Guidance on Underwriting 504 Loans during the COVID-19 Pandemic

Summary

SBA Procedural Notice 5000-20040, effective July 28, 2020, to Certified Development Companies, on underwriting 504 loans during the COVID-19 pandemic. Citing the March 13, 2020 emergency declaration and SBA's standard operating procedure, it recommends additional analysis for a CDC's credit memorandum, in effect through December 31, 2020, to show prudent underwriting; cash flow is the primary source of repayment and a request must be declined if cash flow gives no reasonable assurance of repayment regardless of collateral. The numbered points cover other loans such as PPP or EIDL and their deferment or forgiveness status, industry and revenue impact, stay-at-home orders, customer and supplier concentration, pro forma monthly cash flows for up to 2 years, collateral adequacy, and whether loans funded by September 2020 should be conditioned on a COVID-19 agreement.

Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used

Full text

Text of the PDF file SBA published for this document, recaptured from legacy.sba.gov.

                        SBA Procedural Notice

TO:           All SBA Employees and Certified                                       CONTROL NO.: 5000-20040
              Development Companies

SUBJECT: Guidance on Underwriting 504 Loans                                         EFFECTIVE: July 28, 2020
         during the COVID-19 Pandemic




On March 13, 2020, President Trump declared the ongoing Coronavirus Disease 2019
(COVID-19) pandemic of sufficient severity and magnitude to warrant an emergency declaration
for all States, Territories, and the District of Columbia. SOP 50 10 5(K), Subpart C, Ch. 1, II.A.
states that CDCs must analyze each application in a commercially reasonable manner consistent
with prudent lending standards. SBA recognizes that prudent underwriting during the COVID-19
emergency includes taking into consideration the current and future effects the emergency has on
business operations, cash flow and repayment ability of 504 applicants.

This Notice provides additional analysis that SBA recommends that the CDC should conduct and
include in its credit memorandum as a best practice during the COVID-19 emergency in order to
evidence that the CDC has performed prudent underwriting and provided an adequate financial
analysis of the Applicant’s ability to repay the loan. SLPC may request additional information to
facilitate the proper loan decision if sufficient information is not provided when the application is
submitted. This guidance is in effect through December 31, 2020.

For 504 loans, the cash flow of the Applicant is the primary source of repayment. If the CDC’s
financial analysis demonstrates that the Applicant lacks reasonable assurance of repayment in a
timely manner from the cash flow of the business, the loan request must be declined, regardless
of the collateral available. During the COVID-19 emergency, the CDC’s financial analysis of the
Applicant and credit memorandum should consider the following:

1)     Does the eligible small business concern (SBC) have any other loan(s) (PPP, EIDL, or
       other stimulus financing, etc.) that have repayment or contingent repayment requirements
       that could impact cash flow? If yes:
           a. What is the loan’s status (on deferment, past due, for PPP loans forgiveness
              application in process etc.)?
           b. What is the cash flow during and after any payment deferment period?
           c. What will the cash flow be if the loan is fully, partially or not forgiven?
PAGE 1 of 2                                                                                 EXPIRES: 7-1-21
SBA Form 1353.3 (4-93) MS Word Edition; previous editions obsolete
Must be accompanied by SBA Form 58

                                    Federal Recycling Program   Printed on Recycled Paper
            d. What lien position will the new 504 loan have?
2)      Based on the sector and industry in which the SBC operates, how is the industry and the
        business impacted by the COVID-19 emergency? Have SBC’s business revenue and
        staffing levels have been impacted, and has the applicant provided a plan to return to
        normal operations.
3)      If the SBC is in a state with a stay-at-home order, when is the order scheduled to be lifted,
        and how has the order affected the SBC’s ability to operate (social distancing, traffic
        flow, trade restrictions, inventory and equipment needs)?
4)      How concentrated or diversified is the customer base. How reliant is the SBC on sales to
        or receivables from customers in those concentrations?
5)      How concentrated or diversified is the SBC’s vendor/supplier pool, and which, if any
        vendors/suppliers have decreased ability to support the business?
6)      If using historical financial data, an explanation of why the data is a reliable indicator of
        the Applicant’s ability to meet all business obligations, including the proposed loan’s
        debt payments, in light of the current economic impact of COVID-19, or provide pro
        forma monthly cash flow statements for up to 2 years (based on phased reopening) with a
        break-even analysis.
7)      Discussion of the impact current market conditions have on collateral adequacy.
8)      For 504 loans that will be approved after this notice and funded by September 2020 (with
        the Central Servicing Agent cutoff date of August 27, 2020), the CDCs need to consider
        whether loan approval should be conditioned on the execution of a COVID-19
        agreement. If so, this should be included in the loan authorization and the COVID-19
        agreement must be provided with the closing package.
Additional Considerations
•       Feasibility and Other Studies – SBA encourages SBC’s to obtain or update these as
        necessary when they are appropriate. Size and scope of the Project would be the driving
        factor.
•       Appraisal – SBA recognizes the impact of COVID-19 on appraisals can differ by region
        and industry. SLPC will use its discretion to advise if a submitted appraisal is acceptable,
        making reasonable decisions in favor of the SBC when appropriate.
Questions
Questions concerning this Notice may be directed to 504Questions@sba.gov




Dianna L. Seaborn
Director
Office of Financial Assistance


PAGE 2 of 2                                                                                 EXPIRES: 7-1-21
SBA Form 1353.3 (4-93) MS Word Edition; previous editions obsolete
Must be accompanied by SBA Form 58

                                    Federal Recycling Program   Printed on Recycled Paper

File and source

File: document-procedural-notice-5000-20040-guidance-underwriting-504-loans-during-covid-19-pandemic.html
Size: 3,016 bytes
SHA-256: a81384df58dd573834c9c1b4699416e3287fbee9ada2879762bd7e530989531b
Our copy: document-procedural-notice-5000-20040-guidance-underwriting-504-loans-during-covid-19-pandemic.html
Original: www.sba.gov