SBA Procedural Notice: Second Extension of Guidance on Underwriting 504 Loans during the COVID-19 Pandemic
Summary
SBA Procedural Notice, effective March 31, 2021, to SBA employees and certified development companies, a second extension of guidance on underwriting 504 loans during the COVID-19 pandemic. It recalls that on July 28, 2020 SBA issued Procedural Notice 5000-20040 on the additional credit analysis a CDC should conduct and include in its credit memorandum during the COVID-19 emergency to evidence prudent underwriting and an adequate analysis of the applicant's ability to repay. The notice extends that guidance.
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Full text
SBA Procedural Notice
TO: All SBA Employees and Certified CONTROL NO.: 5000- 808433
Development Companies
SUBJECT: Second Extension of Guidance on EFFECTIVE: March 31, 2021
Underwriting 504 Loans during the
COVID-19 Pandemic
On July 28, 2020, SBA issued SBA Procedural Notice 5000-20040 to provide guidance on the
additional credit analysis that a CDC should conduct and include in its credit memorandum
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. The guidance provided in SBA Procedural Notice 5000-20040 was in effect through
December 31, 2020 and was extended through March 31, 2021 by Procedural Notice 5000-
20070. Given the continuing adverse economic effects of the COVID-19 emergency, the purpose
of this Notice is to extend again the underwriting guidance through June 30, 2021, as described
and updated below.
SOP 50 10 6, Part 2, Section C, Ch 1, paragraph E. 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 should include
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 the 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 has 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. The guidance provided below is in effect through
June 30, 2021.
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. The CDC may consider the payments that SBA will make under
PAGE 1 of 3 EXPIRES: 3/1/22
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
Section 1112 of the Coronavirus Aid, Relief, and Economic Security Act on a new 504 loan
(adjusted to 3 months of payments due to insufficiency of funds) as part of the CDC’s
comprehensive review to determine the ability of the applicant to repay over the entire period of
maturity of the loan.
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) (First Draw
Paycheck Protection Program (PPP) Loan, Second Draw PPP Loan, 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 (e.g., current, on deferment, past due or, for PPP loans
forgiveness application in process, etc.)?
b. Include in the cashflow analysis the impact of any PPP loan (i) during and after
any payment deferment period, and (ii) considering whether the loan is fully,
partially or not forgiven.
c. Include in the cashflow analysis the impact of any EIDL or other stimulus loan
during and after any deferment.
d. Confirm the appropriate lien position for the new 504 loan.
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? Did the SBC obtain a Second Draw PPP Loan (which requires a 25%
reduction in gross receipts), and if so, is this reduction reflected on the SBC’s financial
statements?
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.
PAGE 2 of 3 EXPIRES: 3/1/22
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
Additional Considerations
• Feasibility and Other Studies – SBA encourages SBC’s to obtain or update these studies
as necessary when appropriate. Size and scope of the Project would be the driving factor.
• Appraisal – SBA recognizes that 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.
• Adverse Change after Loan Approval and Prior to Debenture Sale – If the CDC
determines, after loan approval and prior to funding, that the COVID-19 emergency is the
immediate and direct cause of a substantial adverse change in the Borrower’s ability to
repay the Project financing, the “COVID-19 Substantial Adverse Change Remedy
Certification and Agreement (Rev May 2020)” will continue to be available for the
debenture sales in April, May, and June 2021. See, SBA Procedural Notice 5000-20098,
Additional Guidance on 504 Certifications of No Adverse Change for April through June
2021 Debenture Sales during the COVID-19 Emergency and Reminder About Catch-up
Plans.
Questions
Questions concerning this Notice may be directed to 504Questions@sba.gov.
Dianna L. Seaborn
Director
Office of Financial Assistance
PAGE 3 of 3 EXPIRES: 3/1/22
SBA Form 1353.3 (4-93) MS Word Edition; previous editions obsolete
Must be accompanied by SBA Form 58
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