SBA Procedural Notice: Guidance on Underwriting 504 Loans during the COVID-19 Pandemic
Summary
SBA Procedural Notice, Control No. 5000-20040, effective July 28, 2020, to SBA employees and certified development companies, giving guidance on underwriting 504 loans during the COVID-19 pandemic. It recalls the emergency declaration of March 13, 2020. It cites SOP 50 10 5(K), Subpart C, Ch. 1, II.A., which states that CDCs must analyze each application in a commercially reasonable manner consistent with prudent lending standards, and addresses what prudent underwriting requires during the pandemic.
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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
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