral for the loan is located in a special flood
hazard area, Lender must require Applicant to obtain flood insurance for the building
under the NFIP.

If any equipment, fixtures or inventory that is collateral for the loan (“Personal
Property Collateral’’) is in a building any portion of which is located in a special
flood hazard area and that building is collateral for the loan, Lender must require
Applicant to also obtain flood insurance for the Personal Property Collateral under
the NFIP.

If any Personal Property Collateral is in a building any portion of which is located in
a special flood hazard area and that building is not collateral for the loan, Lender
must require Applicant to obtain available flood insurance for the Personal Property
Collateral. The Lender may waive this requirement when the building is not
collateral for the loan if it:

i. | Uses prudent lending standards to determine that flood insurance is not
economically feasible or not available; and

ii. Includes a written justification in the loan file that fully explains why flood
insurance is not economically feasible or, if flood insurance is not available,
the steps taken to determine that it is not available.

Insurance coverage must be at least equal to the outstanding principal balance of the
loan or the maximum limit of coverage made available under the National Flood
Insurance Act of 1968, as amended (42 U.S.C. 4001 et seq.), whichever is less.
(“Maximum limit of coverage available” is the lesser of the maximum limit available
under the NFIP for the type of structure or the insurable value of the structure.)

Insurance coverage must contain a MORTGAGEE CLAUSE/LENDER'S LOSS
PAYABLE CLAUSE (or substantial equivalent) in favor of Lender. This clause
must provide that any action or failure to act by the debtor or owner of the insured
property will not invalidate the interest of Lender. The policy or endorsements must
provide for at least 10 days prior written notice to Lender of policy cancellation.

7. Life Insurance:

a.

b.

For loans processed under standard 7(a) over $350,000 or 7(a) Small Loans that do
not meet the minimum acceptable credit score, Lenders may follow their internal
policy for similarly sized non-SBA guaranteed commercial loans, except:

If the loan is not fully secured, life insurance is required for the principals of sole

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proprietorships, single member LLCs, or for businesses otherwise dependent on one
owner’s active participation, consistent with the size and term of the loan. The
amount and type of collateral available to repay the loan may be factored into the
determination of the appropriate amount of life insurance. If Lender determines that
the principal is uninsurable, Lender must obtain written documentation from a
licensed insurer of the same.

c. For 7(a) Small Loans, SBA Express and Export Express loans, Lenders may follow
their internal written policy for their similarly-sized, non-SBA guaranteed
commercial loans.

Il. ASSIGNMENT OF LEASE AND LANDLORD’S WAIVER

A. When a substantial portion of the loan proceeds are to be used for leasehold improvements or a
substantial portion of the collateral consists of leasehold improvements, fixtures, machinery, or
equipment that is attached to leased real estate, the Lender should obtain an Assignment of
Lease with:

1. A term including renewal options that equals or exceeds the term of the loan; and

2. A requirement that the lessor provide a 60-day written notice of default to the Lender with
option to cure the default; and

3. A Landlord’s Waiver. The Landlord's Waiver gives the Lender access to the leased premises
and facilitates the liquidation of the collateral on the Borrower's premises and should be
obtained for all SBA loans with tangible personal property as collateral.

B. Ifthe loan proceeds will finance existing or new improvements on a leasehold interest in land,
the underlying ground lease must include, at a minimum, detailed clauses addressing the
following:

1. Tenant's right to encumber leasehold estate;
2. No modification or cancellation of lease without Lender's or assignee's approval;
3. Lender's or assignee's right to:

a. Acquire the leasehold at foreclosure sale or by assignment and right to reassign the
leasehold estate (along with right to exercise any options) by Lender or successors;
lessor may not unreasonably withhold, condition or delay the reassignment;

b. Sublease;

Share in hazard insurance proceeds resulting from damage to improvements;
d. Share in condemnation proceeds; and
e. Lender’s or assignee’s rights upon default of the tenant or termination.

C. For lease requirements concerning EPCs and OCs, see Chapter 2, Paragraph III.D of this
Subpart.

D. For loans collateralized by Indian lands held in trust, if the owner of the land cannot get
approval for a lien on the property, you may consider requiring an Assignment of Lease. The

Effective April 1, 2019 Page 200


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