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SOP 50 10 5(D)
Lender and Development Company
Loan Programs
U.S. Small Business Administration
Office of Financial Assistance
SOP 50 10 5(D)
TABLE OF CONTENTS
SUBPART A................................................................................................................................... 5
PURPOSE OF THIS SUBPART ............................................................................................. 5
Chapter 1: 7(a) Lenders .............................................................................................................. 5
THE 7(A) LOAN PROGRAM ............................................................................................... 5
BECOMING A 7(A) LENDER .............................................................................................. 5
HOW SBA OVERSEES 7(A) LENDERS ........................................................................... 14
TYPES OF 7(A) LENDERS WITH DELEGATED AUTHORITY .................................... 18
CHAPTER 2: SMALL BUSINESS LENDING COMPANIES ............................................... 47
A SMALL BUSINESS LENDING COMPANY ................................................................. 47
PROCESS FOR ACQUIRING AN SBLC ........................................................................... 47
CHAPTER 3: CERTIFIED DEVELOPMENT COMPANIES ................................................ 49
SUBPART B ................................................................................................................................. 80
PURPOSE OF THIS SUBPART ........................................................................................... 80
CHAPTER 1: GENERAL DESCRIPTION OF THE 7(a) LOAN PROGRAMS .................... 80
VARIOUS DELIVERY METHODS ................................................................................... 80
USE OF LOAN PROCEEDS ............................................................................................... 80
SUMMARY OF DELIVERY METHODS AND PILOT LOAN PROGRAMS ................. 81
VARIOUS SPECIALIZED PROGRAMS ........................................................................... 85
SPECIAL PURPOSE LOANS ............................................................................................. 88
DEFINITIONS APPLICABLE TO THE 7(A) LOAN PROGRAMS .................................. 89
CHAPTER 2: ELIGIBILITY FOR 7(A) GUARANTY LOAN PROGRAM .......................... 90
INTRODUCTION ................................................................................................................ 90
SUMMARY OF ELIGIBLITY REQUIREMENTS ............................................................. 90
ELIGIBILITY REQUIREMENTS ....................................................................................... 91
ELIGIBLE USES OF LOAN PROCEEDS ........................................................................ 130
CHAPTER 3: LOAN TERMS AND CONDITIONS ............................................................. 144
MAXIMUM LOAN AMOUNTS ....................................................................................... 144
MAXIMUM GUARANTY AMOUNTS ............................................................................ 147
LOAN MATURITIES ........................................................................................................ 149
INTEREST RATES ............................................................................................................ 153
SBA GUARANTY FEES ................................................................................................... 160
OTHER FEES ..................................................................................................................... 166
PROHIBITED FEES .......................................................................................................... 171
DISCLOSURE OF FEES AND LENDER EXPENSES .................................................... 171
AGENTS ............................................................................................................................. 173
WHO MAY CONDUCT BUSINESS WITH SBA ............................................................ 175
CHAPTER 4: CREDIT STANDARDS, COLLATERAL AND ENVIRONMENTAL
POLICIES ............................................................................................................................... 178
CREDITWORTHINESS/CREDIT UNDERWRITING ..................................................... 178
COLLATERAL .................................................................................................................. 184
ENVIRONMENTAL POLICIES AND PROCEDURES ................................................... 195
CHAPTER 5: LOAN AUTHORIZATION ............................................................................ 202
BASIC LOAN CONDITIONS ........................................................................................... 202
INSURANCE REQUIREMENTS ...................................................................................... 203
2 Effective Date: October 1, 2011
SOP 50 10 5(C)
IRS TAX TRANSCRIPT/VERIFICATION OF FINANCIAL INFORMATION ............. 205
STANDBY AGREEMENTS .............................................................................................. 207
ASSIGNMENT OF LEASE AND LANDLORD’S WAIVER .......................................... 208
CONSTRUCTION LOAN PROVISIONS ......................................................................... 208
SPECIAL PROVISIONS FOR FRANCHISES ................................................................. 210
CERTIFICATION REGARDING CHILD SUPPORT ...................................................... 210
SPECIAL PROVISION FOR CAPLINES ......................................................................... 211
MODIFYING THE AUTHORIZATION ........................................................................... 211
CHAPTER 6: SUBMISSION OF APPLICATION FOR GUARANTY ............................... 212
CONTENTS OF LENDER’S APPLICATION FOR GUARANTY .................................. 212
WHERE TO SUBMIT APPLICATION FOR GUARANTY ............................................ 220
CHAPTER 7: POST-APPROVAL MODIFICATIONS, LOAN CLOSING &
DISBURSEMENT .................................................................................................................. 224
POST APPROVAL/PRE-DISBURSEMENT REQUESTS FOR CHANGES .................. 224
TRANSFER OF GUARANTY BETWEEN PARTICIPATING LENDERS .................... 225
PAYMENT OF GUARANTY FEE.................................................................................... 225
LOAN CLOSING AND DISBURSEMENT ...................................................................... 225
CHAPTER 8: POST-DISBURSEMENT, SECONDARY MARKET, SECURITIZATION
AND LENDER REPORTING (SBA FORM 1502) ............................................................... 248
POST-DISBURSEMENT CHANGES ............................................................................... 248
SECONDARY MARKET FOR SBA GUARANTEED LOANS ...................................... 248
SECURITIZATION AND OTHER CONVEYANCES ..................................................... 248
LENDER REPORTING ..................................................................................................... 249
SUBPART C ............................................................................................................................... 257
PURPOSE OF THIS SUBPART ......................................................................................... 257
CHAPTER 1: GENERAL PROVISIONS .............................................................................. 257
PURPOSE OF THE 504 CERTIFIED DEVELOPMENT COMPANY LOAN PROGRAM
............................................................................................................................................. 257
CREDIT STANDARDS ..................................................................................................... 257
Definitions........................................................................................................................... 258
HOW A 504 PROJECT IS FINANCED ............................................................................ 259
CHAPTER 2: ELIGIBILITY .................................................................................................. 265
INTRODUCTION .............................................................................................................. 265
SUMMARY OF ELIGIBLITY REQUIREMENTS ........................................................... 265
ELIGIBILITY REQUIREMENTS ..................................................................................... 266
CHAPTER 3: COLLATERAL, APPRAISALS AND ENVIRONMENTAL POLICIES ..... 310
COLLATERAL .................................................................................................................. 310
APPRAISAL REQUIREMENTS ....................................................................................... 312
ENVIRONMENTAL POLICIES AND PROCEDURES ................................................... 314
CHAPTER 4: LOAN APPLICATION PROCEDURES AND CONTROLS ........................ 322
CDC’S 504 APPLICATION............................................................................................... 322
MINIMUM DEBENTURE AMOUNT .............................................................................. 322
SUBMITTING THE APPLICATION ................................................................................ 322
CHAPTER 5: LOAN CONDITIONS/AUTHORIZATION REQUIREMENTS ................... 325
AUTHORIZATION BOILERPLATE/WIZARD ............................................................... 325
MODIFYING THE AUTHORIZATION ........................................................................... 333
Effective Date: October 1, 2011 3
SOP 50 10 5(D)
CHAPTER 6: CLOSINGS ...................................................................................................... 334
RESPONSIBILITY FOR CLOSING THE 504 LOAN AND DEBENTURE ................... 334
THE CLOSING PACKAGE............................................................................................... 334
SPECIFIC RESPONSIBILITIES AND PROCEDURES FOR CLOSING AND POST-
CLOSING ACTIVITIES .................................................................................................... 335
USE OF CONSTRUCTION ESCROW ACCOUNT ......................................................... 337
CHAPTER 7: DEBENTURE PRICING & FUNDING ......................................................... 339
PRICING A 504 DEBENTURE ......................................................................................... 339
FUNDING THE DEBENTURE ......................................................................................... 342
CHAPTER 8: ALLOWABLE FEES ...................................................................................... 344
ALLOWABLE FEES THAT A 504 BORROWER MAY BE CHARGED ...................... 344
FEES FOR OTHER SERVICES ........................................................................................ 345
DISCLOSURE OF FEES AND EXPENSES ..................................................................... 346
AGENTS ............................................................................................................................. 347
WHO MAY CONDUCT BUSINESS WITH SBA ............................................................ 348
CHAPTER 9: BORROWER’S DEPOSIT, DEBENTURE POOLS AND ............................ 350
RULES GOVERNING THE BORROWER’S DEPOSIT .................................................. 350
DEBENTURE POOLS ....................................................................................................... 350
MISCELLANEOUS ........................................................................................................... 350
POST-DISBURSEMENT ISSUES .................................................................................... 350
APPENDIX 1: RESTRICTIONS ON FOREIGN CONTROLLED ENTERPRISES................ 352
APPENDIX 2: DEFINITIONS ................................................................................................... 355
APPENDIX 3: RELIANCE LETTER ........................................................................................ 361
APPENDIX 4: NAICS CODES OF ENVIRONMENTALLY SENSITIVE INDUSTRIES ..... 363
APPENDIX 5: REQUIREMENTS PERTAINING TO GAS STATION LOANS .................... 365
APPENDIX 6: SBA ENVIRONMENTAL INDEMNIFICATION AGREEMENT ................. 367
I. RECITALS ...................................................................................................................... 367
II. DEFINITIONS ............................................................................................................... 367
III. REPRESENTATIONS AND WARRANTIES............................................................. 370
IV. COVENANTS .............................................................................................................. 372
V. REMEDIATION ........................................................................................................... 373
VI. INDEMNIFICATION .................................................................................................. 374
VII. THIRD PARTY INDEMNITOR'S ELECTION TO PAY LOAN BALANCE .. 375
VIII. RELEASE AND WAIVER ....................................................................................... 376
IX. SUBORDINATION ..................................................................................................... 376
X. LOAN DEFAULT ......................................................................................................... 376
XI. GENERAL PROVISIONS ........................................................................................... 376
APPENDIX 7 – CAPLINES PROGRAM DOCUMENTS ........................................................ 389
4 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
SUBPART A
SBA LENDER AND CERTIFIED DEVELOPMENT COMPANY
PARTICIPATION REQUIREMENTS
PURPOSE OF THIS SUBPART
This subpart contains the requirements for lenders and Certified Development Companies
(CDCs) to participate in SBA lending programs. This subpart also explains the different levels
of delegated status SBA grants to lenders and CDCs, as well as how lenders and CDCs maintain
their participating status with SBA. Finally, this subpart gives a brief overview of how SBA
oversees its participating lenders and CDCs.
When the policy set forth in this Subpart does not adequately address the unique circumstances
regarding a particular matter, an exception to policy may be approved by the Director of the
Office of Financial Assistance (D/FA). The D/FA may not approve an exception to policy if
such exception would be inconsistent with a statute or regulation. A request for an exception to
policy must be submitted to the Loan Guaranty Processing Center (LGPC) for 7(a) applications
and to the Sacramento Loan Processing Center (SLPC) for 504 applications. The processing
center will analyze the request and make a recommendation to the D/FA, or individual acting in
that capacity, who will make the final decision. The decision must be documented in the file.
This procedure may only be used in situations where a minor deviation from standard policy is
necessary for the specific situation. Exceptions to policy will be considered on a case-by-case
basis and the decision will only apply to the specific request.
CHAPTER 1: 7(A) LENDERS
I. THE 7(A) LOAN PROGRAM
A. The 7(a) Loan Program is authorized by section 7(a) of the Small Business Act and is
governed by the regulations outlined in Part 120 of Title 13 of the Code of Federal
Regulations (CFR).
B. This multi-purpose business loan program is administered as a deferred participation
program where SBA guarantees a portion of the loan made by a Lender. The Lender
initiates the loan to a small business and, if the SBA agrees to guaranty the loan, the
Lender funds and services the loan. In the event of default, the lender conducts the
work-out or the liquidation efforts and the Lender and SBA share in the loss, if any,
in accordance with the percentage guaranteed by the SBA.
C. Definitions applicable to this subpart can be found in 13 CFR 103.1, 105.201, 120.10,
120.420 and 120.802.
II. BECOMING A 7(A) LENDER
A. The following lenders may apply to participate with SBA as a 7(a) lender:
1. Federally Regulated Lenders, including those lenders regulated by Federal
Financial Institution Regulators (e.g., the Federal Deposit Insurance
Corporation, the Federal Reserve Board, the Office of the Comptroller of the
Effective Date: October 1, 2011 5
Subpart A SOP 50 10 5(D)
Currency, the Office of Thrift Supervision, the National Credit Union
Administration, and the Farm Credit Administration); and
2. SBA Supervised Lenders:
a) Non-Federally Regulated Lenders, including State regulated lenders
without federal deposit or share insurance protection; and
b) Small Business Lending Companies
B. The following lenders may not apply to participate with SBA as a 7(a) lender:
1. SBA-licensed Small Business Investment Companies (SBICs); and
2. Certified Development Companies (see 13 CFR 120.852, except with respect to
the Community Advantage Pilot Program).
C. Process to Become a 7(a) Participating Lender
1. Federally Regulated Lenders
a) An institution that has federal deposit or share insurance protection and is
a State or National bank, a State or Federally-chartered thrift institution or
a State or Federally-chartered credit union contacts, in writing, the SBA
field office serving the geographic area where the lender’s principal office
is located to request to be a participating lender. With the exception of
State-chartered credit unions, these institutions automatically comply with
the Agency’s examination and supervision requirements.
b) When a State-chartered credit union applies to become a participating
lender:
(1) If the credit union has federal deposit or share insurance protection,
it must send its application to the SBA field office servicing the
geographic area where its principal office is located.
(2) If the credit union does not have federal deposit or share insurance
protection, it must send to the SBA field office the items required in
paragraph 2.b) below for Non-Federally Regulated Lenders.
(3) The SBA field office must contact the Office of Credit Risk
Management (OCRM) and ask for a written determination by
OCRM regarding the State’s level of regulatory supervision and
examination.
(4) The District Counsel must review the application for legal
sufficiency. As part of that review, District Counsel must determine
that the credit union has the authority to apply for participation with
SBA and, specifically, that the person who submitted the application
has the authority to act on behalf of the credit union. Applications
submitted on behalf of a credit union by a Credit Union Service
Organization (CUSO) or Lender Service Provider (LSP) are
unacceptable.
c) The lender’s written request to participate must include a statement that it
is in good standing with its primary regulator and the Lender must
disclose any formal or informal enforcement actions or agreements within
the past 3 years unless such disclosure is prohibited by its primary
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SOP 50 10 5(D) Subpart A
regulator. SBA will determine if the enforcement actions or agreements
will render the lender unacceptable for 7(a) participation. If there are any
enforcement actions or agreements the application must be forwarded to
the Office of Capital Access (OCA).
d) The SBA field office must determine whether the lender meets the
requirements of 13 CFR 120.410 to be a 7(a) participant. If the field office
determines that the lender meets these requirements, it may enter into a
Loan Guaranty Agreement with the lender. Both parties will execute a
Loan Guaranty Agreement (Deferred Participation), SBA Form 750,
and/or a Loan Guaranty Agreement (Deferred Participation) for Short-
Term Loans, SBA Form 750B. Once the SBA Form 750 is executed, the
SBA field office will add the lender to the SBA Partner Information
Management System (PIMS) which identifies the lender as an SBA
participating lender.
2. Non-Federally Regulated Lenders
a) Non-Federally Regulated Lenders (NFRLs), including State regulated
lenders without federal deposit or share insurance protection (such as
Business and Industrial Development Companies (BIDCOs)) must file an
application (in duplicate) containing the information and documents
specified below with the SBA field office serving the geographic area
where the lender’s principal office is located.
b) The lender’s application must include:
(1) Lender’s name, address, telephone number and email address;
(2) A copy of lender’s Articles of Incorporation and by-laws certified by
an appropriate officer;
(3) Amount of the lender’s capital and additional paid-in capital;
(4) The lender’s proposed geographical area of operations;
(5) A list of officers, directors, associates and holders of 10 percent or
more of any class of the lender’s capital stock. ―Associates‖ are
defined in 13 CFR 120.10.
(6) A copy of the most recent audited financial statements on any entity,
other than natural persons, holding 10 percent or more of any class
of the lender’s stock.
(7) An organizational chart showing the relationship of the lender to any
Associates.
(8) A copy of ―Statement of Personal History,‖ SBA Form 1081, signed
and dated within 90 days of submission to SBA, for each person
listed under above item (5).
(9) A copy of the lender’s policies and procedures governing business
loan origination, servicing, and liquidation.
(10) A certification that the lender will not be engaged primarily in
financing the operations of an Affiliate, as defined in 13 CFR
121.103.
Effective Date: October 1, 2011 7
Subpart A SOP 50 10 5(D)
(11) A copy of the State or Federal statute or regulations governing the
lender’s operations, including those pertaining to audit, examination
and supervision of the lender. Each lender bears the burden of
demonstrating that it is subject to continuing supervision by a State
or Federal regulatory authority satisfactory to SBA.
(12) A copy of the latest report covering the examination of the lender, if
such report can be released to SBA. If the report cannot be released
or the lender is newly formed and has not been examined by its
primary regulator include a statement to that effect.
(13) A copy of the most recent audited financial statements of the lender.
(14) A copy of the license, if any, issued to the lender by a regulatory
authority.
(15) A certified copy of a Resolution of the Board of Directors
designating the person(s) authorized to submit the application on
behalf of the lender.
(16) A copy of a satisfactory opinion of independent counsel that the
lender complies with applicable Federal, State, and local laws in the
formation and organization of the company, and with appropriate
Federal and/or State security laws; and is chartered to conduct its
business in the proposed operating area. (―Independent Counsel‖ is
counsel that is not an ―Associate‖ of the lender under 13 CFR
120.10.)
c) Once submitted to the SBA Field Office, SBA must perform the following
steps in evaluating the lender’s application:
(1) Review and comment on the sufficiency of all of the requested items
in the application.
(2) Comment on the qualifications of the lender, including SBA’s
participation requirements in 13 CFR 120.410; and
(3) Make a recommendation to approve or decline the lender’s
application.
d) The SBA Field Office must keep a copy of the application and submit the
original of the application along with its recommendation to the Director,
Office of Financial Assistance (D/FA).
e) The D/FA or designee, in consultation with the Director, Office of Credit
Risk Management (D/OCRM), makes the final determination on the
application and notifies the SBA Field Office. If the application is
approved, the SBA Field Office executes an SBA Form 750 and/or SBA
Form 750B, with the lender and sends a copy of the executed agreement to
the D/FA. The D/FA or designee will create the electronic record of the
lender.
3. SBA Regulated Lenders (Small Business Lending Companies)
A Small Business Lending Company (SBLC) is a nondepository lending
institution that is SBA licensed and is authorized by SBA to only make loans
8 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
pursuant to section 7(a) of the Small Business Act and loans to Intermediaries in
SBA’s Microloan program. See Chapter 2 of this Subpart.
D. Loan Guaranty Agreement – SBA Form 750 and SBA Form 750B
1. The Loan Guaranty Agreement provides a basic framework for the
responsibilities and duties of the lender and SBA when making, closing, and
administering any individual SBA-guaranteed loan. (13 CFR 120.400) This
agreement is subject to SBA’s rules and regulations as amended from time to
time.
2. SBA Form 750 governs loans with a maturity of 12 months or greater. A lender
must execute this agreement prior to submitting any applications for guaranty to
SBA. SBA Form 750B governs loans with a maturity of less than 12 months. If
the lender intends to approve loans with a maturity of less than 12 months, it
must also execute SBA Form 750B.
E. Responsibilities of 7(a) lenders
1. In making SBA-guaranteed loans, 7(a) lenders:
a) Submit applications for guaranty with all required forms, documentation
and credit analyses, to the designated SBA processing center for review.
b) Execute the Authorization, which is prepared by SBA.
c) Close the loan in accordance with the Authorization, all policy and
regulations.
d) Maintain complete loan files.
e) Service the loan in accordance with SOP 50 50 and regulations.
f) Liquidate the loan in accordance with SOP 50 51 and regulations.
g) Comply with SBA Loan Program Requirements for the 7(a) program (13
CFR 120.10.), as such requirements are revised from time to time. SBA
Loan Program Requirements in effect at the time that a Lender takes an
action in connection with a particular loan govern that specific action. For
example, although loan closing requirements in effect when a lender
closes a loan will govern closing actions, a lender’s liquidation actions on
the same loan are subject to the liquidation requirements in effect at the
time that a liquidation action is taken. (13 CFR 120.180)
h) SBA Loan Program Requirements, center contacts and other information
can be found a http://www.sba.gov/for-lenders.
i) Individuals debarred under the SBA or Government-wide debarment
regulations may not conduct business with SBA, including participating in
an SBA-guaranteed loan. Lenders may consult the Excluded Parties List
System (EPLS) to determine if an employee or Agent has been debarred
or suspended by SBA or another federal agency. (www.epls.gov.)
2. To participate in the Small/Rural Lender Advantage Initiative (S/RLA):
a) A lender must be in good standing with SBA and must have processed an
average of 20 or fewer SBA loans annually over the last 3 fiscal years.
The Loan Guaranty Processing Center (LGPC), when processing S/RLA
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Subpart A SOP 50 10 5(D)
loan applications, will screen each application to ensure that the lender has
processed an average of 20 or fewer SBA loans annually over the last 3
fiscal years. The LGPC will request that any lender that has processed
more than an average of 20 SBA loans annually over the last 3 fiscal years
resubmit the application using standard 7(a) procedures or one of SBA’s
delegated lender programs.
b) Non-SBA lenders must be approved by SBA to participate in the 7(a) loan
guaranty program before they can participate in S/RLA.
3. To participate in the Small Loan Advantage (SLA) initiative:
A lender must have an active Supplemental Guaranty Agreement for the
Preferred Lenders Program (PLP). For further discussion of the PLP program,
see paragraph IV.B. of this Chapter.
4. To participate in the Export Working Capital Program (EWCP):
a) An existing SBA lender may contact the local United States Export
Assistance Center (USEAC) or the local SBA field office to request
authority to participate in the EWCP. (A complete listing of USEAC
locations and personnel may be found at www.sba.gov/oit.) The USEAC
or field office staff will provide the lender with the Supplemental
Guarantee Agreement Export Working Capital Program (SBA Form
750EX), which the lender must execute and return to the USEAC.
b) Non-SBA lenders must be approved by SBA to participate in the 7(a) loan
guaranty program before they can participate in EWCP. Such lenders also
may contact the local USEAC or local SBA field office to request
authority to participate in SBA lending. If the lender meets the criteria set
forth in paragraph II above, the USEAC or field office staff will provide
the lender with SBA Form 750 and/or SBA Form 750B, as appropriate,
and SBA Form 750EX, which the lender must execute and return to the
USEAC.
c) The Regional Manager of SBA’s Export Solutions Group located at each
USEAC will consult, advise and train lenders and small business exporters
on the procedures and benefits of SBA’s EWCP.
d) To request authority to participate in the Preferred Lender Program (PLP)
for EWCP, see paragraph IV.B.5 of this Chapter.
5. Preferences
a) A lender may not take any action in connection with an SBA-guaranteed
loan that establishes a preference in favor of the lender. (13 CFR 120.411)
A lender must be particularly careful to avoid establishing a preference
when using its delegated authority (for example, reducing its existing
exposure to the borrower through the use of an SBA guaranteed loan).
b) A lender must not:
(1) Take any side collateral or guaranty that would secure only its own
interest in a loan;
10 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
(2) Obtain a separate guaranty on the unguaranteed portion of the 7(a)
loan without SBA’s approval, such as through a co-guaranty
program or arrangement;
(3) Require a borrower to purchase certificates of deposit;
(4) Maintain a compensating balance not under the control of the
borrower;
(5) Take a side loan which would have the effect of ensuring a risk-free
or limited-risk investment on the participant’s share; or
(6) Have an SBA-guaranteed loan in a ―piggyback‖ structure.
(a) Piggyback financing occurs when one or more lenders provide
more than one loan to a single borrower at or about the same
time, financing the same or similar purpose, and where the
SBA-guaranteed loan is secured with a junior lien position or
no lien position on the collateral securing the non-guaranteed
loan(s).
(b) SBA does not consider a scenario where both loans are for
working capital and the non-SBA guaranteed loan is secured
only by working capital assets to be a piggyback structure.
(c) SBA does not consider a shared lien position with the lender
(pari passu) as a piggyback structure.
c) Under the following circumstances, a lender may make a side loan to
purchase stock of the participant (as may be required by certain lenders
such as Farm Credit Administration entities):
(1) The enabling authority of the lender requires the purchase as a
condition for making the loan.
(2) The lender makes a separate side loan not guaranteed by SBA for the
borrower to buy the stock or debentures. The side loan must be
subordinated to the SBA loan, but the lender may hold a first lien on
any stock collateralizing the side loan.
(3) The interest to be charged on the side loan must not exceed the
maximum rate of interest acceptable for SBA-guaranteed loans, and
the maturity of the side loan must not be less than that of the SBA-
guaranteed loan.
(4) In the event of default, either on the side loan or the SBA-guaranteed
loan, the lender may not take any action to collect or liquidate the
side loan, except canceling or retiring the stock securing the side
loan, until the SBA loan has been fully liquidated.
6. Ethical Requirements Placed on a Lender
SBA lenders must act ethically and exhibit good character. (13 CFR 120.140)
Conduct of a lender’s Associates and staff will be attributed directly to the
lender. Lenders are required to notify SBA immediately upon becoming aware
of any unethical behavior by its staff or its Associates. Examples of unethical
behavior are found at 13 CFR 120.140.
Effective Date: October 1, 2011 11
Subpart A SOP 50 10 5(D)
a) Conflicts of Interest
(1) A lender or its Associates may not have a real or apparent conflict of
interest with a small business or SBA. (13 CFR 120.140 and 13 CFR
Part 105)
(2) Factors that may indicate a conflict of interest
Lender must exercise care and judgment in determining whether a
conflict of interest exists and document the file in detail. SBA will
not guarantee a loan if the lender, its Associates, partner or a close
relative:
(a) Has a direct or indirect financial or other interest in the Small
Business Applicant; or
(b) Had such interest within 6 months prior to the date of
application.
SBA reserves the right to deny liability on its guaranty in the event
that the borrower defaults, if the lender, its Associates, partner or a
close relative acquires such an interest at any time during the term of
the loan.
b) The Standards of Conduct Counselor for the Agency is the Designated
Agency Ethics Official. (13 CFR 105.402(a))
c) Standards of Conduct (―Conflict of Interest‖) Approvals
(1) If a Small Business Applicant has, as an employee, owner, partner,
attorney, agent, owner of stock, officer, director, creditor or debtor,
an individual who, within 1 year prior to the loan application, was an
SBA Employee (as defined by 13 CFR 105.201(a)), the loan
application must be approved by the Standards of Conduct
Counselor. (13 CFR 105.203(a))
(2) If a Small Business Applicant has, as its sole proprietor, partner,
officer, director, or stockholder with a 10% or more interest, an
individual who is an SBA Employee (as defined by 13 CFR
105.201(a)) or a Household Member of an SBA Employee, the loan
application must be approved by the Standards of Conduct
Committee at SBA Headquarters. (13 CFR 105.204) A ―Household
Member‖ of an SBA Employee includes:
(a) The spouse of the Employee;
(b) The minor children of the Employee; and
(c) The blood relatives of the Employee, and the blood relatives of
the Employee’s spouse, who reside in the same place of abode
as the Employee. (13 CFR 105.201(d))
(3) If a Small Business Applicant has, as its sole proprietor, general
partner, officer, director, or stockholder with a 10% or more interest,
or a household member of such individual, an individual who is a
Member of Congress, an appointed official of the legislative or
judicial branch of the Federal Government, a member or employee
12 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
of a Small Business Advisory Council, or a SCORE volunteer, the
loan application must be approved by the Standards of Conduct
Committee. (13 CFR 105.301(c) and 105.302(a))
d) When a Standards of Conduct approval is required, the application should
be processed by the appropriate processing center and, if appropriate, be
conditionally approved and forwarded to the Standards of Conduct
Counselor or Standards of Conduct Committee (through the Standards of
Conduct Counselor). The Standards of Conduct Counselor will notify the
processing center of the final Agency decision and the processing center
will notify the lender accordingly.
e) Other Government Employees
A Small Business Applicant must submit a statement of no objection from
the pertinent department or military service if its sole proprietor, partner,
officer, director, or stockholder with a 10% or more interest, or a
household member of such individual, is an employee of another
department or agency of the Federal Government (Executive Branch)
having a grade of at least GS-13 (or its equivalent) or higher.
(13 CFR 105.301(a))
7. Forward Commitments
A forward commitment exists when a lender issues a commitment to a builder
or developer to finance future sales of real estate. The SBA will not guarantee
loans made by the lender to small businesses to purchase such real estate. This
is a potential conflict of interest for the lender because of its predisposition to
make SBA loans in order to honor their prior agreement with the builder or
developer. Such loans are ineligible for SBA’s guarantee regardless of whether
the lender gets a fee for issuing the commitment.
8. Advertising of Relationship with SBA (13 CFR 120.413)
a) Generally. A lender may publicize its relationship with SBA, including
identifying itself as an SBA participating lender, by placing the
appropriate SBA-approved decal on the window of the lending institution
or placing identical decal icons on its website. A lender may not use the
SBA logo in any manner in any advertisement, brochure, publication or
promotional piece, or state or imply that the lender or its borrowers will
receive any preferential treatment by SBA.
b) Use of Window Decals. The SBA-approved lender decal may only be
used to inform the public of the lender’s relationship with SBA and may
not be used to promote, or appear to promote, the lender’s non-SBA
products or services. Window decals are available from SBA district
offices.
c) Use of Decal Icons on Website. The SBA-approved lender decal icon is
an exact replica of the window decal and may only be used to inform the
public of the lender’s relationship with SBA and may not be used to
promote, or appear to promote, the lender’s non-SBA products or services.
Effective Date: October 1, 2011 13
Subpart A SOP 50 10 5(D)
(1) When using the SBA-approved lender decal icon on a website, the
lender must include the following public statement, ―Approved to
offer SBA loan products under SBA’s Preferred Lender Program‖
(or SBA Express Program, etc.).
(2) The lender decal icon may be downloaded from, and must be used in
accordance with SBA’s lender decal guidelines found at
http://www.sba.gov/content/advertising-sba-relationship.
d) Oversight. A lender’s usage of the window/building decal and any
identical decal icons on its website may be reviewed as part of the
Agency’s lender oversight activities.
III. HOW SBA OVERSEES 7(A) LENDERS
SBA oversees 7(a) lenders through:
A. Loan and Lender Monitoring System (L/LMS)
1. L/LMS is an internal SBA data system that includes the use of historical data
and predictive small business credit scoring. All SBA 7(a) loans with an
outstanding balance are credit-scored quarterly. These data are aggregated,
analyzed and evaluated to assess the credit quality of each individual SBA
lender’s portfolio of SBA-guaranteed loans. SBA uses this information to
monitor the performance of 7(a) lenders individually and in comparison to their
peers.
2. Using SBA’s L/LMS system, SBA assigns all 7(a) lenders a composite rating.
The composite rating reflects SBA’s assessment of the potential risk to the
government of that 7(a) lender’s SBA portfolio. The specific performance
factors which comprise the composite rating are published from time to time by
SBA’s OCRM. In general, these factors reflect both historical 7(a) lender
performance and projected future performance. SBA performs quarterly
calculations on the common factors for each 7(a) lender, so 7(a) lenders’
composite risk ratings are updated on a quarterly basis.
3. SBA has established peer groups to minimize the differences that could result
from changes in loan performance for portfolios of different sizes. The peer
groups are based upon outstanding SBA dollars, and for 7(a) lenders they are:
a) $100,000,000 or more
b) $10,000,000 - $99,999,999
c) $4,000,000 - $9,999,999
d) $1,000,000 - $3,999,999
e) $0 - $999,999 (with at least one loan disbursed in past 12 months)
f) $0 - $999,999 (with no loans disbursed within the past 12 months)
4. SBA assigns a composite rating of 1 to 5 to each 7(a) lender based upon its
portfolio performance, as reported in L/LMS. A rating of 1 indicates strong
portfolio performance, the least risk, and requires the lowest degree of SBA
management oversight (relative to other 7(a) lenders in its peer group). A 5
rating indicates weak portfolio performance, the highest risk, and requires the
highest degree of SBA management oversight. (See 13 CFR 120.10 (definitions
14 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
related to Risk Rating), 13 CFR 120.1015 (Risk Rating System), and 75 FR
9257, March 1, 2010 and 75 FR 13145, March 18, 2010 (Risk Rating Notices).)
B. Lender Portal
1. SBA communicates lender performance to individual 7(a) lenders through the
use of SBA’s Lender Portal (Portal). The Portal allows a 7(a) lender to view its
own quarterly performance data, including, but not limited to, its current
composite risk rating and peer and portfolio averages. Portal data includes both
summary performance and credit quality data. Summary performance data is
largely derived from data that 7(a) lenders provide to SBA through SBA Form
1502 and 172 Reports, therefore, 7(a) lenders bear much of the responsibility
for ensuring data accuracy. If a 7(a) lender reviews its performance components
and finds a discrepancy with its records, the 7(a) lender should contact OCRM.
2. SBA 7(a) lenders with at least 1 outstanding SBA loan may apply for the Portal
access. Currently SBA issues only one Portal user account per 7(a) lender.
Submission of initial requests for a Portal user account must be submitted to
SBA’s OCRM, and must include the following information:
a) Request must be made by a senior officer with proper authority of the 7(a)
lender (Senior Vice President or higher);
b) Request must be sent via regular or overnight mail to the SBA’s OCRM at
409 Third Street, SW, Washington DC 20416, ATTN: Director, Office of
Credit Risk Management;
c) Request must be made using the 7(a) lender’s stationery;
d) Request must include the user’s business card;
e) The stationery and business card should include the 7(a) lender’s name
and address;
f) The request should include the following data:
(1) SBA FIRS ID Number(s);
(2) Account user’s name and title;
(3) Account user’s mailing address, telephone number and email address
at the 7(a) lender;
(4) Requesting officer’s name and title; and
(5) Requesting officer’s mailing address, telephone number and email
address at the 7(a) lender.
g) Once SBA receives and approves the user’s request, SBA will forward the
approval to SBA’s Portal contractor for issuance of a user account name
and password. The Portal contractor will email the user his or her user
name and password within approximately two weeks of account approval.
The user can then access its data by logging into the SBA Lender Portal
web page. Before accessing the Portal, lenders must agree to the terms of
a Confidentiality Agreement which is found on the SBA Lender Portal
web page.
h) Lenders are responsible for complying with and maintaining the Portal
user accounts and passwords as set forth in the Confidentiality Agreement
Effective Date: October 1, 2011 15
Subpart A SOP 50 10 5(D)
on the Portal web page, and as published by SBA from time to time.
Lenders are also responsible for timely informing SBA to terminate or
transfer an account if the person to whom it was issued no longer holds
that responsibility for the 7(a) lender. Lenders must take full responsibility
for protecting the confidentiality of the user password and the 7(a) lender
risk rating and confidential information and for ensuring the security of
the data. See 13 CFR 120.1060.
C. Off-site monitoring and on-site reviews (13 CFR 120.1025 and 120.1050 - 1060).
L/LMS provides performance information that allows SBA to monitor and conduct
off-site reviews of all lenders. Off-site monitoring serves as the primary means of
reviewing lenders with less than $10 million in SBA dollars outstanding although
SBA may determine in its discretion to conduct on-site reviews of these lenders. SBA
will contact the lender if the review detects performance issues or trends requiring
further discussion.
1. For lenders with more than $10 million in SBA dollars outstanding L/LMS
details historical and projected performance data:
a) For use in planning and conducting on-site reviews or examinations;
b) To assist in prioritizing on-site reviews or examinations; and
c) As a system to monitor lenders between on-site reviews or examinations.
Additional information regarding on-site reviews and examinations can be
found in 13 CFR 120.1050-1060 and SBA’s SOP 51 00.
2. Additionally, in accordance with 13 CFR 120.1010, a lender must allow SBA’s
authorized representatives access to its SBA files to review, inspect and/or copy
all records and documents relating to SBA guaranteed loans or as requested for
SBA oversight.
3. SBA may request reports on a case by case basis.
4. Lender oversight fees. Lenders are required to pay SBA fees to cover the costs
of examinations and reviews and, if assessed by SBA, other lender oversight
activities. (13 CFR 120.1070)
a) The fees may cover:
(1) The cost of conducting on-site safety and soundness examinations of
an SBA Supervised Lender (SBLCs and NFRLs);
(2) The cost of conducting an on-site review of a 7(a) lender;
(3) The cost of conducting off-site reviews/monitoring of a 7(a) lender
including the SBA-assessed charge based on the size of the lender’s
SBA-guaranteed portfolio; and
(4) Any additional expenses that SBA incurs in carrying out lender
oversight activities.
b) For the on-site examinations or reviews conducted under (a) and (b)
above, SBA will invoice each lender for the amount owed following
completion of the examination or review.
16 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
c) For the off-site reviews/monitoring conducted under (c) above, and other
lender oversight expenses incurred under (d) above, SBA will invoice
each lender on an annual basis.
(1) The invoice will state the charges, the date by which payment is due
and the approved payment method(s).
(2) The payment due date will be no less than 30 calendar days from the
invoice date.
d) SBA may waive the assessment of the fee under (c) for those lenders
owing less than a threshold amount below which SBA determines that it is
not cost effective to collect the fee.
e) Payments that are not received by the due date shall be considered
delinquent, and SBA will charge interest, and other applicable charges and
penalties as authorized by 31 U.S.C. 3717. A lender’s failure to pay any of
the fee components described above, or to pay interest, charges and
penalties that have been charged, may result in a decision to suspend, limit
or revoke a lender’s status as a participant, including but not limited to, a
participant’s delegated authority. (13 CFR 120.1070).
D. Supervision and enforcement
1. An integral part of overseeing the 7(a) loan program is SBA’s authority to
supervise and take enforcement actions as necessary. (For further guidance on
Lender Supervision and Enforcement, see SOP 50 53.)
2. The D/FA has responsibility for the day-to-day management of lenders with an
SBA risk rating of 1, 2 or 3. With the exception of servicing actions on
individual loans which will be reviewed by OFA, the D/OCRM is responsible
for day-to-day management, including approving delegations of program
authority, of lenders with an SBA risk rating of 4 or 5. (70 FR 21262, April 25,
2005)
3. The D/OCRM (either directly or through the Lender Transaction Team (LTT),
Sacramento Loan Processing Center (SLPC)) and the D/FA will provide a
recommendation prior to the approval of delegated lender authority by the
appropriate SBA official.
E. Suspension or revocation
1. SBA may suspend or revoke the authority of a lender to conduct 7(a) program
activities, in accordance with 13 CFR 120.1400-1600.
Examples of circumstances that may result in suspension or revocation under
the above cited regulation include but are not limited to:
a) Continuous or substantial failure to comply with SBA Loan Program
Requirements, including but not limited to, lender eligibility requirements
and prudent lending requirements;
b) Consistent failure to properly report on loan disbursements and status; or
c) Less Than Acceptable on-site examination/review assessment or repeated
Less Than Acceptable Risk Rating, the latter generally in conjunction with
other grounds.
Effective Date: October 1, 2011 17
Subpart A SOP 50 10 5(D)
2. SBA will notify the lender of a proposed suspension or revocation in
accordance with 13 CFR 120.1600. The lender will be provided an opportunity
to respond prior to final action.
IV. TYPES OF 7(A) LENDERS WITH DELEGATED AUTHORITY
A. Certified Lenders Program (13 CFR 120.440)
More experienced SBA lenders are granted a higher level of authority under the
Certified Lenders Program (CLP) and receive expedited processing of loan
applications. These lenders are designated as ―CLP Lenders.‖
1. Qualifications of a CLP Lender
A CLP Lender must demonstrate that it:
a) Can effectively process, close, service and liquidate loans; and
b) Has a satisfactory performance history with SBA, including the
submission of complete and accurate loan guaranty application packages;
(1) Packages demonstrate strong knowledge of SBA forms and
procedures;
(2) Credit analyses demonstrate solid working knowledge of SBA’s
eligibility and credit criteria; and
c) Has been current in filing SBA required 1502 reports and in remitting
required guaranty, servicing and review fees.
2. Process to become a CLP Lender or to renew CLP status (13 CFR 120.441)
a) A lender may request CLP status or a field office may nominate a lender.
The lender may send a written request to its local SBA field office. The
lender’s written request must include a statement that it is in good
standing with its primary regulator and the Lender must disclose any
formal or informal enforcement actions or agreements within the past 3
years unless such disclosure is prohibited by its primary regulator. SBA
will determine in its discretion if the enforcement actions or agreements
will render the lender unacceptable for CLP participation. If there are any
enforcement actions or agreements the application must be forwarded to
the Office of Capital Access (OCA).
b) The local SBA District Director will consider whether the lender continues
to meet the requirements of 13 CFR 120.410 to be a 7(a) participant and
meets the qualifications identified above in initially approving or
renewing a lender’s CLP status.
3. Supplemental Guaranty Agreement
a) When CLP status is initially approved or renewed, the field office notifies
the lender that it has been initially approved or renewed as a CLP Lender
and sends a ―Supplemental Guaranty Agreement, Certified Lenders
Program (CLP), SBA Form 1186‖ signed by the District Director. The
lender must sign and return the SBA Form 1186 to the field office before
the lender’s CLP status is effective. When the signed SBA Form 1186 is
18 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
received by the field office, it will update PIMS with the lender’s CLP
status and term. The term of CLP status may not exceed 2 years.
b) If the District Director declines a request for initial CLP status or renewal
of CLP status, the lender may appeal to the D/FA, whose decision will be
final. The D/FA will consult with the D/OCRM on each appeal.
4. Authority and Responsibilities
The SBA’s business loan eligibility requirements, credit policy, and procedures
contained in this SOP apply to all CLP loans. A CLP Lender must stay informed
of and apply all of SBA Loan Program Requirements.
a) Eligibility Requirements for CLP Processing
In addition to SBA’s general business loan eligibility standards, the
following additional restrictions apply to CLP loans:
(1) Loans not eligible for CLP processing:
(a) Any pilot program unless SBA specifically authorizes use of
CLP for the pilot; and
(b) Export Working Capital Program (EWCP).
(2) Additional Restrictions Specific to CLP
(a) Existing SBA loan. If an applicant business already has an
SBA loan, the lender may make the CLP loan only if the
existing SBA loan is current.
(b) Reconsiderations of declined loan applications must not be
submitted under CLP procedures, but may be submitted under
Standard 7(a) procedures.
(3) Credit Analysis
The lender must perform a thorough and accurate credit analysis of
the applicant and include its analysis in its credit memorandum
which shall be retained in the loan file. The lender’s conclusions
must be thoroughly supported in the file.
(4) Application Procedure
The CLP loan packages include the same forms and information as
regular 7(a) loan packages. A CLP Lender must ensure that all
required forms and submissions are complete and must prepare a
draft of the SBA Authorization to include with the package. The loan
package should be clearly marked ―CLP‖ on the SBA 4-I and on the
mailing envelope, fax cover or email subject line.
(5) SBA Processing Procedure
The SBA reviewer relies heavily on the information the lender
provides. For CLP loans, SBA still makes both credit and eligibility
decisions about whether to guarantee the loan. If the lender’s
presentation is not adequate for CLP processing, the LGPC may
convert the application from CLP to regular processing.
Effective Date: October 1, 2011 19
Subpart A SOP 50 10 5(D)
(6) Post Approval Responsibilities
(a) Lender will notify SBA of the first disbursement by entry on
SBA Form 1502 (1502).
(b) The CLP Lender’s servicing and liquidating responsibilities for
CLP loans are set forth in sops 50 50 and 50 51.
5. Affiliation Issues/Change of Lender Authority
a) If a CLP Lender makes a major change in its structure or organization, it
must tell the SBA field office in writing. Major changes include:
(1) Acquisition by another entity;
(2) Merge into another legal entity;
(3) A change of name;
(4) Substantial changes in management;
(5) Substantial changes in how the lender handles SBA loans; or
(6) Take over or closure of the lender by a regulatory agency.
20 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
If a CLP Lender continues as the same Then . . .
legal entity that signed the CLP
agreement and. . .
(1) The CLP Lender changes its name. The LTT records the name change. The lender’s
CLP authority is not changed. A new CLP
agreement is not needed.
(2) The CLP Lender is acquired by another The LTT records the holding company name. The
entity. The CLP lender continues as a lender’s CLP authority is not changed. A new
separate legal entity. CLP agreement is not needed.
(3) The CLP Lender acquires another The CLP lender may continue to make CLP loans
lender. The acquired lender does not under its CLP authority unless there is a
continue as a separate legal entity. substantial change in its ability to make CLP
loans.
(4) The CLP Lender acquires another The acquired lender may not make CLP loans.
lender. The acquired lender continues as a The acquired lender may apply for CLP authority.
separate legal entity.
(5) The lender is closed or taken over by a The lender’s CLP authority terminates
regulatory authority. automatically and the lender must cooperate with
SBA to transfer responsibility for servicing and
liquidating its CLP loan portfolio. The LTT
notifies the lender, SBA field office(s), and the
LGPC that the lender may not make any new
loans.
(6) The lender changes its operations so that The SBA will not renew the lender’s CLP
it cannot process SBA loans as required by authority or will suspend or revoke the lender’s
the CLP Program. CLP authority.
If a CLP Lender does not continue as the Then . . .
same legal entity that executed the CLP
agreement and . . .
(1) The CLP Lender is merged into a non- The original CLP lender no longer has the
CLP Lender. The original CLP Lender’s authority to make CLP loans. The surviving
SBA operations are unchanged. lender may apply for CLP authority and execute a
CLP agreement.
(2) The CLP Lender is merged into another The original CLP Lender no longer has the
CLP Lender. authority to make CLP loans under its
agreements with SBA. However, CLP loans can
be made under the surviving CLP Lender’s
agreements and the surviving CLP Lender is
responsible for servicing and liquidating the
original CLP Lender’s CLP loan portfolio.
Effective Date: October 1, 2011 21
Subpart A SOP 50 10 5(D)
(3) The CLP Lender is dissolved. The lender’s CLP authority to make CLP loans
automatically terminates and the lender must
cooperate with SBA to transfer responsibility for
servicing and liquidating its CLP loan portfolio.
The LTT notifies the lender, SBA Field Office(s)
and the LGPC that the lender may not make any
new loans.
6. Monitoring and reviews
See Paragraph III.A through C of this Chapter for further information on
monitoring and reviews.
7. Supervision and enforcement
See Paragraph III.D of this Chapter for further information on supervision and
enforcement.
8. Suspension and revocation
SBA may suspend or revoke a lender’s CLP authority in accordance with 13
CFR 120.1400-1600.
B. Preferred Lenders Program (PLP) (13 CFR 120.450)
The most experienced lenders are designated as PLP Lenders and delegated the
authority to process, close, service, and liquidate most SBA guaranteed loans without
prior SBA review.
1. The PLP Lender
PLP Lenders are authorized to make SBA guaranteed loans, subject only to a
brief eligibility review and assignment of a loan number by SBA. In addition,
they are expected to handle servicing and liquidation of all of their SBA loans
with limited involvement of SBA.
2. Qualifications for Initial PLP Consideration
a) The lender must demonstrate that it:
(1) Has disbursed at least 5 SBA loans within the past 24 months;
(2) Can effectively process, close, service and liquidate SBA loans;
(3) Is in compliance with applicable SBA Loan Program Requirements
(as defined in 13 CFR 120.10);
(4) Has satisfactory SBA performance as determined by SBA in its
discretion. The Lender’s Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance. Other
factors may include, but are not limited to, on-site
review/examination assessments, historical performance measures
(like default rate, purchase rate and loss rate), loan volume to the
extent that it impacts performance measures, and other performance
22 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
related measurements and information (such as contribution toward
SBA’s mission)
(5) Has been current in filing SBA required 1502 reports and in
remitting required guaranty, servicing and review fees;
(6) For lenders regulated by one of the federal/state oversight
authorities, is in good standing with its primary regulator by
submitting a statement to that effect and by disclosing any formal or
informal enforcement actions or agreements within the past 3 years
unless such disclosure is prohibited by its primary regulator (SBA
will determine in its discretion whether an enforcement action or
agreement renders the lender unacceptable for PLP participation);
(7) Is not subject to any SBA enforcement actions; and
(8) Has not received a major substantive objection from its Lead SBA
Field Office.
b) SBA, in its discretion, also will consider other risk related information
(e.g., rapid growth, inadequate capital, formal supervisory actions
outstanding filed by the lender’s federal or state regulator).
3. Process to obtain PLP status
A lender must submit its request for PLP status to its local SBA office with a
copy to the SLPC. For multi-state lenders, the request will go to the District
where the lender is headquartered.
a) The lender’s request should include:
(1) Legal name and address of lender;
(2) Legal name of any holding company of lender;
(3) Name, title, address, phone number, e-mail address and fax number
for contact person at lender for nomination process;
(4) Lender’s Lead SBA Field Office (the SBA field office serving the
area in which the lender’s headquarters is located);
(5) A copy of the lender’s SBA Form 750 and SBA Form 750B, if
applicable;
(6) If lender is or ever was a CLP Lender, state how long the lender has
been CLP;
(7) If lender was previously a PLP Lender, an explanation of why the
lender left the Preferred Lenders Program;
(8) A description of the lender’s history, organization, and management,
including:
(a) When the lender was chartered; and
(b) Any recent mergers or acquisitions;
(9) Personnel who will:
Effective Date: October 1, 2011 23
Subpart A SOP 50 10 5(D)
(a) Be in charge of PLP loans for the lender and their experience
with the lender, in the industry, and with SBA loans; and
(b) Have PLP loan approval authority;
(10) Where and how PLP loans will be processed, closed, serviced and
liquidated;
(11) A statement from the lender:
(a) That it is in good standing with its primary regulator; and
(b) Disclosing any formal or informal enforcement actions or
agreements within the past 3 years unless such disclosure is
prohibited by its primary regulator. SBA will determine in its
discretion if recent enforcement actions or agreements will
render the lender unacceptable for PLP.
b) Field Office’s Nomination should include the field office’s opinion of:
(1) The lender’s rapport with the field office; and
(2) The lender’s commitment to SBA lending.
c) The SBA field office sends the lender’s request and the field office’s
recommendation to the LTT.
d) The LTT’s Role: The LTT gathers the information relevant to a lender’s
participation request, including the field office’s recommendation and the
processing, servicing and liquidation centers’ written opinions of the
lender’s ability to process, close, service, and liquidate SBA loans, as
applicable. The LTT performs an analysis, makes a recommendation and
sends it to the appropriate SBA official who makes a decision and notifies
the LTT. The LTT then informs the lender of SBA’s decision.
e) Upon approval, the LTT notifies the lender and the SBA field office:
(1) That the nomination is approved; and
(2) The length of the preferred status, not to exceed two years. For SBA
lenders with less than 3 years of SBA lending experience/data, the
Agency may consider performance over the period of time the lender
has been an SBA lender, but will limit the lender’s initial term of
preferred status to 1 year or less. Lenders that identify significant
differences between the performance numbers developed by the
lender and those developed by SBA (not related to a lack of accurate
1502 reporting) should contact OCRM.
f) The LTT sends the lender a Supplemental Guaranty Agreement, Preferred
Lenders Program (SBA Form 1347) signed by the appropriate SBA
official. The lender must sign and return the SBA Form 1347 to the LTT
before the lender’s PLP status is effective. (Agreements must be signed
and returned to the Center within 30 days of receipt or a new application
to the program will be required.)
g) The LTT sends the appropriate field offices copies of the approval letter.
The LTT will enter the effective term of the lender’s PLP status on the
PIMS. This is an essential step for lenders processing PLP loans.
24 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
h) If a lender is approved as a PLP Lender, it will automatically be approved
as a CLP Lender. The LTT will send the SBA Form 1186 to the lender for
execution along with the SBA Form 1347. Once approved, a lender’s PLP
and CLP status extends nationally (provided the lender complies with its
lending charter).
i) Decline of PLP application:
If the PLP application is declined, the LTT notifies the lender and SBA
field office with the reason for decline. The lender may re-apply for PLP
status when it has overcome the reason for decline. To do so, the lender
must file a request with the LTT and must show how it has overcome the
reasons for decline. The LTT will review the request, make a
recommendation and send it to the appropriate SBA official for a final
Agency decision. The LTT will notify the lender in writing of SBA’s final
decision.
4. Process for Renewal of PLP Status (13 CFR 120.451(e))
a) The LTT automatically starts the renewal process just prior to the
expiration of a lender’s PLP status. The LTT asks for comments from the
Lead SBA Field Office and the SBA’s processing, servicing and
liquidation centers. The comments should pertain to the lender’s most
recent PLP term and must include:
(1) Whether they recommend renewal;
(2) If they do not recommend renewal, why not;
(3) Whether the lender can process, close, service and liquidate SBA
loans;
(4) Changes in lender’s organization or management;
(5) Any recurring denial of liability or repair situations with the lender;
(6) Reasons for any unfavorable loan volume or repurchase rate data;
(7) Identification of any areas of concern; and
(8) An explanation of any discussions with the lenders that may impact
the PLP decision.
b) The LTT contacts the lender to obtain a statement from the lender that it is
in good standing with its primary regulator. The lender must disclose any
formal or informal enforcement actions or agreements during the lender’s
most recent PLP term unless such disclosure is prohibited by its primary
regulator. SBA will determine in its discretion if the enforcement actions
or agreements will render the lender unacceptable for PLP.
c) The LTT gathers the information relevant to a lender’s renewal. The LTT
performs an analysis, makes a recommendation and sends it to the
appropriate SBA official who makes a decision and notifies the LTT. The
LTT then informs the lender of SBA’s decision.
(1) For renewal of its PLP status, the lender must demonstrate that it:
(a) Can effectively process, close, service, and liquidate SBA
loans;
Effective Date: October 1, 2011 25
Subpart A SOP 50 10 5(D)
(b) Is in compliance with SBA Loan Program Requirements (as
defined in 13 CFR 120.10);
(c) Has satisfactory SBA performance as determined by SBA in its
discretion. The Lender’s Risk Rating, among other factors,
will be considered in determining satisfactory SBA
performance. Other factors may include, but are not limited to,
on-site review/examination assessments, historical
performance measures (like default rate, purchase rate and loss
rate), loan volume to the extent that it impacts performance
measures, and other performance related measurements and
information (such as contribution toward SBA mission);
(d) Is in good standing with its federal or state financial regulator
by submitting a statement to that effect and by disclosing any
formal or informal enforcement actions or agreements within
the past 3 years unless such disclosure is prohibited by its
primary regulator (SBA will determine in its discretion whether
those actions or agreements make the lender ineligible for PLP
status);
(e) Is not subject to any SBA enforcement actions; and
(f) Has been current in filing SBA required 1502 reports and
remitting required guaranty, servicing and review fees.
(2) SBA, in its discretion, also will consider other risk related
information (e.g., rapid growth, inadequate capital, formal
supervisory actions outstanding filed by the lender’s federal or state
regulator).
d) Notification of Renewal
The LTT notifies the lender and Lead SBA Field Office that:
(1) The renewal is approved; and
(2) The term of the renewal.
The LTT sends the lender a new SBA Form 1347 signed by the LTT on
behalf of the appropriate SBA official. The lender must sign and return the
SBA Form 1347 to the LTT before the lender’s PLP renewal is effective.
e) CLP Status for PLP Lenders
The LTT renews the lender’s CLP status to match the term of the lender’s
PLP renewal. The LTT sends the lender a new SBA Form 1186 signed by
the LTT on behalf of the appropriate SBA official. The lender must sign
and return the SBA Form 1186 to the LTT before the lender’s CLP
renewal is effective. When the signed SBA Form 1186 is received, the
LTT updates PIMS to reflect the new expiration date.
f) If Renewal is Declined
The LTT notifies the lender and Lead SBA Field Office of the reason(s)
for decline of the PLP renewal. The lender may not make PLP loans after
26 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
its PLP status expires. (If the lender’s PLP renewal is declined, the
lender’s CLP status will not automatically terminate. If the lender’s PLP
status is not renewed prior to the termination of its CLP status, then the
lender must follow the procedures described above to request renewal of
its CLP status from the local SBA field office.) The lender may re-apply
for PLP status when it has overcome the reason(s) for decline. To do so,
the lender must file a request with the LTT and must show how it has
overcome the reason(s) for decline. The LTT will review the request,
make a recommendation and send it to the appropriate SBA official for a
final Agency decision. The LTT will notify the lender in writing of SBA’s
final decision.
g) Temporary Extension of PLP Status
If a lender’s PLP status is expiring and SBA has not completed the
renewal process, the LTT may extend a lender’s PLP status for a short,
interim period as determined by the D/OCRM, in consultation with the
D/FA.
h) Reinstatement
If a lender’s PLP status was revoked, declined or voluntarily terminated,
the lender may ask SBA to reinstate its PLP status. However, the lender
must follow paragraph B.III of this section.
5. PLP-Export Working Capital Program Authority
a) Domestic lenders with an international lending unit may have concurrent
approval to participate in SBA’s Export Working Capital Program
(EWCP). This program includes the opportunity for experienced
international trade lenders to apply for PLP status with its EWCP unit.
Lenders with PLP-EWCP status are delegated the same level of authority
to process, close, service, and liquidate EWCP loans as is granted to
domestic lenders with PLP authority.
b) SBA offers PLP status on EWCP loans to PLP Lenders through a request
filed by the lender’s international unit for expansion of its domestic
lending institution’s PLP authority. Application requests include the
following elements:
(1) Legal name and address of lender;
(2) Address, city and state where lender’s international lending is
performed;
(3) Name, title, telephone and fax numbers and e-mail address of the
international lending unit’s primary contact;
(4) A copy of the lender’s SBA Form 750EX;
(5) Identification of the USEAC offices the lending unit works through
on EWCP loans;
Effective Date: October 1, 2011 27
Subpart A SOP 50 10 5(D)
(6) A description of the lending unit’s experience in international trade
lending, including its level of EWCP lending over the last 2 years,
Export-Import Bank (―Ex-Im‖) lending activity over the same two
year period, and identification of any form of delegated lender status
with Ex-Im Bank or other trade finance agencies;
(7) Identification of personnel in charge of EWCP lending, their
experience in export trade finance for small concerns, and
(8) Documentation supporting the bank’s delegation of authority to the
contact person filing this PLP expansion request.
c) Completed applications should be directed to the Office of International
Trade (―OIT‖) at SBA. OIT staff will be responsible for screening and
collecting information from the applicable SBA offices on the current
regulatory status of the lender’s domestic lending unit and the
international lending unit’s capabilities as a EWCP participant. OIT will
forward its recommendation and the comments of the other offices to
OCRM for a final decision. The lender must demonstrate that it:
(1) Has a satisfactory history of providing trade finance to exporters
(both the lender and the lender’s loan officers);
(2) Has the ability to develop and analyze complete loan application
packages;
(3) Has been an active participant in the EWCP with SBA and/or with
Ex-Im Bank for at least six consecutive months immediately prior to
the SBA field office’s recommendation;
(4) Is in compliance with SBA Loan Program Requirements (as defined
in 13 CFR 120.10);
(5) Has satisfactory SBA performance as determined by SBA in its
discretion. The Lender’s Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance. Other
factors may include, but are not limited to, on-site
review/examination assessments, historical performance measures
(like default rate, purchase rate and loss rate), loan volume to the
extent that it impacts performance measures, and other performance
related measurements and information (such as contribution toward
SBA mission).
(6) Is in good standing with its federal or state financial regulator by
submitting a statement to that effect and by disclosing any formal or
informal enforcement actions or agreements within the past 3 years
unless such disclosure is prohibited by its primary regulator (SBA
will determine in its discretion whether those actions or agreements
make the lender ineligible for PLP-EWCP status);
(7) Is not subject to any SBA enforcement actions; and
(8) Has been current in filing SBA required 1502 reports and remitting
required guaranty, servicing and review fees.
28 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
d) Lenders are notified of the final decision by written letter from OCRM
with a copy to OIT and the appropriate SBA Field Office. If approved,
OCRM will provide the lender with the Supplemental Guaranty
Agreement – Preferred Lender Program (PLP) for Export Working Capital
Program (EWCP) Loans (SBA Form 2310), which the lender must
execute and return to SBA before the lender can submit any loan
applications under its PLP-EWCP authority. (Agreements must be signed
and returned within 30 days of receipt or a new application to the program
will be required.)
e) If the PLP-EWCP application is declined, OCRM notifies the lender and
SBA field office with the reason for decline. The lender may re-apply for
PLP-EWCP status when it has overcome the reason for decline. To do so,
the lender must file a request with OIT and must show how it has
overcome the reasons for decline. OIT will review the request, make a
recommendation and send it to OCRM for a final Agency decision.
OCRM will notify the lender in writing of SBA’s final decision.
f) All PLP-EWCP expansion approvals will be for a period not to exceed the
existing term of the domestic lender’s PLP authority. The succeeding PLP
renewal of the domestic lending unit will include a section on the lender’s
EWCP lending, with comment requests from the SLPC directed to the
OIT in the same manner as requests for comment from SBA loan
servicing or loan liquidation Centers.
g) Lenders that are participating in the Delegated Authority Lender Program
of the Export-Import Bank of the United States (Ex-Im Bank) (or any
successor Program) are eligible to participate in the PLP-EWCP program.
Lenders should be aware that they must comply with 13 CFR 120.410(d),
which requires SBA lenders to ―be supervised and examined by either a
Federal Financial Institution Regulator or a state banking regulator
satisfactory to SBA.‖ Ex-Im Bank Delegated Authority Lenders must
comply with the PLP-EWCP application procedures described above,
however, such lenders are not required to have prior experience with SBA
7(a) lending and are deemed to be an active participant with Ex-Im Bank
for purposes of the application.
6. Authority and Responsibilities
a) Eligibility Requirements: In addition to the SBA’s primary business loan
eligibility standards set forth in Subpart B, Chapter 2 of this SOP, the
following additional restrictions apply to PLP Loans.
(1) Lenders may use PLP only for 7(a) loans. Lenders may not use PLP
for any pilot program unless SBA authorizes use of PLP for the pilot.
(2) Types of Loans Not Eligible under PLP – these types of loans are not
eligible under PLP processing:
(a) Disabled Assistance Loans (DAL);
(b) Qualified Employee Trusts (ESOP) (loans made to an ESOP
under 13 CFR 120.350 through 120.354);
Effective Date: October 1, 2011 29
Subpart A SOP 50 10 5(D)
(c) Pollution Control program; and
(d) International Trade Loans not secured by a first lien position on
the collateral.
Revolving credits are not eligible for PLP except under CAPLines
and, if the lender has authority from SBA to make PLP-EWCP loans,
under the EWCP.
(3) Types of Businesses Not Eligible for PLP
The types of businesses not eligible under standard 7(a) also are not
eligible under PLP. See Subpart B, Chapter 2 of this SOP.
b) Additional Restrictions Specific to PLP (13 CFR 120.452).
(1) Refinancing – See Subpart B, Chapter 2 of this SOP.
(2) Reconsiderations of declined loan applications. Reconsiderations of
loans previously declined by SBA (regardless of the method by
which they were originally processed) may not be processed under
PLP, or any other processing method where the lender is given
delegated approval authority.
c) PLP Lenders’ Processing Responsibilities - (13 CFR 120.452(a))
SBA’s business loan eligibility requirements, credit policy, and procedures
apply to PLP loans. The PLP Lender must stay informed on and must
apply all of SBA’s Loan Program Requirements. A lender may not submit
the same loan guaranty request under more than one processing method. A
lender also may not knowingly submit a loan guaranty request under PLP
after the applicant has already submitted a request from a different lender.
(1) Lender’s Eligibility Review
(a) A PLP Lender must analyze a PLP applicant’s eligibility in the
same way that SBA analyzes eligibility for a regular 7(a) loan
applicant. The PLP Lender must keep in its loan file
documentation supporting its eligibility analysis. For example,
if a franchise is involved, the PLP Lender must review the
Franchise Registry (www.franchiseregistry.com) to ensure the
franchisor’s agreement continues to meet the SBA’s
requirement that the franchisee’s opportunity for profit and risk
of loss is commensurate with ownership. If the franchisor’s
agreement does not appear on the Registry, the lender must
review the agreement to ensure that it meets SBA’s
requirements as set forth in Subpart B, Chapter 2 of this SOP.
SBA will not conduct an eligibility review prior to issuing a
loan number. SBA may review the lender’s documentation
supporting its eligibility determination as part of any guaranty
purchase request or when conducting lender oversight
activities.
(b) For a PLP loan, size of the applicant is determined as of the
date of the lender’s approval of the loan. A PLP Lender may
30 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
accept as true the size information provided by the applicant,
unless credible evidence to the contrary is apparent.
(2) Credit Analysis
SBA has authorized PLP Lenders to make the credit decision
without prior SBA review. The lender must perform a thorough and
complete credit analysis of the applicant, establish that the loan is of
such sound value as to reasonably assure repayment and document
its analysis in the loan file. See Subpart B, Chapter 4 of this SOP for
specific guidance on processing loan guaranty requests.
(3) The Authorization
PLP Lenders draft the Authorization without SBA review and
execute it on behalf of SBA. The lender must make sure that all
collateral and other requirements documented in the lender’s credit
analysis are in each Authorization. The lender also must include all
SBA-required authorization provisions. See Subpart B, Chapter 5 of
this SOP.
(4) Closing Requirements
(a) SBA closing requirements are the same for PLP loans as for
standard 7(a) loans. With the exception of Small Loan
Advantage (SLA) loans and CAPLines, the same SBA forms
are required. (For further guidance on the required forms for
SLA and CAPLines, see Subpart B, Chapter 7, Paragraphs
III.C.2 and 3 of this SOP.) The lender must obtain all required
collateral positions and must meet all other required conditions
before loan disbursement. SBA delegates to the PLP Lender
responsibility for all pre-disbursement Authorization
requirements in this SOP. The only actions that the lender may
not take on a PLP loan are those specifically reserved to SBA.
See Subpart B, chapter 7 of this SOP.
(b) After closing the loan, the PLP Lender must send to the
appropriate CLSC a copy of the executed Authorization. The
lender should not send SBA any other closing documentation,
including disbursement information, except through the
required periodic loan status reports (SBA Form 1502).
(5) Servicing and Liquidation Responsibilities
See SOPs 50 50 and 50 51, and 13 CFR 120.453 and 13 CFR Part
120, Subpart E for guidance.
7. Change of PLP Lender’s Structure
a) To determine the effect on a lender’s delegated authority due to a change
in the lender’s structure, please see the chart below.
b) If a PLP Lender changes its structure or organization in any of the
following ways, it must inform the LTT in writing:
Effective Date: October 1, 2011 31
Subpart A SOP 50 10 5(D)
(1) The lender is acquired by another lender;
(2) The lender is merged into another legal entity;
(3) The lender changes its name;
(4) The lender substantially changes the management of its SBA
business;
(5) The lender substantially changes how it handles SBA loans; or
(6) A regulatory agency takes over or closes the lender.
An SBA field office that discovers any of the above circumstances also
must immediately notify the LTT in writing.
c) Requests for New SBA Guaranty Agreements
The lender may obtain:
(1) A new SBA Form 750 from the SBA field office; and
(2) New SBA Forms 1186 and 1347 from the LTT.
If a PLP Lender continues as the same Then . . .
legal entity that signed the SBA Forms
1347 (PLP) and 1186 (CLP) and. . .
(1) The PLP Lender changes its name. The LTT records the name change. The
lender’s PLP and CLP authority is not
changed. A new SBA Form 1347 (PLP)
or SBA Form 1186 (CLP) is not
needed.
(2) The PLP Lender is acquired by another The LTT records the holding company
entity. The PLP Lender continues as a name. The lender’s PLP and CLP
separate legal entity. authority is not changed. A new SBA
Form 1347 (PLP) or SBA Form 1186
(CLP) is not needed.
(3) The PLP Lender acquires another lender. The PLP lender may continue to make
The acquired lender does not continue as a PLP loans under its PLP authority
separate legal entity. unless there is a substantial change in
its ability to make PLP and/or CLP
loans.
(4) The PLP Lender acquires another lender. The acquired lender may not make PLP
The acquired lender continues as a separate loans. The acquired lender may apply
legal entity. for PLP authority.
32 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
If a PLP Lender continues as the same Then . . .
legal entity that signed the SBA Forms
1347 (PLP) and 1186 (CLP) and. . .
(5) The lender is closed or taken over by a The lender’s PLP and CLP authority
regulatory authority. automatically terminates and the lender
must cooperate with SBA to transfer
responsibility for servicing and
liquidating its PLP and CLP portfolio.
The LTT notifies the lender, SBA field
office(s) and appropriate centers that
the lender may not make any new
loans.
(6) The lender changes its operations so SBA will not renew the lender’s PLP
much that it cannot show that it handles SBA authority or will suspend or revoke the
loans appropriately. lender’s PLP s authority.
If a PLP Lender does not continue as the Then . . .
legal entity that executed the SBA Forms
1347 (PLP) and 1186 (CLP) and . . .
(1) The PLP Lender is merged into a non- The original PLP Lender no longer has
PLP Lender. The original PLP Lender’s the authority to make PLP loans. The
SBA operations are unchanged. surviving lender may apply for PLP
authority and execute a PLP agreement.
(2) The PLP Lender is merged into another The original PLP Lender no longer has
PLP Lender. the authority to make PLP loans under
its agreements with SBA. However,
PLP loans may be made under the
surviving PLP Lender’s agreements
and the surviving PLP Lender is
responsible for servicing and
liquidating the original PLP Lender’s
PLP loan portfolio.
(3) The PLP Lender is dissolved. It does not Both PLP and CLP authority terminates
merge into another lender. automatically and the lender must
cooperate with SBA to transfer
responsibility for servicing and
liquidating its PLP and CLP loan
portfolios. The LTT notifies the lender,
SBA field office(s) and appropriate
centers that the lender may not make
any new loans.
8. Monitoring and reviews
See Paragraph III.A through C of this Chapter for further information on
monitoring and reviews.
9. Supervision and enforcement
Effective Date: October 1, 2011 33
Subpart A SOP 50 10 5(D)
See Paragraph III.D of this Chapter for further information on supervision and
enforcement.
10. Suspension and revocation
SBA may suspend or revoke a lender’s PLP authority in accordance with 13
CFR 120.1400-1600.
C. SBA Express Program
SBA Express was established as a permanent SBA program under P.L.108-447
signed into law on December 8, 2004. The program reduces the number of
government mandated forms and procedures, streamlines the processing and reduces
the cost of smaller, less complex SBA loans. The program allows lenders to utilize, to
the maximum extent practicable, their respective loan analyses, procedures, and
documentation. In return for the expanded authority and autonomy provided by the
program, lenders agree to accept a maximum SBA guaranty of 50 percent.
1. The SBA Express Lender
To the maximum extent practicable, SBA Express lenders can use their own
forms, internal credit memoranda, notes, collateral documents, servicing and
liquidation documentation. In using their documents and procedures, lenders
must follow their established and proven internal procedures used for their
similarly sized non-SBA guaranteed commercial loans. See Subpart B, Chapter
6 for a listing of the forms SBA requires for SBA Express.
2. Qualifications for Initial SBA Express Lender Status
Lenders can find information about how to apply for SBA Express status on the
SLPC’s website at
http://www.sba.gov/aboutsba/sbaprograms/elending/slpc/plp/sba_slpc_request_
express_statu.html.
a) Existing SBA Lenders
(1) An existing SBA lender must demonstrate that it:
(a) Can effectively process, close, service, and liquidate SBA
loans;
(b) Is in compliance with applicable SBA Loan Program
Requirements (as defined in 13 CFR 120.10);
(c) Has satisfactory SBA performance as determined by SBA in its
discretion. The Lender’s Risk Rating, among other factors,
will be considered in determining satisfactory SBA
performance. Other factors may include, but are not limited to,
on-site review/examination assessments, historical
performance measures (like default rate, purchase rate and loss
rate), loan volume to the extent that it impacts performance
measures, and other performance related measurements and
information (such as contribution toward SBA mission);
34 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
(d) Has been current in filing SBA required 1502 reports and in
remitting required guaranty, servicing and review fees;
(e) For lenders regulated by one of the federal/state oversight
authorities, is in good standing with its primary regulator by
submitting a statement to that effect and by disclosing any
formal or informal enforcement actions or agreements within
the past 3 years unless such disclosure is prohibited by its
primary regulator (SBA will determine in its discretion whether
an enforcement action or agreement renders the lender
unacceptable for SBA Express participation);
(f) Is not subject to any SBA enforcement actions; and
(g) Has not received a major substantive objection from its Lead
SBA Field Office.
(2) SBA, in its discretion, also will consider other risk related
information (e.g., rapid growth, inadequate capital, formal
supervisory actions outstanding filed by the lender’s federal or state
regulator).
b) For SBA lenders with less than 3 years of SBA lending experience/data,
the Agency may consider performance over the period of time the lender
has been an SBA lender, but will limit the lender’s initial term of
participation to 1 year or less. Lenders that identify significant differences
between the performance numbers developed by the lender and those
developed by SBA (not related to a lack of accurate 1502 reporting) may
contact OCRM.
c) Lenders that do not currently participate with SBA
In addition to meeting the Agency’s lender requirements as set forth in
Paragraph II.C. of this chapter, a lender that does not currently participate
with SBA also must demonstrate that it:
(1) Is in good standing with its primary federal/state regulator by
submitting a statement to that effect and by disclosing any formal or
informal enforcement actions or agreements within the past 3 years
unless such disclosure is prohibited by its primary regulator (SBA
will determine whether the enforcement action or agreement renders
the lender unacceptable for participation in this program);
(2) Has at least 20 commercial or business loans for $350,000 or less at
their most recent fiscal year end;
(3) Ensures its primary SBA loan personnel have received appropriate
training on SBA’s policies and procedures (such training could
include SBA District Office training and/or trade association training
that adequately addresses SBA’s regulations and Standard Operating
Procedures, including SBA’s loan processing, servicing, and
liquidation requirements); and
(4) Has no major substantive objections from the D/OCRM (e.g.,
relating to risk or program integrity).
Effective Date: October 1, 2011 35
Subpart A SOP 50 10 5(D)
3. Process to become an SBA Express Lender
a) A lender may send a written request to its local SBA Field Office with a
copy to the Lender Transaction Team, Sacramento Loan Processing
Center. For multi-state lenders, the lender may send a written request to
the SBA Field Office where the lender is headquartered.
b) As noted above, lenders not currently participating with the SBA must
meet the Agency’s lender requirements as set forth in Paragraph II.C. of
this chapter and must become an approved SBA lender before
participating in SBA Express. (An application for SBA Express authority
may be made simultaneously with the application for SBA lender
authority.)
c) An SBA field office may nominate a lender for SBA Express status by
sending a written nomination to the LTT. When an SBA field office
nominates a lender for PLP status, it also may nominate the lender for
SBA Express status.
d) The LTT gathers the information relevant to a lender’s participation
request. The LTT performs an analysis, makes a recommendation and
sends it to the appropriate SBA official who makes a decision and notifies
the LTT. The LTT then informs the lender of SBA’s decision.
e) SBA may limit a new SBA lender to a yearly maximum of $25 million of
SBA Express in its first year of participation.
4. Supplemental Guaranty Agreement
a) If the lender’s request for SBA Express status is approved, the LTT
notifies the lender of the decision and sends the lender an SBA Express
Supplemental Loan Guaranty Agreement to sign and return. The LTT also
sends the lender instructions for submitting SBA Express applications.
b) The lender must sign and return the agreement to the LTT before the
lender’s SBA Express status is effective. (Agreements must be signed and
returned to the Center within 30 days of receipt or a new application to the
program will be required.)
c) If the lender is a PLP Lender, the term of its SBA Express status, when
possible, will be tied to the lender’s remaining PLP term.
d) Lenders not currently participating in SBA’s loan programs that are
approved for SBA Express will be limited to an initial SBA Express term
of 1 year.
5. Decline of SBA Express Status
If SBA declines a request for nomination for SBA Express status, the LTT
notifies the lender and Lead SBA Field Office of the reason(s) for decline of the
request. The lender may re-apply for SBA Express status when it has overcome
the reason(s) for decline. To do so, the lender must file a request with the LTT
and must show how it has overcome the reason(s) for decline. The LTT will
review the request, make a recommendation and send it to the appropriate SBA
official for a final Agency decision. The LTT will notify the lender in writing of
SBA’s final decision.
36 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
6. Renewals of SBA Express Status
a) The LTT will automatically start the renewal process a few months prior
to the expiration of a lender’s SBA Express status. The LTT will contact
the lender and ask it for a statement that it is in good standing with its
primary federal/state regulator and disclosure of any formal or informal
enforcement actions or agreements within the past 3 years unless such
disclosure is prohibited by its primary regulator.
b) The LTT will also contact the lender’s Lead SBA Field Office and the
SBA’s processing, servicing and liquidation centers. The comments of
those offices should pertain to the lender’s most recent SBA Express term
and must include:
(1) Whether they recommend renewal;
(2) If they do not recommend renewal, why not;
(3) Whether the lender can effectively process, close, service and
liquidate SBA loans;
(4) Changes in lender’s organization or management;
(5) Any recurring denial of liability or repair situations with the lender;
(6) Reasons for any unfavorable loan volume or repurchase rate data;
(7) Identification of any areas of concern; and
(8) An explanation of any discussions with the lenders that may impact
the SBA Express decision.
c) The LTT gathers the information relevant to a lender’s renewal. The LTT
performs an analysis, makes a recommendation and sends it to the
appropriate SBA official who makes a decision and notifies the LTT. The
LTT then informs the lender of SBA’s decision.
d) Lenders that have participated in SBA Express for 2 years or more may be
renewed in the program for a term up to 2 years, but SBA may renew for
less than 2 years if lender or program circumstances warrant. Lenders
participating in SBA Express for less than 2 years may be renewed in
SBA Express for an additional year and may be renewed for up to 2 years
thereafter.
e) For renewal of a lender’s SBA Express status and to determine its renewal
term for SBA Express:
(1) The lender must demonstrate that it:
(a) Can effectively process, close, service, and liquidate SBA
loans;
(b) Is in compliance with applicable SBA Loan Program
Requirements (as defined in 13 CFR 120.10);
(c) Has satisfactory SBA performance as determined by SBA in its
discretion. The Lender’s Risk Rating, among other factors,
will be considered in determining satisfactory SBA
performance. Other factors may include, but are not limited to,
on-site review/examination assessments, historical
Effective Date: October 1, 2011 37
Subpart A SOP 50 10 5(D)
performance measures (like default rate, purchase rate and loss
rate), loan volume to the extent that it impacts performance
measures, and other performance related measurements and
information (such as contribution toward SBA mission);
(d) Has been current in filing SBA required 1502 reports and in
remitting required guaranty, servicing and review fees;
(e) Is in good standing with its federal or state financial regulator
by submitting a statement to that effect and by disclosing any
formal or informal enforcement actions or agreements within
the past 3 years unless such disclosure is prohibited by its
primary regulator, SBA will determine in its discretion whether
those actions or agreements make the lender ineligible for SBA
Express status;
(f) Is not subject to any SBA enforcement actions; and
(g) Has not received substantive objections from its Lead SBA
Office.
(2) SBA, in its discretion, also will consider other risk related
information (e.g., rapid growth, inadequate capital, formal
supervisory actions outstanding filed by the lender’s federal or state
regulator).
f) The LTT notifies the lender of SBA’s decision and, if the renewal is
approved, the LTT sends the lender a new SBA Express Supplemental
Guaranty Agreement to sign.
g) The lender must sign and return the agreement to the Center before the
lender’s SBA Express renewal is effective. (Agreements must be signed
and returned to the Center within 30 days of receipt or a new application
to the program will be required.)
h) If the renewal is declined, the lender will be notified of the reason(s) for
the decline, and it may not make SBA Express loans after its SBA Express
status expires. The lender may re-apply when it has overcome the
reason(s) for decline. To do so, the lender must file a request with the LTT
and must show how it has overcome the reason(s) for denial. The LTT
will review the request, make a recommendation and send it to the
appropriate SBA official for a final Agency decision. The LTT will notify
the lender in writing of SBA’s final decision.
i) If a lender’s SBA Express status was revoked, declined or voluntarily
terminated, the lender may ask SBA to reinstate its SBA Express status.
However, the lender must follow paragraph C.3 of this section.
7. Authority and Responsibilities
a) SBA Express lenders may make SBA Express loans in any area of the
country.
b) SBA Express lenders must apply and comply with all of SBA’s Loan
Program Requirements.
38 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
c) Eligibility Requirements: In addition to the SBA’s primary business loan
eligibility standards set forth in Subpart B, Chapter 2 of this SOP, the
following additional restrictions apply to SBA Express loans.
(1) Lenders may not use SBA Express for any pilot program unless SBA
authorizes use of SBA Express for the pilot.
(2) Types of Loans Not Eligible under SBA Express – these types of
loans are not eligible under SBA Express processing:
(a) Disabled Assistance Loans (DAL);
(b) Qualified Employee Trusts (ESOP) (loans made to an ESOP
under 13 CFR 120.350 through 120.354);
(c) Pollution Control program; and
(d) CAPLines program.
(3) Types of Businesses Not Eligible for SBA Express
The types of businesses not eligible under standard 7(a) also are not
eligible under SBA Express. See Subpart B, Chapter 2 of this SOP.
(4) Additional Restrictions Specific to SBA Express
(a) Refinancing – See Subpart B, Chapter 2 of this SOP.
(b) Reconsiderations of declined loan applications.
Reconsiderations of loans previously declined by SBA
(regardless of the method by which they were originally
processed) may not be processed under SBA Express.
(c) Previous Submissions. A loan is not eligible for SBA Express
if the SBA Express lender is aware that the application was
previously submitted to SBA under any SBA program, except
that the SLPC Director may waive this prohibition if the
application was preliminary or incomplete when previously
submitted or it has changed materially since the previous
submission. .
d) SBA Express Lender’s Processing Responsibilities
(1) Lender’s Eligibility Review
(a) SBA Express is a streamlined program, so complex or
ambiguous eligibility issues should be processed using
standard 7(a) procedures rather than through SBA Express.
SBA grants SBA Express lenders increased responsibility for
screening applicants and loans for SBA eligibility. SBA
Express lenders must be fully familiar with SBA’s eligibility
requirements as set forth in the SBA Loan Program
Requirements and must screen all SBA Express applicants and
loans to ensure they meet those requirements.
(b) Lenders may rely, in many instances, on certifications provided
by the Small Business Applicant, several of which are included
in the SBA Express application documents. In the case of size,
the lender may rely on information provided by the applicant at
Effective Date: October 1, 2011 39
Subpart A SOP 50 10 5(D)
the date of application, unless the lender has credible evidence
to the contrary.
(c) Certain eligibility issues require additional lender review
and/or verification. If, for example, a franchise is involved, the
SBA Express lender must review The Franchise Registry
(www.franchiseregistry.com) to ensure the agreement
continues to meet SBA’s requirements. (See Subpart B,
Chapter 2 of this SOP for further guidance on franchise
eligibility.) Lenders must follow all standard 7(a) eligibility
requirements and maintain appropriate documentation
supporting their eligibility screening in the loan file. The lender
also must ensure all required forms/information are obtained,
complete and properly executed.
(d) Lenders must carefully review and screen SBA Express
applicants and loans to ensure they meet SBA’s eligibility
requirements before transmitting to the SLPC the SBA Express
guaranty request and supplemental information via E-Tran.
(e) Lenders must ensure all required forms/information are
obtained, complete, and properly executed. Appropriate
documentation must be maintained, including adequate
information to support the eligibility of the applicant and the
loan, in the lender’s loan file.
(2) Credit Analysis
(a) SBA has authorized SBA Express lenders to make the credit
decision without prior SBA review. The credit analysis must
demonstrate that there is a reasonable assurance of repayment.
The lender is required to use appropriate, prudent and generally
accepted industry credit analysis processes and procedures
(which may include credit scoring), and these procedures must
generally be consistent with those used for its similarly sized
non-SBA guaranteed commercial loans. Lenders that do not
use credit scoring for their similarly sized non-SBA guaranteed
commercial loans may not use credit scoring for SBA Express.
Lenders must validate (and document) with appropriate
statistical methodologies that their credit analysis procedures
are predictive of loan performance, and they must provide that
documentation to SBA upon request. In addition, the credit
scoring results must be documented in each loan file and
available for SBA review.
(b) Lenders must not make a SBA Express loan which would be
inconsistent with SBA’s ―credit not available elsewhere‖
standard (see Subpart B, Chapter 2 of this SOP), i.e., lenders
must not make an SBA guaranteed loan that would be available
on reasonable terms from either the lender itself or another
source without an SBA guaranty.
40 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
(c) The credit decision, including how much to factor in a past
bankruptcy or whether to require an equity injection, is left to
the business judgment of the lender. Also, if the lender requires
an equity injection and, as part of its standard processes for
non-SBA guaranteed loans verifies the equity injection, it must
do so for SBA Express loans. (Lenders must adhere to the
requirement that owners of 20% or more must inject equity into
the business above certain thresholds. See Subpart B, Chapter 2
of this SOP, regarding the Utilization of Personal Resources.)
While the credit decision is left to the business judgment of the
lender, early loan defaults will be reviewed by SBA pursuant to
SOP 50-51.
(3) Application Documents and Authorization
(a) The SBA Express lender is responsible for ensuring all
required forms/information are obtained, complete, and
properly executed. After the loan is closed, the lender must
continue to apprise SBA of certain critical performance data as
well as changes in certain basic borrower information, such as
trade name and address. See Subpart B, Chapter 6 of this SOP.
(b) The lender completes the SBA Express Authorization without
SBA review and signs it on behalf of SBA. SBA does not
require that this form be provided to the borrower. See Subpart
B, Chapter 5 of this SOP.
e) Closing, Servicing and Liquidation
The SBA Express lender must close, service, and liquidate its SBA
Express loans using the same reasonable and prudent practices and
procedures that the lender uses for its non-SBA guaranteed commercial
loans.
f) Affiliation issues/Change of Lender Status
When a holding company with a PLP subsidiary requests an extension of
PLP status to a non-PLP subsidiary, it may also request SBA Express
status for the non-PLP subsidiary. The nomination or request must include
documentation that the lender has met the SBA Express participation
requirements set forth above.
8. Monitoring and reviews
SBA uses the L/LMS system to assess SBA Express lenders quarterly through
the composite risk rating. In addition, those SBA Express lenders with
outstanding SBA balances of $10 million or more are also reviewed on-site, in
accordance with SOP 51 00. See Paragraph III.A through C of this Chapter for
further information on monitoring and reviews.
9. Supervision and enforcement
See Paragraph III.D of this Chapter for further information on supervision and
enforcement.
Effective Date: October 1, 2011 41
Subpart A SOP 50 10 5(D)
10. Suspension or revocation
See Paragraph III.E of this Chapter for further information on suspension and
revocation.
D. The Patriot Express Pilot Loan Initiative
SBA developed the Patriot Express Pilot Loan Initiative to support the entrepreneur
segment of the Nation’s military community (including spouses). This initiative uses
streamlined documentation and processing features similar to SBA Express. The
specific features of the program, including but not limited to applicant eligibility,
maximum loan amounts and guaranty percentages, are set forth in Subpart B of this
SOP.
1. Becoming a Patriot Express Lender
a) Existing SBA Lenders
(1) Lenders that currently participate in the SBA Express or PLP
programs are automatically eligible to make Patriot Express loans
after they have executed the Patriot Express Supplemental Guaranty
Agreement.
(2) Lenders that do not currently participate in the SBA Express or PLP
programs may request Patriot Express and SBA Express authority
simultaneously. An existing SBA lender must demonstrate that it
meets the criteria to participate in SBA Express set forth in
Paragraph IV.C.2. above.
(3) How To Request Patriot Express Status
(a) An SBA lender (or field office on behalf of an SBA lender)
may send a request to participate in writing to the Lender
Transaction Team, Sacramento Loan Processing Center 6501
Sylvan Road, Citrus Heights, CA 95610 or fax a request to
(916) 735-0643 with an information copy to its Lead SBA
Office.
(b) When a lender (or field office on behalf of an SBA lender)
requests or extends SBA Express and/or PLP status, it also may
request Patriot Express status.
(c) When a holding company with a PLP subsidiary requests an
extension of PLP status to a non-PLP subsidiary, it also may
request Patriot Express status for the non-PLP subsidiary. The
nomination or request must include documentation that the
lender has met the Patriot Express participation requirements.
(d) If the lender’s request is approved, the LTT will send the
lender a Patriot Express Supplemental Loan Guaranty
Agreement to be signed by the lender.
(e) Agreements must be signed and returned to the LTT before the
lender’s Patriot Express status is effective. (Agreements must
be returned within 30 days of receipt or a new application to
the initiative will be required.)
42 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
b) Lenders Not Currently Participating In SBA’s Loan Programs
(1) Lenders not currently participating with the SBA must meet the
Agency’s lender requirements as set forth in Paragraph II of this
Chapter and must become an approved SBA Express before
participating in Patriot Express. (An application for SBA
Express/Patriot Express authority may be made simultaneously with
the application for SBA lender authority. See paragraph II of this
Chapter.) In order to become an approved SBA Express, the lender
must demonstrate that it meets the criteria set forth in Paragraph
IV.C.2 (SBA Express) of this Chapter.
(2) How To Request Patriot Express Status
(a) The process is the same as stated above for existing SBA
lenders.
(b) Lenders not currently participating in SBA’s loan programs
that are approved for Patriot Express will be limited to an
initial Patriot Express term of 1 year, after which SBA will
review their performance.
(c) SBA may limit a new SBA lender to a yearly maximum of $25
million of Patriot Express authority in its initial year of
participation.
2. Renewing Patriot Express Lender Status
a) The LTT will automatically start the renewal process a few months prior
to the expiration of a lender’s Patriot Express status. The LTT will contact
the lender and ask for a statement that it is in good standing with its
primary federal/state financial regulator and disclosure of any formal or
informal enforcement actions or agreements during its previous Patriot
Express term unless such disclosure is prohibited by its primary regulator.
The LTT will also contact the lender’s Lead SBA Office and the SBA’s
Servicing and Purchase Centers as applicable for information on the
lender’s policies, procedures and any other relevant information. The
LTT gathers the information relevant to a lender’s renewal, analyzes it,
and sends it with a recommendation to the appropriate SBA official, who
reviews the renewal, makes a final decision, and forwards that decision to
the LTT.
b) Lenders that have participated in Patriot Express for 2 years or more may
be renewed in the initiative for a term up to 2 years, but SBA may renew
for less than 2 years if lender or program circumstances warrant. Lenders
participating in Patriot Express for less than 2 years may be renewed in
Patriot Express for an additional year and may be renewed for up to 2
years thereafter.
c) In renewing a lender and determining its renewal term for Patriot Express,
SBA will consider whether the lender meets the criteria set out in
Paragraph IV.C.6 of this Chapter.
Effective Date: October 1, 2011 43
Subpart A SOP 50 10 5(D)
d) The LTT notifies the lender of the SBA’s decision and, if the renewal is
approved, the LTT sends the lender a new Patriot Express Supplemental
Guaranty Agreement to sign. The lender must sign and return the
agreement to the LTT before the lender’s Patriot Express renewal is
effective. (Agreements must be signed and returned to the LTT within 30
days of receipt or a new application to the initiative will be required.) If
the renewal is not approved, the lender will be notified as to the reason(s),
and it may not make Patriot Express loans after its Patriot Express status
ends.
e) The lender may re-apply for Patriot Express status when it has overcome
the reason(s) for decline. To do so, the lender must file a request with the
LTT and must show how it has overcome the reason(s) for decline. The
LTT will review the request, make a recommendation and send it to the
appropriate SBA official for a final Agency decision. The LTT will notify
the lender in writing of SBA’s final decision.
f) If the lender’s Patriot Express status was revoked, declined or voluntarily
terminated, the lender may ask SBA to reinstate its Patriot Express status.
However, the lender must follow paragraph D.1 of this section.
3. Authority and Responsibilities
Patriot Express lenders have all of the same authority and responsibilities set
forth in Paragraph IV.C.7 of this Chapter.
4. Monitoring and Enforcement
SBA uses the L/LMS system to assess Patriot Express lenders quarterly through
the composite risk rating. In addition, those lenders with outstanding SBA
balances of $10 million or more are also reviewed on-site, in accordance with
SOP 51 00. See Paragraph III.A through C of this Chapter for further
information on monitoring and reviews.
5. Supervision and enforcement
See Paragraph III.D of this Chapter for further information on supervision and
enforcement.
6. Suspension or revocation
See Paragraph III.E of this Chapter for further information on suspension and
revocation.
E. Export Express Program
The Export Express Program is designed to help SBA meet the export financing
needs of small businesses too small to be effectively met by existing SBA export loan
guaranty programs. It is generally subject to the same loan processing, making,
closing, servicing, and liquidation requirements as well as the same maturity terms,
interest rates, and applicable fees as the SBA Express Loan Program. Any differences
between the Export Express requirements are set forth in the appropriate section of
this SOP. (For example, certain uses of loan proceeds are allowed under Export
44 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
Express that are not allowed under SBA’s other lending programs. See Subpart B,
Chapter 2 of this SOP.)
1. Becoming an Export Express Lender
a) Existing SBA Express lenders continue to have Export Express authority
through December 2, 2011, but after that date must have a signed Export
Express Supplemental Guaranty Agreement to make Export Express
loans.
b) The procedures for receiving permanent Export Express authority are
different based on the lender’s existing authority:
(1) Active SBA Express Lenders
Lenders that currently have SBA Express authority that would like to
make Export Express loans must submit a request to SBA. The
request should be submitted to the lender’s local SBA District Office
or U.S. Export Assistance Center (USEAC). These offices should
submit lenders’ requests to the Office of Credit Risk Management,
Lender Transaction Team (LTT) at lender.oversight@sba.gov. The
LTT will send the lender the Export Express Supplemental Guaranty
Agreement (Agreement) and the lender will have 30 days to execute
and return the Agreement to the LTT.
(2) Existing 7(a) Lender that Does Not Participate in the SBA Express
Program
An existing 7(a) lender that would like to participate in the Export
Express Program must submit a nomination request to its local SBA
District Office. The local SBA District Office will submit the
request to the LTT. The LTT will contact the local SBA USEAC for
comments and process the request in accordance with the procedures
and process for the SBA Express Program, as described in Paragraph
IV.C. above. Lenders can request SBA Express and Export Express
authority simultaneously, but are not required to do so. The LTT
will send the lender the Export Express Supplemental Guaranty
Agreement and the lender will have 30 days to executed and return
the Agreement to the LTT.
c) To retain or renew Export Express authority, SBA Express lenders must:
(1) Effectively process, make, close, service, and liquidate Export
Express loans;
(2) Remain in substantial compliance with applicable SBA Loan
Program Requirements;
(3) Have received no major substantive objections regarding renewal
from the field office(s) covering the territory where the lender
generates significant numbers of Export Express loans; and
(4) Received acceptable review results on the Export Express portion of
any SBA administered lender reviews.
d) SBA will generally grant lenders Export Express loan authority for a term
that coincides with the lender’s SBA Express and/or PLP term, unless the
Effective Date: October 1, 2011 45
Subpart A SOP 50 10 5(D)
D/OCRM or designee determines a shorter term is appropriate. For 7(a)
lenders that do not participate in SBA Express or PLP, the maximum term
will be 2 years.
2. Monitoring and reviews
SBA uses the L/LMS system to assess Export Express lenders quarterly through
the composite risk rating. In addition, those lenders with outstanding SBA
balances of $10 million or more are also reviewed on-site, in accordance with
SOP 51 00. See Paragraph III.A through C of this Chapter for further
information on monitoring and reviews.
3. Supervision and enforcement
See Paragraph III.D of this Chapter for further information on supervision and
enforcement.
4. Suspension or revocation
See Paragraph III.E of this Chapter for further information on suspension and
revocation.
46 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
CHAPTER 2: SMALL BUSINESS LENDING COMPANIES
I. A SMALL BUSINESS LENDING COMPANY (“SBLC”) IS: 13 CFR 120.460-
120.490
A. Authorized by the Administrator to make loans pursuant to section 7(a);
B. Regulated, supervised and examined solely by SBA;
C. Subject to additional SBA regulations specific to SBLCs regarding the formation,
capitalization, and enforcement actions; and
D. Subject to all other 7(a) regulations specific to loan processing, servicing and
liquidation.
II. PROCESS FOR ACQUIRING AN SBLC
A. SBA regulations restrict the issuance of the SBA lending authority to operate as an
SBLC to 14 entities. To acquire an SBLC, an entity must purchase one of the existing
lending authorities from a current SBLC.
B. The private parties negotiate a purchase and sale agreement which includes the terms
and conditions related to the sale.
C. A written request by the selling SBLC to the D/FA for approval of a transfer of
ownership and control by the entity transferring the SBA lending authority becomes
notice to SBA of the intent to transfer. The written request should include:
1. The name and address of the acquiring concern; and
2. The name of the acquiring concern’s primary contact.
D. The acquiring concern must file a request for transfer in duplicate with the D/FA
addressing each of the following elements:
1. The Legal name, address, telephone, facsimile and email address of the
acquiring concern;
2. Identification of the form of organization of the proposed SBLC along with
stamp-filed copies of the concerns articles of incorporation or limited liability
company operating agreement;
3. Identification of the proposed SBLC’s capitalization including the form of
ownership, the identification of all classes of equity capital and proposed
funding amounts, rights and preferences accorded to each class of stock or
members interest (including voting rights, redemption rights, and rights of
convertibility) and conditions for transfer, sale or assignment of these interests;
4. The proposed SBLC’s geographic area of operation;
5. Identification of all officers, directors, limited partners, members and all other
parties that propose to hold an equity interest of at least 10% of the economic
interest in any class of stock, limited partnership interest or members interest in
the concern.
6. An organization chart showing the relationship of the proposed SBLC with all
related associates and affiliates within the organization.
Effective Date: October 1, 2011 47
Subpart A SOP 50 10 5(D)
7. A copy of the SBA Form 1081, Statement of Personal History, signed and dated
within 90 days of submission to SBA, for each individual and entity identified
in 5 above.
8. Proof of fidelity insurance coverage as detailed in 13 CFR 120.470(e).
9. A comprehensive business plan that details:
a) The nature of proposed operations, including the organizational units
involved in sourcing, evaluating, underwriting, closing, disbursing
servicing and liquidating small business loans in the organization;
b) The level of prospective lending activity for the first three years of
operation;
c) The identification of all sources of capital used to finance lending
operations; and
d) A projected balance sheet, income statement and statements of cash flows
three years forward, along with the related interest rate, default and
prepayment assumptions. The plan projections should be assembled under
three different operating scenarios: normalized activity, activity assuming
a 30% reduction in projected lending, and activity based on a 50%
reduction in projected lending.
10. All documents associated with any type of external financing expected to be
undertaken by the proposed SBLC;
11. A written statement from an authorized official of the acquiring concern
certifying that the SBLC will not be primarily engaged in the financing the
operations of an affiliate as defined in 13 CFR 121.103.
12. The most recent audited financial statements of the acquiring concern if it has
been in operation for more than one year, or the audited financial statements of
the acquiring concern’s parent company.
13. A certified copy of a board, limited partners, or members resolution specifying
the individual(s) or officials granted the authority by the organization to submit
this SBLC application;
14. A written opinion of independent counsel that addresses:
a) Whether the acquiring concern is duly formed and organized and in good
standing;
b) Whether the acquiring concern is qualified to enter into this transaction;
and
c) The qualifications of the individual or official to submit the application.
15. A certification by the acquiring concern that it is in full compliance with all
federal, state, and local laws.
E. The D/FA will provide written notification to the acquiring concern that SBA will not
object to the transfer of the lending authority. Included with this letter will be all
applicable SBA Form 750 agreement(s) for execution and return to OFA.
Note: Lender participation in specific SBA programs such as PLP and SBA Express will be
considered separately.
48 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
CHAPTER 3: CERTIFIED DEVELOPMENT COMPANIES
I. THE 504 LOAN PROGRAM
A. The SBA 504 Loan Program is an economic development program offering a
financing package that stimulates private sector investment in long-term fixed assets
to increase productivity, create new jobs, and increase the local tax base. The stimulus
is provided by making long-term, low down payment, reasonably priced fixed-rate
financing to healthy and expanding businesses which have the highest probability of
successfully creating new jobs and competing in the world marketplace.
B. Certified Development Companies (CDCs) are non-profit corporations certified and
regulated by the Small Business Administration to package, process, close, and
service 504 loans. These 504 loans are issued through a partnership with Certified
Development Companies (CDC) and private sector, third party lenders. There are a
small number of for-profit CDCs that have been grandfathered into the current 504
program. The provisions of this SOP apply to the non-profit and the for-profit CDCs
in accordance with the terms of the regulations.
C. Terms and definitions specific to the 504 program can be found at 13 CFR 120.802
II. BECOMING A CDC
A. A CDC must provide evidence of the following in its application 13 CFR 120.810:
1. Non-Profit Status 13 CFR 120.820 - A CDC must be a non-profit corporation
and must:
a) Be in good standing in the State in which the CDC is incorporated;
b) Be in compliance with all laws, including taxation requirements, in the
State in which the CDC is incorporated and any other State in which the
CDC conducts business; and
c) Provide a copy of their IRS tax exempt status.
2. Area of Operations 13 CFR 120.821–
The Area of Operations is the state of the CDC’s incorporation.
3. CDC Membership 13 CFR 120.822 – A CDC must have at least 25 members
who actively support economic development in their area of operations.
Members are responsible for electing the Board of Directors of the CDC. The
Members (whether active or retired but still actively supporting economic
development) must represent the following 4 Membership groups:
a) Government organizations;
b) Financial institutions (lenders);
c) Community organizations such as chambers of commerce, foundations,
trade associations, colleges, universities, or small business development
centers; and
d) Businesses in the Area of Operations.
4. Other Membership requirements are:
a) CDC membership must meet annually.
Effective Date: October 1, 2011 49
Subpart A SOP 50 10 5(D)
b) Membership meetings require a quorum to transact business. A quorum
must be present for the duration of the meeting. SBA defines a quorum as
the presence of at least 51% (in person or by proxy) of the Members
entitled to vote.
c) No person or entity can own or control more than 10% of the CDC's
voting membership.
d) No employee or staff of the CDC can qualify as a member of the CDC for
the purpose of meeting the membership requirements.
5. CDC Board of Directors 13 CFR 120.823 - The CDC must have a Board of
Directors chosen from the membership by the members. In addition:
a) There must be at least 3 of the 4 membership groups represented on the
Board.
b) No single membership group shall control the Board.
c) No person who is a member of a CDC's staff may be a voting member of
the Board except for the CDC manager.
d) At least 1 member other than the CDC manager must possess commercial
lending experience.
e) The Board must meet at least quarterly and shall be responsible for CDC
staff decisions and actions.
f) A quorum shall require at least 5 Directors authorized to vote. The Board
meetings require a quorum to transact business. A quorum must be present
for the duration of the meeting.
g) SBA allows interim vacancies on the Board of Directors to be filled by a
majority of the remaining Board members. Any person filling an interim
vacancy must stand for election at the next Annual or Special meeting of
the members, whichever comes first.
h) If a new Board position is created, it must be filled by a vote of the
members at the next Annual or Special meeting of the members.
i) When the Board votes on SBA loan approval or servicing actions, at least
1 Board Member with commercial loan experience acceptable to SBA,
other than the CDC manager, must be present and vote.
j) There must be no actual or apparent conflict of interest with respect to any
actions of the Board.
k) The CDC Board of Directors may delegate management functions to an
Executive Committee. The Executive Committee must meet the same
requirements as the Board of Directors but may be appointed by the Board
of Directors.
6. Committees 13 CFR 120.823(a) – The Board may establish a Loan Committee
comprised of members of the CDC who may or may not be on the CDC’s Board
of Directors. The Loan Committee reports to the Board, and members must
include:
a) At least 1 member with commercial lending experience acceptable to
SBA;
50 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
b) All members of the Loan Committee must live or work in the Area of
Operations of the State where the 504 project they are voting on is
located;
c) No CDC staff may serve on a Loan Committee;
d) A quorum must have at least 5 committee members authorized to vote;
e) The CDC's Board must ratify the actions of any Loan Committee; and
f) There must be no actual or apparent conflict of interest with respect to any
actions of the Loan Committee.
g) For multi-state CDCs there must be a separate Loan Committee for each
state into which the CDC expands. 13 CFR 120.823(b)
7. CDC Staff 13 CFR 120.824 -
a) A CDC must directly employ full-time professional management,
including an Executive Director (or the equivalent) managing daily
operations. A CDC may petition SBA to waive the requirement of the
manager being employed directly if:
(1) Another non-profit with the same Area of Operations as the CDC
and with economic development as one of its principal activities will
contribute to the management of the CDC; or
(2) The petitioning CDC is rural and has insufficient loan volume to
justify having management employed directly by the CDC.
b) A CDC must have qualified full-time professional staff to market,
package, process, close and service loans.
c) When any of the functions referred to in 7.a) and b) above are not
performed by an employee directly employed by the CDC, the CDC must
use a written professional services contract.
d) Professional services contracts, with the exception of those for accounting
and legal services, must be pre-approved by SBA. 13 CFR 120.824(b)-(f)
e) The professional services contract must:
(1) Demonstrate that the CDC is not a shell for another entity as a result
of the contract;
(2) Not diminish the responsibility of the Board of Directors for the
operations of the CDC;
(3) State that the CDC’s Board of Directors specifically acknowledges
and retains the ultimate responsibility for all loan approvals and loan
servicing actions, 13 CFR 120.823, and that such responsibility must
be carried out independently of any control by the Contractor;
(4) State that no contractor or associate of the contractor may be a
voting or non-voting member of the CDC’s Board of Director;
(5) Clearly state the:
(a) Contract is for services performed;
(b) Description of services that the contractor will perform;
(c) Payment is for services actually rendered;
Effective Date: October 1, 2011 51
Subpart A SOP 50 10 5(D)
(d) Compensation must be broken down by individual if more than
one person is being compensated under the contract;
(e) A description of each individual who is providing services
under the contract, whether the individuals are specifically
named in the contract;
(f) Sources of compensation for services;
(g) Rate of compensation for all parts of the contract except
servicing must be stated at an hourly rate. The servicing
portion may be based on a percentage not to exceed the amount
authorized by the regulations. 13 CFR 120.971(a)(3)
(h) Basis for its determination that the fees are customary and
reasonable for similar services in the area;
(i) Additional compensation from CDC fee income such as
multipliers or bonuses are not permitted; and
(j) Contract payments for professional services should not exceed
75% of the CDC’s 504 processing and servicing income;
(6) Include a provision that allows the CDC to terminate the contract
with written notice (usually a 30 to 60 day notice) without penalty at
any time prior to the expiration date of the contract;
(7) State the term of the contract and cannot be open-ended;
(8) State that all compensation paid to the contractor will be paid by the
CDC and that the contractor cannot charge the borrower for the same
services;
(9) State that the contractor is prohibited from requiring a 503/504
applicant or borrower to purchase other services from the contractor
as a condition of the contractor’s performing CDC staff or
management functions;
f) A Board of Director’s Resolution must accompany the contract and
contain a statement:
(1) That the contract is in compliance with 13 CFR 120.824 and 120.825
and SBA Loan Program Requirements;
(2) Of understanding that the contract is subject to pre-approval and
yearly review by SBA; and
(3) Of understanding that submission of the contract with the Annual
Report is required.
g) Financial Ability to Operate 13 CFR 120.825
A CDC must be able to sustain its operations continuously, with reliable
sources of funds (such as income from services rendered and contributions
from government or other sponsors). Any funds generated from 504 loan
activity by a CDC remaining after payment of staff and overhead expenses
must be retained by the CDC as a reserve for future operations or for
investment in other local economic development activity in its Area of
Operations.
52 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
B. Basic Operating and Ethical Requirements for CDCs
1. A CDC must operate in accordance with all SBA Loan Program Requirements.
It must supply to SBA current and accurate information about all certification
and operational requirements, and maintain all records and submit all reports
required by SBA. 13 CFR 120.826 and 13 CFR 120.830
a) This includes submission of financial statements audited in accordance
with Generally Accepted Accounting Principles (GAAP) by an
independent CPA for CDCs with 504 loan portfolio balances of $20
million or more; or at a minimum a review by an independent CPA or
independent accountant in accordance with GAAP for CDCs with 504
loan portfolio balances of less than $20 million. The auditor’s opinion
must state that the financial statements are in conformity with GAAP. See
13 CFR 120.826(d) for further guidance on auditor qualifications.
b) For further guidance on the preparation of the annual report, refer to 13
CFR 120.830, the Operational Review Guide for the Annual Report and
the Operational Review Example Format. Within 60 days of receipt of the
CDC annual report, the SBA field office must forward a copy to the D/FA
along with the field office’s analysis and review of the annual report and a
CDC operational review. If the annual report is incomplete, the SBA field
office must notify the CDC in writing and within 30 days of receipt of
SBA’s notice, the CDC must resubmit a complete annual report.
c) A CDC that is certified by SBA within 6 months of its fiscal year-end will
not have to submit financial statements or its Annual Report for that year.
d) A CDC must have satisfactory SBA performance as determined by SBA
in its discretion. The CDC’s Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance. Other factors
may include, but are not limited to, on-site review/examination
assessments, historical performance measures (like default rate, purchase
rate and loss rate), loan volume to the extent that it impacts performance
measures, and other performance related measurements and information
(such as contribution toward SBA’s mission).
2. Regulations regarding the ethical requirements for CDCs may be found at 13
CFR 120.140 and 13 CFR 120.851.
a) The Standards of Conduct Counselor for the Agency is the Designated
Agency Ethics Official. (13 CFR 105.402(a))
b) Standards of Conduct (―Conflict of Interest‖) Approvals
(1) If a Small Business Applicant has, as an employee, owner, partner,
attorney, agent, owner of stock, officer, director, creditor or debtor,
an individual who, within 1 year prior to the loan application, was an
SBA Employee (as defined by 13 CFR 105.201(a)), the loan
application must be approved by the Standards of Conduct
Counselor. (13 CFR 105.203(a))
(2) If a Small Business Applicant has, as its sole proprietor, partner,
officer, director, or stockholder with a 10% or more interest, an
Effective Date: October 1, 2011 53
Subpart A SOP 50 10 5(D)
individual who is an SBA Employee (as defined by 13 CFR
105.201(a)) or a Household Member of an SBA Employee, the loan
application must be approved by the Standards of Conduct
Committee at SBA Headquarters. (13 CFR 105.204) A ―Household
Member‖ of an SBA Employee includes:
(a) The spouse of the Employee;
(b) The minor children of the Employee; and
(c) The blood relatives of the Employee, and the blood relatives of
the Employee’s spouse, who reside in the same place of abode
as the Employee. (13 CFR 105.201(d))
(3) If a Small Business Applicant has, as its sole proprietor, general
partner, officer, director, or stockholder with a 10% or more interest,
or a household member of such individual, an individual who is a
Member of Congress, an appointed official of the legislative or
judicial branch of the Federal Government, a member or employee
of a Small Business Advisory Council, or a SCORE volunteer, the
loan application must be approved by the Standards of Conduct
Committee. (13 CFR 105.301(c) and 105.302(a))
c) When a Standards of Conduct approval is required, the application should
be processed by the appropriate processing center and, if appropriate, be
conditionally approved and forwarded to the Standards of Conduct
Counselor or Standards of Conduct Committee (through the Standards of
Conduct Counselor). The Standards of Conduct Counselor will notify the
processing center of the final Agency decision and the processing center
will notify the lender accordingly.
d) Other Government Employees
A Small Business Applicant must submit a statement of no objection from
the pertinent department or military service if its sole proprietor, partner,
officer, director, or stockholder with a 10% or more interest, or a
household member of such individual, is an employee of another
department or agency of the Federal Government (Executive Branch)
having a grade of at least GS-13 (or its equivalent) or higher.
(13 CFR 105.301(a))
3. Restrictions regarding CDC participation in SBIC and 7(a) programs may found
at 13 CFR 120.852.
4. The CDC’s place of business:
a) Must be accessible and open to the public during regular business hours
with an adequate staff to perform normal business transactions;
b) May be located with a sponsoring organization if it is clearly evident to
the public that the CDC is a separate entity; and
c) Must have:
(1) A separately listed telephone number; and
54 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
(2) At least one qualified professional staff member available full-time
as described in paragraph II.A.7 above.
5. CDC Loan files:
a) All loan case files and collateral documents must be either at the principal
office of the CDC or maintained in a manner acceptable to SBA that
permits their immediate access.
b) A CDC must provide, at its own expense, documents or copies when
requested by SBA.
c) CDCs maintaining computer-stored documents must ensure that the
documents are actual reproductions of original documents.
d) File Retention Guidelines:
(1) Inquiries, partial applications, and applications withdrawn, canceled
or denied by the CDC or SBA must be kept for 2 years after
notification of incomplete application, withdrawal, cancelation or
decline. After 2 years, the files may be destroyed.
(2) General correspondence must be kept for 1 year. Case-specific
correspondence should be filed in the case file.
(3) Paid off loan files (including the original application file, servicing
file and closing file), must be kept for 9 years after the loan was paid
in full.
(4) Files from liquidated loans (including the original application file,
closing and servicing files), must be kept for 10 years after the loan
was charged off.
6. CDC financial and organizational records:
a) The CDC must maintain its own financial records including books of
account and minutes of all meetings of members, stockholders, directors,
executive committees, and other officials. The CDC financial reports
furnished to SBA must contain complete disclosure of matters relevant to
the act and regulations. Records and documents which are the basis for or
related to its financial statements or loans must be maintained in a manner
that permits their immediate availability.
b) All organizational files must be accessible to SBA.
7. CDC fiscal year: The CDCs choose their own fiscal year. The CDC must notify
its Lead SBA Office of any change.
C. Operational changes the CDC must report to SBA
1. Any changes in a CDC’s address, telephone number, officers, directors,
professional staff, bylaws, or articles of incorporation must be reported to its
Lead SBA Office not later than 30 days after the change takes place.
―Statements of Personal History,‖ (SBA Form 1081), and fingerprint cards (FD
258), must be filed on new officers, directors, and professional staff as required
in paragraph III.A below. Requests for name changes must be submitted to the
Lead SBA Office prior to filing an amended Articles of Incorporation as noted
in subparagraph 4 below.
Effective Date: October 1, 2011 55
Subpart A SOP 50 10 5(D)
2.The CDC must submit notice of all changes to its Lead SBA Office by certified
mail or other form of delivery from which a receipt of acceptance is obtained.
All changes are subject to post-approval by SBA.
3. If the CDC works with multiple SBA district offices, the CDC is responsible for
updating all SBA offices about any changes in the CDC’s name, address,
telephone number and professional staff.
4. CDC legal name changes must be submitted to the D/FA for prior approval.
After approval, the CDC must send a copy of the board resolution authorizing
the change and a copy of the Amendment to the Articles of Incorporation
approved by the State acknowledging the legal name change to all the
appropriate SBA field offices, the SLPC, appropriate SBA CLSC, and to the
D/FA. The Lead SBA Office will notify the Central Servicing Agent (CSA).
Note: the CDC must use its legal name, not a ―dba‖ name on all
correspondence.
5. Within 10 business days of the date a CDC becomes a party to litigation or other
legal proceedings, it must submit a written report, by certified or overnight mail,
to its Lead SBA Office and must notify all appropriate SBA field offices. The
report must describe the proceedings, the CDC’s identity and relationship to
other parties involved. Once proceedings are terminated by settlement or final
judgment, the CDC must promptly advise SBA of the terms.
6. Any change affecting the perception of the CDC’s ―good character‖ must be
reported immediately to the CDC’s Lead SBA Office.
D. Other CDC Services 13 CFR 120.827
A CDC may provide a small business with assistance unrelated to the 504 loan
program as long as the CDC does not make such assistance a condition of the
application for a 504 loan. A CDC is subject to 13 CFR Part 103 when providing such
assistance. See Subpart B, Chapter 3 of this SOP when providing such assistance on
a 7(a) loan.
E. Minimum Level of Activity and Restrictions on Portfolio Concentrations 13 CFR
120.828
A CDC must have at least 4 approvals during 2 consecutive fiscal years, and the
portfolio must be diversified as to type of business.
F. Job Opportunity Average 13 CFR 120.829
1. A CDC must maintain the required average of one Job Opportunity per an
amount of 504 loan funding as specified by SBA from time to time in the
Federal Register and must indicate in its annual report the Job Opportunities
actually or estimated to be provided by each Project.
2. A CDC is permitted two years from its certification date to meet this average. If
a CDC does not maintain the required average, it may retain its certification if it
justifies to SBA's satisfaction its failure to do so in its annual report and shows
how it intends to attain the required average.
56 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
III. THE PROCESS OF APPLYING TO BECOME A CDC
A. The Application 13 CFR 120.810
The Application for Certification as a Certified Development Company, SBA Form
1246, outlines the requirements for an application. The following documents must
accompany the application:
1. Membership list of persons/entities organized by membership groups;
2. Board of Directors List organized by membership groups and accompanied by
SBA Form 1081, Statement of Personal History, signed and dated within 90
days of submission to SBA, for each Board Member (any Board member that
answers ―yes‖ to question numbers 10a, 10b, 10c, or 11 on SBA Form 1081
must also submit fingerprint cards);
3. Plan of Operation - a narrative describing the applicant’s ability to package,
process, close and service the loans. In addition, the plan should identify the
applicant’s financial and legal capacity and identify how it plans to market the
504 program and the geographic area it plans to serve;
4. Organizational Chart;
5. List of all officers and paid employees of the CDC (including all contracted
staff and contractors performing loan packaging, processing, closing and
servicing for the CDC) accompanied by a completed SBA Form 1081, signed
and dated within 90 days of submission to SBA, for each officer and paid
employee and fingerprint cards for paid employees and contractors (any officer
that answers ―yes‖ to question numbers 10a, 10b, 10c, or 11 on SBA Form 1081
must also submit fingerprint cards);
6. Certificate of Incorporation;
7. Articles of Incorporation;
8. By-Laws, which must include the regulatory requirements regarding
Membership and the Board of Directors;
9. Board Resolution authorizing the CDC’s creation;
10. Financial statements and projections demonstrating the CDC’s financial ability
to operate.
B. Where to Apply
1. The CDC submits an original and one copy of the application to the SBA field
office serving the proposed Area of Operations. If there is more than one field
office serving the proposed Area of Operations, the CDC submits its application
to the field office where the CDC will be headquartered. The field office will
review the application and forward all SBA Forms 1081 and fingerprint cards to
OIG. If the application is complete and eligible, the field office will forward to
the appropriate SBA official for a final decision:
a) The application;
b) Copies of SBA Forms 1081 with attachments;
c) A notation that the SBA Forms 1081 and fingerprint cards have been
forwarded to OIG; and
Effective Date: October 1, 2011 57
Subpart A SOP 50 10 5(D)
d) Its recommendation.
2. Decline at the Field Office: If the field office declines a CDC application, it will
notify the CDC in writing outlining the reasons for decline and the CDC’s rights
of appeal, with a copy to the appropriate SBA official. The CDC applicant has
60 days to send an appeal to the field office for action by the next higher
authority.
3. Final Decision – SBA will send a letter to the CDC applicant notifying it of the
decision with a copy to the appropriate SBA district director.
C. Probationary Period for a New CDC 13 CFR 120.812
1. Newly certified CDCs will be on probation for a period of two years. Shortly
before the end of the probationary period, to apply for permanent status the
CDC must provide its Lead SBA Office with:
a) A current Membership List;
b) A current Board of Directors List;
c) A list of all members of all committees;
d) Current By-Laws, including any amendments; and
e) Current Articles of Incorporation, including any amendments.
2. The Lead SBA Office must obtain comments from the SBA processing and
servicing centers as to the quality of the CDC’s processing and servicing. The
field office must include the centers’ comments and its own comments on the
CDC’s closing in its recommendation to the appropriate SBA official.
3. SBA will determine permanent CDC status or an extension of probation, in part,
based upon the CDC’s compliance with the certification and operational
requirements in 120.820 through 120.830. Also, the CDC must have
satisfactory SBA performance, as determined by SBA in its discretion. The
CDC’s Risk Rating, among other factors, will be considered in determining
satisfactory SBA performance. Other factors may include, but are not limited
to, on-site review; examination assessments, historical performance measures
(like default rate, purchase rate and loss rate), loan volume to the extent that it
impacts performance measures, and other performance related measurements
and information (such as contribution toward SBA mission).
4. SBA will consider failure to apply for permanent status before the end of the
probationary period as a withdrawal from the 504 program. If the CDC
withdraws, it must transfer all funded and/or approved loans to another CDC
approved by SBA, including all related servicing fees.
5. The CDC must have appropriate personnel attend industry training in credit
analysis, 504 packaging, closing and servicing within 1 year of certification.
IV. SBA OVERSIGHT OF CDCS
A. CDCs must submit to SBA the reports listed in 13 CFR 120.830
B. SBA oversees CDCs through:
1. Loan and Lender Monitoring System (L/LMS):
58 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
a) L/LMS is an internal SBA data system that includes use of historical data
and predictive small business credit scoring. All SBA 504 loans with an
outstanding balance are credit-scored quarterly. These data are aggregated,
analyzed and evaluated to assess the credit quality of each individual SBA
lender’s portfolio of SBA loans. SBA uses this information to monitor the
performance of CDCs individually and in comparison to their peers.
b) Using SBA’s L/LMS system, SBA assigns all CDCs a composite rating.
The composite rating reflects SBA’s assessment of the potential risk to the
government of that CDC’s SBA portfolio performance. The specific
performance factors which comprise the composite rating are published
from time to time by SBA’s Office of Credit Risk Management (OCRM).
In general, these factors reflect both historical CDC performance and
projected future performance. SBA performs quarterly calculations on the
common factors for each CDC, so CDCs’ composite risk ratings are
updated on a quarterly basis.
c) SBA established peer groups to minimize the differences that could result
from changes in loan performance for portfolios of different sizes. The
peer groups are based upon outstanding SBA dollars, and for CDCs they
are:
(1) $100,000,000 or more
(2) $30,000,000 - $99,999,999
(3) $10,000,000 - $29,999,999
(4) $5,000,000 - $9,999,999
(5) $0 - $4,999,999
d) SBA assigns a composite rating of 1 to 5 to each CDC based upon its
portfolio performance, as reported in L/LMS. A rating of 1 indicates
strong portfolio performance, the least risk, and requires the lowest degree
of SBA management oversight (relative to other CDCs in its peer group).
A 5 rating indicates weak portfolio performance, the highest risk, and
requires the highest degree of SBA management oversight. (See 13 CFR
120.10 (definitions related to Risk Rating), 13 CFR 120.1015 (Risk Rating
System), and 75 FR 9257, March 1, 2010 and 75 FR 13145, March 18,
2010 (Risk Rating Notices).)
2. Lender Portal
a) SBA communicates CDC performance to individual CDCs through the
use of SBA’s Lender Portal (Portal). The Portal allows a CDC to view its
own quarterly performance data, including, but not limited to, its current
composite risk rating and peer and portfolio averages. Portal data includes
both summary performance and credit quality data. Summary performance
data is largely derived from data that is provided to SBA through the
Central Servicing Agent. If a CDC reviews its performance components
and finds a discrepancy with its records, the CDC should contact OCRM.
b) CDCs with at least 1 outstanding SBA loan may apply for the Portal
access. Currently SBA issues only 1 Portal user account per CDC.
Effective Date: October 1, 2011 59
Subpart A SOP 50 10 5(D)
Submission of initial requests for a Portal user account must be submitted
to SBA’s OCRM, and must include the following information:
(1) Request must be made by a senior officer of the CDC with proper
authority (Senior Vice President or higher);
(2) Request must be sent via regular or overnight mail to the SBA’s
OCRM at 409 Third Street, SW, Washington DC 20416, ATTN:
Director, Office of Credit Risk Management;
(3) Request must be made using the CDC’s stationery;
(4) Request must include the user’s business card;
(5) The stationery and business card should include the CDC’s name
and address;
(6) The request should include the following data:
(a) SBA FIRS ID Number(s);
(b) Account user’s name and title;
(c) Account user’s mailing address, telephone number and email
address at the CDC;
(d) Requesting officer’s name and title; and
(e) Requesting officer’s mailing address, telephone number and
email address at the CDC.
(7) Once SBA receives and approves the user’s request, SBA will
forward the approval to SBA’s Portal contractor for issuance of a
user account name and password. The Portal contractor will email
the user his or her user name and password within approximately
two weeks of account approval. The user can then access its data by
logging into the SBA Lender Portal web page. Before accessing the
Portal, lenders must agree to the terms of a Confidentiality
Agreement, which is found on the SBA Lender Portal web page.
(8) CDCs are responsible for complying with and maintaining the Portal
user accounts and passwords as set forth in the Confidentiality
Agreement on the Portal web page, and as published by SBA from
time to time. CDCs are also responsible for timely informing SBA to
terminate or transfer an account if the person to whom it was issued
no longer holds that responsibility for the CDC. CDCs must take full
responsibility for protecting the confidentiality of the user password
and the CDC risk rating and confidential information and for
ensuring the security of the data. See 13 CFR 120.1060.
3. Off-site monitoring and on-site reviews (13 CFR 120.1025 and 120.1050-1060)
L/LMS provides performance information that allows SBA to monitor and
conduct off-site reviews of all CDCs. Off-site monitoring serves as the primary
means of reviewing CDCs with less than $30 million in SBA dollars
outstanding; however, SBA may determine at its discretion to conduct on-site
reviews of these CDCs. SBA will contact the CDC if the review detects
performance issues or trends requiring further discussion.
60 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
a) For CDCs with $30 million or more in SBA dollars outstanding L/LMS
details historical and projected performance data:
(1) For use in planning and conducting on-site reviews or examinations;
(2) To assist in prioritizing on-site reviews or examinations, and
(3) As a system to monitor CDCs between on-site reviews or
examinations. Additional information regarding on-site reviews and
examinations can be found in 13 CFR 120.1050-1060 and SBA’s
SOP 51 00.
b) Additionally, in accordance with 13 CFR 120.1010 , a CDC must allow
SBA’s authorized representatives access to its SBA files to review, inspect
and/or copy all records and documents relating to SBA guaranteed loans
or as requested for SBA oversight.
c) SBA may request reports on a case by case basis.
C. Supervision and Enforcement
1. An integral part of overseeing the CDC program is SBA’s authority to supervise
and take enforcement actions as necessary.
2. The D/FA has responsibility for day-to-day management of CDCs with an SBA
risk rating of 1, 2, or 3. With the exception of servicing actions on individual
loans which will be reviewed by OFA, the D/OCRM is responsible for day-to-
day management including approving delegations of program authority of
CDCs with an SBA risk rating of 4 or 5. 70 FR 21262, April 25, 2007
D. Oversight and enforcement actions 13 CFR 120.1400-1600
1. SBA may take enforcement actions against a CDC if the CDC (for example):
a) Fails to receive approval for at least 4 loans during last 2 consecutive
fiscal years;
b) Fails to comply materially with SBA Loan Program Requirements;
c) Makes a material false statement or fails to disclose a material fact to
SBA;
d) Performs actions with respect to the 504 loans in a commercially
imprudent or unreasonable manner;
e) Fails to correct a deficiency after receiving notice of same from SBA; or
f) Exercises poor behavior or takes actions undermining SBA’s management
of the 504 program.
2. SBA may take enforcement actions against an ALP or PCLP CDC if the CDC
(for example):
a) Does not continue to meet the requirements for eligibility;
b) Fails to follow SBA Loan Program Requirements; or
c) Fails to maintain a LLRF as required (PCLP only).
3. SBA identifies the types of enforcement actions in 13 CFR 120.1500. SBA, in
its discretion, may undertake (for example):
a) Immediate suspension, upon written notice, when SBA determines that
one or more grounds set forth in 13 CFR 120.1400(c)(11) exist and such
Effective Date: October 1, 2011 61
Subpart A SOP 50 10 5(D)
action is necessary to prevent significant loss to SBA or significant
impairment of program integrity;
b) Suspension or termination of the CDC’s authority to:
(1) Participate in the 504 program or any pilot or other program within
the 504 program; or
(2) Perform any function under the program (processing, closing,
servicing, liquidation or litigation).
c) Transfer of some or all of the CDC’s portfolio to another CDC or any
other entity (13 CFR 120.1500(e)(1));
d) Instruct the Central Servicing Agent (CSA) to withhold payments to CDC;
or
e) For ALP or PCLP CDCs, suspension or termination of the CDCs authority
to participate as an ALP or PCLP CDC.
f) The term of any suspension will be determined by SBA in its discretion.
4. Enforcement Procedures 13 CFR 120.1600
a) For all enforcement actions other than immediate suspension, SBA will
issue a written notice to the CDC:
(1) Identifying the proposed action;
(2) Outlining the reasons for the action; and
(3) Stating the term and scope of the any suspension proposed.
b) For immediate suspension, the written notice will contain the:
(1) Reasons for the action; and, if from a third party, the
(a) Name of the third party, or
(b) Documentation received from that party; or
(c) If there are compelling reasons not to release that information,
a summary of same.
(2) Term and scope of the suspension.
c) A CDC proposing an objection to the action must file a written objection
to the appropriate SBA official or other person identified in the notice
within 30 calendar days of its receipt of the notice from SBA as provided
in 13 CFR 120.1600.
d) Upon CDC’s request, SBA, in its discretion may extend the time to object.
e) If CDC timely files a written objection, SBA will:
(1) Issue a written notice of decision to the CDC within 90 days of either
receiving the objection or from when additional information is
provided, whichever is later, unless SBA provides notice that it
requires additional time; and
(2) For immediate suspension, the notice must be issued within 30 days
of receiving the objection advising if SBA is continuing with the
suspension, unless SBA provides notice that it requires additional
time.
62 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
f) SBA, in its discretion, may:
(1) Seek additional information; or
(2) Consider an untimely objection.
g) SBA may then issue a notice of final agency decision.
h) CDC may appeal the final agency decision in accordance with SBA
regulations.
5. Mergers
CDCs wishing to merge must notify the SBA in writing of their desire to merge.
A letter signed by a responsible management official accompanied by a Board
of Directors resolution from each of the CDCs wishing to merge must be sent to
the District Office. The request should include the following:
a) The name of the proposed merged entity;
b) A listing of the proposed Membership of the merged entity;
c) A listing of the proposed Board of Directors of the merged entity;
d) An explanation of the purpose of the merger and how the merged entity
will service its area of operations;
e) Copies of the proposed merger documents and any proposed amendments
to the Articles of Incorporation and By-Laws; and
f) A pro forma balance sheet and income statement for the merged entity.
The District Office should prepare a recommendation that should include, but
not be limited to, an evaluation of the historical performance of the surviving
CDC regarding the:
a) Quality and completeness of the CDC’s loan packages;
b) CDC’s credit analysis abilities as well as knowledge of SBA’s policies
and procedures;
c) CDC’s capability and performance related to loan closing; and
d) CDC’s servicing capability and performance (include comments from the
appropriate servicing center(s)).
The decision process is a two-step process:
a) The CDC’s request and the District Office’s recommendation should be
sent by email to the Chief, 504 Program Branch who will forward it to the D/FA
for a final decision.
b) If SBA approves the merger, SBA will notify the CDC which must
provide SBA with:
(1) Copies of the documents for the merger filed with the state;
(2) Any executed amendments to the Articles of Incorporation and By-
Laws; and
(3) Revised list of the Members of the CDC and Board of Directors,
along with the corresponding Minutes of the meetings for the
Effective Date: October 1, 2011 63
Subpart A SOP 50 10 5(D)
Members and Board Resolution reflecting the approval of the
changes.
Upon receipt, review and approval of the merger documents, SBA
will take the steps necessary to merge the portfolios.
6. Voluntary Transfer and Surrender of CDC Certification
SBA regulations at 13 CFR 120.857 discuss the circumstances under which a
CDC can voluntarily transfer and surrender its certification.
The process for voluntary withdrawal and surrendering a CDC certification
requires the following:
a) The CDC must notify the SBA in writing of the intent to withdraw from
the program. The letter must be signed by a responsible management
official and accompanied by a Board of Directors resolution stating the
intent to withdraw from the program.
b) Upon receipt of the letter of intent to withdraw and approval by SBA, the
CDC must surrender to SBA all active loans files for review and transfer.
c) The District will make a recommendation to transfer the files of the
withdrawing CDC to one or more CDCs. In order to make a
determination that the recipient CDC(s) is/are capable and have the
capacity to take on the additional responsibility of an increased portfolio,
the District Office should prepare a recommendation on behalf of the
recipient(s) that should include, but not be limited to, an evaluation of the
CDC’s:
(1) Quality and completeness of loan packages;
(2) Credit analysis abilities as well as knowledge of SBA’s policies and
procedures;
(3) Capability and performance related to loan closing; and
(4) Servicing capability and performance (include comments from the
appropriate servicing center(s).
d) The CDC’s request and the District Office’s recommendation for transfer
of the portfolio should be emailed to the Chief, 504 Program Branch who
will forward it to the D/FA. Upon receipt and review, SBA will notify the
CDC of SBA’s acceptance of their request to surrender its certification
and the District Office will be notified of by the 504 Program Branch of
the steps necessary to complete the transfer of the portfolio to another
CDC.
V. TYPES OF CDCS
In order for a CDC to apply for a change in status, the CDC must be in compliance with
SBA Loan Program Requirements.
64 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
A. Priority CDCs 13 CFR 120.802
Priority CDC status provides for expedited 504 loan closing. To request this status,
the CDC must use the services of a Designated Attorney.
1. To become a priority CDC, a CDC must have:
a) At least one 504 closing attorney, designated as provided below;
b) Adequate experience and expertise in 504 loan closings;
c) A history of presenting complete and accurate closing packages;
d) Satisfactory SBA performance as determined by SBA in its discretion.
The CDC’s Risk Rating, among other factors, will be considered in
determining satisfactory SBA performance. Other factors may include,
but are not limited to, on-site review/examination assessments, historical
performance measures (like default rate, purchase rate and loss rate), loan
volume to the extent that it impacts performance measures, and other
performance related measurements and information (such as contribution
toward SBA’s mission).
e) A qualified and knowledgeable staff;
f) A satisfactory working relationship with its Lead SBA Office; and
g) Directors and officers’ liability insurance in form and substance
satisfactory to SBA with:
(1) An endorsement covering CDC committees and staff engaged in the
closing process;
(2) Limits of at least $1,000,000/$1,000,000;
(3) A deductible not more than $10,000; and
(4) A declaration that SBA will receive at least 20 days prior notice of
any lapse of coverage, failure to renew, or cancellation.
(5) The CDC must submit to SBA annually a certificate from its
insurance carrier confirming this coverage.
2. Application Process
a) Application by the CDC
(1) The CDC submits a written application to the Lead SBA Office. The
application must address each of the items in the previous paragraph,
the items identified in paragraph III.A.1, 2 and 5 above (to assure
that the CDC remains in compliance with these requirements), and
must include a copy of the CDC’s insurance policy or a certificate of
insurance or declarations page showing:
(a) The amount of coverage;
(b) The amount of the deductible;
(c) The premium; and
(d) A declaration from the insurance company that SBA will
receive the required 20-day notice of cancellation.
Effective Date: October 1, 2011 65
Subpart A SOP 50 10 5(D)
(2) The Lead SBA Office forwards the application to the D/FA with the
recommendations of the district director, district counsel and other
field offices, if applicable.
b) Nomination by the Lead SBA Office
(1) The Lead SBA Office sends a nomination to the D/FA with a copy to
the CDC. The nomination must be signed by the district counsel and
the district director. The nomination should address all of the
conditions above and include evidence of the required insurance
coverage and the name of the Designated Attorney.
(2) If the application contains both a request for Designated Attorney
and a request for priority status, the Lead SBA Office should send
the complete package to the D/FA, who will forward the attorney
information to Office of General Counsel (OGC).
c) Notification to the CDC
The D/FA will notify the CDC in writing of its approval and the attorney
will receive a separate acceptance letter from OGC.
3. Designated Attorney is defined at 13 CFR 120.802 . To become a Designated
Attorney, an attorney must submit evidence of:
a) A degree from a recognized law school;
b) Membership in the bar of the state in which the attorney’s 504 closing
practice is or will be primarily located;
c) Professional malpractice insurance coverage:
(1) With limits of at least $1,000,000/$1,000,000; and
(2) A deductible not to exceed $20,000 for individuals and firms with 3
or fewer attorneys, $50,000 for law firms with more than 3 attorneys
or $100,000 for large law firms with more than 25 attorneys.
(3) Applicants may request a hardship exemption from the General
Counsel with respect to the policy limits or the deductible. Policy
limit reductions to $500,000/$1,000,000 will only be granted to sole
practitioners and small firms of three or less attorneys, while
deductible requirement waivers will only be granted to larger firms
with a demonstrated, strong financial history.
(4) Sole practitioners seeking a hardship waiver must state what their
present annual premium is and what it would cost to get $1,000,000
with $20,000 deductible and $500,000/$1,000,000 with $20,000
deductible. All other relevant financial information should also be
provided.
d) Attendance at an SBA-approved 504 loan closing training course.
Attorneys may fulfill this requirement at any time prior to designation or
within 6 months after designation; and
e) Adequate expertise in 504 loan closings.
4. Process to request Designated Attorney status
66 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
a) The CDC nominates the attorney by submitting an application to the SBA
field office in which the attorney’s practice is primarily located. An
application must include:
(1) A submission on the attorney’s letterhead addressing each of the
conditions in the previous paragraph;
(2) A copy of the attorney’s malpractice insurance policy, or a certificate
of insurance or declarations page showing the:
(a) Amount of coverage and deductible;
(b) Premium; and
(c) Name of the attorney insured.
(3) If the attorney requests a hardship exemption with respect to the
insurance policy limits or a waiver of the amount of the deductible,
the attorney must include the request with the application, supported
by appropriate information including:
(a) The amount of the policy limits or deductible; and
(b) The current premium;
(c) The quote obtained for the increased premium;
(d) The size of the firm;
(e) The firm’s arrangement for covering the deductible, such as a
loss reserve or escrow; and
(f) Evidence of the firm’s history and financial strength.
b) Other Restrictions/Requirements
(1) A designated attorney cannot be:
(a) An employee of the CDC or of an associate of the CDC.
(b) On the board of the CDC, participate in its lending decisions,
or otherwise be too closely associated with the CDC.
(2) An attorney may be a member of the CDC, but not an officer,
provided SBA Counsel determines the attorney is not too closely
associated with the CDC. SBA Counsel must consider the attorney’s
relationship with the CDC including:
(a) The degree of control exerted by the attorney on the CDC’s
decision-making;
(b) Any benefits accruing to the attorney through the attorney’s
association with the CDC; and
(c) Any appearance of conflict of interest.
c) The SBA field office forwards the application to the Office of General
Counsel (OGC) with the recommendations of the district director, district
counsel and other field offices, if applicable.
d) OGC will notify the attorney that he/she has been accepted as a designated
504 closing attorney.
Effective Date: October 1, 2011 67
Subpart A SOP 50 10 5(D)
e) The district office must allow a CDC to use a non-designated attorney for
a reasonable time to develop an additional designated attorney or to
replace a designated attorney. In either event, SBA counsel will accept
the closing package from a non-designated attorney and conduct a non-
priority closing review.
5. To retain Designated Attorney status an attorney must:
a) Deliver annually to the Office of General Counsel on or before July 1, a
certificate from its insurance carrier confirming the existence of this
coverage.
b) Notify SBA immediately if there is a change of status (e.g., new address,
new law firm or change in malpractice coverage).
c) Submit evidence of attendance at an SBA-approved closing update course
every 2 years. The attorney may take the course any time within the year
their status would expire to maintain their status.
6. Termination of Priority CDC Status
The D/FA or designee may terminate a CDC’s priority designation for good
cause, including, but not limited to, the CDC’s failure to use a designated
attorney, failure to maintain adequate insurance coverage, submission of
unsatisfactory closing packages or failure to maintain a good working
relationship and good communications with SBA field office personnel.
B. Accredited Lenders Program (ALP)
SBA may designate a CDC as an Accredited Lender. ALP-CDCs are accountable for
thorough credit and eligibility analysis on loan applications and on servicing actions.
The Agency relies on the ALP-CDC’s credit analysis in making the decision to
guarantee the debenture and complete the documentation in a reduced timeframe.
1. Application for ALP status
a) A CDC may apply in writing to its Lead SBA Office providing all
applicable information addressed in subparagraph 2 below.
b) To be eligible for ALP status, a CDC must have permanent CDC status.
SBA will consider the following factors:
(1) CDC staff experience;
(2) Number of 504 loans approved and size of portfolio;
(3) Satisfactory SBA performance as determined by SBA in its
discretion. The CDC’s Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance. Other
factors may include, but are not limited to, on-site
review/examination assessments, historical performance measures
(like default rate, purchase rate and loss rate), loan volume to the
extent that it impacts performance measures, and other performance
related measurements and information (such as contribution toward
SBA’s mission).;
(4) Record of compliance with SBA Loan Program Requirements;
(5) Priority CDC status; and
68 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
(6) Record of cooperation with all SBA offices, including field offices
and SBA’s loan processing and servicing centers.
c) See 13 CFR 120.840 and 120.841.
2. Lead SBA Office Review
a) The Lead SBA Office must review the ALP application and make a
recommendation within 2 weeks of receipt of the CDC’s letter. The Lead
SBA Office’s recommendation must include:
(1) An evaluation, in conjunction with the SLPC and the appropriate
CLSC, of the:
(a) Quality of the CDC’s loan packages;
(b) CDC staff’s knowledge of SBA policies and procedures;
(c) CDC staff’s credit analysis abilities;
(d) CDC staff’s capability and performance related to loan closing;
and
(e) CDC staff’s servicing capability and performance.
(2) Evidence that the CDC is in compliance with 13CFR 120.840 &
120.841;
(3) A certified copy of the CDC's Board of Directors' resolution
authorizing the application for ALP status (this is only required for
new ALP CDC applications not for renewals);
(4) Comments from the CDC and the Lead SBA office on any
outstanding issues on the CDC’s most current CDC Management
Report including:
(a) Any failed benchmarks;
(b) Any loans in the ―90 day or more past due‖ category or in the
―Catch-Up‖ category; and
(c) Any past due Annual Reports;
(5) Verification that the CDC’s employees are either hired directly by
the CDC or are under a contract that has been approved by SBA;
(6) A copy of the contract and the Board of Directors (BOD) resolution
must be provided (if applicable);
(7) Verification that the CDC is in compliance with 13 CFR 120.824,
120.825 and 120.826 ;
(8) A copy of and an evaluation of the CDC’s current bylaws and
articles of incorporation to insure that they are in compliance with
the regulations;
(9) Evidence of compliance with the requirements of a Priority CDC,
including Board of Directors’ liability insurance and Designated
Attorney requirements (see paragraph V.A above); and
(10) Current list of the CDC’s Membership, Board of Directors, staff and
any committees.
Effective Date: October 1, 2011 69
Subpart A SOP 50 10 5(D)
b) The Lead SBA Office forwards the application and its recommendation to
the appropriate SBA official for final determination.
3. Term of designation
SBA will designate a CDC as an ALP-CDC for up to two years and may renew
the designation for additional two year periods.
4. Renewal of an ALP-CDC’s designation
a) Ninety days prior to the end of the term, the CDC should apply in writing
for renewal to the Lead SBA Office. The application for renewal must
address all of the requirements found at 13 CFR 120.840 and 120.841 and
submit the required items noted in paragraphs V.B.1 and 2 above.
b) The Lead SBA Office will review the CDC’s application and Management
Report and send its recommendation to the appropriate SBA official for
final determination.
5. Recognition of ALP Status Between SBA Offices
Once the CDC is approved as an ALP-CDC for a particular field office, it is an
ALP-CDC for its entire Area of Operations.
6. Oversight and Enforcement Actions
See Paragraph IV of this Chapter above.
C. Premier Certified Lenders Program (PCLP)
Under the PCLP, SBA designates qualified CDCs as PCLP CDCs and delegates
to them increased authority to process, close, service and liquidate 504 loans. 13
CFR 120.848 SBA also may give PCLP CDCs increased authority to litigate
504 loans. 13 CFR 120.845 Loans processed under PCLP are subject to the
same loan terms and conditions as other 504 loans, but SBA delegates to the
PCLP CDC all loan approval decisions, except eligibility.
1. Application for PCLP Status
A CDC may apply in writing to its Lead SBA Office providing all applicable
information set forth in paragraph V.B.1 and 2 above and the following:
a) A certified copy of the Board of Directors' resolution authorizing the
application for PCLP status (this is only required for new PCLP CDC
applications not for renewals); and
b) Evidence that the CDC:
(1) Is in compliance with its Loan Loss Reserve Fund (LLRF)
requirements;
(2) Has established a PCLP processing goal of 50%; and
(3) Has a demonstrated ability to process, close, service and liquidate
504 and/or PCLP loans; and
(4) Has satisfactory SBA performance as determined by SBA in its
discretion. The CDC’s Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance. Other
70 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
factors may include, but are not limited to, on-site
review/examination assessments, historical performance measures
(like default rate, purchase rate and loss rate), loan volume to the
extent that it impacts performance measures, and other performance
related measurements and information (such as contribution toward
SBA’s mission).
2. Lead SBA Office Review
a) The Lead SBA Office must review the PCLP application and make a
recommendation within 2 weeks of receipt of the CDC’s letter. The Lead
SBA Office’s recommendation must address the requirements and include
the information stated in the previous paragraph.
b) The Lead SBA Office sends the application and its recommendation to the
SLPC. The SLPC reviews the materials and forwards the entire
application including all supporting documentation with its
recommendation to the appropriate SBA official for final determination.
3. Notification of PCLP Status
SBA will notify the CDC in writing of an approval or decline of a PCLP
application. If the application is declined SBA will notify the CDC of the
reasons for the decline.
4. Loan Guaranty Agreement Premier Certified Lenders Program (PCLP)
Upon approval as a PCLP CDC, the SLPC will send the CDC a Loan Guaranty
Agreement Premier Certified Lenders Program (PCLP) (SBA Form 2006). The
CDC must sign and return the agreement before it can begin processing PCLP
loans.
5. PCLP Term
SBA will confer PCLP status for a period of up to two years.
6. Area of Operations
The PCLP CDC may exercise its PCLP authority in its entire Area of
Operations.
7. Loan Loss Reserve Fund (LLRF)
a) A PCLP CDC must establish and maintain a LLRF for its financings under
this program. The LLRF will be used to reimburse the SBA for 10 percent
of any loss sustained by SBA as a result of a default in the payment of
principal or interest on a PCLP debenture. Each Loss Reserve must equal
1% of the original principal amount of each PCLP debenture.
b) The PCLP CDC must grant SBA a first priority perfected security interest
in its LLRF. The security interest in the PCLP CDC’s LLRF must be
granted pursuant to a security agreement between the PCLP CDC and
SBA. The security interest in the PCLP CDC’s LLRF must be perfected
pursuant to a control agreement between the PCLP CDC, SBA and the
applicable depository institution.
Effective Date: October 1, 2011 71
Subpart A SOP 50 10 5(D)
c) When establishing a LLRF, a PCLP CDC must coordinate with its Lead
SBA Office to execute and deliver the required documentation. SBA
created a Control Agreement SBA Form 2230 and a Security Agreement
SBA Form 2229 that must be used in connection with the PCLP. If any
changes to the agreements are required in order to meet local legal
requirements, or if significant numbers of local lenders are adverse to
executing the agreements, SBA field counsel must work with the OGC to
make appropriate changes to the agreements. A fully executed original
copy of the control and security agreements, as well as any applicable
financing statements, must be provided to and retained by the lead SBA
office.
d) All documents must be satisfactory to SBA in both form and substance.
SBA may require changes in, or supplements to, the documentation from
time to time. If a depository institution will not enter into any agreement
required by SBA or violates the terms of any such agreement, the PCLP
CDC may not maintain an LLRF with that institution.
e) For further guidance on the LLRF, see the table at the end of this chapter
and 13 CFR 120.847.
8. Renewal of an PCLP-CDC’s designation
The SLPC automatically starts the renewal process just prior to the expiration of
a CDC’s PCLP status. The SLPC asks for comments from the CDC’s Lead SBA
Office and the SBA’s servicing and liquidation centers. SBA’s review will
address all of the requirements found at 13 CFR 120.846 and the items noted in
paragraphs V.C.1 above.
D. Oversight and Enforcement Actions
See Paragraph IV of this Chapter above.
What Each PCLP CDC Must Do Deadline For Activity
Establish LLRFs 180 days after becoming a PCLP CDC
Contribute 50% of the required Loss Reserve Within 5 business days after the PCLP
for a PCLP Debenture Debenture is sold
Contribute an additional 25% of the required 1 year after PCLP CDC issues PCLP
Loss Reserve for a PCLP Debenture Debenture
Contribute the final 25% of the required Loss 2 years after PCLP CDC issues PCLP
Reserve for a PCLP Debenture Debenture
Pay SBA its Exposure on a PCLP Debenture 10 days after the PCLP CDC and SBA
in lieu of SBA’s withdrawal of amounts from determine the Exposure
the Loss Reserves (optional)
Contribute to the Loss Reserve any difference 30 days from the creation of the difference
between the required amount of Loss
72 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
Reserves and actual Loss Reserves resulting
from transfers, fees, or any other reason
Pay SBA any difference between the 45 days after demand for payment by SBA
Exposure on a PCLP Debenture and the Loss
Reserves after SBA makes withdrawals from
the Loss Reserves
Report to and reconcile with the lead SBA 45 days after the end of each quarter
office any discrepancies between the
Quarterly PCLP List of Required LLRF
Deposits and its records
Submit to lead SBA office the Quarterly 45 days after the end of each quarter
PCLP Summary of LLRF Balances
What Lead SBA Office Must Do Deadline For Activity
Notify Sacramento Loan Processing Center 30 days after it verifies compliance
when a PCLP CDC meets LLRF initial
establishment requirements
Process requests for interest earned on LLRF 15 days after request by PCLP CDC, unless
or excess funds in LLRF there is disagreement on entitled amount
Transmit to each PCLP CDC the Quarterly 15 days after the end of the quarter
PCLP List of Required LLRF Deposits
Work with PCLP CDCs to reconcile any Within 45 days of the end of the quarter
differences in quarterly Loss Reserve
calculations
Review and approve the Quarterly PCLP List Within 60 days of the end of the quarter
of Required LLRF Deposits
Written notice to the PCLP CDC of SBA’s No less than 3 days before effecting the
intent to transfer funds from the LLRF transfer
VI. AREA OF OPERATIONS
There are 3 ways a CDC may process 504 loans outside its approved area of operation –
they are:
1 - Case-by-case requests based on particular circumstances
2 - Expanding based on a Local Economic Area (LEA)
3 - Becoming a Multi-State CDC
A. Case-by-case 13 CFR 120.839
1. A CDC may apply to make a 504 loan for a Project outside its Area of
Operations to the field office serving the area in which the Project will be
located. The CDC must demonstrate that it can adequately fulfill its 504
program responsibilities for the 504 loan, including proper servicing.
Effective Date: October 1, 2011 73
Subpart A SOP 50 10 5(D)
2.The field office may approve the application if the CDC has satisfactory SBA
performance as determined by SBA in its discretion and either:
a) The applicant CDC has previously assisted the business to obtain a 504
loan; or
b) The existing CDC or CDCs serving the area agree to permit the applicant
CDC to make the 504 loan; or
c) There is no CDC within the Area of Operations.
B. Local Economic Area (LEA) Expansion 13 CFR 120.835
1. A CDC may apply for expansion of its territory to include a Local Economic
Area (LEA). An LEA is an area, as determined by SBA, that is:
a) In a State other than the State in which an existing CDC, or an applicant
applying to become a CDC, is incorporated,
b) Is contiguous to the CDC's existing Area of Operations, or the applicant's
proposed Area of Operations, of its State of incorporation, and
c) Is a part of a local trade area that is contiguous to the CDC's Area of
Operations (or applicant's proposed Area of Operations) of its State of
incorporation.
2. Examples of a local trade area would include a city that is bisected by a State
line or a metropolitan statistical area that is bisected by a State line.
3. A CDC that has been certified to participate in the 504 program may apply to
expand its Area of Operations if it meets all requirements to be an Accredited
Lender Program (ALP) CDC, as outlined elsewhere in this chapter, and
demonstrates that it can competently fulfill its 504 program responsibilities in
the proposed area.
4. Application Process
a) The CDC must submit the items listed below to its Lead SBA Office (13
CFR 120.802, Definitions).
(1) A list of the requested area(s) (e.g., a county, parish, incorporated
city) in the contiguous state and information supporting how those
area(s) meet the definition of a Local Economic Area (13 CFR
120.802, Definitions).
(2) A certified copy of the resolution of the Board of Directors
approving the proposed expansion; a copy of any changes to the
articles of incorporation that are required; and a copy of any bylaw
changes that are required (or a statement that no changes are
necessary). CDCs are reminded that they may have to register as a
―foreign corporation‖ in the state which contains the new territory.
(3) Documentation showing that the CDC currently meets the
requirements of an ALP CDC. (This includes those CDCs that are
ALP CDCs already.) (13 CFR 120.841, Qualifications for the ALP
and earlier in this chapter) In addition, the CDC’s attorney is to
provide a written statement certifying that the CDC is operating in
compliance with its articles and by-laws and is in good standing with
74 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
its State of incorporation. A CDC’s attorney must review the CDC’s
corporate documents and minutes of board and membership
meetings before providing the certification.
(4) A summary of the qualifications and experience of any new
professional staff who will be responsible for marketing, packaging,
processing, closing, servicing, and if applicable, liquidating the loans
in the expanded area as well as a complete SBA Form 1081, signed
and dated within 90 days of submission to SBA, and fingerprint card
for each person. If the new employees will be provided under
contract, submit a contract for their services that meets the
regulations governing contracts. (13 CFR 120.824) In addition,
identify the CDC’s Designated 504 Closing Attorney who is licensed
to practice in that jurisdiction. If a CDC does not have a designated
attorney in that jurisdiction at the time of application, then:
(a) The CDC may request a waiver for a period of up to 2 years of
the requirement of a designated 504 Closing Attorney through
the District Office in the new jurisdiction as part of the LEA or
Multi-State expansion request.
(b) If a waiver is granted under (a) above, the LEA or Multi-State
expansion will also be limited to the period of the waiver. If
the CDC does not have a Designated 504 Closing Attorney at
the end of 2 years, the CDC’s LEA or Multi-State expansion
will expire.
(c) The CDC may not close loans as a Priority CDC in the area of
expansion until such time as they have a Designated 504
Closing Attorney licensed to practice in that state.
(5) A copy of the CDC’s most recently published CDC Management
Report demonstrating that: 1) the CDC’s portfolio passes at least 4 of
the 5 SBA-established risk benchmarks; 2) all loan statuses (i.e.
Those items listed in the mid section of the report under status
summary) are current or in compliance; 3) there are no loans listed
under the ―Loans 90 or More Days Past Due‖ category; and 4) there
are no loans listed under ―Loans in Catch-Up That Missed At Least 3
Consecutive Payments.‖ (If there are loans under Nos. 3 and 4,
provide documentation for each such loan describing the actions
taken to correct the deficiencies on those loans after the report was
prepared and whether those efforts were successful for each of the
relevant loans.)
b) The Lead SBA Office will review the request and submit to Headquarters
the following in the analysis of the request for an LEA expansion:
(1) Comments on whether the CDC is in compliance with SBA’s
regulations and policies;
(2) Comments on whether the Lead SBA Office agrees that the areas
requested meet the definition of a Local Economic Area;
Effective Date: October 1, 2011 75
Subpart A SOP 50 10 5(D)
(3) Confirmation that the Lead SBA Office has reviewed any new
contracts to determine if they meet the requirements set forth in 13
CFR 120.824 and a note that the contracts have been approved by
SBA;
(4) Comments on the CDC’s ability to manage an increase in loan
servicing activity resulting from the expansion; and
(5) Any other pertinent comments regarding the CDC’s application or
operations.
(a) The Lead SBA Office must solicit the comments of any other
field office in which the CDC operates or proposes to operate
as well as the comments of the processing and servicing
centers.
(b) The Lead SBA Office must determine that the CDC is in
compliance with SBA's regulations, policies, and performance
benchmarks, including pre-approval and annual review by SBA
of any management or staff contracts, and the timely
submission of all annual reports.
(c) In making its recommendation on the application, the Lead
SBA Office may consider any information presented to it
regarding the requesting CDC, the existing CDC, or CDCs that
may be affected by the application, and the proposed Area of
Operations.
(6) The Lead SBA Office will submit the application, recommendation,
and supporting materials within 60 days of the receipt of a complete
application from the CDC to the D/FA, who will make the final
decision.
c) If the Lead SBA Office determines that the CDC LEA application is
incomplete, it should inform the CDC in writing, identifying the
information missing from the application. The Lead SBA Office also has
full authority to decline a CDC’s expansion request. A letter outlining the
reasons for decline and the CDC’s rights of appeal must be sent to the
CDC with a copy to the D/FA. The CDC has 60 days to appeal the decline
to the Lead SBA Office for action by the D/FA.
d) SBA will consider whether the CDC has satisfactory SBA performance as
determined by SBA in its discretion. The CDC’s Risk Rating, among
other factors, will be considered in determining satisfactory SBA
performance. Other factors may include, but are not limited to, on-site
review/examination assessments, historical performance measures (like
default rate, purchase rate and loss rate), loan volume to the extent that it
impacts performance measures, and other performance related
measurements and information (such as contribution toward SBA’s
mission).
e) The D/FA may consider any information submitted or available related to
the applicant and the application. SBA will notify the CDC of its decision
in writing, and if the application is denied, the reasons for its decision.
76 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
C. Multi-State Expansion 13 CFR 120.835
A CDC can expand by applying to be a Multi-State CDC provided the State the CDC
seeks to expand into is contiguous to the State of the CDC's incorporation; the CDC
demonstrates that its membership meets the requirements in 13 CFR 120.822
separately for its State of incorporation and for each additional State in which it seeks
to operate as a Multi-State CDC; and the CDC has a loan committee meeting the
requirements of 13 CFR 120.823.
1. Application Process
A CDC seeking to become a Multi-State CDC must apply to the Lead SBA
Office where the CDC intends to locate its principal office for that State. The
request must include:
a) Demonstration that the state that the CDC seeks to expand into is
contiguous to the state of the CDC’s incorporation. [13 CFR 120.802,
Definitions]
b) A listing of the 25 new members that meets the requirements contained in
13 CFR 120.822 (a). [13 CFR 120.835(c)(2)]
c) A listing of the new members of the loan committee that meets the
requirements contained in 13 CFR120.823. [13 CFR 120.835(c)(3)] For
loan committee members, provide SBA Form 1081 for each member and
if necessary fingerprint cards.
d) The address where the CDC’s principal office in the new state will be
located and a copy of the lease if the space is to be leased [13 CFR
120.835(c)].
e) A certified copy of the resolution of the Board of Directors (BOD)
approving the expansion; a certified copy of any changes to the articles of
incorporation that are required; and a certified copy of any bylaw changes
that are required (or a statement that no changes are required).
f) After the CDC’s attorney has had an opportunity to review corporate
documents and minutes of board and membership meetings, the CDC’s
attorney is to provide a written statement certifying that the CDC is
operating in compliance with its articles and by-laws and is in good
standing with its State of incorporation. If registration as a foreign
corporation is required, provide a copy of the registration.
g) Evidence that the CDC currently meets the requirements of an ALP CDC.
(This includes those CDCs that are ALP CDCs already.) [13 CFR 120.840
and 120.841, Qualifications for the ALP, and earlier in this chapter].
h) A copy of the binder page of the Board of Directors’ current liability
insurance or a Certificate of Insurance reflecting at least $1,000,000
Liability coverage and a deductible/retention of not more than $10,000.
i) The name of the designated attorney licensed to practice in the new state.
Include proof that the designated status is current and provide a copy of
the binder page of the attorney’s current malpractice insurance or a
Certificate of Insurance reflecting at least $1,000,000 Liability coverage
Effective Date: October 1, 2011 77
Subpart A SOP 50 10 5(D)
and a deductible/retention of not more than $10,000. The certificate must
either contain the name of the designated attorney or provide it in an
attachment. [13 CFR 120.841(e)]
j) A copy of the CDC’s most recently published CDC Management Report
demonstrating that:
(1) The CDC’s portfolio performance passes 4 of the 5 the SBA
established risk benchmarks.
(2) All statuses are current or in compliance;
(3) There are no loans listed under the ―Loans 90 or More Days Past
Due‖ category;
(4) There are no loans listed under ―Loans in Catch-Up That Missed At
Least 3 Consecutive Payments.‖
(5) If there are loans under Nos. 3 and 4, then the CDC should explain
what action has been taken, such as a deferment or a request that
SBA purchase the debenture.
(6) The CDC’s Annual Report submission is current and the Annual
Report is in compliance.
k) The CDC must demonstrate that it has satisfactory SBA performance as
determined by SBA in its discretion. The CDC’s Risk Rating, among
other factors, will be considered in determining satisfactory SBA
performance. Other factors may include, but are not limited to, on-site
review/examination assessments, historical performance measures (like
default rate, purchase rate and loss rate), loan volume to the extent that it
impacts performance measures, and other performance related
measurements and information (such as contribution toward SBA’s
mission).
l) Provide a summary of the qualifications and experience of those loan
officers who will be responsible for marketing, packaging, processing and
servicing the loans in the expanded area. If the loan officers are new
employees, provide a complete 1081 and fingerprint card (as required) for
each employee. If the new employees will be provided under contract,
submit a contract for their services that meets the regulations governing
contracts [13 CFR 120.824].
2. Analysis by the SBA Office 13 CFR 120.837
a) The Lead SBA Office conducts a review and comments on:
(1) Any previous experience with the applicant, including comments on
the CDC’s ability to handle an increase in loan servicing activity
including on-site servicing of an expanded geographic area.
(2) The CDC’s compliance with SBA's regulations, policies, and
performance benchmarks, including the timely submission of all
annual reports.
(3) Compliance of any new contracts with SBA regulations [13 CFR
120.824].
78 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart A
(4) Comments from other field offices that have dealings with the
applicant, including Servicing Centers.
(5) Any other pertinent comments regarding the CDC’s operations.
b) If the Lead SBA Office’s analysis determines that the CDC is in
compliance with SBA’s regulations and policies governing CDCs, the
district will, within 60 days of receipt of a complete request, forward the
CDC’s application along with the Lead SBA Office’s analysis and
recommendation to the D/FA.
c) If the Lead SBA Office’s analysis determines that the CDC is not in
compliance with SBA’s regulations and policies governing CDCs, return
the application to the CDC identifying the outstanding issues to give the
CDC an opportunity to come into compliance.
3. The Decision
a) The D/FA may consider any information submitted or available related to
the applicant and the application and will make the final decision. SBA
will notify the CDC of its decision in writing, and if the application is
denied, the reasons for its decision.
b) Multi-State CDCs must maintain a separate accounting for each State of
all 504 fee income and expenses and provide, upon SBA’s request,
evidence that the funds resulting from its Multi-State CDC operations are
being invested in economic development activities in each State in which
they operate. 13 CFR 120.825
c) If a CDC is approved to operate as a Multi-State CDC, the CDC's ALP,
PCLP, or Priority CDC authority will carry over into every additional
State in which it is approved to operate as a Multi-State CDC.
Effective Date: October 1, 2011 79
Subpart B SOP 50 10 5(D)
SUBPART B
SECTION 7(A) BUSINESS LOAN PROGRAMS
PURPOSE OF THIS SUBPART
This subpart contains the policies and procedures governing 7(a) business loan programs
including standard 7(a), the Certified Lenders Program, the Preferred Lenders Program, SBA
Express and the Agency’s Pilot Loan Programs.
When the policy set forth in this Subpart does not adequately address the unique circumstances
regarding a particular matter, an exception to policy may be approved by the D/FA. The D/FA
may not approve an exception to policy if such exception would be inconsistent with a statute or
regulation. A request for an exception to policy must be submitted to the LGPC. The LGPC will
analyze the request and make a recommendation to the D/FA, or individual acting in that
capacity, who will make the final decision. The decision must be documented in the file. This
procedure may only be used in situations where a minor deviation from standard policy is
necessary for the specific situation. Exceptions to policy will be considered on a case-by-case
basis and the decision will only apply to the specific request.
CHAPTER 1: GENERAL DESCRIPTION OF THE 7(A) LOAN PROGRAMS
SBA is an agency of the federal government that is authorized through the Small Business Act to
guarantee loans made by lenders to eligible small businesses. (13 CFR Part 120)
I. VARIOUS DELIVERY METHODS
A. The Agency guarantees loans through various delivery methods including:
1. Standard 7(a) Loan Processing
2. Small/Rural Lender Advantage (S/RLA)
3. Certified Lenders Program (CLP)
4. Preferred Lenders Program (PLP)
5. Small Loan Advantage (SLA)
6. SBA Express
7. Export Express
8. Pilot Loan Programs, which currently include:
a) Patriot Express;
b) Community Advantage (covered by a separate Community Advantage
Participant Guide); and
c) Dealer Floor Plan (covered by a separate Dealer Floor Plan Procedural
Guide).
II. USE OF LOAN PROCEEDS
SBA loan proceeds may be used to finance any of the following:
1. Working capital;
80 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
2. Furniture and fixtures;
3. Machinery and equipment;
4. Purchase of land and building including construction and renovations;
5. Business Acquisition; and
6. Refinancing of existing debt.
III. SUMMARY OF DELIVERY METHODS AND PILOT LOAN PROGRAMS
The following charts summarize the various delivery methods for SBA’s lending
programs, including Pilot Loan Programs.
Effective Date: October 1, 2011 81
Subpart B SOP 50 10 5(D)
7(a) LOANS (except SBA Express, Export Express and pilot loan programs)
Standard 7(a), CLP, Small/Rural Lender Advantage, PLP, and Small Loan Advantage
Attribute Standard 7(a)/CLP Small/Rural Lender Preferred Lenders Program Small Loan Advantage (SLA)
Advantage (S/RLA) (PLP)
Geographic Area Nationwide Nationwide (Only Nationwide Only available to PLP Lenders.
available to lenders that
have averaged 20 SBA
loans or less annually
for the last 3 fiscal
years)
Borrow Portion of SBA Form 4 plus required Form 2301, Part A Same as Standard 7(a) Same as S/RLA.
SBA Application attachments.
Lender Portion of Full credit analysis by lender on Form 2301, Part B Full credit analysis by lender Form 2301, Part B (Lenders Application for Guaranty).
SBA Application Form 4-I. Submitted to SBA for its (Lenders Application for using Form 4-I. but not Full credit analysis by lender but does not submit to
review prior to SBA approval. Guaranty), Form 2301, submitted to SBA prior to SBA.
Eligibility Questionnaire may be Part C (Eligibility approval. Form 1920 (Part B) Form-7: PLP Eligibility Checklist (same as PLP loans).
completed by lender but is not Questionnaire). Specific which requires abbreviated If loan is not eligible for submission under delegated
required. CLP lenders prepare credit analysis information. Lender is authority, lender completes Form 2301, Part C
Authorization and submit to SBA requirements based on delegated credit decision and (Eligibility Questionnaire) instead.
with application. size of loan, new completes checklist which is
business, debt service submitted to SBA.. Lender
coverage, or judgments prepares and executes
or bankruptcy filings. Authorization.
Type of Loan Short-term (12 months) or Long- Same as Standard 7(a) Same as Standard 7(a) Same as Standard 7(a)
term loan (No revolving features.)
Loan Decision SBA approves the loan for both Same as Standard 7(a) Lender is delegated the credit Lender is delegated the credit decision and completes
credit and eligibility. decision and completes a a checklist for eligibility which it retains for possible
checklist for eligibility which review by SBA.
SBA reviews.
Target Processing Standard 7(a): 6 business days 5 business days 1 business day 1 business day
Time CLP: 3 business days
Centralized Yes. Standard 7(a) Loan Guaranty Same as Standard 7(a) Use of E-Tran Required. Use of E-Tran required. If a delegated submission,
Processing Processing Center - Sacramento, except that analysis by once the E-Tran fields are completed and submitted
CA and Hazard, KY. SBA does not include by the lender, the lender either receives approval from
Complete review of credit and the review of any SBA as evidenced by a loan number or, if a loan is not
eligibility by SBA loan officers. supporting eligible for submission under delegated authority,,
CLP: Same as Standard 7(a) except documentation such as lender will be instructed to submit loan application
that SBA relies principally on financial statements but package electronically to the Standard 7(a) Loan
lender’s analysis resulting in shorter instead relies principally Guaranty Processing Center.
review by SBA. on the lender’s analysis
along with credit scores
resulting in shorter
review by SBA.
E-tran Available No, lender may submit by mail, fax Same as Standard 7(a) Use of E-Tran required. Use of E-Tran is required.
and e-mail
Maximum loan General rule is gross loan amount Limited to $350,000 Same as Standard 7(a) Limited To $250,000
amounts limited to $5,000,000 per loan.
SBA guaranty amount limited to
$3,750,000 to one borrower (and
any affiliates).
Percent of Guaranty 85% for loans of $150,000 or less. Same as Standard 7(a) Same as Standard 7(a) Same as Standard 7(a)
75% for loans over $150,000
Maximum Maturity WC – 10 Years Same as Standard 7(a) Same as Standard 7(a) Same as Standard 7(a)
F&F, M&E – Useful life
Real Estate – 25 years
Maximum Interest Prime/LIBOR Base Rate/SBA Same as Standard 7(a) Same as Standard 7(a) Same as Standard 7(a)
Rates Optional Peg Rate + 2.25% for
maturities under 7 years.
Prime/LIBOR Base Rate/SBA
Optional Peg Rate + 2.75% for
7years or more.
Rates can be higher by 2% for loans
of $25,000 or less; and 1% for loans
between $25,000 and $50,000.
Collateral Policy Available collateral (liquidation Same as Standard 7(a) Same as Standard 7(a) Same as Standard 7(a)
value) up to loan amount.
SBA Guaranty Fees Maturity of 12 months or less = Same as Standard 7(a) Same as Standard 7(a) Same as Standard 7(a)
0.25%
Maturities over 12 Months
82 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
Gross loan: $150,000 or less =
2.0% of guaranteed portion
Gross loan: $150,001 - $700,000 =
3.0% of guaranteed portion
Gross loan: $700,001 - 5,000,000 =
3.5% of guaranteed portion up to
$1,000,000 PLUS 3.75% of the
guaranteed portion over $1,000,000
On-going guaranty fee = 0.55%
SBA Prepayment Yes if term of loan is for 15 years or Same as Standard 7(a) Same as Standard 7(a) Same as Standard 7(a)
Penalty more and prepaid in first 3.
Lender Agreements All lenders must execute Form 750 Same as Standard 7(a) Same as Standard 7(a) plus .Same as PLP.
with SBA (and 750B for short term loans). Supplemental Agreement
CLP lenders must execute a which must be renewed every
Supplemental Guaranty Agreement 2 years.
which must be renewed every 2
years.
SBA Express, Export Express, and Patriot Express
Attribute SBA Express (est. 1995 as a pilot; Export Express (est. 1999 as a pilot; became Patriot Express Pilot Loan Initiative
became permanent in 2004) permanent in 2010) (est. 2007)
Eligibility Restrictions None. Same eligibility requirements as Applicant must use loan proceeds for an export Applicant must be owned and controlled (51
Standard 7(a). development activity. In addition, applicant must percent or more) by one or more of the
have been in operation, though not necessarily in following groups: veteran, service-disabled
exporting, for at least 12 months, unless (1) the veteran, active duty military participating in
applicant’s key personnel have clearly the military’s Transition Assistance Program
demonstrated export expertise and substantial (TAP), reservist or national guard member or
previous business experience, and (2) the lender a current spouse of any of these groups, a
processes the loan using conventional widowed spouse of a service member who
commercial underwriting procedures and does died while in service, or a widowed spouse of
not rely solely on credit scoring or credit matrices a veteran who died of a service-connected
to approve the loan. disability.
Borrower Portion of SBA Form 1919. Requires abbreviated Same as SBA Express. Same as SBA Express.
Application information and no exhibits.
Lender Portion of SBA Form 1920 (A, B & C). Requires Same as SBA Express. Same as SBA Express.
Application abbreviated information and no exhibits.
No prior credit review by SBA.
Target Processing Time 1 business day 1 business day 1 business day
Centralized Processing Lender retains application documentation Same as SBA Express. Same as SBA Express
in its files and submits a request for SBA
approval by entering general information
about the borrower and loan into E-tran
(SBA’s electronic submission system).
SBA’s approval is evidenced by the
issuance of an SBA loan number.
E-tran Available Use of E-Tran required. Use of E-Tran required Use of E-Tran required
Maximum loan amounts Limited to $350,000 (gross) (including any Limited to $500,000 (gross). Limited to $500,000 (gross) (including any
outstanding SBA Express, Community outstanding SBA Express, Community
Express, Patriot Express and Export Express, Patriot Express and Export Express
Express loans.) loans.)
Maximum Percent of Guaranty 50% 90% for loans of $350,000 or less. Same as Standard 7(a)
75% for loans over $350,000 up to $500,000
Maximum Maturity Maximum 7 years for Revolving Lines of Generally, same as SBA Express, including Same as SBA Express
Credit including term out period. general line of credit with term out period. If
Otherwise, same as Standard 7(a). transactional line of credit, the maximum term is
7 years and no disbursement may be made for
an export transaction where payment by the
foreign buyer will occur after the maturity date of
the loan.
Maximum Interest Rates Loans $50,000 or less: Prime +6.5% Same as SBA Express Same as Standard 7(a)
Over $50,000: Prime + 4.5%
Collateral Policy $25,000 or less, no collateral required. Generally, same as SBA Express. If line of credit Same as SBA Express up to $350,000. Over
Over $25,000, lenders use same collateral over $25,000 is used to support the issuance of a $350,000, same as Standard 7(a).
policies used for their non-SBA guaranteed standby letter of credit, the line of credit must
loans. have collateral that will provide coverage for at
least 25% of the issued standby letter of credit
Effective Date: October 1, 2011 83
Subpart B SOP 50 10 5(D)
amount.
SBA Guaranty Fees Same as Standard 7(a) Same as Standard 7(a) Same as Standard 7(a)
SBA Prepayment Penalty Same as Standard 7(a) Same as Standard 7(a) Same as Standard 7(a)
Other Fees a Lender May Same as non-SBA guaranteed loans with Same as SBA Express. Same as SBA Express.
Charge limited restrictions. (Ex. Renewal fees are
not permitted.)
Lender Supplemental Same as Standard 7(a) plus SBA Express Same as Standard 7(a) plus Export Express l Same as Standard 7(a) plus Patriot Express
Agreement Supplemental Guaranty Agreement which Supplemental Guaranty Agreement which must Supplemental Guaranty Agreement which
must be renewed every 2 years. be renewed every 2 years. must be renewed every 2 years.
Technical Assistance None required. Provided by the USEACs. None required. However, SBA emphasized
its existing technical assistance programs
such as SCORE and the SBDCs as part of
the overall Patriot Express initiative.
84 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
IV. VARIOUS SPECIALIZED PROGRAMS
The following two charts describe various specialized programs and their requirements.
Applications for these programs cannot be processed under CLP, PLP, SBA Express or
the Pilot Loan Programs except for EWCP which may be processed PLP.
7(a) Loans
International Trade
Attribute International Trade Loan Program (IT) Export Working Capital Program (EWCP)
Geographic Area Nationwide Nationwide
Borrow Portion of SBA Application SBA Form 4 plus required attachments. EIB SBA Form 84-1 Joint Application for Export Working
Capital Guarantee plus required attachments.
Lender Portion of SBA Application Full credit analysis by lender on Form 4-I. Submitted to EIB SBA Form 84-1 Joint Application for Export Working
SBA for its review prior to SBA approval. Additional Capital Guarantee plus required attachments.
eligibility requirements must be met. Identified in
Eligibility Questionnaire (Standard 7(a) submission) or For PLP EWCP Lenders: EIB SBA Form 84-1 Joint
Eligibility Checklist (PLP submission). Application for Export Working Capital Guarantee plus
required attachments, SBA Form 4-I, SBA Form 1920SX
(Part B), and PLP-EWCP Eligibility Checklist.
Type of Loan Long-term loan specifically for the acquisition, Working capital loan. May be short-term (12 months or
construction, renovation, modernization, improvement, or less) or long term up to a maximum of 3 years. It is one of
expansion of productive facilities or equipment to be used two SBA loan programs that is permitted to finance a
in the United States in the production of goods and stand-by letter of credit. (Export Express is the other.)
services involved in international trade; to refinance debt
as allowed under Standard 7(a) and for working capital.
Loan Decision Same as Standard 7(a) and PLP. Same as Standard 7(a) and PLP.
Target Processing Time Same as Standard 7(a) and PLP. Same as Standard 7(a) and PLP.
Centralized Processing Yes. Standard 7(a) Loan Guaranty Processing Center - Yes. For non-PLP submissions, applications are sent to
Sacramento, CA and Hazard, KY. the USEAC (located in multiple locations throughout the
If submitted in conjunction with a non-PLP EWCP then a country) for a complete review of credit and eligibility by
complete review of credit and eligibility by US Export USEAC SBA loan officers. The USEAC Loan Officer will
Assistance Center (USEAC) SBA loan officers. USEACs submit appropriate documentation to the Standard 7(a)
located in multiple locations throughout the country Loan Guaranty Processing Center - Sacramento, CA and
sponsored by the Dept. of Commerce. Hazard, KY.
For PLP submissions, centralized processing in the For PLP submissions centralized processing in the
Sacramento Loan Processing Center. Sacramento Loan Processing Center.
E-Tran Available No, lender may submit by mail, fax and e-mail For EWCP, no, lender may submit by mail, fax and e-mail.
For PLP-EWCP, use of E-Tran required.
Maximum loan amounts Gross loan amount limited to $5,000,000 per loan. General rule is gross loan amount limited to $5,000,000
SBA guaranty amount limited to $4,500,000 to one per loan.
borrower (and any affiliates). However, the amount SBA guaranty amount limited to $4,500,000 to one
guaranteed for working capital for the IT loan combined borrower (and any affiliates).
with any other outstanding 7(a) loan for working capital
cannot exceed $4,000,000.
Percent of Guaranty 90% 90%
Maximum Maturity Same as Standard 7(a) 36 months
Maximum Interest Rates Same as Standard 7(a) No SBA maximum, but SBA monitors for reasonableness.
Collateral Policy Generally, a first lien on the fixed assets financed with the First lien on export receivables and inventory being
loan as well as other collateral available. However, a financed. Other collateral may be considered.
second lien may be approved in certain cases if there is
adequate assurance of repayment of the loan. May not
be processed PLP if a first lien is not taken.
SBA Guaranty Fees Same as Standard 7(a) Same as Standard 7(a) for short-term loans (1/4 of 1% for
(Multiply percentage times loans under 12 months). If reissued as a new loan for an
guaranteed amount, not gross additional 12 months, the short-term guaranty fee applies.
amount.) If maturity is extended beyond 12 months, the long-term
guaranty fee will apply.
SBA Prepayment Penalty Same as Standard 7(a) Not applicable due to short term nature of loan.
Lender Agreements with SBA All lenders must execute Form 750 All lenders must execute Form 750, Form 750 B for short
term loans and Form 750EX .PLP Lenders: Supplemental
Guaranty Agreement that is renewed every 2 years.
Effective Date: October 1, 2011 85
Subpart B SOP 50 10 5(D)
7(a) LOANS
CAPLines
Attribute Working Capital Contract Seasonal Builders
CAPLines CAPLines CAPLines CAPLines
Geographic Area Nationwide Nationwide Nationwide Nationwide
Borrower Portion of Non-delegated: Same as Non-delegated Same as Non-delegated: Same as Non-delegated: Same as
SBA Application Standard 7(a) Standard 7(a) PLUS must Standard 7(a) PLUS Standard 7(a) PLUS
PLP: SBA Form 1919 provide a project cost historical financial demonstrate successful
schedule for each contract statements that performance on similar type
to be financed. demonstrate a seasonal construction PLUS
PLP: SBA Form 1919 PLUS financing pattern. produce a cash flow
the project cost schedule PLP: SBA Form 1919 PLUS projection for project to be
for each contract to be historical financial financed.
financed. statements that PLP: SBA Form 1919 PLUS
. demonstrate a seasonal two items noted above.
financing pattern.
Lender Portion of SBA Non-delegated: Same as Non-delegated: Same as Non-delegated: Same as Non-delegated: Same as
Application Standard 7(a) Standard 7(a) Standard 7(a) . Standard 7(a).
PLP: SBA Form 1920SX PLP: SBA Form 1920SX PLP: SBA Form 1920SX PLP: SBA Form 1920SX
Parts B and C. Parts B and C. Parts B & C. Parts B & C.
Unique Eligibility Must sell on credit and Contract must permit lender 30-day zero balance each Borrower must have
Requirements create accounts receivable, to obtain an assignment of year is required. previous building
not notes receivable proceeds. Some exceptions experience of the same
may apply (see ch.7 of this type. Speculative building
subpart). but with documentation to
support likelihood of sale.
Type of Loan Revolving Line of Credit to Finances all costs Finances seasonal WC Finances direct costs
finance short-term WC associated with specific needs. May be revolving. associated with building a
needs of the Borrower contract(s), but not profit. commercial or residential
May be revolving. structure for sale.
Loan Decision Non-delegated: SBA Same as Working Capital Same as Working Capital Same as Working Capital
approves the loan for both CAPLines. CAPLines. CAPLines.
credit and eligibility.
PLP: Lender is delegated
credit decision and
completes a checklist for
eligibility which it retains for
possible review by SBA at a
later date.
Target Processing Non-delegated: 6 business Same as Working Capital Same as Working Capital Same as Working Capital
Time days. PLP: 1 business day. CAPLines. CAPLines. CAPLines.
Centralized Yes. Non-delegated: Same as Working Capital Same as Working Capital Same as Working Capital
Processing Standard 7(a) Loan CAPLines. CAPLines. CAPLines.
Guaranty Processing
Center - Complete review of
credit and eligibility by SBA
loan officers.
PLP: Yes. Sacramento, CA
(SLPC).
E-tran Available Non-delegated, lender may Same as Working Capital Same as Working Capital Same as Working Capital
submit by mail, fax and e- CAPLines. CAPLines. CAPLines.
mail
PLP: Use of E-tran
required.
Maximum loan Same as Standard 7(a). Same as Standard 7(a). Same as Standard 7(a). Same as Standard 7(a).
amounts
Percent of Guaranty Same as Standard 7(a). Same as Standard 7(a). Same as Standard 7(a). Same as Standard 7(a).
Maximum Maturity 10 Years 10 Years 10 Years 5 Years
Maximum Interest Same as Standard 7(a). Same as Standard 7(a). Same as Standard 7(a). Same as Standard 7(a).
Rates
Collateral Policy 1st lien on working/trading Assignment of contract First lien on seasonal No less than a second lien
assets (A/R, inventory) and proceeds. Some exceptions Inventory and Receivables on real estate project.
if not using a borrowing may apply.
base certificate additional
collateral to ensure 1:1
collateral ratio
SBA Guaranty Fees Same as Standard 7(a). Same as Standard 7(a). Same as Standard 7(a). Same as Standard 7(a).
SBA Prepayment N/A N/A N/A N/A
Penalty
Lender Agreements All lenders must execute Same as Working Capital Same as Working Capital Same as Working Capital
86 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
with SBA Form 750 & 750B (short CAPLines. CAPLines. CAPLines.
term loans) plus PLP
lenders must have
Supplemental Guaranty
Agreement for PLP.
Effective Date: October 1, 2011 87
Subpart B SOP 50 10 5(D)
V. SPECIAL PURPOSE LOANS
Certain special purpose loan programs are subject to separate or special funding under
SBA’s budget.
A. Community Adjustment and Investment Program (CAIP)
CAIP was established in 1993 to assist U.S. companies doing business in areas of the
country that have been negatively affected by the North American Free Trade
Agreement (NAFTA). CAIP loans allow for the reimbursement of the guaranty fee
on eligible 7(a) loans.
1. Eligibility
To be eligible for CAIP, the small business must reside in a county, or a defined
area within a county, noted as being negatively affected by NAFTA based on
job losses and the unemployment rate of the county. There is also a job creation
component of one job created for every $70,000 of the guaranteed portion of the
7(a) loan.
2. Eligible CAIP Communities
To find out if the business is in an eligible area, go to the listing of the counties
at www.sba.gov at All CAIP. This listing is updated several times a year.
3. Debt Refinancing under CAIP
a) No more than 49% of loan principal made available under CAIP may be
used to refinance existing long-term debt (i.e., debt with a remaining term
of more than 24 months) or to finance a change of ownership.
b) For purposes of this limitation, the following are not considered to be
long-term debt refinancing and, accordingly, are not subject to the
limitation:
(1) Converting short-term debt (i.e., debt with a remaining term of 24
months or less) to long-term debt;
(2) Converting interim debt (i.e., a bridge loan) to long-term debt;
(3) Converting line of credit or revolving credit debt to long-term debt;
(4) If the debt was incurred to open a new facility, expand operations at
an existing facility, enter new markets, or improve a small business’s
competitive position;
(5) Bringing trade payables to a current status or buying out a factor;
and
(6) A change of ownership (e.g., acquisition, merger or consolidation)
that is essential to sustain the existence of the business.
4. Application Process
Once the 7(a) loan is approved by SBA (as evidenced by an SBA loan number),
the lender must submit a completed Form 2021 to the Standard 7(a) Loan
Guaranty Processing Center (LGPC). The LGPC will review the form and, if it
meets all eligibility requirements, will forward it to the Office of Financial
Assistance (OFA). In addition to the completed form, SBA’s loan accounting
information must reflect that the guaranty fee has already been paid. (The CAIP
request is for reimbursement.)
88 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
OFA then prepares a package to be submitted to and considered by the CAIP
Finance Committee, which is comprised of officials from the Departments of
Agriculture and Treasury and the North American Development Bank.
If the CAIP Finance Committee approves the application, SBA will refund the
guaranty fee to the lender who, in turn, refunds any fee paid by the borrower to
the borrower. (Note: The CAIP Finance Committee meets infrequently, and
funds for this initiative are limited and may not always be available.)
B. The following special purpose loan programs as of the date of this SOP are not
funded:
1. Disabled Assistance Loan (DAL)
2. Loan Program for Low Income Individuals
3. The Veterans Loan Program (not to be confused with Patriot Express)
4. The 8(a) Participant Loan Program
5. Defense Economic Transition Loan Program
6. Defense Loan and Technical Assistance (DELTA)
Check with the local SBA field office, the Standard 7(a) Loan Guaranty Processing
Center (LGPC) or the Sacramento Loan Processing Center (SLPC) to see if these
programs have been funded and are available.
VI. DEFINITIONS APPLICABLE TO THE 7(A) LOAN PROGRAMS
The definitions applicable to the 7(a) loan programs are set forth in 13 CFR 103.1 and
120.10.
Effective Date: October 1, 2011 89
Subpart B SOP 50 10 5(D)
CHAPTER 2: ELIGIBILITY FOR 7(A) GUARANTY LOAN PROGRAM
I. INTRODUCTION
This section discusses the steps necessary to determine if a Small Business Applicant is
eligible for an SBA guaranteed loan. The eligibility issues that apply to the lender or the
structure of the loan are discussed elsewhere.
Eligibility should be determined as early in the loan making process as possible. The
small business must meet the eligibility requirements at the time of application and, with
the exception of the size standard, must continue to meet these requirements through the
closing and disbursement of the loan.
A Standard 7(a) Eligibility Checklist has been created to assist those lenders that do not
have delegated authority to identify eligibility issues. For delegated lenders, an Eligibility
Checklist must be completed (unless the lender is ―eligibility authorized). An example of
one of these checklists is the Eligibility Information for Preferred Lender Participation
(PLP) Loans.
II. SUMMARY OF ELIGIBLITY REQUIREMENTS
A. The Small Business Applicant must: (13 CFR 120.100)
1. Be an operating business;
2. Be organized for profit;
3. Be located in the United States (includes territories and possessions);
4. Be small (as defined by SBA); and
5. Demonstrate a need for the desired credit.
B. Lender must certify that credit is not available elsewhere on reasonable terms; (13
CFR 120.101)
C. The Small Business Applicant must show that the funds are not available from
alternative sources, including personal resources of the principals; (13 CFR 120.102)
D. The following businesses are not eligible: (13 CFR 120.110)
1. Non-profit businesses (for profit subsidiaries are eligible)
2. Financial businesses primarily engaged in the business of lending, such as
banks, finance companies, and factors;
3. Passive businesses owned by developers and landlords that do not actively use
or occupy the assets acquired or improved with the loan proceeds (except
Eligible Passive Companies);
4. Life insurance companies;
5. Businesses located in a foreign country (businesses in the U.S. owned by aliens
may qualify)
6. Pyramid sales distribution plans;
7. Businesses deriving more than one-third of gross annual revenue from legal
gambling activities;
8. Businesses engaged in any illegal activity;
90 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
9. Private clubs and businesses which limit the number of memberships for
reasons other than capacity;
10. Government-owned entities (except for businesses owned or controlled by a
Native American tribe);
11. Businesses principally engaged in teaching, instructing, counseling or
indoctrinating religion or religious beliefs, whether in a religious or secular
setting;
12. Consumer and marketing cooperatives (producer cooperatives are eligible);
13. Loan packagers earning more than one third of their gross annual revenue from
packaging SBA loans;
14. Businesses with an Associate who is incarcerated, on probation, on parole, or
has been indicted for a felony or a crime of moral turpitude;
15. Businesses in which the lender or any of its Associates owns an equity interest;
16. Businesses which present live performances of a prurient sexual nature; or
derive directly or indirectly more than 5% of their gross revenue through the
sale of products or services, or the presentation of any depictions or displays, of
a prurient sexual nature;
17. A business or applicant involved in a business which defaulted on a Federal
loan or Federally assisted financing resulting in a loss to the government. A
compromise agreement shall also be considered a loss;
18. Businesses primarily engaged in political or lobbying activities; and
19. Speculative businesses (such as oil wildcatting).
III. ELIGIBILITY REQUIREMENTS
A. The Small Business Must be Organized for Profit.
1. All small business applicants must be organized for profit. Non-profit
businesses are not eligible for SBA business loan assistance.
2. For-profit businesses owned by a non-profit business are eligible if they meet
SBA’s other eligibility requirements. The non-profit affiliate must be included
in the calculation of the size of the business. This may result in a determination
that the for-profit entity is not considered small by SBA size standards and
therefore not eligible. In addition, if the non-profit affiliate owns 20 percent or
more of the for-profit business but cannot or will not guarantee the loan, the for-
profit business is not eligible for SBA assistance. If the loan proceeds are used
for the benefit of the non-profit rather than the for-profit business, the for-profit
business is not eligible.
3. Documentation that may be reviewed to determine for-profit status:
a) Articles of Incorporation-- filed with Secretary of State or similar
department in the state where the applicant is organized or conducts
operations;
b) Articles of Organization-- (for a Limited Liability Corporation (LLC))
filed with Secretary of State or similar department in the state where the
applicant is organized or conducts operations;
Effective Date: October 1, 2011 91
Subpart B SOP 50 10 5(D)
c) Corporate By-Laws and any amendments;
d) Partnership Agreements;
e) Association By-laws; and
f) Tax Returns.
B. The Applicant Must Be Small Under SBA Size Requirements (13 CFR Part 121)
1. The applicant business alone (without affiliates) must not exceed the size
standard for the industry in which the applicant is primarily engaged AND the
applicant business combined with its affiliates must not exceed the size standard
designated for either the primary industry of the applicant alone or the primary
industry of the applicant and its affiliates, whichever is higher. Affiliation
exists when one individual or entity controls or has the power to control another
or a third party or parties controls or has the power to control both. SBA
considers factors such as ownership, management, previous relationships with
or ties to another entity, and contractual relationships when determining
whether affiliation exists. The complete definition of affiliation is found at 13
CFR 121.103. (See also, 13 CFR 121.107 and 121.301)
2. The applicable size standards are increased by 25% when the applicant agrees to
use all of the financial assistance within a labor surplus area. Labor surplus
areas are designated by the Department of Labor. (13 CFR 121.301(e))
3. For most retail businesses, the applicant and its affiliates cannot exceed $7.0
million in gross sales averaged over the last 3 fiscal years.
4. For most wholesale businesses, the applicant and its affiliates cannot have more
than 100 employees.
5. For most manufacturing businesses, the applicant and its affiliates cannot have
more than 500 employees.
6. The applicant business may qualify under either the industry size standards
discussed above or the alternative size standard. To qualify under the
alternative size standard, the applicant business must meet the following:
a) The maximum tangible net worth of the applicant is not more than
$15,000,000; and
b) The average net income after Federal income taxes (excluding any carry-
over losses) of the applicant for the 2 full fiscal years before the date of
the application is not more than $5,000,000.
7. When size status of an applicant is determined: (13 CFR 121.302)
a) The size of an applicant for SBA financial assistance is determined as of
the date the application for such financial assistance is accepted for
processing by SBA. Changes in the size of the business subsequent to the
applicable date when size is determined will not disqualify an applicant
for assistance.
b) If the Small Business Applicant is an existing business and is using the
proposed loan proceeds to acquire another business, the sizes of the two
businesses are combined to determine if the application is size eligible.
92 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
c) For applications processed under a lender’s delegated authority, (PLP,
SBA Express, Export Express, Patriot Express, etc.), size is determined as
of the date of approval of the loan by the lender.
8. Formal size determinations (13 CFR 121.303)
a) By signing the application, a small business applicant is deemed to have
certified that it is small under the applicable size standard. SBA or lender
may request additional information concerning the applicant’s size based
on information supplied in the application or any other source. A preferred
lender or SBA Express lender may accept as true the size information
provided by an applicant, unless credible evidence to the contrary is
apparent.
b) Prior to denial of eligibility based on size, a formal size or affiliation
determination may be requested by a small business applicant, the SBA
loan application processing office or a lender. The request must be made
to the Government Contracting Area Director serving the area in which
the headquarters of the applicant is located, regardless of the location of
the parent company or affiliates.
9. Review of Franchise/License/Dealer/Jobber or Similar Agreements
The discussion in this section applies to franchise agreements, license
agreements, dealer agreements (with the exception of dealer agreements from
new car manufacturers which are not reviewed for eligibility), jobber or similar
agreements. A finding that the agreement is acceptable under this section
means that the agreement does not impose unacceptable control provisions
on the Small Business Applicant which would result in affiliation. The fact
that the agreement is acceptable does not mean that the Small Business
Applicant is eligible.
Franchise development agreements (often referred to as Master Franchise
Agreements) are ineligible as they have been determined to be inherently
speculative and are considered to be passive investments. Development
agreements may include, but are not limited to: (a) agreements which provide
the developer a geographic area with which to grow additional franchise units;
and (b) agreements where the developer’s income is derived from the royalty
payments of each franchise unit in the developer’s geographic territory.
Franchise development agreements should not be confused with area
development rights within a franchise agreement, which allow a specific
franchisee to operate a number of franchises within a specified geographic area.
An agreement containing area development rights may be eligible if it complies
with the guidance in this section.
a) Affiliation can exist through:
(1) Common ownership,
(2) Common management,
Effective Date: October 1, 2011 93
Subpart B SOP 50 10 5(D)
(3) Excessive restrictions upon the sale/transfer of the franchise interest,
or
(4) Control by a franchisor either directly or through an affiliated entity
or agent such that the franchisee does not have the independent right
to both profit from its efforts and bear the risk of loss commensurate
with ownership. (13 CFR 121.103 (i))
b) Review
SBA requires, in all cases, a determination as to whether affiliation exists
when the applicant has or will have a Franchise/License/Dealer/Jobber or
similar relationship. Regardless of the title of the agreement, if the
franchisor/licensor/dealer/jobber, etc. provides a product or service that is
critical to the Small Business Applicant’s business operation and/or
provides a trademark critical to the Small Business Applicant’s business
operation, then the agreement and any related documents must be
reviewed.
c) Review and determination must be conducted by:
(1) SBA--for all loans processed through the LGPC, including CLP.
(2) Lender--for PLP, SBA Express, or any other expedited processing
method.
(3) In all cases, the Franchise/License/Dealer/Jobber or similar
agreement, including any amendments and/or addendums must be
executed by all parties prior to first disbursement.
d) Franchise Information Assistance
Lenders must go to http://www.sba.gov/content/franchise-findings to
check the SBA Franchise Findings List for information with respect to a
specific Franchise/License/Dealer/Jobber or similar agreement to review
specific findings and see if there have been any findings for a particular
Franchise/License/Dealer/Jobber or similar agreement, which if still in the
Agreement, would make the Agreement ineligible. Lenders may also
contact SBA at franchise@sba.gov to request statistical information on
SBA lending to a specific franchise operation. This mailbox is not
designed to evaluate franchise material, so lenders should not send
franchise documents to this mailbox for review. In addition, lenders
may contact SBA counsel in the District Office or the SBA Franchise
Counsel for specific questions regarding eligibility determinations.
e) Registry of approved franchise/license/dealer/jobber or similar agreements
To facilitate the review of these agreements, the Franchise Registry
(―Registry‖) lists franchise agreements that have been approved by SBA.
Lender must ensure that the documents with the loan application are the
same as the documents listed on the Registry.
Lenders must follow the procedures set forth below to determine franchise
program eligibility for a loan application.
94 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(1) Check www.franchiseregistry.com to determine if the agreement is
listed.
(a) Process to determine if Listed on Registry
Lender must log into the Lender’s section from the Home Page
of the Franchise Registry using their password. Upon logging
into the Lender’s section, lender should type the name of the
franchise system in the Search Box to determine if a specific
franchise system has been listed on the Registry.
If the franchise system is not listed, lender should follow the
procedure under (b) below.
If the franchise system is listed, lender should click on the plus
(+) box to determine if the specific year (effective date) of the
Agreement has been listed. Agreements have been organized
into loan folders.
If the specific year of the Agreement is not listed as a loan
folder, lender should follow the procedure under (b) below.
(Lenders are no longer able to use the generic Certification of
No Material Change Form.)
If the specific year of the Agreement is listed as a loan folder,
lender should open the loan folder. Lender should then click
on ―View Agreement Detail‖ to review the specific eligibility
of the specific Agreement. Lender should review the
Agreement Application Summary page for the following
information:
(i) Determination Date (Approval) of the Agreement;
(ii) Addendum required; and
(iii) Specific Eligibility Notes (formally Footnotes).
Lender should return to the Loan Folder to print the
Certification of Franchise Documents.
In order for a franchise agreement to be eligible under the
Franchise Registry the lender’s file must include the following:
(i) Executed franchise/license/dealer/jobber Agreement and
any approved attachments and exhibits;
(ii) Executed Addendum (if required);
(iii) Executed Certification of Franchise Documents; and
Effective Date: October 1, 2011 95
Subpart B SOP 50 10 5(D)
(iv) Compliance with any required eligibility notes.
(b) Not Listed on Registry
(i) If the Agreement is not listed on the Registry, a review
must be made of the Agreement and all related
documents.
(ii) Lenders must consult the franchise findings list at
http://www.sba.gov/content/franchise-findings to see if
there have been any findings for a particular
Franchise/License/Dealer/Jobber or similar agreement,
which if still in the Agreement, would make the
Agreement ineligible. The information provided by the
SBA Franchise Findings List should be used by Lenders
to ensure they are making informed eligibility
determinations. Lenders should consult the findings list
under the ―fix available‖ category to see if there is a fix to
remedy the specific issues noted on the findings list.
(iii) If an Agreement has no negotiated fix available and the
noted findings remain in the
Franchise/License/Dealer/Jobber or similar agreement,
then the Agreement should be determined to be ineligible.
Lender may contact the SBA Franchise Counsel for
additional guidance.
(2) Affiliation Issues to Consider
The following are examples of common situations that should be
examined to determine if affiliation exists.
(a) Control
The provisions of the Agreement may not:
(i) Set the Applicant’s net profit;
(ii) Require the payment of excessive
Franchise/License/Dealer/Jobber, etc. continuing fees;
(iii) Directly control the applicant’s employees including
hiring or terminating (unless under a short term step-in
agreement);
(iv) Require the Applicant to deposit receipts or revenues into
an account which Franchisor/Licensor/Dealer/Jobber, etc.
controls, or from which withdrawals may be made only
with Franchisor/Licensor/Dealer/Jobber, etc. consent
(whether or not a fee is charged to the franchisee);
(v) Include an option to purchase the applicant’s personal
property upon expiration or breach of the Agreement,
96 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
where the Franchisor/Licensor/Dealer/Jobber, etc. has the
ability to control the price at the time of purchase (right
of first refusal is allowed provided it is on commercially
reasonable terms);
(vi) Allow the hiring of the applicant’s employees by the
Franchisor/Licensor/Dealer/Jobber, etc. (in the temporary
personnel industry, consider temporary employees hired
by the franchisee to be employees of the franchisor); or
(vii) Require that the billing activities for the applicant be
handled by the Franchisor/Licensor/Dealer/Jobber, etc. or
Third Party chosen by the
Franchisor/Licensor/Dealer/Jobber, etc.
(viii) Require the franchisee or EPC owner to sell their real
property (or lease) to the franchisor upon expiration or
breach of the Agreement. (This type of provision can be
found in the Agreement itself or recorded against the real
estate as a purchase option or deed restriction.)
(ix) Include a Right of First Refusal on a partial transfer of
ownership within a franchise entity.
(b) Leasing from Franchisor/Licensor/Dealer/Jobber, etc.
During the term of the SBA-guaranteed loan,
Franchisor/Licensor/Dealer/Jobber, etc. may not terminate any
Real Estate Lease unless an uncured default has occurred under
the terms of the Real Estate Lease or the Franchise Agreement.
(c) Transfer
Any transfer provision which requires a
Franchisor/Licensor/Dealer/Jobber, etc.’s consent must state
―Consent must not be unreasonably withheld or delayed‖ or its
equivalent. SBA will not infer this into a Franchise Agreement.
Reasonable Business Judgment is not an acceptable standard.
(d) Termination
A Franchisor/Licensor/Dealer/Jobber, etc.’s power to cancel
without cause does not confer upon it power to control the
applicant and is not an indication of affiliation.
(e) Independent Contractor
Franchisor/Licensor/Dealer/Jobber, etc. and applicant must
maintain an Independent Contractor Relationship.
Example: Insurance Agents who sell policies issued by one
insurance company have been found to be independent
contractors when the Agents performed their services at their
Effective Date: October 1, 2011 97
Subpart B SOP 50 10 5(D)
own business locations and paid all of the expenses of
maintaining their own offices.
(f) Insurance Industry
Based on the Industry standard established by the Insurance
Agency, it is common practice for the franchisor to own the
Insurance Policies as well as receive the payments on the
policy. This type of arrangement, by itself, does not create
affiliation.
(g) Fitness Industry
Fitness centers that appear to cater to one gender but have a
policy that allows both men and women to use the facility must
submit the following additional documentation with the loan
application:
(i) Affidavit that men and women are allowed to use the
facility; and
(ii) Diagrammed layout of the facility clearly showing two
separate bathrooms/changing rooms.
(h) Gasoline Industry
Based on the Industry standard established by the Gasoline
Industry, it is common practice for the oil company to install a
credit card system to provide for payment of gasoline products.
This type of arrangement, by itself, does not create excessive
control or affiliation.
Most Dealer Agreements are for a term of three years with
limited or no renewal terms. In situations where a gasoline
supplier is leasing the real property to the dealer, the Petroleum
Marketing Practices Act controls and contains detailed
provisions on the authority and procedure for non renewal or
termination. This type of lease arrangement, by itself, does not
place inappropriate control in the oil company/dealer.
(i) Eligibility Determination. The eligibility determination
for all Gas Station Loans must include a review of the
relevant documents. The documentation associated with
Gas Station Loans is voluminous, complex and frequently
contains provisions that (1) enable an oil company or
another non-small Person to exert significant control over
the small business loan applicant resulting in affiliation
(13 CFR 121.103); (2) have a significant negative impact
98 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
on the marketability and collateral value of the Property;
and (3) impair the applicant's repayment ability.
Therefore, all "Relevant Documents" must be reviewed to
determine whether a single provision or based on the
"totality of the circumstances" (13 CFR 121.103(a)(5))
execution of the Relevant Documents by the small
business would render it ineligible for SBA financial
assistance.
(a) Relevant Documents. For purposes of this
paragraph, the term "Relevant Documents" includes
but is not limited to (1) the report containing the
preliminary results of a search of the title to the
Property including the documents listed in the
abstract of title (hereafter the "Title Report"), (2)
the small business concern’s oil company supply
agreement and convenience store franchise
agreement, if any, and (3) if the loan is to purchase
the Property, all purchase and sale documents
including the exhibits, addendums, amendments,
etc., (hereafter the "Purchase and Sale
Documents"). While titles vary, examples of
Relevant Documents that must be reviewed include:
the Real Estate Sale Agreement; Terms and
Conditions of Sale Contract; Escrow Instructions;
Escrow Agreement; Franchise Agreement; Contract
Dealer Gasoline Agreement; Branded Reseller
Agreement; Memorandum of Gasoline Agreement
for Dealer-Owner, Franchisee-Operated Facility;
Branded Gas Sales Restriction and Covenant;
Special Warranty Deed; Bill of Sale; Use
Restriction Addendum; Right of First Refusal
Agreement; Repurchase Option; Subordination
Agreement; Environmental Release; Environmental
Declaration; Environmental Matters, Remediation
and Indemnification Addendum; and Site Access
Agreement.
(b) Subordination is not sufficient to overcome the
unacceptable results of objectionable provisions that
are of record or to be recorded. This is because to
clear the title, SBA's lien would need to be
foreclosed and doing so would prevent the small
business concern from selling the gas station as a
going concern and significantly diminish SBA's
recovery in the event of default.
(c) Examples of Unacceptable Document Review
Findings:
Effective Date: October 1, 2011 99
Subpart B SOP 50 10 5(D)
(i) Affiliation. Provisions in the Relevant
Documents that give an oil company or
another non-small Person significant control
over the small business applicant are not
acceptable. (See 13 CFR 120.100 (d).)
Examples include: (1) Purchase or
Repurchase Options. Purchase or repurchase
options that allow an oil company or other
Person to acquire the small business concern's
primary business asset (e.g. real estate) if the
small business concern violates a condition,
covenant, restriction or other provision.
(Distinction: A "purchase option" is different
from a "right of first refusal". A right of first
refusal that allows an oil company or other
Person to match a third party's offer is
generally acceptable to SBA.) Please note
that a right of first refusal on a partial transfer
of an interest in the small business concern is
NOT acceptable.; (2) Deed/Use Restrictions.
Provisions that give an oil company or other
Person the right to record deed or use
restrictions that enable the oil company or
other Person to control the use of the Property
thereby preventing the small business owner
from fully benefiting commensurate with
ownership. Note that certain deed restrictions
pertaining to the use of the property, which are
intended to protect the health and safety of
occupants, may be acceptable. Examples of
uses in deed restrictions based upon
environmental concerns which may be
acceptable may include: residential use, use as
a day care center for children or seniors, use
as a school, or use as a hospital.
(ii) Significant Impairment of Collateral Value or
Repayment Ability. Provisions in the
Relevant Documents that impose
requirements, restrictions or consequences that
could significantly impair (1) the collateral
value and marketability of the Property or (2)
the small business concern's repayment ability
are not acceptable. The fact that the collateral
will consist solely of personal property, such
as buildings and trade fixtures located on
leased land, is irrelevant since they would
100 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
ordinarily be sold in-place in the event of
foreclosure, e.g., a carwash, mini-mart, or fuel
pumping equipment. Examples include: (1)
Deed restrictions, covenants, easements,
reversionary interests and other provisions that
restrict the use of the Property for the benefit
of the seller, an oil company, or any other
Person such as those that restrict the brand of
fuel that can be sold on the Property or require
subsequent owners of the Property to
indemnify an oil company or other Person;
and (2) Engineering Controls that require the
small business concern 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.
(iii) Alteration of SBA/Lender’s Legal Rights,
Remedies or Responsibilities. Provisions in
the Relevant Documents that alter SBA or
Lender's legal rights, remedies or
responsibilities or impose additional duties are
not acceptable. Examples include provisions
that require SBA/Lender to: (1) Release or
Waive their legal rights, remedies or claims
against the seller, an oil company or other
Person; (2) Subordinate the SBA/Lender lien;
(3) Indemnify the seller, an oil company or
any other Person; (4) Notice. Provide the
seller, an oil company or any other Person
with special notice of default or foreclosure;
or (5) Forbearance. Provide the oil company
or another Person with an exclusive period of
time in which to decide what action to take
before SBA/Lender can initiate liquidation
activities in the event of default on the SBA
loan.
f) Questions on SBA’s Franchise Policy, Requests for Reconsideration and
Appeals
(1) Questions on SBA’s Franchise Policy should be directed to local
field counsel, center counsel, or SBA Senior Franchise Counsel.
(2) Lenders that believe that a franchise decision that has been rendered
by SBA is inconsistent with this SOP may appeal the decision by
forwarding a copy of the decision, along with an explanation of how
the determination is perceived to be inconsistent with this SOP to
FranchiseAppeals@sba.gov. Franchise appeals will be reviewed by
Effective Date: October 1, 2011 101
Subpart B SOP 50 10 5(D)
the SBA Franchise Committee comprised of OGC attorneys
appointed by the Associate General Counsel for Financial Law &
Lender Oversight. The Associate General Counsel for Financial Law
& Lender Oversight will retain the authority to overrule decisions
rendered by the SBA Franchise Committee.
C. The Small Business Applicant Must Demonstrate a Need for a Guaranty on the Loan.
1. The Small Business Applicant’s need for the loan is determined by applying the
―Credit Elsewhere Test.‖ The purpose of the Credit Elsewhere test is to
determine if the Small Business Applicant along with its principals have the
ability to obtain some or all of the requested loan funds from alternative sources
without causing undue hardship. (13 CFR 120.101)
2. The lender must determine that:
a) The Small Business Applicant is unable to obtain the loan on reasonable
terms without a Federal government guaranty, and
b) Some or all of the loan is not available from any of the following sources:
(1) The resources of the applicant business; or
(2) The personal resources of the principals of the applicant business.
If some or all of the loan applied for is otherwise available on reasonable terms
from any of these sources, the loan application must be reduced or declined.
3. The lender must substantiate the factors that prevent the financing from being
accomplished without SBA support and retain the explanation in the Small
Business Applicant’s file. The file must contain documentation that specifically
identifies the factors in the present financing that meet the Credit Elsewhere
Test.
4. Acceptable factors that demonstrate an identifiable weakness in the credit or
exceed policy limits of the lender include, among others:
a) The business needs a longer maturity than the lender’s policy permits (for
example, the business needs a loan that is not on a demand basis);
b) The requested loan exceeds either the lender’s legal lending limit or policy
limit regarding the amount that it can lend to one customer;
c) The lender’s liquidity depends upon selling the guaranteed portion of the
loan on the secondary market;
d) The collateral does not meet the lender’s policy requirements;
e) The lender’s policy normally does not allow loans to new businesses or
businesses in the applicant’s industry; and/or
f) Any other factors relating to the credit that, in the lender’s opinion, cannot
be overcome except for the guaranty. These other factors must be
specifically documented in the loan file.
5. Unacceptable factors include:
a) To address the lender’s Community Reinvestment Act (CRA) compliance;
or
b) To refinance debt already on reasonable terms.
102 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
6. The lender must certify that credit is not otherwise available by signing the
Lender Official block on the appropriate application form.
7. Utilization of personal resources. As part of the credit elsewhere test, SBA
requires the personal resources of any owner of 20% or more of the Small
Business Applicant be reviewed. (13 CFR 120.102)
a) The rule also applies to each person when the combined ownership of the
spouses and dependent children is 20% or more.
b) If the Small Business Applicant is owned by a Trust, the rule applies to the
Trustor. All donors to the trust will be deemed to have Trustor status for
eligibility purposes.
c) The utilization of the personal resources rule does not apply to the
business resources of an associate or affiliated business.
d) Once it is determined that an individual owner is subject to the utilization
of personal resources rule, his or her percentage of ownership has no
effect on the amount of the required injection.
8. Personal Resources of Spouses and Dependent Children
a) The SBA’s lending programs qualify as ―Special-Purpose Credit
Programs‖ under the Equal Credit Opportunity Act (ECOA). This
regulation stipulates that information pertaining to the applicant’s marital
status, sources of personal income, alimony, child support, and spouse’s
financial resources can be obtained and considered in determining
program eligibility. Therefore, the lender has the right to obtain the
signature of an applicant’s spouse (whether an owner of the business or
not) or other person on an application or credit instrument if it is required
by Federal or State law.
b) Unless there is a legal impediment to access the personal resources of the
spouse, such as those held by an independent trustee of an irrevocable
trust, the applicant is presumed to have access to the personal resources of
his/her spouse and minor children. The personal resources of close
relatives (excluding spouse and dependent children), including children
above the age of majority, living in the household are not considered to be
available to the applicant for injection into the business.
c) SBA or the lender can require injection of the available personal resources
of the individual’s minor children.
d) SBA or the lender cannot require the injection of the spouse’s personal
resources, but can determine that the applicant is ineligible because of
access to personal resources.
9. Liquid Assets
a) Only liquid assets are subject to being injected into the project (this
includes liquid assets held in a revocable trust). Liquid assets include:
(1) Cash;
(2) Certificates of deposit;
(3) Marketable securities and bonds;
Effective Date: October 1, 2011 103
Subpart B SOP 50 10 5(D)
(4) Cash surrender value of life insurance; and
(5) Similar assets. Lenders should consider carefully the transfer of
assets or other actions of the applicant to avoid compliance with the
intent of this provision. At a minimum, liquid assets transferred by
applicants within 6 months of application for SBA assistance will
not be exempt.
b) Liquid assets do not include:
(1) Closely held non-marketable stocks or bonds;
(2) Individual retirement accounts (IRAs), 401(k), 403(b), Keoghs, or
other established retirement accounts subject to withdrawal
restrictions or penalties; Health Savings Accounts, tax-advantaged
Educational Savings Accounts, such as 529 accounts, and other
similar assets;
(3) Equity in real estate or other fixed assets; or
(4) Assets pledged as security on debt obtained over 6 months prior to
the loan application. The dollar value of the pledged liquid assets
that exceeds the amount of the debt being secured is considered a
liquid asset.
10. Utilization of Personal Resources Rule (13 CFR 120.102)
a) The lender must determine the overall dollar value of the allowable
exemption, which is defined as the amount of personal resources that do
not have to be injected into the business. The allowable exemption is
determined on the basis of the ―total financing package.‖ The total
financing package includes the SBA loan, together with any other loans,
equity injection, or business funds used or arranged for at the same
general time for the same project as the SBA loan.
b) If the total financing package:
(1) Is $250,000 or less, the exemption is two times the total financing
package or $100,000, whichever is greater;
(2) Is between $250,001 and $500,000, the exemption is one and one-
half times the total financing package or $500,000, whichever is
greater; or
(3) Exceeds $500,000, the exemption is one times the total financing
package or $750,000, whichever is greater.
c) Once the exemption is determined, it is subtracted from the liquid assets.
If the result is positive, that amount must be injected into the project.
d) Liquid assets required to be injected into the business under the utilization
of personal resources rule cannot be pledged as an alternative to injection.
e) SBA or the lender may require additional capitalization beyond that
required by the utilization of personal resources rule.
11. Determining the Amount of the Allowable Exemption
104 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
Lenders must use the following procedures to make, as of the date of the loan
application, a written determination of the allowable exemption which must be
kept in the file, available for SBA’s review:
a) Carefully review the personal financial statements required from the
owners of 20% or more of the equity of the business (including the
resources of spouse and dependent children);
b) Determine the value of the liquid assets subject to the rule for each
individual; and
c) Subtract the allowable exemption from the liquid assets of each individual
subject to the rule (including their immediate family).
Note: A husband and wife and their dependent children are only entitled to one
exemption.
12. Reducing Ownership Interest
a) Any person subject to the utilization of personal resources rule 6 months
prior to the date of the loan application would continue to be subject to the
rule even if that person has changed his or her ownership interest to less
than 20%.
b) The only exception to the 6-month rule is when that person completely
divests his or her interest prior to the date of application. Complete
divestiture includes divestiture of all ownership interest and severance of
any relationship with the Small Business Applicant (and any associated
Eligible Passive Concern) in any capacity, including being an employee
(paid or unpaid).
D. Ineligible Types Of Businesses
1. To determine if a business is eligible for SBA assistance, the lender must:
a) Determine the primary business industry of the Small Business Applicant.
(13 CFR 121.107)
b) Determine whether the Small Business Applicant is one of the types of
business listed as ineligible in SBA regulations. (13 CFR 120.110)
2. SBA may not guarantee a loan to a Small Business Applicant for the benefit of
an ineligible affiliated business.
3. SBA cannot guarantee a loan to any of the following types of businesses:
a) Businesses organized as a non-profit (for-profit subsidiaries are eligible)
(13 CFR 120.110 (a))
b) Businesses Engaged in Lending (13 CFR 120.110 (b))
(1) SBA cannot guarantee a loan that provides funds to businesses
primarily engaged in lending or investment, or to an otherwise
eligible business for the purpose of financing investment not related
or essential to the business. This prohibits loans to:
(a) Banks;
Effective Date: October 1, 2011 105
Subpart B SOP 50 10 5(D)
(b) Life Insurance Companies (but not independent agents);
(c) Finance Companies;
(d) Factors;
(e) Investment Companies;
(f) Bail Bond Companies; and
(g) Other businesses whose stock in trade is money and which are
engaged in financing.
(2) The following are exceptions to this regulation:
(a) 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.
(b) A business that provides financing in the regular course of its
business (such as a business that finances credit sales) is
eligible provided not more than 50% of its revenue is from
financing its sales.
(c) A mortgage servicing company that disburses loans and sells
them within 14 calendar days of loan closing is eligible.
Mortgage companies are eligible when they are primarily
engaged in the business of servicing loans. Mortgage
companies that make loans and hold them in their portfolio are
not eligible.
(d) A check cashing business is eligible if it receives more than
50% of its revenue from the service of cashing checks.
c) Passive Businesses (13 CFR 120.110 (c))
(1) Passive businesses owned by developers and landlords that do not
actively use or occupy the assets acquired or improved with the loan
proceeds (except Eligible Passive Companies under 120.111) are not
eligible.
(2) Businesses primarily engaged in subdividing real property into lots
and developing it for resale on its own account are not eligible.
(3) Businesses that are primarily engaged in owning or purchasing real
estate and leasing it for any purpose are not eligible. For example,
shopping centers are not eligible and businesses that lease land for
the installation of a cell phone tower or wind turbine also are not
eligible; however, the business operating the cell phone tower or
wind turbine is eligible.
(4) Apartment buildings and mobile home parks are not eligible. But,
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. If the applicant is a start-up, the
applicant’s projections must show that more than 50% of the
106 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
business’s revenue will be derived from transients who stay for 30
days or less at a time.
(5) Residential facilities that are licensed as nursing homes or assisted
living facilities are eligible.
(6) Businesses that are engaged in leasing equipment, household goods
or other items are eligible. (See subparagraph b) above regarding the
eligibility of businesses engaged in lending.)
(7) Businesses such as barber shops, hair salons, nail salons, and similar
types of businesses are eligible, regardless of whether they have
employees or contract with individuals to provide the services.
(8) An ineligible passive business cannot obtain an SBA loan for any
purpose, including the purchase or construction of a building for its
own use.
d) Life Insurance Companies (13 CFR 120.110 (d))
(1) Life insurance companies are not eligible.
(2) Even if a life insurance agent writes insurance for only one
company, he or she may qualify as an eligible independent
contractor if the business meets all of the following factors:
(a) If the insurance agent is subject to the control or direction of
another merely as to the result to be accomplished and not as to
the means and methods for accomplishing the result;
(b) If the insurance agent hires, supervises and pays employees he
or she needs to help perform his or her services;
(c) If the insurance agent performs his or her services at his or her
own place of business rather than at the company’s place of
business;
(d) If the insurance agent is paid by the job or on a commission
basis, rather than by the hour, week or month;
(e) If the insurance agent is responsible for paying his or her own
business expenses;
(f) If the insurance agent provides the significant amount of his or
her tools, materials, and other equipment, even if the insurance
company provides some forms, manuals, or other materials;
(g) If the insurance agent invests in facilities that are used by him
or her 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
(h) If the insurance agent can realize a profit or incur a loss as a
result of his or her services.
e) Business Located in a Foreign Country or Owned by Undocumented
(Illegal) Aliens (13 CFR 120.110 (e))
Effective Date: October 1, 2011 107
Subpart B SOP 50 10 5(D)
(1) Businesses are not eligible if the business is:
(a) Located in a foreign country with no activities in the United
States; or
(b) Owned in whole or in part by undocumented (illegal) aliens.
(2) Businesses are eligible if the business:
(a) Is located in the U.S.;
(b) Operates primarily in the U.S.; and
(c) Is authorized to operate in the state or territory where they seek
SBA financial assistance; OR
(d) Makes a significant contribution to the U.S. economy through
the:
(i) Payment of taxes to the U.S.; or
(ii) Use of American products, materials, and labor.
(3) The proceeds must be used exclusively for the benefit of the
domestic operations. As a result the business and its employees are
subject to U.S. and local taxes.
(4) Businesses involved in international trade are subject to U.S. trade
restrictions.
(5) Businesses owned by legal permanent residents are eligible. See
Paragraph III.E. of this Chapter.
f) Businesses Selling Through a Pyramid Plan (13 CFR 120.110 (f))
Pyramid or multilevel sales distribution plans are not eligible for SBA
assistance.
g) Businesses Engaged in Gambling (13 CFR 120.110 (g))
(1) Small businesses that obtain more than one-third of their annual
gross income for the prior year, including rental income, from legal
gambling activities are not eligible.
(2) Small businesses are eligible if they obtain one-third or less of their
annual gross income, including rental income, from:
(a) Commissions from official State lottery ticket sales under a
State license; or
(b) Gambling activities licensed and supervised by state authority
in those states where the activities are legal.
h) Businesses Engaged in any Illegal Activity (13 CFR 120.110 (h))
SBA must not approve loans to borrowers that are engaged in illegal
activity or who 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 borrower’s intended market.
i) Businesses Which Restrict Patronage (13 CFR 120.110 (i))
Businesses that restrict patronage for any reason other than capacity are
108 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
not eligible. For example, a men’s only or women’s only health club is not
eligible.
j) Government-Owned Entities, Excluding Native American Tribes (13 CFR
120.110(j))
(1) Municipalities and other political subdivisions are not eligible.
(2) Special Requirements Applicable to Native American Businesses
(3) A Native American tribe is a Governmental entity and is not eligible.
A small business owned in whole or in part by a Native American
tribe is eligible if:
(a) It establishes that it is a separate legal entity from the tribe and
submits the documents authorizing its existence; and
(b) The tribe waives sovereign immunity with respect to the
collateral for the loan and collection of the loan from the
borrower, OR agrees to a ―sue and be sued‖ clause specifically
naming U.S. Federal courts as ―courts of competent
jurisdiction.‖
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.
k) Businesses Engaged in Promoting Religion (13 CFR 120.110 (k))
(1) A Small Business Applicant is not eligible if it is principally engaged
in teaching, instructing, counseling or indoctrinating religion or
religious beliefs, whether in a religious or secular setting.
(2) A Small Business Applicant is not ineligible merely because it offers
religious books, music, ceremonial items and other religious articles
for sale. The lender must consider the overall activities and business
environment of the Small Business Applicant. SBA has a worksheet
to assist with this process. (SOP 70 50, Legal Responsibilities,
Appendix 3a, Religious Eligibility)
l) Cooperatives (13 CFR 120.110(l))
(1) Consumer and marketing cooperatives are not eligible.
(2) Producer Cooperatives.
A producer cooperative is eligible if:
(a) It is engaged in a business activity;
(b) The purpose of the cooperative is to obtain financial benefit for
itself as an entity AND its members in their capacity as
businesses; and
(c) Each member of the cooperative is small.
m) Businesses Engaged in Loan Packaging (13 CFR 120.110(m))
A Small Business Applicant that receives more than 1/3 of its gross annual
revenue from packaging SBA loans is not eligible.
Effective Date: October 1, 2011 109
Subpart B SOP 50 10 5(D)
n) Businesses with an Associate of Poor Character (13 CFR 120.110 (n))
(1) The SBA cannot provide financial assistance to businesses with
Associates who are incarcerated, on probation, on parole, or have
been indicted for a felony or a crime of moral turpitude.
(2) An application can be accepted for processing if the individual
indicates an arrest record, but was acquitted or the indictment was
dismissed and the individual is not incarcerated, on probation or on
parole for any offense.
(3) An individual with a deferred prosecution is treated as if the
individual is on probation or parole. Such an applicant is not eligible.
(4) To determine eligibility under this section, 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 Small Business 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. The completion of an SBA Form 912, Statement of
Personal History (―912‖), by each Subject Individual is required as
part of the character evaluation process and the form must be
completed within 90 days of submission of the application to SBA.
Every person completing a 912 must answer each question fully
giving details about any ―yes‖ response. NOTE: A ―yes‖ is required
even when the applicant believes the record is sealed, expunged or
otherwise unavailable. (This information must be kept private and
confidential.) There are no exceptions to or waivers of this policy.
(a) If every Subject Individual answers questions 7, 8 and 9 as
―no,‖ normal loan processing may proceed.
(b) If a Subject Individual answers ―yes‖ to question 7, then the
Small Business Applicant is not eligible.
(c) If a Subject Individual answers ―yes‖ to question 8 or 9, then
that individual must go through a background check and
character determination unless the charge resulting in a ―yes‖
answer was a single misdemeanor that was subsequently
dropped without prosecution. (Documentation from the
appropriate court or prosecutor’s office must be attached to the
SBA Form 912 and maintained in the lender’s loan file.) If the
individual pleads guilty to the charges or to lesser charges the
background check and character determination must be
conducted. Currently, SBA conducts two types of background
checks: (1) a Name Check, which requires a search of available
records based on a person’s name and social security number
(SSN); and (2) a Fingerprint Check, which searches available
records based on the person’s name and SSN plus a complete
and legibly written FD-258 Fingerprint Card.
110 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(d) If there is a ―yes‖ response, the lender must take the following
actions:
(i) The lender must obtain a complete understanding of the
reason(s) for the ―yes‖ response and when necessary for
clarification, the lender must obtain additional written
explanation from the Subject Individual to include the
following:
(a) Date of the offense(s) including month, day and
year. If the actual day is not known, include the
month and year.
(b) City and state or the county and state where the
offense(s) occurred.
(c) The specific charge(s) [DUI, assault, forgery,
robbery etc.] AND the level of the charge; (either a
misdemeanor or felony).
(d) Disposition of the charge(s). This may include but
is not limited to the following:
(i) Any fines imposed;
(ii) Any class or workshop to be attended;
(iii) Any jail time served;
(iv) If applicable, the terms of probation (including
evidence and dates of successful conclusion of
the probation); or
(v) Any other court conditions (such as
registration as a sex offender).
(e) Assuming the court’s conditions have been met, the
applicant should state that all conditions of the court
have been satisfied in his explanation and provide
court documents evidencing that these conditions
were met.
(f) The borrower’s dated signature on the explanation.
(ii) When an applicant discloses a felony arrest a Fingerprint
Check is required and a Fingerprint Card (FD 258) must
be completed. Local law enforcement agencies will
usually assist the individual with the fingerprinting.
Lenders may obtain the FD 258 from their local District
Office.
(iii) When an applicant discloses a past offense(s) that was
classified as a misdemeanor, the background check may
either be a Name Check or a Fingerprint Check.
(iv) Regardless of whether the past offense was a felony or a
misdemeanor, the lender must submit the complete 912
package to the local field office before loan processing
Effective Date: October 1, 2011 111
Subpart B SOP 50 10 5(D)
can proceed. Copies of the documents are to be submitted
to the field office. The lender must retain the originals in
its loan file. SBA recommends that the lender submit the
912 package as soon as possible.
(v) The field office will send the complete 912 package to
the Office of Inspector General/Office of Security
Operations (OIG/OSO) at SBA Headquarters. When a
912 with a ―yes‖ response is forwarded to the OIG/OSO),
lender personnel must not make any statement to anyone
outside the SBA about action being taken regarding the
912 information submitted. Exceptions are only permitted
when in compliance with the provisions of the Privacy
Act. (See SOP 40 04.)
(e) Decisions Available to the SBA When Processing a 912 with a
―yes‖ response:
(i) Clear the 912 to permit processing, approval and
disbursement;
(a) SBA will clear a positive 912 for processing and
waive the fingerprint requirement only when the
reason for the ―yes‖ response meets one of the
following criteria:
(i) A single minor (misdemeanor) offense or
arrest; OR
(ii) Up to three minor offenses (arrests and/or
convictions at one time or separately),
concluded more than 10 years prior to the date
of the SBA application; OR
(iii) A Prior Offense cleared by the Director,
Office of Financial Assistance (D/FA) or
designee on a previous application where no
other offenses have occurred since the
previous application was cleared by the D/FA
or designee. This clearance is only valid for
six months from date of issuance.
NOTE: Only the D/FA or designee may authorize
the processing center or lender to process and
subsequently disburse a loan when the Form 912 is
not cleared.
(b) The field office cannot clear felony arrests or
convictions for loan processing.
(c) When the field office receives the completed 912
package and decides to clear it for processing, it
will notify the lender that the application has been
cleared for processing and will submit the 912
package to the OIG/OSO for a Name Check.
112 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(d) When the Name Check corroborates the information
on the 912, OIG/OSO will advise the field office,
which will then notify the lender.
(e) When the Name Check results contradict the
disclosure on the 912, or the disclosed criminal
history raises a question about the character of the
individual, OIG/OSO will refer the matter to the
D/FA. If the loan was already processed and
approved, the lender shall be notified of the adverse
change and directed to immediately cease further
loan disbursements and seek immediate repayment
of the loan proceeds from the borrower.
(f) The D/FA or designee can overrule the clearance by
the field office.
(g) The lender may be responsible for any funds that
are uncollected in the event that the Name Check
reveals additional undisclosed offenses or fraud.
(ii) Place the processing of the application on hold for further
investigation;
(a) The lender must obtain from the Subject Individual
a Form FD 258, SBA Fingerprint Card, and submit
it to the field office to forward to OIG/OSO for a
Fingerprint Check. The processing of the
application will remain on hold until the results of a
Fingerprint Check are received at which time the
application will either proceed or be declined.
(b) If additional criminal activity is revealed,
information pertaining to the additional criminal
activity will be provided to the D/FA or designee
who will notify the field office that an adverse
condition exists.
(iii) Decline the application because the information supplied
on the Subject Individual shows the offense is open and
has not been adjudicated or the Subject Individual is on
probation or parole.
(f) 912 Decision Appeals
(i) SBA will consider a request submitted by an applicant for
reconsideration of a determination of lack of good
character. Factors that contribute to a favorable
reconsideration include: (1) additional information
provided by the applicant that satisfactorily explains the
circumstances of the prior offense(s); and/or (2) the
passage of time between the date of the prior offense(s)
and the date of application, during which the applicant
has not committed additional offenses and has generally
Effective Date: October 1, 2011 113
Subpart B SOP 50 10 5(D)
led a responsible life and made a contribution to the
community.
(ii) The applicant should send a written request for
reconsideration through the lender to: Director, Office of
Financial Assistance, U.S. Small Business
Administration, Office of Financial Assistance, 409 3rd
Street, SW, Suite 8300, Washington, DC 20416.
(g) CLP and PLP 912 Procedures.
(i) If, in connection with a CLP or a PLP loan, a Subject
Individual answers question 8 or 9 with ―yes,‖ then that
individual must go through a background check and
character determination unless the charge resulting in a
―yes‖ answer was a single misdemeanor that was
subsequently dropped without prosecution.
(Documentation from the appropriate court or
prosecutor’s office must be attached to the SBA Form
912.) If the individual pleads guilty to the charges or to
lesser charges the background check and character
determination must be conducted. The application may be
processed using CLP or PLP procedures, as applicable,
after the lender has requested and received written
clearance of the character issue(s) from the district office.
(ii) To request clearance from the district office, the lender
must submit a cover letter with the lender’s contact
information, a brief description of the business along with
SBA Form 912 and any required attachments.
(h) SBA Express and Patriot Express 912 Procedures.
(i) Generally, loans submitted under SBA Express and
Patriot Express may be made only if questions 1, 2, and 3
on SBA Form 1919 are all answered ―no.‖ If a Subject
Individual answers ―yes‖ to question 1, then the Small
Business Applicant is not eligible. If a Subject Individual
answers ―yes‖ to question 2 or 3, then that individual
must go through a background check and character
determination unless the charge resulting in a ―yes‖
answer was a single misdemeanor that was subsequently
dropped without prosecution. (Documentation from the
appropriate court or prosecutor’s office must be attached
to the SBA Form 1919 and maintained in the lender’s
loan file.) If the individual pleads guilty to the charges or
to lesser charges the background check and character
determination must be conducted. When there is a ―yes‖
response on questions 2 or 3, the lender may elect to
process, submit, and disburse the loan under SBA
Express and Patriot Express, only when the subject’s
114 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
affirmative activity meets the criteria set forth above for
SBA to clear an application for processing (a single
minor offense or up to three minor offenses more than 10
years prior to the date of the application or a prior offense
that was cleared by the D/FA or designee on a previous
application and no additional offenses have occurred
since the date the prior application was cleared [the D/FA
or designee’s clearance is only valid for 6 months from
date of issuance]). If the affirmative activity does not
meet the criteria set forth above and the lender cannot
clear the application for processing, the Form 912 and
any supporting documentation must be sent to the local
field office which will forward it to the OIG/OSO for
processing. OIG/OSO will notify the field office, and the
field office will notify the lender that the applicant is or is
not eligible on a character basis for an SBA loan. The
lender must document its loan file with SBA’s
notification. The application may be processed using
SBA Express or Patriot Express procedures, as
applicable, after the lender has received OIG/OSO’s
written clearance of the character issue(s) from the field
office.
(ii) In using this authority, SBA Express and Patriot Express
lenders must secure and submit a completed 912 to SBA
using the following procedure:
(a) The Subject Individual must complete and sign the
912. The lender must ensure that the following
items are completed correctly, as incomplete Forms
912 will be returned to the lender:
(i) Applicant’s Social Security number;
(ii) Applicant’s date of birth;
(iii) Applicant must provide specific information
about each charge including the date, city and
state where charged;
(iv) Applicant must be very specific on the
disposition of each charge. For example, if
probation was the disposition, specify for
which charge(s) and for how long;
(v) Signature Block: Must be signed and dated
within 90 days of the submission to SBA;
(b) Lender must insert the SBA Servicing Office that
will service the loan after it is processed by the
SLPC;
(c) Include the lender’s address, telephone number, and
contact person;
Effective Date: October 1, 2011 115
Subpart B SOP 50 10 5(D)
(d) Lender must check, sign, and date the ―Fingerprints
waived‖ box and the ―Clear For Processing‖ box;
(e) Lender must submit one copy of the 912 to the
OIG/OSO at 409 3rd Street, SW, Washington DC
20416 and retain the original copy of the 912 in the
loan file.
NOTE: An SBA Express or Patriot Express lender
choosing not to exercise its authority to clear a 912
with a ―yes‖ response must submit a standard 7(a)
loan application to the Standard 7(a) Loan Guaranty
Processing Center to be processed under standard
7(a) loan procedures.
(i) For all Form 912s submitted, SBA’s OIG/OSO will request a
―Name Check‖ (a/k/a background check) from the FBI.
Note: Incomplete Form 912s cannot be processed and will be
returned to the lender. The lender must submit a corrected 912
before processing can continue.
(i) If the information from the FBI Name Check is consistent
with the information provided on the 912, OIG/OSO will
notify the appropriate SBA Servicing Office, and the
SBA Servicing Office will document its file and notify
the lender that the applicant is eligible on a character
basis for an SBA loan. The lender must document its loan
file with SBA’s notification that the applicant is eligible.
(ii) If the information from the FBI Name Check contradicts
the information provided on the SBA Form 912,
OIG/OSO will notify OFA and the D/FA or designee will
evaluate the discrepancy and determine if the discrepancy
warrants a denial of the loan on the basis of character. If
the loan warrants a denial, the D/FA or designee will
notify the SBA Servicing Office and the SBA Servicing
Office will notify the lender that the applicant is not
eligible on a character basis. If the loan has been
disbursed, the Agency will cancel its guaranty.
(j) Reducing Ownership to Avoid Submitting Form 912
A Subject Individual may not reduce his or her ownership in a
Small Business Applicant for the purpose of avoiding
completion of Form 912. Anyone who would have been
considered a Subject Individual within 6 months prior to the
application must complete Form 912. The only exception to the
6-month rule is when a Subject Individual completely divests
his or her interest prior to the date of application. Complete
divestiture includes divestiture of all ownership interest and
severance of any relationship with the Small Business
116 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
Applicant (and any associated Eligible Passive Concern) in any
capacity, including being an employee (paid or unpaid).
o) Equity Interest by Lender or Associates in Applicant Concern (13 CFR
120.110(o))
A lender or any of its associates may not obtain an equity position, either
directly or indirectly, in the Small Business Applicant. The only exception
is when the Associate of the lender 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.
p) Businesses Providing Prurient Sexual Material (13 CFR 120.110 (p))
A business is not eligible for SBA assistance if:
(1) It presents live or recorded performances of a prurient sexual nature;
or
(2) 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.
By law SBA must consider the public interest in granting or denying
financial assistance. The 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 it, in view of community standards, to be prurient.
q) Prior Loss to the Government (13 CFR 120.110 (q)) and Delinquent
Federal Debt (31 CFR 285.13)
(1) Unless waived by SBA for good cause, SBA cannot provide
assistance to a Small Business 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 following:
(a) Loss on the sale or other disposition of collateral acquired after
default;
(b) Compromise, i.e., resolution or settlement of a loan balance for
less than the full amount due;
(c) Bankruptcy by a borrower and/or any guarantors; and
(d) Any unreimbursed advance payments by a Federal agency.
(2) Unless waived by SBA for good cause, SBA cannot provide
assistance to a Small Business Applicant if there is a Delinquent
Federal Debt:
(a) A debt is considered ―delinquent‖ when any Federal loan or
Federally assisted financing has not been paid within 90 days
Effective Date: October 1, 2011 117
Subpart B SOP 50 10 5(D)
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.
(b) A debt is not considered ―delinquent‖ if:
(i) The creditor agency has released the obligor from paying
the debt;
(ii) The obligor is subject to, or has been discharged in, a
bankruptcy proceeding;
(iii) The obligor has entered into a satisfactory written
repayment agreement and is current; or
(iv) 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
paragraph q)(1) above.)
(3) ―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, federally-backed student loans and
disaster loans (excluding any amount forgiven as a condition of the
loan at the time of origination). It does not include
unpaid/delinquent taxes or any loss incurred by the Federal Deposit
Insurance Corporation (FDIC) when it sells a loan at a discount.
(4) These rules apply to:
(a) The Small Business Applicant;
(b) Any business in which an Associate of the Small Business
Applicant owned, operated or controlled a business that
incurred the Delinquent Federal Debt or caused the Prior Loss;
(c) Any business controlled by the same person(s) who
controls/controlled the business that incurred the Delinquent
Federal Debt or caused the Prior Loss;
(d) Any Associate of the Small Business Applicant who has (or
guaranteed) a Delinquent Federal Debt or caused a Prior Loss
(either directly or as a guarantor); and
(e) Any guarantor who has (or guaranteed) a Delinquent Federal
Debt or a caused Prior Loss (either directly or as a guarantor).
(5) 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 (4) immediately
above has either a Delinquent Federal Debt or a Prior Loss which
would result in the Small Business Applicant being ineligible for
SBA financial assistance.
118 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(a) CAIVRS allows the lender to enter multiple tax id numbers
(either SSN or EIN) to search for an outstanding Delinquent
Federal Debt or Prior Loss in connection with a loan
application.
(b) Lenders may obtain instructions for accessing CAIVRS at
http://www.hud.gov/offices/hsg/sfh/sys/caivrs/caivrs_faq.cfm.
(6) Waiver Requests:
(a) 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 Small Business
Applicant to the individual or business causing the delinquency
or prior loss and the circumstances.
(b) For Delinquent Federal Debt, the Chief Financial Officer
(CFO) (who may only delegate this authority to the Deputy
Chief Financial Officer) will make the final decision on the
request.
(c) For Prior Loss to the Government, the D/FA or designee will
make the final decision on the request.
(7) If the 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.
r) Businesses primarily engaged in political or lobbying activities (13 CFR
120.110 (r))
A Small Business Applicant that derives over 50% of its gross annual
revenue from political or lobbying activities is not eligible.
s) Speculation (13 CFR 120.110 (s))
(1) Speculative businesses are not eligible. This prohibits loans to a
Small Business Applicant for:
(a) The sole purpose of purchasing and holding an item until the
market price increases; or
(b) Engaging in a risky business for the chance of an unusually
large profit.
(2) Speculative businesses include:
(a) Wildcatting in oil;
(b) Dealing in stocks, bonds, commodity futures, and other
financial instruments;
(c) Mining gold or silver in other than established fields;
(d) Research and Development; and
Effective Date: October 1, 2011 119
Subpart B SOP 50 10 5(D)
(e) Building homes for future sale (except under the Builders
CAPLine program).
Note: Construction of homes for future sale with no sales contract in
place (spec homes) is eligible under the Builder’s CAPLine program.
(13 CFR120.391)
(3)
Non-speculative businesses which are eligible include:
(a) A business, such as a grain elevator, that uses a commodity
contract to lock in a price;
(b) A farmer who uses a commodity contract to lock in the sale
price of his or her harvest;
(c) A business engaged in drilling for oil in established fields; and
(d) A business engaged in building a home under contract with an
identified purchaser.
E. 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 US provided the persons are
lawfully in the US. 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 912 reflects s/he is a U.S. Citizen no further verification
of status is required.
2. 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 administrative hearing.
a) The USCIS Form I-551 (551) is evidence of LPR status. USCIS has two
versions of the 551:
(1) Resident Alien Card; and
(2) Permanent Resident Card. (This is the most recent version.)
b) USCIS requires replacement of the 551 every 10 years to update the
photograph and security measures. Replacements may also be necessary if
the 551 is lost, the individual changes name, etc. Replacement of the 551
may take more than a year. LPR status is not in jeopardy merely because
the 551 document lapses.
Acceptable forms of evidence when the 551 has been submitted to USCIS
for replacement or has an expired date include the following:
120 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(1) A temporary stamp by USCIS on the individual’s passport that says
―Processed for I-551 – Temporary Evidence of Lawful Permanent
Residence;‖
(2) USCIS Form I-327, ―Re-entry Permit,‖ issued to LPRs in lieu of a
visa, which is valid for only 2 years;
(3) USCIS Form I-797, ―Notice of Action,‖ a receipt issued to an alien
when the 551 is lost or surrendered for renewal or changes (e.g., a
name change because of marriage or divorce).
(4) SBA requires that the 551 or an acceptable substitute must be current
at the time it is submitted with an application or it will be returned
and not processed. PLP, SBA Express and Pilot Loan Program
lenders must have a copy of the current 551 or acceptable substitute
prior to requesting a loan number.
3. Businesses owned by the following persons may be eligible:
a) Non-immigrant aliens residing in the US. 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 visa.
(1) They must have current/valid USCIS documentation permitting them
to reside in the U.S. legally; and
(2) The documentation/status of each alien must be verified with
USCIS.
b) Asylees and refugees (persons who receive temporary refuge in the United
States) with LPR status.
4. Businesses owned by aliens who are subject to the Immigration Reform and
Control Act of 1986 (IRCA) might be eligible under limited circumstances.
a) IRCA vests USCIS with the authority to grant illegal aliens lawful
temporary resident status. IRCA prohibits financial assistance to
businesses owned 20% or more by such individuals for a period of 5 years
after USCIS grants lawful temporary resident status.
b) This disqualification does not apply to Cuban or Haitian entrants or alien
entrants subject to IRCA who are aged, 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 4 or SBA Form 1919, which includes the ―Statements
Required by Law and Executive Orders.‖ This includes a certification that
IRCA does not apply to them.
5. Documentation to evidence and verify an alien’s status.
a) At time of application, for any alien required to complete SBA Form 912
(for EWCP loans, for any alien identified as an owner on EIB-SBA Form
Effective Date: October 1, 2011 121
Subpart B SOP 50 10 5(D)
84-1 and for SBA Express, Patriot Express and Export Express loans, for
any alien identified on SBA Form 1919), the following applies:
(1) Aliens must provide their alien registration number on SBA Form
912, ―Statement of Personal History‖ (for EWCP loans, aliens must
provide their alien registration number on EIB-SBA Form 84-1 and
for SBA Express, Patriot Express and Export Express loans, aliens
must provide their alien registration number on SBA Form 1919).
(2) Lenders must obtain a copy of the individual’s USCIS
documentation and maintain in the case file.
(3) All lenders must register designated personnel with the SLPC at
Sacramento504Register@sba.gov. The SLPC will respond to such
requests by providing instructions on how to complete registration
and to use the electronic verification process. 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.
(4) 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.
(a) As required by USCIS, SBA accepts either of the following
authorization statements:
(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.
(b) 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 a verification.
The original Document Verification Request (Form G-845) and
authorization for release must be maintained by the lender in
the borrower’s file for review by SBA and USCIS, if requested.
(c) 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.
122 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(d) 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..
The lender must document the findings in the loan file. This applies in all
cases, regardless of the processing method or loan program.
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.
6. 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.
7. 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.)
(2) The personal guaranty of management must be considered as a loan
condition and if not required, the decision must be explained in the
loan file.
b) The applicant must pledge collateral within the jurisdiction of the U.S.
sufficient to pay the loan in full at any time during its life. If the small
business applicant owned by foreign nationals, foreign entities or non-
immigrant aliens residing in the US does not have sufficient collateral, the
applicant is not eligible for a 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.
F. The Eligible Passive Company (EPC) Rule
The Eligible Passive Company (EPC) rule is an exception to SBA regulations that
prohibit financing assets which are held for their passive income. Because the EPC
rule is an exception, it is interpreted strictly.
Effective Date: October 1, 2011 123
Subpart B SOP 50 10 5(D)
1. Conditions necessary to qualify as an EPC. (13 CFR 120.111)
a) Under SBA regulations, an EPC can take any legal form or ownership
structure. 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 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.
b) An EPC must use loan proceeds 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 (OC) for conducting the OC’s
business. 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.
2. Conditions that apply to all legal entities:
a) 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, subject to paragraph 1.b) above;
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.
d) The EPC must lease the project property directly to the OC and:
(1) The lease must be in writing;
(2) The lease must be subordinated to the SBA’s mortgage, trust deed
lien, or security interest on the property;
(3) The lease must have a term, including options to renew exercisable
solely by the OC, at least equal to the term of the loan;
(4) 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 lender to exercise the tenant’s rights upon default;
(5) 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 expenses of holding the property, such as
maintenance, insurance and property taxes; and
(6) 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 borrowers must
comply.
(7) 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
124 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
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) If the mineral lease has been terminated, the lender should
attempt to have it removed from the Title Policy.
(c) If the lender is unable to have the 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).
e) 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 or for
the purchase of fixed assets.
f) Each holder of an ownership interest constituting at least 20% of either the
EPC or the OC must:
(1) Guarantee the loan (if the holder is a trust, then the Trustee shall
execute the guarantee on behalf of the trust); and
(2) Comply with the Utilization of Personal Resource Rule. See
Paragraph III.C.7 - 11 of this Chapter.
3. Conditions that apply to trusts.
a) 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
purpose.
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.
(2) Beneficiaries usually do not have any control over the actions of the
trust and, therefore, do not have to meet the guaranty and personal
resource requirements.
e) The Trustee shall certify in writing to SBA that:
(1) The Trustee has authority to act;
(2) The trust has authority to borrow funds, pledge trust assets, and lease
the property to the OC;
Effective Date: October 1, 2011 125
Subpart B SOP 50 10 5(D)
(3) The Trustee has provided accurate, pertinent language from the trust
agreement confirming the above; and
(4) The Trustee has provided and will continue to provide SBA with a
true and complete list of all trustors and donors.
f) The trust itself does not have to be small by SBA size standards.
4. Size Determinations under the EPC rule
a) If the EPC and the OC are affiliated the two companies are combined for
determining size.
(1) If there is only one OC, use the OC’s NAICS code.
(2) If there 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.
(3) If the 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) If the EPC and the OC are not affiliated, each entity must be small under
the size requirement for its particular industry.
c) 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.
d) An EPC (including a trust) may engage in a business activity other than
leasing the property to the OC.
5. Multiple OCs can be separately owned.
6. Multiple EPCs in one transaction are not permitted.
7. When sending data to SBA, use the same NAICS Code that was used to
determine size for the Small Business Applicant.
8. 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.
G. Special Requirements For Loans Where Collateral May Be Included In The National
Register Of Historic Places
If a loan will in any way affect properties included or eligible to be included in the
National Register of Historic Places, lender must consult with local SBA counsel for
further guidance.
H. Additional Eligibility Requirements for Patriot Express Pilot Loan Initiative
1. Eligibility for Patriot Express is limited to businesses that meet SBA’s standard
eligibility requirements discussed above and that are 51% or more owned and
controlled by an individual or individuals in one or more of the following
groups:
126 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
a) Veterans (other than dishonorably discharged);
b) Service-Disabled Veterans;
c) Active Duty Military service member participating in the military’s
Transition Assistance Program (TAP), which is applicable to potential
retirees within 24 months of separation and to discharging Active Duty
members within 12 months of discharge;
d) Reservists and National Guard members;
e) Current spouse of any Veteran, any Active Duty service member, or any
Reservist or National Guard member; widowed spouse of a service
member who died while in service; or widowed spouse of a veteran who
died of a service-connected disability.
Eligibility for Reservists and National Guard members is limited to current
members of the Reserve or Guard (and their current spouses). Former Reservists
and National Guard members (and their spouses) are not eligible, unless they
qualify from active duty as Veterans.
2. Lenders must document in their loan file a borrower’s eligibility for Patriot
Express using the following DOD/DVA documentation, including the 51%
ownership by the above, and must present copies of that documentation with
any request to SBA to purchase:
a) Veteran: Copy of Form DD 214, which is provided for other than
dishonorably discharged veterans.
b) Service-Disabled Veteran: Copy of Form DD 214 or documentation from
the DVA that the veteran has been determined as having a service-
connected disability.
c) Service Member: DOD photo card (Geneva Convention Identification
Card) and Form DD 2648 (active duty service member) or Form 2648-1
(reserve component member).
d) Transitioning Active Duty Military Member: DD Form 2, "U.S. Armed
Forces Identification Card (Active)," or DD Form 2, "Armed Forces of the
United States Geneva Conventions Identification Card (Active)" and, DD
Form 2648 (Active Duty Military member) or DD Form 2648-1 (Reserve
Component member ).
e) Reservists and National Guard: DD Form 2, Armed Forces of the United
States Identification Card (Reserve).
f) Current Spouse of Veteran: The veteran’s Form DD 214 and evidence of
status as a current spouse.
g) Current Spouse of Transitioning Active Duty Military Member or Current
Reservist/National Guard Member: DD Form 1173, Department of
Defense Guard Reserve Family Member Identification Card and evidence
of status as the current spouse.
h) Widow of Active Duty Service Member who died in service or Widowed
Spouse of Veteran who died of a service connected disability:
Effective Date: October 1, 2011 127
Subpart B SOP 50 10 5(D)
Documentation from DOD or from DVA clearly showing this to be the
case.
3. Patriot Express is a streamlined loan initiative, so complex loans or unusual
situations/issues are generally not eligible and should be processed through
standard 7(a) loan processing.
I. Additional Eligibility Requirement For SBLCs
An SBLC may not make a loan to a Small Business Applicant that has received
assistance from an affiliated SBIC. (13 CFR 120.476)
J. Additional Eligibility Requirements for Export Express
a) 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:
(1) The applicant’s key personnel have clearly demonstrated export
expertise and substantial previous successful business experience,
and
(2) 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.
b) Small Business 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.
c) Lender must maintain in its loan file information provided by the borrower
as it pertains to the use of proceeds for export development activities and
its projected impact on the borrower’s export sales along with an estimate
of the borrower’s export sales for the 12 month period following the date
of the loan application.
K. Additional Eligibility Requirements for International Trade Loans
The Small Business Applicant must establish either of the following in order to be
eligible:
1. That the loan proceeds will expand existing export markets or develop new
export markets. To establish this, the Small Business Applicant must submit an
128 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
export business plan, including both a projection and narrative rationale that
contains enough information to reasonably support the likelihood of expanded
export sales. The plan should identify the amount of expected export sales; or
2. That the Small Business Applicant is adversely affected by import competition.
The Small Business Applicant must demonstrate injury attributable to increased
competition with foreign firms in the relevant market. A narrative explanation
and financial statements showing that imported products or services which are
directly competitive with those produced by the Small Business Applicant have
contributed significantly to a decline in competitive position are required.
Alternatively, the Small Business Applicant can submit a finding of injury by
the International Trade Commission or the Secretary of Commerce pursuant to
Chapter 3 of Title II of the Trade Act of 1974 (19 U.S.C. 2341 et seq.), and
3. In addition to either 1 or 2 above, the Small Business Applicant must also be
able to demonstrate that the loan will allow the Small Business Applicant to
improve its competitive position. The loan report must document evidence that
can support the fact that the loan will allow the Small Business Applicant to
improve its competitive position.
L. Additional Eligibility Requirements For EWCP
1. Eligibility for EWCP will be limited to businesses that meet SBA’s standard
eligibility requirements discussed above and that have a history of at least 12
full months of operations prior to filing an application.
2. The SBA Approving Official may waive the 12 month requirement, based upon
demonstrated export expertise and previous business experience. The
justification and recommendation for waiver must be included in the loan
officer's report.
3. Export management companies (EMC) or export trading companies (ETC) may
use this program only if the EMC or ETC takes title to the goods or services
being exported. EMCs or ETCs which have any bank ownership are ineligible
for the EWCP loan program.
M. Additional Eligibility Requirements For CAPLines
1. To be eligible for a Seasonal CAPLine, the applicant must qualify under
standard 7(a) requirements and:
a) Have been in operation for at least 12 calendar months; and
b) Be able to demonstrate a definite pattern of seasonal activity.
2. To be eligible for a Contract CAPLine, the applicant must qualify under
standard 7(a) requirements and:
a) Be able to demonstrate an ability to operate profitably based upon the
prior completion of similar contracts;
b) Possess the overall ability to bid, accurately project costs, and perform the
specific type of work required by the contract(s); and
c) Have the financial capacity and technical expertise to complete the
contract on time and at a profit.
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Subpart B SOP 50 10 5(D)
3. To be eligible for a Builder’s CAPLine (13 CFR 120.391; 120.392; 120.393;
120.394), the applicant must qualify under standard 7(a) requirements and:
a) Be construction contractors or homebuilders under NAICS codes 236220,
236115, 236116, or 236118 with a demonstrated managerial and technical
ability in profitable construction or renovation;
b) Must either perform the construction/renovation work or manage the job
with at least one supervisory employee on the job site during the entire
construction phase;
c) Renovations must be ―prompt and significant.‖ Construction must begin
within a reasonable time after loan approval and the cost of renovation
must equal or exceed one-third (1/3) of the purchase price of the property.
The cost of renovation of buildings already owned by the applicant must
equal or exceed one-third (1/3) of the fair market value at the time of loan
application; and
d) Have demonstrated a successful performance record in bidding and
completing construction/renovation at a profit within the estimated
construction period, are able to demonstrate prior prompt payments to
suppliers and subcontractors, and the prior successful performance must
have been of comparable type and size to the proposed project. (Prior
experience in single family construction is not comparable to high-rise
apartment construction);
4. To be eligible for a Working Capital CAPLine, the applicant must qualify under
standard 7(a) requirements and generate accounts receivable (not notes
receivable).
IV. ELIGIBLE USES OF LOAN PROCEEDS (13 CFR 120.120)
A. SBA Guaranteed Loan Proceeds May Be Used To:
1. Acquire Land and/or purchase, construct or renovate buildings;
2. Improve a site (e.g. Grading, streets, parking lots, landscaping), including up to
5 percent of the loan amount for community improvements such as curbs and
sidewalks;
3. Acquire and install fixed assets.
4. Inventory;
5. Supplies;
6. Raw Materials;
7. Working Capital;
8. Energy Conservation loans; or
9. Refinancing.
B. Loan Proceeds May be Used to Finance a Lender’s Other Real Estate Owned
(OREO):
Where loan proceeds will be used to finance the purchase of real estate owned by the
7(a) lender making the loan, the application must:
130 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
1. Be submitted to the LGPC (delegated authority may not be used to process these
applications);
2. Include an independent real estate appraisal that meets the requirements found
in Chapter 4 of this Subpart (the appraisal requirement cannot be delayed until
loan closing), and that provides the liquidation value of the real estate;
3. Include an explanation of the circumstances surrounding the lender’s acquisition
of the real estate. If the acquisition of the property was triggered by a business
failure at that particular location, the lender must submit a detailed explanation
of why the new small business borrower will succeed at that same location; and
4. Identify the lender’s cost in the real estate. In order to get the full SBA
guaranty, the sales price may not exceed the mortgage balance plus care and
preservation expenses or the liquidation value, whichever is less. If the sales
price is greater than the mortgage balance plus care and preservation expenses
or the liquidation value (whichever is less), then the SBA guaranty is reduced
accordingly.
For example:
OREO Sales Price $1.2 million
Lender’s costs or liquidation value (whichever is less) $1.0 million
Guaranty amount: 75% of $1.0 million $750,000
Effective SBA guaranty: $750,000/$1,200,000 62.5%
C. Loan Proceeds for Farm Enterprises May be Used for:
1. The purchase of land, buildings, and land improvements (fencing, irrigation
systems, construction of dikes, silos, barns, hog and dairy facilities, etc.);
2. Construction, renovation, or improvement (including water systems) of farm
buildings other than residences;
3. The purchase of farm machinery and equipment;
4. The purchase of seed and the acquisition of animals;
5. Operating expenses directly related to the farming operation, excluding personal
or family living expenses; and
6. The refinancing of debt related to the farming operation, excluding personal or
family debt, provided the refinancing meets Agency policy regarding
refinancing (see paragraph D below).
D. Business Loan Proceeds Restrictions
Loan proceeds may not be used for any of the following purposes (including the
replacement of funds used or borrowed for any such purpose): (13 CFR 120.130)
1. Payments, distributions or loans to an Associate of the applicant except for
compensation for services actually rendered at a fair and reasonable rate;
2. Refinancing debt owed to an SBIC;
3. Floorplan financing;
Effective Date: October 1, 2011 131
Subpart B SOP 50 10 5(D)
4. Investments in real or personal property acquired and held primarily for sale,
lease or investment.
5. Payment of Delinquent Taxes. 13 CFR 120.160(d)
a) Loan proceeds must not be used to pay delinquent IRS withholding
(payroll) taxes, sales taxes or other funds payable for the benefit of others.
b) Payment of delinquent income taxes may be permitted if the applicant has
an approved payment arrangement with the IRS.
6. To finance the relocation of the applicant business out of a community, if there
will be a net reduction of one-third of its jobs or a substantial increase in
unemployment in any area of the country. An exception may be allowed if the
lender can justify the relocation because:
a) The relocation is for key economic reasons and crucial to the continued
existence, economic wellbeing, and/or competitiveness of the applicant;
and
b) The economic development benefits to the applicant and the receiving
community outweigh the negative impact on the community from which
the applicant is moving.
E. Policies Regarding Debt Refinancing
1. SBA guaranteed loan proceeds may not be used to refinance debt originally
used to finance a loan purpose that would have been ineligible for SBA
financing at the time it was originally made.
2. SBA guaranteed loan proceeds may not be used to refinance debt in the personal
name of the owners, with the limited exception noted below for credit card debt
in the personal name used for business purposes.
3. SBA guaranteed loans may be used to refinance the following types of business
debt (see paragraph 6 below for additional requirements if refinancing same
institution debt):
a) Debt (short or long term) structured with a demand note or balloon
payment;
b) Debt with an interest rate that exceeds the SBA maximum interest rate for
the processing method being used;
c) Credit card obligations used for business-related purposes;
d) Debt that is overcollateralized based on SBA’s collateral requirements;
e) Revolving lines of credit (short term or long term) where the original
lender is unwilling to renew the line or the applicant is restructuring its
financing in order to obtain a lower interest rate or longer term;
f) Debt with a maturity that was not appropriate for the purpose of the
financing (e.g. a 3 year term loan to finance a piece of equipment with a
useful life of 15 years);
g) Debt used to finance a change of ownership of a business may be
refinanced if:
(1) The lender obtains a current business valuation that meets SBA’s
requirements in Chapter 4 of this Subpart;
132 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(2) The amount reflected on the applicant’s most recent business
financial statements for intangible assets exceeds $500,000 and the
applicant does not have at least 25% equity, the application may not
be processed using delegated authority and must be sent to the
LGPC;
(3) The lender may consider refinancing any seller take-back financing
with an SBA-guaranteed loan if it has been in place for at least 24
months following the change of ownership and is, and has been,
current for the past 24 months. The refinancing request must meet
the requirements set forth in paragraphs 4 and 5 below; and
h) Debt that is not identified above but the Lender believes no longer meets
the needs of the Small Business Applicant. Applications under this
subparagraph may only be processed through Standard 7(a) procedures.
4. With the exception of debt under 3.a), c) or e) above, when refinancing debt the
new installment amount must be at least 10 percent less than the existing
installment amount(s). If other debt is being refinanced at the same time, such
debt may be included in the cashflow improvement calculation. If the note
terms include an escalating payment structure, the new installment amount must
be at least 10 percent less than the expected installment amount within the next
12 months.
5. When refinancing debt, the lender’s loan file must include a written analysis
that addresses the following issues and any supporting documentation:
a) Why was the debt incurred?
b) Has over-obligated or imprudent borrowing necessitated a major
restructuring of the debt?
c) Is the debt being refinanced currently on reasonable terms?
d) Will the new loan improve the financial condition of the Small Business
Applicant?
e) Does the refinancing include payments to creditors in a position to sustain
a loss, for example, the applicant has an inadequate collateral position,
low or deficit net worth, or the loan is in default?
f) Would the lender/SBA be likely to sustain part or all of the same loss by
refinancing the debt or will additional collateral or altered terms protect
the interest of the taxpayer?
g) What portion of the total loan does the refinancing constitute?
h) If credit card debt will be refinanced, the borrower must certify that the
credit card debt being refinanced was incurred exclusively for business
purposes.
(1) If the credit card is issued to the small business, the lender may
refinance the credit card debt after confirming that the credit card is
in the name of the business and the borrower has certified that the
credit card debt being refinanced was incurred exclusively for
business related purposes. If the business credit card was also used
for personal reasons, the small business must identify which
Effective Date: October 1, 2011 133
Subpart B SOP 50 10 5(D)
purchases were for personal reasons and that amount must be
deducted from the credit card balance before applying for the SBA–
guaranteed loan. Loan proceeds must not be used to refinance any
personal expenses.
(2) If the credit card is issued to an individual personally, the lender
must confirm which of the credit card obligations were used for
business-related purposes. Lenders must document the specific
business purpose of the credit card debt and the borrower must
certify that the loan proceeds are being used only for business-
related debt. Documentation required for refinancing credit card
debt includes a copy of the credit card statements and individual
receipts for any business expenses in excess of $100. In all cases, the
borrower must certify that the amount that will be refinanced was
used exclusively for business expenses.
6. Refinancing Same Institution Debt
a) When a lender seeks to use SBA guaranteed loan proceeds to refinance its
own debt, it must include a transcript showing the due dates and when
payments were received as part of its analysis and recommendation. In
addition, the lender must explain any late payments and late charges that
have occurred during the last 36 months. An SBA guaranteed loan may
not be used to refinance same institution debt where there is an appearance
that the lender will shift to SBA all or part of a potential loss from that
same debt. (13 CFR 120.201)
b) Applications that include the refinancing of same institution debt may not
be processed using PLP procedures unless (13 CFR 120.452(a)(2)):
(1) The debt is an interim loan that has been made for other than real
estate construction purposes and was approved by the lender within
90 days prior to the issuance of a PLP loan number; or
(2) The debt is a construction loan that has not been disbursed.
7. Refinancing an SBA-Guaranteed Loan
Refinancing an existing SBA debt is permissible provided the conditions of
paragraphs 3, 4, and 5 above are satisfied and the procedures of this paragraph
are followed.
a) Procedure to refinance an SBA-guaranteed loan:
(1) Contact the lender holding the existing SBA-guaranteed loan and
verify that the lender has declined to approve an increase in loan
amount or a second loan and the lender is either unwilling or unable
to modify the current payment schedule.
(2) Document the conversation in the case file, recording the date, time
and person with whom you spoke, along with a short summary of the
conversation.
b) Procedure to refinance a same institution SBA-guaranteed loan:
134 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(1) A lender may refinance one of its own SBA-guaranteed loans only if
it is unable to modify the terms of the existing loan because a
secondary market investor will not agree to modified terms.
(2) These applications may not be processed PLP, they must be
processed in the LGPC.
8. Refinancing under SBA Express
a) A lender may refinance an existing non-SBA guaranteed loan or borrower
debt from another lender if:
(1) The existing loan no longer meets the needs of the applicant (for
example if the current loan is a term loan and a revolver is needed);
and
(2) The new loan meets the SBA’s 10% increase in cash flow
requirement, as applicable (see Paragraph 4 above).
b) Under SBA Express, a lender may refinance its own non-SBA guaranteed
debt to the applicant if:
(1) Items a)(1) and a)(2) above are met;
(2) The debt has been current (no payment beyond 29 days past due) for
at least the last 36 months; and
(3) The lender’s exposure to the applicant will not be reduced.
c) Lenders must avoid any circumstances that could create a possible conflict
of interest. Also, in refinancing debt, particularly credit card debt, lenders
must take reasonable steps to ensure applicants are aware and certify
(SBA Form 1919, Borrower’s Information Form, includes such a
certification) that refinancing comprises only business related debt.
d) Existing SBA-guaranteed loans may not be refinanced under SBA
Express. The only exception is if the transaction is the purchase of an
existing business that has an existing SBA loan that is not with the
requesting SBA Express lender.
9. Refinancing Under Patriot Express
a) A lender may refinance debt under Patriot Express if it follows the
guidelines set forth in paragraph 8 above for SBA Express.
b) In addition, the lender may not make a Patriot Express loan which reduces
its existing credit exposure for any borrower, except in cases where an
interim loan(s) has been made for other than real estate construction
purposes to the borrower which was approved by the lender within 90
days of receipt of the issuance of a subsequent SBA loan number.
10. Refinancing Under CAPLines
a) No proceeds from a Seasonal, Contract or Builder’s CAPLine may be used
to refinance any existing debt.
Effective Date: October 1, 2011 135
Subpart B SOP 50 10 5(D)
b) Proceeds from a Working Capital CAPLine may refinance existing short-
term notes as long as the conditions of paragraphs 3, 4 and 5 above are
met and:
(1) The short-term note is not an open-ended line of credit;
(2) The refinanced portion does not include any term debt or permanent
working capital;
(3) The refinancing does not put SBA in a position to sustain a loss
which the existing lender is presently facing;
(4) The borrower has a sufficient borrowing base to support refinancing
of the existing line of credit plus any additional and/or existing short-
term debt;
(5) The refinancing is specifically identified in the Use of Proceeds
section of the Authorization; and
(6) If the application includes the replacement of same institution short-
term debt:
(a) The application must be submitted to the LGPC for processing;
such applications may not be processed under delegated
authority; and
(b) If the applicant defaults on the SBA-guaranteed CAPLine
within 90 days of initial disbursement, there will be a
presumption that the loan proceeds were used to pay a creditor
in a position to sustain a loss causing a shift of all or part of the
loss to SBA in violation of 13 CFR 120.201 and SBA may
deny liability on its guaranty of the line.
c) Additional documentation required:
(1) A copy of the note(s) and an explanation of the terms and conditions
of any debt(s) being refinanced;
(2) A copy of the transcript of account; and
(3) A Borrowing Base Certificate with Aging of Receivables and List of
Inventory, as necessary.
d) If the debt to be refinanced was not being repaid in accordance with the
terms of the note, the debt should be refinanced on a term, rather than
revolving basis.
11. Refinancing under International Trade Loan Program
International Trade loan proceeds may be used for the refinancing of any debt
that is not structured with reasonable terms and conditions, including any debt
that qualifies for refinancing under Standard 7(a).
12. Refinancing as part of a change of ownership
a) If the change of ownership is a complete change of ownership and any
existing debt of the business being acquired will be refinanced as part of
the transaction, the refinancing of such debts is considered part of the
purchase of the business and does not have to meet the requirements set
forth in this section.
136 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
b) If the change of ownership is between existing owners of a business and
existing business debt will be refinanced as part of the transaction, the
refinancing must meet the requirements set forth in this section.
c) If the existing debt is SBA guaranteed and with the same lender, the
application cannot be processed using PLP, SBA Express, Export Express
or Patriot Express processing procedures. These applications must be
processed in the LGPC. In a complete change of ownership situation, the
option to assume the existing SBA debt should be offered to the buyer.
13. Other conditions that apply to debt refinancing
a) A 7(a) loan may not be used to refinance a debt owed to an SBIC.
b) The third party financing for an existing 504 project cannot be refinanced
with a 7(a) loan. (13 CFR 120.920(b))
c) After an SBA Authorization has been issued, a lender or an affiliate of the
lender may make interim advances (also known as bridge loans) and SBA
loan proceeds may be used to reimburse the interim advances, as long as
the interim advances reasonably comply with the terms of the SBA
Authorization. Such advances are made at the lender’s own risk. The
lender does not have to notify SBA of such advances or loans.
d) The payment of trade payables is not considered to be debt repayment.
e) The Authorization must include:
(1) An itemization of all debts being repaid by loan proceeds when the
individual creditor is to be paid $10,000 or more; and/or
(2) The loan number and dollar amount of any existing SBA debt
refinancing.
F. Leasing Part of a Building Acquired with Loan Proceeds (13 CFR 120.131)
1. Amount of rentable property that can be leased:
a) For an existing building, a small business must occupy 51% of the
rentable property and may lease up to 49%; and
b) For new construction, a small business must occupy 60% of the rentable
property, may permanently lease up to 20% and temporarily lease an
additional 20% with the intention of using some of the additional 20%
within three years and all of it within 10 years.
c) An EPC must lease 100% of the rentable property to an OC. The OC must
follow items a) and b) above.
d) Circumstances may justify allowing the SBC a period of time after closing
of the SBA loan to comply with the above occupancy requirements. For
example, a pre-existing lease may have a few more months to run. In no
case may the small business have more than 1 year to meet occupancy
requirements.
e) The restrictions in a) and b) above apply regardless of whether the rentable
property is leased to a commercial or residential tenant.
f) The applicant may not use loan proceeds to improve or renovate any of the
Rentable Property that is leased to a third party.
Effective Date: October 1, 2011 137
Subpart B SOP 50 10 5(D)
2. ―Rentable Property‖ is the total square footage of all buildings or facilities used
for business operations (13 CFR 120.10) excluding vertical penetrations
(stairways, elevators, and mechanical areas that are designed to transfer people
or services vertically between floors), and including common areas (lobbies,
passageways, vestibules, and bathrooms). Rentable property excludes all
outside areas.
3. Only the D/FA or designee can classify outside areas as usable square footage
or common area.
4. If the projected rental income is included in the repayment analysis, it must be
independently substantiated.
G. Residential Space as Part of the Business
If the nature of the business requires a resident owner or manager, loan proceeds may
be used for the purchase of an existing building(s) or construction of a new
building(s) that includes residential space, however, such residential space may not
exceed 49% of the total property. The residential space must be an essential part of
the business. For example, a horse-breeding facility traditionally requires that
someone be on premises 24/7 to care for the horses. In this case, the residential
property would be considered to be a part of the business rather than leased property.
H. Change of Ownership (13 CFR 120.202)
1. A Small Business Applicant may use loan proceeds for a change of ownership
in the following circumstances:
a) The Small Business Applicant is purchasing 100% of the ownership
interest in a business (either an asset purchase, transfer of a partnership
interest or a redemption of stock); or
b) The Small Business Applicant is acquiring 100% of the ownership interest
of one or more exiting owners. When a change of ownership is between
existing owners, this must be accomplished through redemption of stock
by the corporation or through the purchase of a partner’s interest by the
partnership. A partner, shareholder, or an unrelated third party may not
use SBA-guaranteed loan proceeds to purchase an existing owner’s
interest in the business.
2. The seller is not remaining as an officer, director, stockholder or key employee
of the business. (13 CFR 120.130) (If a short transitional period is needed, the
small business may contract with the seller as a consultant for a period not to
exceed 12 months including any extensions.)
3. The business must be the borrower.
4. For a complete change of ownership, the lender must meet the requirements for
IRS verification identified in Chapter 5, Paragraph III.C of this Subpart.
5. If there is business real estate as part of the change of ownership, the real estate
cannot be financed separately by a non-SBA guaranteed loan unless the SBA
loan receives a shared lien position (pari passu) on the real estate with the non-
SBA guaranteed loan. This provision does not apply if the business real estate is
being financed as part of a 504 project.
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SOP 50 10 5(D) Subpart B
6. The following changes of ownership are not eligible:
a) A non-owner who is purchasing a portion of the ownership of the business
from a selling owner; or
b) An existing owner who is purchasing the ownership of another existing
owner that will not result in 100% ownership by the purchaser.
7. SBA considers a change of ownership to be a ―new‖ business because it will
result in new, unproven ownership/management and increased debt unrelated to
business operations.
a) The lender’s loan documentation must include:
(1) A business valuation (not to include any real estate) by the lender or
an independent third party hired by the lender with proven
experience in business valuations. (See Chapter 4 of this Subpart for
SBA’s business valuation requirements.)
(2) A site visit of the assets being acquired. The lender must document
in its loan file the date of the site visit as well as comments.
(3) A real estate appraisal for commercial real estate that meets SBA’s
requirement. (See Chapter 4 of this Subpart for SBA’s appraisal
requirements.)
(4) An analysis as to how the change of ownership will benefit the
business (not the seller or the buyer). If the analysis cannot support
that the change of ownership will be in the best interests of the
business and its continued, successful operations, then the loan
request must not be submitted to SBA for its guaranty.
b) Intangible Assets: An SBA-guaranteed loan may be used to finance a
change of ownership that includes intangible assets.
(1) If the purchase price of the business includes intangible assets
(including, but not limited to, goodwill, client/customer lists, patents,
copyrights, trademarks and agreements not to compete) in excess of
$500,000, the borrower and/or seller must provide an equity
injection of at least 25% of the purchase price of the business for the
application to be processed under delegated authority. (Seller equity
is defined as seller take-back financing that is on full standby
(principal and interest) for a minimum of 2 years.) The borrower
and seller will agree how much equity each will provide. For
example, the borrower and seller may each provide half of the equity
or the borrower may provide 15% and the seller may provide 10%.
(2) If the purchase price of the business includes intangible assets of
$500,000 or less, b)(1) immediately above does not apply.
(3) If the purchase price of the business includes intangible assets in
excess of $500,000 and the equity contribution from the borrower
and the seller combined is less than 25% of the purchase price of the
business, the application may not be processed using delegated
authority and must be sent to the LGPC.
Effective Date: October 1, 2011 139
Subpart B SOP 50 10 5(D)
(4) The ―purchase price of the business‖ includes all assets being
acquired such as real estate, machinery and equipment, and
intangible assets. Real estate may not be removed from the
transaction and financed separately to avoid the 25% equity injection
requirement for PLP processing.
(5) The value of the intangible assets is determined by either the book
value as reflected on the business’s balance sheet, a separate
appraisal for the particular asset, or the value of the business as
identified in the business valuation minus the sum of the working
capital assets and the fixed assets being purchased.
(6) If any of the loan proceeds will be used to finance intangible assets,
the amount must be specifically identified in the Use of Proceeds
section of the application and the Authorization.
(7) The lender must obtain a current business valuation in accordance
with the requirements set forth in Chapter 4 of this Subpart.
I. Eligible Use of Proceeds for SBA Express and Patriot Express
SBA Express and Patriot Express loan proceeds must be used exclusively for
business-related purposes.
J. Eligible Use of Proceeds for Export Express
1. Export Express loans must be used for an export development activity, which
includes the following:
a) Obtaining a standby letter of credit when required as a bid bond,
performance bond, or advance payment guarantee;
b) Participation in a trade shows that takes place outside the United States;
c) Translation of product brochures or catalogues for use in markets outside
the United States;
d) Obtaining a general line of credit for export purposes;
e) Performing a service contract for buyers located outside the United States;
f) Obtaining transaction-specific financing associated with completing
export orders;
g) Purchasing real estate or equipment to be used in the production of goods
or services for export;
h) Acquiring, constructing, renovating, modernizing, improving or expanding
a production facility or equipment to be used in the United States in the
production of goods or services for export; and
i) Providing term loans and other financing to enable a small business
concerns, including an export trading company and an export management
company, to develop a market outside the United States.
2. Loan proceeds may not be used to:
140 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
a) Finance overseas operations, except for the marketing and/or distribution
of products/services exported from the US; or
b) Refinance existing SBA-guaranteed loans.
3. When an Export Express loan finances specific export transactions, the lender
must determine if US companies are authorized to conduct business with the
proposed country. Lenders must check Ex-Im Bank’s Country Limitation
Schedules, which can be found on Ex-Im Bank’s website at
http://www.exim.gov/tools/country/country_limits.cfm or is available from
SBA’s Office of International Trade. A loan may not be made to a business that
exports to a foreign country which is listed as a prohibited country (Note # 7) on
the Country Limitation Schedules.
K. Eligible Use of Proceeds for EWCP
1. EWCP loan proceeds may be used to:
a) Acquire inventory for export or to be used to manufacture goods for
export;
b) Pay the manufacturing costs of goods for export;
c) Purchase goods or services for export;
d) Support Standby Letters of Credit related to export transactions;
e) For working capital directly related to export orders;
f) For foreign accounts receivable and inventory financing; and
g) Support an indirect export. The term ―indirect export‖ applies to situations
where, although the Borrower’s direct customer is located in the United
States, that customer will be exporting the items/services it purchased
from the Borrower to a foreign Buyer. In such cases, the Borrower must
provide certification of the indirect export from the actual exporter
(typically in the form of a letter, invoice, order or contract) to the Lender.
The country to which the items/services will be shipped must be one with
which SBA is not legally prohibited from doing business, pursuant to the
Ex-Im Bank Country Limitation Schedule. A loan may not be made to a
business that exports to a foreign country which is listed as a prohibited
country (Note # 7) on the Country Limitation Schedules.
2. Lender fees and charges are an eligible use of proceeds as well as any
packaging fee paid.
3. EWCP loan proceeds may not be used to (13 CFR 120.342):
a) Support the Borrower’s domestic sales, except in the case of an indirect
sale:
b) Acquire fixed assets or capital goods for use in the Borrower’s business;
c) Acquire, equip, or rent commercial space overseas; or
d) Finance professional export marketing advice or services, foreign business
travel, participation in trade shows or support staff in overseas offices,
except to the extent it relates directly to the transaction being financed.
L. Eligible Uses of Proceeds for International Trade Loans
Effective Date: October 1, 2011 141
Subpart B SOP 50 10 5(D)
1. Acquire, construct, renovate, modernize, improve or expand facilities and
equipment to be used in the United States to produce goods or services involved
in international trade and to develop and penetrate foreign markets;
2. Working Capital; and
3. Refinancing any debt that is not structured with reasonable terms and
conditions, including any debt that qualifies for refinancing under Standard 7(a).
M. Eligible Uses of Proceeds for CAPLines
1. Seasonal CAPLines
Borrowers must use the loan proceeds solely to finance the seasonal increases of
accounts receivable and inventory (or in some cases associated increased labor
costs). Funds must not be used to maintain activity during the slow periods of
the business’s cycle.
2. Contract CAPLines
The contractor must use loan proceeds only to finance the costs of one or more
specific contracts, including overhead or general and administrative expenses,
allocable to the specific contract(s). Contract CAPLine proceeds may not be
used for permanent working capital, to acquire fixed assets, to pay delinquent
taxes or similar funds held in trust (directly or indirectly), to refinance existing
debt, to finance a contract in which significant performance has already begun,
for change of ownership or floorplan financing. In addition, Contract CAPLines
proceeds may not be used to cover any mark-up or profit. Further, advances of
loan proceeds financing performance of one contract or sub-contract under a
master agreement may not be used to finance the performance of another
contract or sub-contract. Likewise, progress payments or proceeds received in
the performance of a contract or sub-contract financed with this line must not be
applied in repayment of a different contract or sub-contract. Funding and
payment applications must be accounted for in conjunction with the specific
contract or sub-contract to which they relate.
3. Builder’s CAPLines
a) Borrowers must use the loan proceeds solely for direct expenses related to
the construction and/or ―substantial‖ renovation costs of a specific eligible
project (residential or commercial buildings for resale), including labor,
supplies, materials, equipment rental, direct fees (building permits, interim
disbursement inspection fees, etc.), utility connections (above or below
ground), construction of septic tanks, and landscaping. (―Substantial‖
means rehabilitation expenses of more than one-third of the purchase price
or fair market value at the time of application.)
b) Proceeds paid to a subcontractor can include the subcontractor’s profit.
The cost of land is eligible if the land cost does not exceed 20 percent of
the project cost. Up to 5% of the project cost can be allocated for
improvements that benefit all properties in a subdivision, such as streets,
curbs, sidewalks, or open spaces.
142 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
c) The borrower must not use loan proceeds to purchase vacant land for
possible future construction or to operate or hold rental property for future
rehabilitation.
4. Working Capital CAPLines
Borrowers must use the loan proceeds for short term working capital/ operating
needs. Proceeds must not be used to pay delinquent withholding taxes or similar
trust funds (state sales taxes, etc.), or for floorplanning. In the event that
Working Capital CAPLine proceeds are used to acquire fixed assets, lender
must refinance the portion of the line used to acquire the fixed asset into an
appropriate term facility no later than 90 days after lender discovers that the line
was used to finance a fixed asset.
Effective Date: October 1, 2011 143
Subpart B SOP 50 10 5(D)
CHAPTER 3: LOAN TERMS AND CONDITIONS
I. MAXIMUM LOAN AMOUNTS
The maximum loan amount allowed under SBA’s loan program varies by product but
generally cannot exceed $5 million. Loans greater than this amount cannot be approved
under the 7(a) program. Please see the Quick Reference Chart below for more
information.
SBA QUICK REFERENCE CHART No. 1
Loan Program/Product Maximum Loan Amount
Standard 7(a) Loans $5,000,000
CLP Loans $5,000,000
PLP Loans $5,000,000
S/RLA $350,000
SLA (PLP lenders only) $250,000
SBA Express Loans $350,000 (gross) (including any outstanding SBA Express, Community
Express, Patriot Express and Export Express)
Export Express $500,000 (gross)
Patriot Express Loans $500,000 (gross) (including any outstanding SBA Express, Community
Express, Patriot Express and Export Express)
CAPLines or Lines of Credit $5,000,000
Export Working Capital Loans (EWCP) $5,000,000
International Trade Loans (IT) $5,000,000
Community Adjustment & Investment $5,000,000
Program (CAIP)
Energy Loans (as described in $5,000,000
§7(a)(12) of the Small Business
Act)
ESOP Loans $5,000,000
A. Maximum Loan Amount - 90 Day Rule
If two SBA guaranteed loans are approved within 90 days of each other, the
maximum gross loan amount of all the loans made in that time frame to any one
business (including affiliates) cannot exceed $5,000,000. Please note that the
maximum SBA guaranty amount outstanding of all loans to any one business
144 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(including affiliates) regardless of when the loans were approved cannot exceed
$3,750,000 except IT loans and EWCP loans - see Chart No. 2 below.
B. Loans to Businesses with Affiliates
Lenders must determine whether affiliation exists and document the results in their
credit analysis. (See Chapter 2 of this Subpart for a discussion of affiliation.) If
affiliation exists, SBA’s loan maximums apply to the affiliated group as if it were a
single business.
C. Establishing the CAPLine Loan Amount
1. Seasonal CAPLine: The loan amount is based on the cash flow projections. The
amount should correlate to the costs of the seasonal buildup of inventory and/or
receivables.
2. Contract CAPLine:
a) A single Contract CAPLine may be utilized to fund a single or multiple
contracts. Once the overall line amount has been approved by SBA, the
lender may advance against additional contracts without SBA approval,
provided that the borrower and lender are in compliance with all terms of
the Authorization. The contracting parties, as a result of a properly
executed change order, may agree to increase the contract price
subsequent to the approval of the Contract CAPLine. In such event, if the
overall line amount needs to be increased, the lender must comply with
paragraph D below to obtain SBA’s approval of the increase in the line.
The contracting parties, as a result of a properly executed change order,
also may agree to decrease the contract price subsequent to the approval of
the Contract CAPLine and/or after a progress advance was made. In such
event, the lender must assure the borrower is aware that the next future
advance or future advances, if necessary, will be at the decreased amount.
b) For single contract financing, the loan amount is equal to the sum of the
costs of the contract (excluding profit), as evidenced by the project cost
schedule.
c) For multiple contract financing, the master note amount is equal to the
sum of the costs of all contracts (excluding profit) to be financed under the
CAPLine, as evidenced by the project cost schedules. For future projects
not yet identified, at the time the contract is obtained all costs by line item
should be identified. The amount of the sub-note for each specific contract
should equal the total costs of that contract.
3. Builder’s CAPLine:
a) A single line may be utilized to fund multiple projects. Once the overall
line amount has been approved by SBA, the lender may advance against
additional projects without SBA approval, providing the borrower and
lender are in compliance with all terms of the loan Authorization.
b) SBA may allow the finished property to be rented pending sale only in
cases where the rental will enhance the ability to sell the property.
Effective Date: October 1, 2011 145
Subpart B SOP 50 10 5(D)
c) The final sale of the property must be an arms length transaction with
legal transfer to an unaffiliated third party.
d) For a non-revolving loan, the loan amount is based on the written proposal
of costs (not anticipated selling price) provided by the applicant for a
single project.
e) For a revolving loan, the master note amount is based on the cash flow
projection provided by the applicant for ALL work to be performed by the
SBC (not just a specific project). The amount of a sub-note (for each
specific project) is based on the written proposal of costs (not anticipated
selling price) provided by the applicant for that particular project.
4. Working Capital CAPLine:
To determine the maximum line amount, the lender must follow its established
policies and procedures utilized on its similarly sized, non-SBA guaranteed
commercial lines of credit or the lender may use the following formula:
a) Net Sales for Prior Year
b) Divide Prior Year Net Sales by 365
c) Multiply Daily Sales figure by number of days to finance (whatever
number is the business sales cycle)
d) The result will be the estimated working capital needs.
D. Loan Increases
1. Increases to 7(a) loans, regardless of the disbursement status, are subject to
statutory, administrative, and program maximums and must be approved by
SBA. Upfront and ongoing fees for increases in subsequent years are at the
rates in effect at the time the loan was originally approved.
2. Standard 7(a), CLP, PLP, SBA Express, Export Express and Patriot Express
term loans: If the request for an increase is more than 20% of the original loan
amount or is more than18 months after the original approval date of the loan,
the lender must include with its request its analysis showing that the purpose of
the increase is the same as the original purpose of the loan and that the
borrower’s cash flow can support the increased payment amount.
3. For revolving lines of credit made under SBA Express, Export Express and
Patriot Express, increases:
a) May be requested at any time during the life of the loan, but must be
within 7 years of the date of loan approval and be in compliance with
Chapter 3, Paragraph III.D. of this Subpart (maximum maturities on SBA
Express, Export Express and Patriot Express loans);
b) May not exceed the dollar limit for the program at the time the loan was
originally approved (this includes any other outstanding loans under SBA
Express, Export Express and Patriot Express); and
c) Must include an analysis of appropriate credit and risk factors consistent
with the procedures the lender uses for its similarly sized non-SBA
146 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
guaranteed commercial loans if the increase is above 33% of the original
loan amount.
4. PLP, SBA Express, Export Express and Patriot Express Increases: Lenders must
follow their established and proven internal credit review and analysis
procedures used for their non-SBA guaranteed commercial loans to determine
whether the increase is appropriate prior to submitting the request for an
increase to SBA.
5. See Chapter 7, Paragraph I of this Subpart for the procedures and the
appropriate form for all lenders to use when requesting an increase in the loan
amount.
II. MAXIMUM GUARANTY AMOUNTS
The maximum dollar amount outstanding of SBA’s guaranty to any one business
(including affiliates) shall not exceed $3,750,000, except when the loan is approved
under a program which specifically permits higher amounts. Please refer to the SBA
Quick Reference Chart below. The SBA’s guaranty is also known as the ―SBA share‖ or
―guaranteed portion‖.
SBA QUICK REFERENCE CHART No. 2
Loan Program/Product Maximum Guaranty Amount Percentage
Standard 7(a) Loans—See Note 1 $3,750,000 85% for loans of $150,000 or less. 75%
for loans over $150,000
CLP Loans $3,750,000 85% for loans of $150,000 or less. 75%
for loans over $150,000
PLP Loans $3,750,000 85% for loans of $150,000 or less. 75%
for loans over $150,000
SBA Express Loans $3,750,000--See Note 2 50%
Export Express $3,750,000--See Note 2 90% for loans of $350,000 or less. 75%
for loans over $350,000 up to
$500,000.
Patriot Express Loans $3,750,000--See Note 2 85% for loans of $150,000 or less. 75%
for loans over $150,000
CAPLines $3,750,000 85% for loans of $150,000 or less. 75%
for loans over $150,000
EWCP Loans $4,500,000 90%
International Trade Loans $4,500,000--See Note 3 90%
CAIP Loans $3,750,000 85% for loans of $150,000 or less. 75%
for loans over $150,000
Energy Loans $3,750,000 85% for loans of $150,000 or less. 75%
Effective Date: October 1, 2011 147
Subpart B SOP 50 10 5(D)
Loan Program/Product Maximum Guaranty Amount Percentage
for loans over $150,000
ESOP Loans $3,750,000 85% for loans of $150,000 or less. 75%
for loans over $150,000
Note 1: The amount of any loan received by an Eligible Passive Company applies to the
loan limit of both the Eligible Passive Company and the Operating Company.
Note 2: Multiple loans allowed up to program maximum listed in Quick Reference Chart
1. The guaranteed amount of these loans counts toward the $3.75 million maximum
guaranty that may be outstanding at any one time.
Note 3: Exception for IT Loans. The amount guaranteed for working capital for the IT
loan combined with any other outstanding 7(a) loan for working capital cannot exceed
$4,000,000. (Small Business Act, Section 7(a)(3)(B))
Note: 4: Export Express Loans: If two Export Express loans are approved within 90
days of each other, and the combined gross loan amount of all the Export Express loans
approved in that time frame to any one borrower (including affiliates) exceeds $350,000,
then the maximum guaranty percentage of each of these loans is 75% (subject to the
$375,000 limit).
A. Multiple Loans from Different Programs with Different Maximums
When an applicant applies for any combination of 7(a) and 504 loans, the order in
which the loans are approved determines the maximum loan and guaranty amount
available. Because the 7(a) loan has a lower maximum guaranteed amount, the 7(a)
loan should be approved first. Please ensure that the SBA centers processing the
applications know there is a companion application so that the 7(a) loan can be
approved first.
B. Maximum Guaranty Percentage for Multiple 7(a) Loans (13 CFR 120.210)
The maximum guaranty percentage for 7(a) loans of $150,000 or less is 85, unless the
percentage is being computed on a subsequent 7(a) loan to the same borrower (or its
affiliates) and the subsequent loan application is submitted within 90 days (see
Paragraph I.A of this Chapter) of the receipt or approval date of the first loan. In this
case the gross dollar amounts of the loans are combined. If the combined gross
amount exceeds $150,000, then the percentage of guaranty on the combined loans
shall not be more than 75% (subject to the $3,750,000 limit).
For example, if a business receives an 85% guaranty on a loan of $140,000, and
submits a second application for $50,000 within 90 days of the first loan’s approval,
the percentage of guaranty on the second loan must be reduced accordingly so that the
combined guaranty is no more than 75%.
(Please refer to the section on EWCP loans for an exception to the rules.)
C. Maximum Guaranty Percentage for Multiple 7a and 504 Loans
148 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
The 90-day rule is only for those situations where a borrower is approved for multiple
7(a) loans within a 90-day period. It does NOT apply if the borrower is receiving a
7(a) loan and a 504 loan.
D. Zero Percent Guaranty Cannot be Provided For Ineligible Purposes
The percentage of guaranty which SBA provides its participants is the same for every
part or purpose of that loan. A 7(a) loan cannot include proceeds for an ineligible
purpose or have any portion of the loan made to an ineligible business. An ineligible
purpose cannot be included as part of any SBA guaranteed loan and no part of an
SBA loan may be guaranteed at zero percent.
E. Changing a Guaranty Percentage After Loan Approval
1. On loans that have been approved but not fully disbursed, a lender may submit a
request to change the guaranty percentage to the LGPC.
2. Any changes must comply with SBA policy and program constraints.
3. Submit a written request to the LGPC that includes the name of the lender,
name of the lending officer, phone number, fax number, name of the borrower,
SBA Loan Number and the following information:
a) How it is now;
b) How it should be; and
c) Why – justification for the change and any supporting documentation.
4. Post-approval modifications should be sent by e-mail to 7aLoanMod@sba.gov
or by fax to 916-735-1975.
5. On fully disbursed loans, lenders may submit a request to change the guaranty
percentage to the appropriate CLSC in accordance with SOP 50 50.
III. LOAN MATURITIES (13 CFR 120.212)
The loan term must be appropriate for the borrower's ability to repay and the use of
proceeds. Working capital loans and the financing of intangible assets (including
goodwill) must not exceed 10 years. Equipment loans should not exceed 10 years (or the
useful life of the equipment) and real estate loans must not exceed 25 years unless a
portion of the loan is used for construction or renovation. If the use of proceeds of a real
estate loan includes construction or renovation, the construction or renovation period may
be added to the 25 year maximum maturity.
SBA QUICK REFERENCE CHART No. 3
Program/Use of Proceeds Maximum Maturity Additional Considerations
See Note 1 below
7(a)--Inventory or Working Up to 10 years Terms for a working capital or inventory
Capital loan should be appropriate to the
borrower’s ability to repay up to 10
years.
7(a)--Equipment, Fixtures, or 10 years except when the When maturity exceeds 10 years, lender
Furniture useful life of the asset must document the loan file that the
exceeds 10 years reasonable economic life of the asset(s)
Effective Date: October 1, 2011 149
Subpart B SOP 50 10 5(D)
Program/Use of Proceeds Maximum Maturity Additional Considerations
See Note 1 below
acquired is greater than 10 years and
final maturity must not exceed the useful
economic life or 25 years, whichever is
less.
7(a)--Real Estate—including Up to 25 years (See Note The maximum maturity for these loans is
Acquisition, rehabilitation, 2) 25 years plus any additional period
renovation or construction reasonably necessary to complete the
construction or improvements.
7(a)--Mixed Purposes May use blended maturity When loan proceeds are used for multiple
or a maturity up to the purposes (land & building, working
maximum for the asset capital, and machinery & equipment, or
class comprising the the refinancing of any these purposes),
largest percentage of the maturity may be the blended
the use of proceeds. maturity based on the use of proceeds or
up to the maximum for the asset class
comprising the largest percentage of the
use of proceeds.
International Trade Loans Same as 7(a)
Export Working Capital Up to 3 years For single transactions, maturity should
Program correspond to the length of the
transaction cycle, usually not to exceed
18 months. Maturities greater than 18
months may be approved, if justification
and recommendation for a longer
maturity is included in the loan officer’s
report. For revolving lines of credit, the
maturity is typically 12 months. The
lender may request re-issuance of a line
(new loan & loan number) no earlier
than 45 days prior to maturity of the
existing line.
CAPLines Up to 10 years (except Seasonal, Contract, or Builder loans which
Builder’s CAPLines finance a single transaction should have
which cannot exceed 5 a maturity tied to the seasonal cycle,
years) contract completion date, or project
completion date. All CAPLines must
have an exit strategy. Final disbursement
should occur far enough in advance of
maturity so that a sufficient amount of
time is available for the assets acquired
with proceeds to be converted back to
cash and final payment.
SBA Express, Patriot Express Term loans--same as 7(a). SBA Express LOCs may consist of a
and Export Express Lines of Credit (LOCs) revolving period and maturity
up to 7 years. extensions of any length, as long as the
combined term does not exceed 7 years.
For Export Express transactional lines of
credit, the maximum term is 7 years and
no disbursement can be made for an
export transaction where payment by the
150 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
Program/Use of Proceeds Maximum Maturity Additional Considerations
See Note 1 below
foreign buyer will occur after the
maturity date of the loan.
NOTE 1: Loan maturity must not exceed the period of the guaranty. This prohibits such
structures as a working capital loan with a 15-year maturity and an SBA guaranty limited
to 10 years.
NOTE 2: The 25-year maximum maturity is not applicable for loans processed under the
Builders Loan Program (13 CFR 120.396)
A. Establishing the Repayment Period (13 CFR 120.212)
When lenders establish a repayment schedule and loan maturity, they must consider
the following: 1) the borrower’s ability to repay, 2) use of loan proceeds, and 3)
useful life of the assets being financed. SBA has instructed the fiscal and transfer
agent to stop the sale into the secondary market of a loan when the maturity exceeds
the regulatory limits.
B. Establishing the Maturity Date
The maturity date for a 7(a) loan is set in terms of the number of months from either
the date of Note or the date of initial disbursement to the date when final payment is
due.
C. Maturity When Refinancing Existing Assets or a Business Acquisition
1. The maximum maturity for a loan used to refinance a real estate or fixed asset
loan shall be the remaining useful life of the asset(s). The lender’s loan analysis
must document and justify that the asset(s) being refinanced has a useful life at
least as long as the maturity provided.
2. The maximum maturity for a loan used to refinance a business acquisition shall
be 10 years, unless the largest percentage of the small business’s assets is real
estate which would permit a maturity up to 25 years.
D. SBA Express, Export Express and Patriot Express Maximum Maturities and the use
of Non-Financial Default Provisions
1. SBA Express, Export Express and Patriot Express loans must have a stated
maturity and the maturities are the same as any other 7(a) loan, except that
revolving loans are limited to a maximum maturity of 7 years, including any
―term-out‖ period. For Export Express transactional lines of credit, the
maximum term is 7 years and no disbursement can be made for an export
transaction where payment by the foreign buyer will occur after the maturity
date of the loan. For Export Express general lines of credit, the maximum
maturity is 7 years and there must be a ―term-out‖ period to allow for the
orderly amortization of the entire loan balance. If at the end of the revolving
period the Export Express borrower still has the need for a revolving line of
credit, the lender must issue a separate Export Express loan to meet this need.
Effective Date: October 1, 2011 151
Subpart B SOP 50 10 5(D)
2.
Non-financial default provisions are allowed under SBA Express, Export
Express and Patriot Express under the following conditions:
a) Non-financial default provisions are loan conditions that, if violated,
would cause the loan to be in default even though the borrower has made
all payments as agreed.
b) Non-financial default provisions must be substantive and must be agreed
to by the borrower in writing at loan closing;
c) The provisions must be consistent with those used by lender on its
similarly-sized non-SBA guaranteed commercial loans;
d) A lender may not request purchase of the guaranty solely based on a
violation of a non-financial default provision (see 13 CFR 120.520); and
e) A maturity date must be established in the note. For example, a line of
credit could state that it is payable upon demand under certain conditions,
but in no case later than a certain date.
3. Revolving loans may be established as renewable each year, provided they do
not exceed the maximum 7 year term. Lender may not charge renewal fees. If a
one year loan is renewed, Lender must pay the guaranty fee for loans with a
maturity in excess of 12 months. See paragraph V.G. of this chapter for further
discussion of guaranty fees on renewals of short-term loans.
4. The term of a loan may not exceed the period of the SBA guaranty commitment.
E. Maturity of CAPLines
With the above noted exception for Builder’s CAPLines, the maximum maturity on a
CAPLine is 10 years. Any CAPLine with a maturity of less than 10 years can be
renewed as long as the total revolving repayment period does not exceed 120 months.
The renewal is an extension of maturity (not a new loan). Thus, the loan number
remains the same. If the original maturity was for 12 months or less, and the new
maturity exceeds 12 months, an additional guaranty fee will be due. See paragraph
V.G. of this Chapter.
F. Maturity of EWCP Loans:
1. General: The maximum maturity of an EWCP loan is 36 months. SBA’s
guaranty remains in effect for disbursements made through the maturity date,
subject to the terms and conditions of the loan authorization and loan
documents. With the exception of a disbursement made to fund a drawing
against a letter(s) of credit that was issued under the EWCP before the maturity
date, disbursements made after the maturity date are not covered under the
guaranty. The maturity of the loan is:
a) The date specified in the loan authorization. Such date will not be longer
than 36 months from the Note date. If the loan is not reissued, or
extended, all outstanding amounts are due and payable on that day.
b) Standby Letters of Credit. Unless SBA provides prior written consent,
Standby Letters of Credit supported by an EWCP loan must expire before
the loan maturity date. If the lender receives SBA’s prior written consent
and makes a disbursement after the maturity date because there has been a
152 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
draw on a standby letter of credit which was issued under the EWCP prior
to the maturity date, such disbursement will be covered by the guaranty.
2. Specific Types of EWCP loans:
a) Single Transaction-Specific Loan: A non-revolving loan that supports a
specifically identified, single export transaction. While the term of a
transaction-specific loan typically should not exceed 1 year, SBA may, on
a case-by-case basis, approve a longer loan term (up to 36 months) to
allow for an extended production cycle.
b) Transaction Based-Revolving Line of Credit: A revolving line of credit
can support either multiple export transactions or a single, specifically
identified export transaction on a continuous basis during the term of the
loan. While the term of a revolving line of credit typically does not
exceed 1 year, SBA may allow an initial commitment up to 36 months
with annual renewals.
c) Asset Based Loans (ABLs): ABLs are revolving lines of credit supported
by a monthly Borrowing Base Certificate which reports levels of assets,
normally accounts receivable and inventory, supporting the loan amount.
ABLs are typically committed for 12 months and re-issued annually.
Because a re-issuance of a loan is a new loan, another guaranty fee is due
each time the loan is re-issued. (See the discussion of guaranty fees in
Paragraph V of this Chapter.) ABLs, however, can have up to a 36 month
maturity with annual renewals. The lender must supply to SBA updated
financial statements on the borrower annually.
IV. INTEREST RATES
A. General Policy on Interest Rates (13 CFR 120.213; 120.214; 120.215)
1. A loan may have a fixed or variable interest rate. The maximum interest rate
that may be established for any 7(a) loan is governed by SBA’s regulations on
interest rates, which preempts any provisions of a state’s constitution or law.
The lender negotiates the interest rate with the Small Business Applicant,
subject to SBA’s maximum rates.
2. SBA will periodically publish the maximum allowable fixed interest rate in the
Federal Register. The maximum allowable fixed interest rate will be based on
the cost of converting a floating rate note to a fixed rate note using the LIBOR
Swap Rate. For a listing of the current maximum allowable fixed interest rates,
see http://www.colsonservices.com/main/news.shtml. The maximum allowable
fixed rate may only be used by a lender if such rate will be in effect for the
entire term of the loan, without adjustment or reset. Otherwise, the maximum
rates for variable rate loans will apply.
3. For variable interest rate loans, the base rate in effect on the first business day of
the month will determine the basis for the initial interest rate for any complete
loan application received by SBA during that month. The initial note rate must
not exceed SBA’s maximum interest rate. The basis for the SBA maximum
interest rate is an acceptable base rate plus allowable spread. The spread above
the base rate as identified in the Note may not be changed during the life of the
Effective Date: October 1, 2011 153
Subpart B SOP 50 10 5(D)
loan without the written agreement of the borrower. For further discussion of
variable interest rates, see paragraph C below.
4. Default interest rates are not permitted except as described below for SBA
Express, Patriot Express and Export Express.
5. For loans with a variable interest rate, the following terms must be defined:
a) Base Rate:
(1) For standard 7(a), CLP and PLP loans, there are three acceptable
base rates:
(a) The Prime Rate;
(b) One Month London Interbank Offered Rate (LIBOR) plus 3
percentage points (LIBOR Base Rate); or
(c) The SBA Optional Peg Rate.
(2) The Prime or LIBOR Base Rate will be that rate which is in effect on
the first business day of the month, as identified in a national
financial newspaper or website. This rate may be found in the
newspaper on the second business day of the month. If a website is
used, please ensure whether it is publishing the current day’s rate or
the previous day’s rate as some newspaper websites publish the
previous day’s rate. The Optional Peg Rate is a weighted average of
rates the federal government pays for loans with maturities similar to
the average 7(a) loan. SBA calculates and publishes the Optional
Peg Rate quarterly in the Federal Register. Base Rates will be
rounded to two digits with .004 being rounded down and .005 being
rounded up.
(3) For SBA Express, Patriot Express and Export Express, in addition to
the above rates a lender may use the same base rate of interest it uses
on its similar non-SBA loans with one exception. If the loan is sold
in the secondary market, only the base rates identified in the above
paragraph are permitted.
b) Frequency of change;
c) Range of fluctuation; and
d) Ceiling and floor (if any).
6. Lender must notify the appropriate Commercial Loan Servicing Center of any
changes to the Note terms related to the interest rate after the loan is disbursed.
7. Reference Chart on Interest Rates
SBA QUICK REFERENCE CHART No. 4: Maximum Interest Rates Allowed
Product Interest Rate – The Limitations
published maximum
allowable fixed rate or if
variable:
Standard 7(a) Loans $25,000 or less Cannot exceed Prime, LIBOR See Paragraphs B through E
(Maturity less than 7 years) Base Rate, or SBA below
154 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
Product Interest Rate – The Limitations
published maximum
allowable fixed rate or if
variable:
Optional Peg Rate+ 4.25%
Standard 7(a) Loans $25,000 or less Cannot exceed Prime, See Paragraphs B through E
LIBOR Base Rate, or below
(Maturity 7 years or more) SBA Optional Peg Rate
+ 4.75%
Standard 7(a) Loans more than Cannot exceed Prime, LIBOR See Paragraphs B through E
$25,000 up to $50,000 Base Rate, or SBA below
Optional Peg Rate+ 3.25%
(Maturity less than 7 Years)
Standard 7(a) Loans more than Cannot exceed Prime, LIBOR See Paragraphs B through E
$25,000 up to $50,000 Base Rate, or SBA below
Optional Peg Rate+ 3.75%
(Maturity 7 Years or more)
Standard 7(a) Loans greater than Cannot exceed Prime, LIBOR See Paragraphs B through F
$50,000 Base Rate, or SBA below
Optional Peg Rate+ 2.25%
(Maturity less than 7 years)
Standard 7(a) Loans greater than Cannot exceed Prime, LIBOR See Paragraphs B through F
$50,000 Base Rate, or SBA below
Optional Peg Rate+ 2.75%
(Maturity 7 years or more)
SBA Express and Export Express Cannot exceed Prime + 6.5% See Paragraphs G and H.2
Loans - $50,000 or less (All below
maturities)
SBA Express and Export Express - Cannot exceed Prime + 4.5% See Paragraphs G and H.2
More than $50,000 (All maturities) below
Patriot Express Same as Standard 7(a) See Paragraph H.1 below
Export Working Capital Loans No SBA Maximum. See note below
CAPLines Same as Standard 7(a) loans
NOTE: SBA does not prescribe interest rates for the EWCP but does monitor the rates
charged for reasonableness. (13 CFR 120.344(c))
B. Base Rate, Allowable Spread, and Allowable Variance for Small Loans (13 CFR
120.214)
1. A loan may have a variable interest rate. The base rate may be one of the
following:
a) the Prime Rate;
b) the One Month LIBOR plus 3 percentage points (LIBOR Base Rate); or
c) the SBA Optional Peg rate.
Effective Date: October 1, 2011 155
Subpart B SOP 50 10 5(D)
2.The allowable spread is based on the maturity of the loan. For loans with an
original maturity less than 7 years, the maximum allowable rate cannot exceed
2.25 percentage points over the prime rate. For loans with an original maturity
of 7 years or longer, the maximum allowable rate cannot exceed 2.75
percentage points over the prime rate. The spread as identified in the Note may
not be changed during the life of the loan without the written agreement of the
borrower.
3. Lenders are permitted to add an additional 1 percentage point to the maximum
interest rate listed above for those loans greater than $25,000 but not more than
$50,000.
4. Lenders are permitted to add an additional 2 percentage points to the maximum
interest rate listed above for those loans of $25,000 or less.
5. The lender must designate on its application for guaranty the amount of the
percentage spread to be added to the base rate at each adjustment date.
C. Policy on Variable Interest Rates
1. Standard Policy
SBA’s maximum allowable interest rate applies only to the initial Note rate on a
variable rate loan. Subsequent increases due to a change in the base rate are not
subject to the maximum rate at the time of loan application.
2. Post-Approval Changes to the Interest Rate
a) Pre-Disbursement Changes: After loan approval and prior to first
disbursement, the lender may change the initial Note rate, including
changing the base rate, the spread over the base rate, or from a fixed rate
to a variable rate or from a variable rate to a fixed rate, provided the new
interest rate does not exceed the maximum allowable interest rate at the
time of the loan application. The lender must obtain the borrower’s written
agreement and must notify the appropriate SBA CLSC of the change or
make the change through E-Tran servicing.
For example, an SBA guaranteed loan was approved with a variable rate.
Since the loan was approved, there have been changes to the prime rate.
The borrower has asked the lender if it can switch to a fixed rate. The
answer is yes as long as the loan has not been disbursed and the fixed rate
selected does not exceed the maximum allowable fixed rate at the time of
loan application.
b) Post-Disbursement Changes: After the loan is disbursed, on a variable
rate loan, the lender may change the base rate or the spread over the base
rate as long as the new base rate or spread is based on a method permitted
when the loan was approved and is consistent with the interest rate
regulations at the time the loan was approved. The lender must obtain the
borrower’s written agreement and must notify the appropriate SBA CLSC
of the change or make the change through E-Tran servicing. For further
guidance see the Servicing and Liquidation Actions 7(a) Lender Matrix.
156 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
3. Frequency of Interest Rate Adjustment
a) The first adjustment may occur on the first calendar day of the month
following initial disbursement, using the base rate in effect on the first
business day of the month. Lenders may delay the initial adjustment
period. For example, lenders have used periods as long as 5 years in order
to provide the borrower with an interest rate that is set for the first 5 years
of the loan. After that time, the interest rate will begin to fluctuate as
stated in the Authorization. Whenever a lender delays the initial
adjustment period, the spread over the base rate used to calculate the
initial Note rate must remain the same once the interest rate begins to
fluctuate.
b) The lender must specify in the Note the frequency at which the interest
rate adjustment will occur. This adjustment period as identified in the
Note may not be changed without the written agreement of the borrower.
Subsequent adjustments may occur no more frequently than monthly. All
subsequent adjustments will set the interest rate on the first calendar day
of the adjustment period using the base rate in effect on the first business
day of the adjustment period. The rate of interest will change on the first
calendar day of the adjustment period even though the rate may not be
known until the second business day of that period. For example, if the
first of the month is a Sunday, the base rate is the prime rate in effect on
Monday. This rate will be reported in the Wall Street Journal on Tuesday,
the third calendar day and second business day of the month. Many
lenders use the calendar quarter as the adjustment period, especially those
that sell the guaranteed portion in the Secondary Market.
After the interest rate begins fluctuating, the loan can be re-amortized.
Typically, loans are re-amortized every time the interest rate is adjusted to
ensure full amortization by the maturity date.
4. Interest Rate Ceilings and Floors
SBA will permit a lender to limit the upward and downward adjustments by
establishing a floor and ceiling provided that (1) both the floor and ceiling are
stated in the Note; and (2) the difference between the stated rate in the Note and
the floor is equal to or greater than the difference between the stated rate in the
Note and the ceiling. For example, if the Note rate is 10% and the ceiling is
12%, the floor must be 8% or lower.
5. Accrual Method
SBA does not require a specific accrual method, unless the loan is sold in the
Secondary Market. Loans sold on the Secondary Market must either use 30/360
or Actual/365 as the interest accrual methods. While the interest accrual
Effective Date: October 1, 2011 157
Subpart B SOP 50 10 5(D)
method 365/360 is permitted on loans not sold on the Secondary Market,
lenders are cautioned that they cannot use this accrual method and charge the
maximum allowable rate of interest because this will result in an Annual
Percentage Rate that exceeds SBA’s regulatory maximum.
6. Amortization
Lender should use an amortization schedule that is appropriate for the type of
loan. A fixed interest rate loan must use a payment that will fully amortize the
loan by the maturity date. Typically, variable rate loans are reamortized every
time the interest rate is adjusted to ensure full amortization by the maturity date.
The amortization schedule may be adjusted to meet the cash flow needs of the
business.
D. Fixed and Variable Rate Combinations
The lender may use a fixed rate on either the guaranteed or unguaranteed portion and
a variable rate on the other portion of the loan. SBA allows such combinations as long
as each rate does not exceed the SBA maximum interest rate. A lender may use this
structure to make a loan that permits it to retain a variable interest rate on the
unguaranteed portion and sell a fixed rate guaranteed portion on the Secondary
Market. This reduces the volatility of the borrower’s interest rate.
E. Interest Rate Swap Contracts
1. An interest rate swap is a contract between two parties where one party pays a
fee in exchange for an agreement by the other party to pay any interest in excess
of an established amount. The contract may last for all or part of the term of the
loan. The swap contract only relates to the payment of interest.
Example: A borrower has a prime plus 2% interest rate on a 7(a) variable rate
guaranteed loan (presently 5.25%). The borrower could purchase an interest
rate swap contract that would set the interest rate at 7%. When the Note rate is
lower than the rate paid by the borrower on the swap contract (7%), the swap
seller keeps the extra amount as compensation for the risk that rates will at some
point exceed 7%. When the Note rate is higher than the rate paid by the
borrower on the swap contract, the borrower would continue to pay the fixed
rate of 7% and the swap seller would pay the difference above 7% to the lender.
The ability to stabilize the amount of the loan payment each month is the benefit
to the borrower of an interest rate swap contract.
2. In order to use an interest rate swap in the 7(a) program, the interest rate swap
contract must meet the following conditions:
a) The interest rate swap contract is an agreement between the small business
borrower and the lender or, if the swap seller is not the lender, a third
party. SBA is not a party to the interest rate swap contract.
b) The interest rate swap contract does not affect the amount of money owed
by the borrower to SBA in the event SBA purchases the guaranty. In the
158 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
event of a borrower default, interest will be calculated using the base rate
and spread in the variable interest rate Note, not the swap contract.
c) SBA will not be responsible if the swap seller defaults during the life of
the contract. The borrower will be liable for the interest as required in the
Note.
d) Loans with accompanying interest rate swap contracts may be sold on the
secondary market. The lender is still required under the secondary market
contract (SBA Form 1086) to forward interest and principal pursuant to
the original terms of the loan. It is the lender’s responsibility to work with
the swap seller to make sure funds are available for submission to the
fiscal and transfer agent according to the time schedule in the Form 1086.
e) The full amount of the principal and interest required under the Note must
be reported by the lender on the Form 1502.
f) SBA will not review swap contracts for borrowers or provide guidance on
their use. While swap contracts should not have a significant impact on
the cost of the loan, SBA will not publish any guidelines on the cost of
these contracts.
g) The borrower must sign a statement acknowledging that interest will be
calculated at the Note rate if the swap contract is terminated.
h) The following statement must be included in the swap contract that is
executed by the borrower and the swap seller: ―The Small Business
Administration is not a party to this contract and does not guarantee it. In
the event SBA is called upon to honor its guaranty to the lender, the
borrower’s debt will be determined by the terms of the Note, including the
variable interest rate provision.‖
i) Swap contracts may be used on new or existing loans.
j) The swap contract does not have to last for the entire length of the loan
agreement.
k) SBA does not have a standard form for an interest rate swap contract.
l) Any fees owed the swap counterparty as a result of the default by the
borrower will be subordinated to the SBA 7(a) loan.
F. Interest Rate Requirements for an SBA Note
1. Fixed rate loans—the lender must specifically state the interest rate in the Note.
2. Variable rate loans—the lender must include the following information in the
Note:
a) Identification of the rate being used as the base rate;
b) The publication in which the designated base rate appears regularly (e.g.
Wall Street Journal or the Federal Register if using the SBA Optional Peg
Rate);
c) The permanent percentage spread to be added to the base rate;
d) The initial interest rate of the loan (from disbursement to first adjustment);
Effective Date: October 1, 2011 159
Subpart B SOP 50 10 5(D)
e) The date of the first rate adjustment; and
f) The frequency of rate adjustment.
G. SBA Express and Export Express Interest Rate Policy
1. A lender may charge up to 4.5% over the prime rate on loans over $50,000 and
up to $350,000 ($500,000 for Export Express) and up to 6.5% over the prime
rate for loans of $50,000 or less, regardless of the maturity of the loan.
2. For variable rate loans, the lender is not required to use the base rate identified
in 13 CFR 120.214(c). It may use the same base rate of interest it uses on its
similarly-sized non-SBA guaranteed commercial loans, as well as its established
change intervals, payment accruals, etc. However, the interest rate throughout
the term of the loan may not exceed the maximum allowable SBA Express or
Export Express interest rate and the loan may be sold on the Secondary Market
only if the base rate is one of the base rates allowed in 13 CFR 120.214(c).
3. A lender may charge a default interest rate if it does so for its similarly-sized
non-SBA guaranteed commercial loans, as long as the interest rate does not
exceed the amounts stated in this paragraph. (The default interest rate is a
change (increase) in the interest rate charged to the borrower as a result of a
failure to meet certain conditions specified in the loan agreement.)
4. The amount of interest SBA will pay to a lender following default of an SBA
Express loan is capped at the maximum interest rates for the standard 7(a) loan
program.
H. Patriot Express Pilot Loan Initiative Interest Rate Policy
1. The standard 7(a) interest rate restrictions apply.
2. A lender may charge a default interest rate if it does so for its similarly-sized
non-SBA guaranteed commercial loans, as long as the interest rate does not
exceed the amounts stated in this paragraph. (The default interest rate is a
change (increase) in the interest rate charged to the borrower as a result of a
failure to meet certain conditions specified in the loan agreement.)
3. For variable rate loans, a Patriot Express lender is not required to use the base
rate identified in 13 CFR 120.214(c). It may use the same base rate of interest it
uses on its similarly-sized non-SBA guaranteed commercial loans as well as its
established change intervals (including intervals more frequently than monthly),
payment accruals, etc. However, the interest rate throughout the term of the loan
may not exceed the maximum allowable Patriot Express interest rate and the
loan may be sold on the Secondary Market only if the base rate is one of the
base rates allowed in 13 CFR 120.214(c).
V. SBA GUARANTY FEES (13 CFR 120.220)
A. Standard Policy
1. A lender must pay a fee to SBA for each loan guaranteed under the 7(a)
program. This fee is known as the ―SBA Guaranty Fee‖. The total loan amount
determines the percentage that is used to calculate this fee. (See the ―Fees‖
column in Chart 5 below.) The guaranty fee is based on the guaranteed portion
160 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
of the loan and not the total loan amount. The chart below describes the
applicable fees.
2. The Agency automatically calculates the guaranty fee for each individual loan.
This calculation is modified in SBA’s loan accounting system and E-tran to
include changes to the fee that are necessary due to other loans approved within
the past 90 days. Short term loans are not included in this calculation. For more
information, see subparagraph V.I below or contact the processing center or
local SBA office.
Note: If there is a conflict between the fees stated in the Authorization and the
statutory amount authorized at the time the loan is approved, then the statutory
amount governs.
SBA QUICK REFERENCE CHART No. 5
Gross Loan Size FEES NOTES
Loans of $150,000 or less (See 2% of guaranteed portion Maturities that exceed 12
Note 1) months.
Lender is authorized to
retain 25% of the fee.
$150,001 to $700,000 3% of guaranteed portion
$700,001 to $5,000,000 3.5% of guaranteed portion
up to $1,000,000 PLUS
(See Note 2 ) 3.75% of the guaranteed
portion over $1,000,000
Short Term Loans – up to $5 0.25% of the guaranteed Maturities of 12 months or
million portion less
NOTE 1: For example, the guaranty fee on a $100,000 loan with an 85% guaranty would
be 2% of $85,000 or $1,700, of which the lender would retain $425.
NOTE 2: For example, the guaranty fee on a $5,000,000 loan with a 75% guaranty ($3.75
million guaranteed portion) would be 3.5% of $1,000,000 ($35,000) PLUS 3.75% of
$2,750,000 ($103,125), which totals $138,125.
B. When the Guaranty Fee Must be Paid (13 CFR 120.220(b))
1. The lender must pay the guaranty fee to SBA as follows:
a) On loans with maturities in excess of 12 months, the lender must pay the
guaranty fee to SBA within 90 days of the date of loan approval.
Effective Date: October 1, 2011 161
Subpart B SOP 50 10 5(D)
b) On short term loans (maturities of 12 months or less), the lender must
submit the guaranty fee to SBA with the application for guaranty. The
application will not be processed without the fee. For EWCP loans that
are re-issued after 12 months, each time the loan is re-issued it is a new
loan and another guaranty fee is due.
c) Short Term PLP Loans: Because SBA does not approve or decline the
credit for PLP loans, the lender does not send the guaranty fee for short
term PLP loans to the processing center with the request for a loan
number. When a loan number is assigned, the processing center notifies
the lender that the guaranty fee must be sent directly to the SBA Denver
Finance Center (DFC) at U.S. Small Business Administration, Denver,
Colorado 80259-0001. The lender must pay the guaranty fee within 10
business days from the date the loan number is assigned and before the
lender signs the Authorization for SBA. Lenders are strongly encouraged
to use www.pay.gov (see paragraph C.1 below. If the DFC does not
receive the fee within 10 business days after the processing center issues
the loan number, SBA cancels the guaranty.
d) Short Term SBA Express, Export Express and Patriot Express Loans: For
SBA Express, Export Express and Patriot Express loans with a maturity of
12 months or less, the lender does not send the fee to the processing center
with the request for loan number. When a loan number is assigned, the
processing center notifies the lender that the guaranty fee must be sent
directly to the SBA DFC. The lender must pay the guaranty fee within 10
business days from the date the loan number is assigned and before the
lender signs the Authorization for SBA. Lenders are strongly encouraged
to use www.pay.gov (see paragraph C.1 below). If the DFC does not
receive the fee within 10 business days after the processing center issues
the loan number, SBA cancels the guaranty.
e) THE DUE DATE FOR GUARANTY FEE PAYMENT MAY NOT BE
WAIVED OR EXTENDED even if the disbursement period is extended.
2. The lender may charge the guaranty fee to the borrower after the loan is
approved for short term loans or after initial disbursement for loans with
maturities in excess of 12 months. However, the first disbursement may not be
made primarily for the purpose of paying the guaranty fee. The Borrower may
use loan proceeds to pay the guaranty fee. If the borrower plans to use the loan
proceeds to pay the guaranty fee, the Authorization must include a Use of
Proceeds category for either payment of the guaranty fee or general working
capital. Note: When an escrow closing is used, the lender may charge the
borrower the guaranty fee only when all loan funds have been disbursed to the
borrower from the escrow account.
C. Method of Guaranty Fee Payment
1. Lenders must submit the guaranty fee either electronically or by check to SBA
DFC. SBA strongly encourages lenders to submit all guaranty fees
electronically, including payment through www.pay.gov. When using
www.pay.gov, select ―form type 1544‖ and select ―guaranty.‖ The loan must
162 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
have been approved and an SBA loan number issued in order to use
www.pay.gov.
2. In the following circumstances, the lender must submit payment of the fee with
the application or request for action to the appropriate processing or servicing
center:
a) Short term loans;
b) Loans where the SBA share is being increased;
c) Loans whose maturity is being extended from 12 months or less to over 12
months;
d) Loans where the guaranty is being reinstated because it was previously
cancelled due to non-payment of the fee.
In these cases, if the fee does not accompany the application or request for
action, SBA will not consider the request.
D. If the Fee Is Not Paid
If the guaranty fee is not paid within 90 days, the guaranty will be cancelled.
1. Notification of Fee Requirement
The Authorization is the lender’s notification that a guaranty fee is due and
payable within 90 days of approval. SBA may, but is not required to, inform the
lender when the guaranty fee has not been received by SBA within the required
time frame. Neither the issuance of any notice of non-payment by SBA nor the
receipt of any notice of non-payment by the lender waives the lender’s
obligation to pay the fee within 90 days of approval. In addition, the obligation
to pay the guaranty fee to SBA is not contingent upon the Borrower having paid
the fee to the lender.
2. Notice of Cancellation of Guaranty
If DFC has not received the full guaranty fee by the due date, on the 91st day
after loan approval SBA will issue a ―Notice of Overdue Guaranty Fee.‖ IF
DFC has not received the full guaranty fee by the 120th day after loan approval,
on the 121st day SBA will cancel the guaranty and issue a ―Notice of
Cancellation of Guaranty.‖
3. When reviewing a lender’s continued participation in any of SBA’s loan
programs, SBA will consider a lender’s failure to remit required guaranty fees
in a timely manner.
E. Reinstatement of Guaranty After Cancellation
If SBA cancelled its guaranty because the lender did not pay the guaranty fee, the
lender may request that SBA consider reinstating its guaranty. The lender must
submit a written request to the appropriate SBA Commercial Loan Servicing Center
and must include the following (see SOP 50 50 4, Chapter 10):
1. SBA Loan Number and the SBA Loan Name;
2. A remittance of the full guaranty fee owed with the SBA Loan No. and the SBA
Loan Name written on the remittance;
Effective Date: October 1, 2011 163
Subpart B SOP 50 10 5(D)
3. A certification that there has been no un-remedied adverse change in the
financial condition, organization, operations, or fixed assets of the Borrower or
Operating Company since the date of application for guaranty;
4. If the loan has been disbursed in whole or in part, a certification that the loan is
current, the lender has been reporting the loan on all 1502 monthly reports since
the loan was disbursed, and the lender has been paying the SBA on-going
guaranty fee in a timely manner on this loan; and
5. A complete written explanation as to why the lender failed to pay the guaranty
fee and what the lender has done to correct any deficiencies in its procedures.
Note: A history of failure to pay required guaranty fees will impact a lender’s
participation in SBA programs with delegated authority such as PLP or SBA Express.
F. Additional Guaranty Fee for Loan Increases
1. When a 7(a) loan is increased, additional appropriations are committed, and an
additional Guaranty fee is due. The additional fee is based on the rules in effect
at the time the loan was originally approved. Therefore, the amount of the
additional guaranty fee due for an increase will equal what the guaranty fee
would have been if the increase was part of the original loan amount, less the
amount of the original fee (if already remitted).
2. The additional guaranty fee associated with the increase must be submitted to
and received by the SBA Commercial Loan Servicing Center (CLSC)
processing the request for increase. Without the additional fee, the request will
not be considered.
G. Additional Guaranty Fee for Extensions of Short Term Loans
1. When the maturity of a short term 7(a) loan is extended beyond 12 months, an
additional guaranty fee is due. (Lenders may contact the appropriate SBA CLSC
(or the Office of International Trade for EWCP loans) for assistance.) The
additional fee must accompany the request to extend the maturity past 12
months. The lender may charge the additional fee to the borrower after the
lender has received notice from SBA that the maturity extension has been
approved.
2. No additional guaranty fees will be owed for loans extended beyond their
original maturity date when SBA determines the extension is to effect collection
and no new funds are disbursed, regardless of the original maturity.
H. Guaranty Fee Refunds (13 CFR 120.220(c))
1. Short term loans--the guaranty fee will be refunded only if:
a) The loan application is withdrawn by the lender prior to approval by SBA;
b) SBA declines to guarantee the loan; or
c) SBA approves the loan but substantially changes the loan terms and the
modified terms are unacceptable to the lender. In this case, the lender must
request a refund in writing within 30 calendar days of SBA's approval.
2. Loans with a maturity in excess of 12 months:
a) The guaranty fee is based on the amount that SBA has approved prior to
the loan being closed and initially disbursed. Any request by the lender to
164 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
decrease the approved amount must be approved by SBA with a date that
is prior to the date the loan is closed and initially disbursed by the lender
in order for the guaranty fee payable to be adjusted downward. SBA Form
2237 must be submitted by the lender to the appropriate SBA CLSC for an
adjustment to the approved amount of the loan and guaranty fee. On loans
that have been initially disbursed, the guaranty fee associated with any
increase approved by SBA must be paid to SBA, whether or not the
increase is subsequently cancelled.
(1) Full refund: The guaranty fee for a loan with a maturity in excess of
12 months may be refunded only when the loan has not been closed
and initially disbursed and the lender submits a written request to
SBA to cancel. Once a loan with a maturity exceeding 12 months has
been initially disbursed, no refund is permitted.
(2) Partial refund: If SBA approves the cancellation of a portion of the
loan prior to the loan being closed and initially disbursed, SBA will
adjust the guaranty fee payable to reflect the new loan amount and
refund the excess amount if the fee has already been paid. If the loan
has been closed and initially disbursed, no refund is permitted.
I. Guaranty Fee Calculation for Multiple Loans Within 90 Days
1. Whenever one borrower, including any affiliate, receives an approval for more
than one loan (with a maturity exceeding 12 months) within 90 days of each
other, the loans will be treated as if they were one loan for purposes of
determining the percentage of guaranty and for determining the amount of the
guaranty fees.
2. Because the guaranty fee is based on the amount of the SBA share, the lender
must calculate the fee based on the combined SBA shares of all SBA business
loans to one borrower, including affiliates, approved within 90 days of each
other. (Loans with a maturity of 12 months or less are not included in this
calculation.)
3. When two loans are approved within 90 days of each other, the applicable fee
for the second loan will equal the amount of the fee that would have been
charged had the two loans been combined, less the amount of the fee on the first
loan.
4. When the applicant receives both a short and long term 7(a) loan, the percentage
of guaranty is calculated as if the loans are combined, but the guaranty fee is
based solely on the maturity of each loan.
5. If a short term loan that was made within 90 days of a long term loan is renewed
and the maturity is extended beyond 12 months, the guaranty fee calculated at
the time of renewal would equal the fee that would have been charged if both
loans were originally long term. The amount owed SBA at the time of renewal
would equal the recalculated guaranty fee less the amount paid at the time of
original approval.
6. This rule also applies to any subsequent increases to either of the loans, even if
one of the loans subsequently is paid in full.
Effective Date: October 1, 2011 165
Subpart B SOP 50 10 5(D)
VI. OTHER FEES (13 CFR 120.221)
SBA QUICK REFERENCE CHART No. 6
TYPE OF FEE AMOUNT NOTES
SBA On-Going Guaranty Fee A percentage of the outstanding Paid by lender and cannot be
balance of the guaranteed passed on to the Borrower.
portion. The fee is set at time of (See A below)
approval.
Fees for Packaging and Other Amount deemed reasonable and Can be paid by lender or borrower
Services customary by the local SBA and can be included in the loan
office for the market area amount. (See B below)
Extraordinary Servicing Fee Not to exceed 2%, except under Primarily for construction
the EWCP and Working servicing needs, field
Capital CAPLines. inspections and asset-based
lending costs. (See C below)
Out-of-Pocket Expenses All direct costs associated with Necessary expenses must be a
collateral instrument result of a requirement of SBA
recordation, appraisals, policy. (See D below.)
environmental reports or other
closing costs.
Late Payment Fee Not to exceed 5% of the regular Must be delinquent more than 10
loan payment days. (See E below)
Subsidy Recoupment Fee 5%, 3% or 1% of the amount of Fee paid to SBA on loans with a
the prepayment maturity of 15 years or more
when the borrower prepays
25% or more of its loan in any
one year during the first three
(3) years of the loan term. (See
F below)
Assumption Fee Not to exceed 1% of the principal Fee may be paid by the seller or
balance outstanding at time of assumptor. (See g below)
assumption
A. Lender’s Annual Service Fee (―SBA On-Going Guaranty Fee‖) (13 CFR 120.220(f))
1. Lenders are required to pay SBA an annual service fee (―on-going guaranty
fee‖). This fee is set at the time of loan approval and based on the outstanding
principal balance of the guaranteed portion of each loan. SBA specifies the
amount of the fee each fiscal year for all loans approved during that year. This
fee cannot be charged to the borrower. With the exception noted for EWCP
loans in paragraph 2 below, lenders pay this fee on a monthly basis when
reporting the status of the loans on SBA Form 1502. (For further guidance on
SBA Form 1502 reporting, see Chapter 8, Paragraph IV of this SOP.) SBA may
charge the lender a late fee if the on-going guaranty fee is not paid timely.
Note: The fee will be listed in the Authorization and, unless SBA drafts and
executes the Authorization, it is the lender's responsibility to ensure that the
166 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
Authorization includes the correct fee.
2. EWCP Loans: For EWCP loans approved after September 27, 2010, the lender
may choose one of the following options for payment of the EWCP Ongoing
Fee only. Either option (monthly or annually) will result in payment of the
same total amount of EWCP Ongoing Fee on each EWCP loan. Regardless of
which payment option is chosen, the lender must continue to submit, on a
monthly basis, the lender’s 1502 Report on all 7(a) loans in the lender’s
portfolio, including all EWCP loans.
a) Option 1 – Monthly Payment of EWCP Ongoing Fee
Option 1 allows Lenders to pay the EWCP Ongoing Fee monthly along
with other 7(a) loan ongoing servicing fees to Colson with the required
1502 Report. Because EWCP loans may be a small percentage of the
Lender’s 7(a) portfolio, Option 1 allows Lenders to voluntarily pay the
EWCP Ongoing Fee on each EWCP loan on a monthly basis along with
the rest of their 7(a) portfolio.
b) Option 2 – Annual Payment of EWCP Ongoing Fee
Lenders may pay the EWCP Ongoing Fee on each EWCP loan annually
by selecting Option 2. Lenders selecting Option 2 will receive an annual
invoice on each EWCP loan from SBA’s DFC. The EWCP loan balance
reported by the Lender on the monthly 1502 Reports for the EWCP loan
will allow DFC to compute the EWCP Ongoing Fee amount to be billed
annually.
The vast majority of EWCP loans have a maturity of 12 months or less;
however, EWCP loans may have a maturity of up to 36 months. For
EWCP loans with a maturity of 12 months or less, Lenders will receive
one EWCP Ongoing Fee invoice after maturity. For EWCP loans with a
maturity in excess of 12 months and not more than 24 months, Lenders
will receive a EWCP Ongoing Fee invoice 12 months after closing and
again after maturity. For EWCP loans with a maturity greater than 24
months, Lenders will receive a EWCP Ongoing Fee invoice 12 months
after closing, 24 months after closing and again after maturity.
The DFC will mail the Lender an EWCP Ongoing Fee invoice on each
EWCP loan within 60 days of each 12-month interval on the EWCP loan
and payment will be due within 30 days of the date of the invoice. The
invoice will be for the EWCP Ongoing Fee amount owing for the previous
12 months, or shorter period for loans maturing prior to the end of the 12-
month period. Lenders will be given instructions on the invoice to make
payment using the Pay.gov online payment process.
Colson will send monthly EWCP reports to DFC and SBA’s Office of
International Trade (OIT). This report will track information on each
EWCP loan by Lender, including but not limited to the following:
Effective Date: October 1, 2011 167
Subpart B SOP 50 10 5(D)
(1) Whether the Lender is submitting 1502 Reports on EWCP loans as
required;
(2) When annual invoices are to be sent; and
(3) The accrued amount to be billed for the EWCP Ongoing Fee for
each EWCP loan.
The DFC will send a monthly report to OIT and SBA’s Office of Credit
Risk Management reporting any Lenders that are delinquent on payments
of invoiced EWCP Ongoing Fees. OIT will be responsible (through
delegation to the USEAC Regional Managers) for monitoring Lenders in
regards to submitting the required 1502 Reports and the payment of the
required EWCP Ongoing Fees. A lender’s failure to pay any of the fees
(and any interest and penalties that are subsequently charged by SBA due
to a lender’s delinquent payment) may result in SBA’s decision to suspend
or revoke a lender’s eligibility to participate in SBA’s 7(a) program or to
limit a lender’s delegated authority.
B. Fees for Packaging and Other Services
1. The lender or a third party may charge a Small Business Applicant fees for
packaging and other services. ―Packaging services‖ includes assisting the Small
Business Applicant with completing the application, preparing a business plan,
cash flow projections, and other documents related to the application. ―Other
services‖ includes consulting as to what financing is needed and what type,
broker or referral fees. The fees must be reasonable and customary for the
services actually performed and may not be a percentage of the loan amount. A
standard fee charged to all Small Business Applicants is not acceptable.
2. Prior to the services being provided, the lender must advise the Small Business
Applicant in writing that the applicant is not required to obtain or pay for
unwanted services. If fees are charged to the Small Business Applicant, an SBA
Form 159(7a) must be completed.
3. A lender cannot charge a Small Business Applicant for the lender’s costs
associated with underwriting the loan including the completion by the lender of
SBA’s application forms and lender’s analysis. In addition, if the lender pays a
third party to assist the lender with the completion of the application forms and
the analysis, the lender cannot pass this cost onto the Small Business Applicant.
4. SBA may review these fees at any time. Lenders and third parties must refund
any fee considered unreasonable by SBA. (See paragraph X.C. below for further
guidance.)
C. Extraordinary Servicing Fee
1. A lender cannot charge the borrower a servicing fee on an SBA-guaranteed loan
unless the servicing fee is to cover expenses for extraordinary servicing
requirements connected with the loan. Such a fee may not exceed 2% per year
on the outstanding balance of the part requiring special servicing. Examples of
extraordinary servicing fees include amounts to service construction loans or
monitor accounts receivable and inventory collateral in asset-based lending.
168 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
Under no circumstances may the fee exceed 2% of the loan amount EXCEPT
under the EWCP or Working Capital CAPLine programs. In these programs,
the fee must be reasonable and prudent based on the level of extraordinary
effort required. In addition, if the lender charges an extraordinary servicing fee
on its similarly-sized, non-SBA guaranteed commercial loans, it cannot charge a
higher fee on its SBA-guaranteed loans.
2. Lenders must obtain SBA’s prior written approval for these fees. Lender must
include the fees to be charged to administer the loan/line in its credit
memorandum. Lenders submitting applications under delegated authority must
enter the amount of the fee to be charged in E-Tran and certify that the fee is
reasonable and prudent based on the level of extraordinary effort required.
SBA’s issuance of a loan number will constitute its prior written approval of the
fees, subject to SBA’s subsequent review of the fees for reasonableness. SBA
will review such fees when conducting lender oversight activities and at time of
guaranty purchase. If SBA determines the fee is excessive, the lender must
reduce the fee to an amount SBA deems reasonable, refund any sum in excess
of that amount to the borrower, and refrain from charging or collecting from the
borrower any funds in excess of the amount SBA deems reasonable. SBA’s
guaranty does not extend to extraordinary servicing fees and, at time of
guaranty purchase, SBA will not pay any portion of such fees.
3. The following actions do not qualify as extraordinary servicing and therefore a
participating lender is prohibited from collecting fees for these services:
a) Changing the installment amount to avoid circumstances where the
required payment amount will not be sufficient to pay the loan in full by
the maturity date;
b) Changing the installment amount after a deferment;
c) Providing the release or exchange of collateral (standard out-of-pocket
expenses such as recordation fees are permitted); or
d) Any modification to the repayment terms of the note.
4. Past due financial statements: SBA does not permit a lender to charge a default
interest rate or a separate servicing fee for past due financial statements.
Lenders should make note in their loan files as to the attempts it has made
(following prudent lending standards) to obtain the required financial
statements. At some point the borrower usually requires some kind of servicing
action by the lender. At that time the lender can require the past due financial
statements.
D. Out-of-Pocket Expenses
1. Lenders may be reimbursed by the borrower for all direct costs including UCC
filings or recording fees, photocopying, delivery charges, collateral appraisals
and environmental impact reports that are obtained in compliance with SBA
policy, and other direct charges related to loan closing. These costs must be
itemized and kept in the loan file for SBA’s possible review. The costs of
software used to prepare SBA loan documents cannot be passed on to a Small
Business Applicant.
Effective Date: October 1, 2011 169
Subpart B SOP 50 10 5(D)
2.Lenders may not be reimbursed by the Small Business Applicant for work
performed by lender’s in-house counsel.
3. Direct costs associated with document preparation in connection with the loan
closing do not need to be reported in SBA Form 159(7a).
E. Late Payment Fee
Lenders may charge the borrower a late payment fee not to exceed 5% of the regular
loan payment when the borrower is more than 10 days delinquent on its regularly
scheduled payment. The fee is the property of the lender and is not shared with the
investor if the loan is sold into the Secondary Market. SBA’s guaranty does not
extend to late fees and, at time of guaranty purchase, SBA will not pay any portion of
such fees.
F. Subsidy Recoupment Fee
For loans with a maturity of 15 years or longer, the borrower must pay to SBA a
Subsidy Recoupment Fee when the borrower voluntarily prepays 25% or more of its
loan in any one year during the first 3 years after first disbursement. The fee is 5% of
the prepayment amount during the first year, 3% the second year, and 1% in the third
year. If the lender believes that the prepayment of the loan is not voluntary, the lender
may submit a request for a determination, with the lender’s supporting analysis, to the
appropriate CLSC. The CLSC will submit the request, along with its recommendation
to the D/FA. Only the D/FA or designee can make the determination that a
prepayment is involuntary.
G. Assumption Fee
1. In the case of an assumption, SBA does not require a new guaranty fee, and lien
positions are often maintained eliminating the need for recording fees. As an
incentive for a lender to retain an existing loan, SBA allows a lender to charge
an assumption fee that is consistent with its assumption fee charged on its non-
SBA guaranteed loans. The fee must be reasonable in relation to services
provide and cannot exceed 1% of the principal balance outstanding at time of
assumption. SBA’s guaranty does not extend to assumption fees and, at time of
guaranty purchase, SBA will not pay any portion of such fees.
2. This fee may be paid by the seller or the assumptor. Lenders should review
SBA’s SOP 50 50, Loan Servicing, for procedures to process an assumption
request.
H. SBA Express, Export Express and Patriot Express Fee Policy
1. The SBA guaranty and on-going servicing fees are the same for SBA Express,
Export Express and Patriot Express as for standard 7(a) loans. The policy
regarding packaging fees is the same as for standard 7(a) loans. In addition, the
lender may charge the same fees for SBA Express, Export Express and Patriot
Express loans as it charges for its similarly-sized non-SBA guaranteed
commercial loans as long as the fees are directly related to the service provided,
are reasonable and customary for the services performed, and are not based on a
percentage of the loan amount. Examples include application fees and
reasonable transaction fees such as cash advance fees, late fees, returned check
170 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
charges, currency conversion fees, over limit fees (assuming the borrower did
not exceed SBA’s approved loan amount), and organizational change fees. If
packaging or application fees are charged, they must be disclosed on SBA Form
159(7a).
2. As with standard 7(a) loans, lenders may not charge servicing fees unless the
fees are to compensate for extraordinary servicing requirements connected with
the loan; for example, monitoring the levels of accounts receivable for a line of
credit.
3. Renewal fees are not permitted.
4. SBA reserves the right to disallow fees that are not customary and/or which do
not bear a relationship to the actual service provided. Also, if the lender requests
that SBA honor its guaranty on an SBA Express, Export Express or Patriot
Express loan, with the exception of the SBA guaranty fee, the Agency will not
purchase any portion of the loan balance that consists of fees charged to the
borrower.
VII. PROHIBITED FEES (13 CFR 120.222)
The lender or its associate may not:
A. Require the applicant or borrower to pay the lender, a lender associate, or any party
designated by either, any fees or charges for goods or services, including insurance,
as a condition for obtaining an SBA guaranteed loan;
B. Charge the borrower any commitment, bonus, origination, broker, commission,
referral or similar fees;
C. Charge points or add-on interest;
D. Share any premium received from the sale of an SBA-guaranteed loan in the
Secondary Market with a Service Provider, packager, or other loan-referral source; or
E. Charge borrowers for legal services, unless they are hourly charges for requested
services actually rendered. The lender or its associate may not pass on to the
applicant/borrower any cost of legal services not calculated on an hourly basis for
services provided in connection with the applicant/borrower’s transaction.
VIII. DISCLOSURE OF FEES AND LENDER EXPENSES (13 CFR Part 103; 120.221;
120.222)
A. Disclosure of Fees and Identification of Agents
Section 13 of the Small Business Act (15 U.S.C. §642) requires that a Small Business
Applicant identify the names of persons engaged by or on behalf of the Small
Business Applicant for the purpose of expediting the application and the fees paid or
to be paid to any such person. SBA regulations at 13 CFR 103.5 require any agent to
execute and provide to SBA a compensation agreement (―Agreement‖). Each
Agreement governs the compensation charged for services rendered or to be rendered
to the Small Business Applicant or lender in any matter involving SBA assistance.
―Agent‖ means an authorized representative, including an attorney, accountant,
Effective Date: October 1, 2011 171
Subpart B SOP 50 10 5(D)
consultant, packager, lender service provider, or any other person representing an
applicant or participant by conducting business with SBA.
B. SBA Form 159(7a) ―Fee Disclosure Form and Compensation Agreement‖
1. The Small Business Applicant or the lender, depending on who paid or will pay
the Agent, must use SBA Form 159(7a), ―Fee Disclosure Form and
Compensation Agreement,‖ to document the fees. The Small Business
Applicant, the Agent and the lender must sign the SBA Form 159(7a). A
separate SBA Form 159(7a) must be executed for each Agent.
2. Information on this form will be used to monitor the Agents, fees charged by
Agents, and the relationship between Agents and lenders. Lenders must make
sure that all of the appropriate data fields on SBA Form 159(7a) are completed.
3. The following are not considered Agents for purposes of this Agreement and,
therefore, are not required to complete SBA Form 159(7a):
a) Applicant’s accountant for the preparation of financial statements required
by the applicant in the normal course of business and not related to the
loan application;
b) A state-certified or state-licensed appraiser employed by the lender to
appraise collateral in connection with the SBA loan;
c) An environmental professional employed by the lender to conduct an
environmental assessment of the collateral in connection with an SBA
loan;
d) Any attorney in connection with the SBA loan closing; and
e) A real estate agent who is receiving a commission for the sale of real
estate in connection with the SBA loan.
4. The lender must inform the applicant in writing that the applicant does not have
to employ an Agent or representative (including the lender) to assist the
applicant with the loan application. If an applicant employs an Agent or
representative, the fee paid must bear a reasonable relationship to the services
actually performed. The SBA does not allow contingency fees (fees paid only if
the loan is approved) or charges for services which are not reasonably necessary
in connection with an application.
5. If the total compensation exceeds $2,500, the compensation must be itemized.
6. Lenders must submit SBA Form 159(7a) to Colson on loans that involve
payment of fees, including, but not limited to, those covering any packaging
fees charged by the participating lender or where the lender paid the loan agent
fee. This submission is required only once after there has been an initial
disbursement on the loan and should be submitted in conjunction with a lender’s
1502 report for the month. The information may be submitted to Colson either
by facsimile or by electronic document imaging utilizing either the Portable
Document Format (.pdf) or the Tagged Information Format (.tif). Lenders may
either fax the document to Colson at (718) 315-5170 or email the pdf/tif file to
Form159@colsonservices.com. Lenders are required to retain an original
signature version of the form in their files for compliance review purposes.
172 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
IX. AGENTS
A. SBA regulations at 13 CFR Part 103 govern the activities of Agents, the disclosure of
fees, and the circumstances that would result in revocation or suspension.
1. Agent – (13 CFR 103.1(a))
a) SBA defines an ―Agent‖ to mean an authorized representative, including
an attorney, accountant, consultant, packager, lender service provider, or
any other person representing an applicant or participant by conducting
business with SBA.
b) For lender service providers SBA approves the written agreement between
the lender and the lender service provider, thus SBA Form 159(7a) is not
required for the services provided by the lender service provider to the
lender. (13 CFR 103.5(c)) Fees paid by the lender to the lender service
provider cannot be passed onto the Small Business Applicant other than
for reasonable costs associated with assisting the Small Business
Applicant with its portion of the application (loan packaging).
c) For all other Agents paid by either a Small Business Applicant or a lender,
an SBA Form 159(7a) must be completed and signed by the Small
Business Applicant and the lender. For each Agent paid by the Small
Business Applicant to assist it in connection with its application, the
Agent also must complete and sign the form. When an Agent is paid by
the lender, the lender must identify the Agent on SBA Form 159(7a) and
the lender and Small Business Applicant must sign the form.
d) The only situation where an Agent can receive compensation from both
the lender and the Small Business Applicant is when the Agent is
providing different services by providing packaging services to the Small
Business Applicant and receiving a referral fee from the lender. (13 CFR
103.4(g))
e) The SBA does not allow contingency fees (fees paid only if the loan is
approved) or charges for services which are not reasonably necessary in
connection with an application.
2. Referral Agents – (13 CFR 103.1(f))
―Referral Agent‖ means a person or entity that identifies and refers an applicant
to a lender or a lender to an applicant. The referral agent may be employed and
compensated by either an applicant or a lender. Each referral agent, including
loan packagers, must disclose the name of its customer and all fees charged in
connection with the SBA loan transaction on SBA Form 159(7a).
3. Lender Service Provider – (13 CFR 103.1(d))
a) ―Lender Service Provider‖ means an Agent who carries out lender
functions in originating, disbursing, servicing, or liquidating a specific
SBA business loan or loan portfolio for compensation from the lender.
b) A lender must have a continuing ability to evaluate, process, close,
service, liquidate and litigate small business loans. (13 CFR 120.410) A
lender may contract with a third party (Lender Service Provider (LSP)) to
Effective Date: October 1, 2011 173
Subpart B SOP 50 10 5(D)
assist the lender with one or more of these functions. However, the lender
itself, not the LSP, must be able to demonstrate that it has day-to-day
responsibility for evaluating, processing, closing, disbursing, servicing,
liquidating and litigating its SBA portfolio. SBA determines whether or
not an agent is a LSP on a loan-by-loan basis by reviewing the
relationship it establishes with a lender and the services it provides. If an
Agent qualifies as an LSP, a formal agreement between the Agent and
lender is required and must be approved by SBA. (See Paragraph X.D.
below for further guidance on LSP agreements.)
c) All participating lenders must submit each LSP agreement to the LGPC
for review and approval. Lenders may submit the agreements to
LSPagreements@sba.gov. After SBA approves an LSP agreement, if
there are any changes to the agreement, the lender must submit the revised
agreement to SBA for review and approval.
d) District Offices will send all existing LSP agreements that have been
approved by the district offices to the LGPC to ensure compliance with
SBA Loan Program Requirements. If any changes have been made to a
previously-approved LSP agreement, the lender must submit the revised
agreement to the LGPC for review and approval.
e) SBA will investigate any complaint by a,Small Business Applicant, lender
or any other participant in an SBA program, concerning the activity,
services completed, or fees charged by any lender service provider.
f) SBA reserves the right to audit compliance with any SBA-approved LSP
agreement.
4. Packager – (13 CFR 103.1(e))
a) ―Packager‖ means an Agent who is employed and compensated by a
Small Business Applicant or lender to prepare the Applicant’s application
for financial assistance from SBA. The packager may be the lender.
b) For 7(a) loans, if a CDC employee performs packaging or loan referral
services within the scope of their CDC employment, both the CDC and
the employee are agents. If a CDC employee acts as a packager or referral
agent outside the scope of his or her employment, the CDC is not
considered an agent.
B. Agents and Privacy Act Considerations
Private information about a loan cannot be discussed with anyone who claims to be
an Agent for a Small Business Applicant, Participant, or lender without evidence of
representation. Proprietary information is protected by the Right to Financial Privacy
Act and the Privacy Act. Without proper authorization, SBA and participating lenders
may not discuss private information with even a spouse or other close relative of the
Applicant.
C. Reporting Data on Agents through E-Tran
SBA is required to collect certain information regarding the involvement of Agents in
applications for financial assistance from SBA. For each loan submitted through E-
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SOP 50 10 5(D) Subpart B
Tran, lenders must identify whether an Agent was involved in any way with the
transaction, and, if so, provide the name, street address, city, state, zip code and
phone number of the Agent.
D. Employment of Agent Initiated by Small Business Applicant
Lenders and Agents must clearly inform any Small Business Applicant that the SBA
does not require the use of an Agent for packaging or referring a loan application.
When a Small Business Applicant employs an Agent:
1. The Agent may bill and be paid by the Small Business Applicant for providing
packaging services as long as compensation is reasonable and customary for
those services; the compensation is not based on a percentage of the loan
amount; and the compensation is not contingent on the loan being approved.
2. The Agent who works for a Small Business Applicant as a packager may also
work as a loan referral agent for the Small Business Applicant and receive a
referral fee from the Small Business Applicant.
3. The Agent may be a loan referral agent for a lender and a packager for a Small
Business Applicant, provided both the Small Business Applicant and the lender
are aware of both relationships, and the Agent does not receive a referral fee
from the Small Business Applicant or a packaging fee from the lender.
4. SBA Form 159(7a) must be completed by the Agent and the Small Business
Applicant for all fees paid by the Small Business Applicant.
E. Employment of Agent by Lender (not an LSP)
1. When a lender has decided to approve a loan application and needs assistance
with the preparation of the paperwork for the application to SBA, the loan
closing, or preparation of the loan to sell it on the Secondary Market, the lender
may use an Agent.
2. The compensation for these services must be reasonable and customary for the
services actually provided; cannot be based on a percentage of the loan amount;
and cannot be contingent upon the loan being approved.
3. The Agent must bill and be paid by the lender for all services and the lender
may not pass these charges through to the Small Business Applicant under any
circumstances.
X. WHO MAY CONDUCT BUSINESS WITH SBA (13 CFR 103.2)
A. Any person or entity applying for SBA assistance does not need an Agent to conduct
business with SBA. The term ―conduct business with SBA‖ is defined at 13 CFR
103.1(b).
1. Those Agents debarred under the SBA or Government-wide debarment
regulations may not conduct business with SBA. SBA may require that an
Agent supply written evidence of his or her authority to act on behalf of an
applicant or lender as a condition of revealing any information about the
applicant’s or lender’s current or prior dealings with the SBA. Lenders may
Effective Date: October 1, 2011 175
Subpart B SOP 50 10 5(D)
consult the Excluded Parties List System (EPLS) to determine if an Agent has
been debarred or suspended by SBA or another federal agency. (www.epls.gov.)
2. SBA may, for good cause, suspend or revoke the privilege of an Agent to
conduct business with the government. The suspension or revocation remains in
effect during any administrative proceedings under SBA regulations at 13 CFR
Part 134. The meaning of ―good cause‖ may be found at 13 CFR 103.4.
B. Illegal Activity of an Agent Must Be Reported
Lenders should report any illegal activity of Agents to the Office of the Inspector
General, Attention: Assistant Inspector General for Investigations. Any substantiating
evidence should be included when contacting the Office of the Inspector General.
C. Review of Agent Fees
1. Lenders must review the Agent’s services and related fees to determine if the
fees are necessary and reasonable when:
a) There is an indication from a third party that an Agent’s fees might be
excessive; or
b) When an Applicant complains about the fees charged by an Agent.
2. In cases where fees appear to be unreasonable, Lenders should contact the
D/OCRM to report the fees.
3. If an SBA investigation determines an Agent fee is excessive, the Agent must
reduce the fee to an amount SBA deems reasonable, refund any sum in excess
of that amount to the Applicant, and refrain from charging or collecting from
the Applicant any funds in excess of the amount SBA deems reasonable.
D. Lender Service Provider Agreements
A Lender Service Provider (LSP) Agreement is an agreement between a lender and
an Agent which performs specified duties on behalf of the lender. SBA views LSP
Agreements as a means of permitting a lender to acquire staff for a particular activity
through a contract rather than employing those same people directly. However, the
lender itself, not the LSP, must be able to demonstrate that it has day-to-day
responsibility for evaluating, processing, closing, servicing, liquidating and litigating
its SBA portfolio. LSP Agreements are not SBA forms but each agreement must
include the following:
1. Services: The contract must specifically state what services will be performed
by the LSP.
2. Lender’s responsibility: There must be a statement that the lender has full
responsibility for all loan decisions regarding SBA applications including
approvals, closings, disbursements, servicing actions and due diligence. The
LSP only provides assistance to the lender.
3. Compensation: The compensation must be specifically explained as to what will
be charged for each type of service and must state that the fees are for services
actually performed.
a) Services related to loan packaging, processing and assistance with
Secondary Market sales must be charged on an hourly basis. These fees
176 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
cannot be based on a percentage of the loan amount or on whether the loan
is approved.
b) Services related to loan servicing may be based on a percentage of the
loan balance.
c) The contract must state that all compensation paid to the LSP will be paid
by the lender and that the LSP is prohibited from charging the Small
Business Applicant for the same services.
d) The lender and the LSP cannot share in any Secondary Market premium.
e) The billing for loan packaging or for other loan processing services must
identify the Small Business Applicant’s name.
4. Term: The full term of the contract including options must be stated in order for
SBA to determine if it is reasonable. In addition, the contract must clearly
identify terms and conditions satisfactory to SBA that permit the lender or the
LSP to terminate the contract prior to its expiration date on a reasonable basis
(usually 30 – 60 days).
5. There must be a statement that:
a) The lender and the LSP will not engage in the sharing of any Secondary
Market premium.
b) The LSP will not assume a portion of the risk of the un-guaranteed portion
of any loan.
c) The agreement is binding on any affiliates and successors of the LSP and
the lender.
d) Discloses any prior or existing relationship other than the contractual one
created by the agreement or that no such relationship exists.
e) The agreement is subject to all applicable laws, regulations, and policies
including all SBA Loan Program Requirements.
6. The contract must not evidence any actual or apparent conflict of interest or
self-dealing on the part of any of the lender’s officers, management or staff.
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Subpart B SOP 50 10 5(D)
CHAPTER 4: CREDIT STANDARDS, COLLATERAL AND ENVIRONMENTAL
POLICIES
I. CREDITWORTHINESS/CREDIT UNDERWRITING
A. Credit Standards (13 CFR 120.150)
Lenders must analyze each application in a commercially reasonable manner,
consistent with prudent lending standards.
On SBA-guaranteed loans, the cash flow of the Small Business Applicant is the
primary source of repayment, not the liquidation of collateral. Thus, if the lender’s
financial analysis demonstrates that the Small Business 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.
1. The lender’s analysis must include:
a) A description of the history and nature of the business.
b) A description of and comments on the business plan including financial
condition of the business, need for the business in the area (if new) and
competition.
c) A discussion of the owners’ and managers’ relevant experience in the type
of business, as well as their personal credit histories.
d) A financial analysis of the Small Business Applicant’s current balance
sheet before and after the loan to include any required adjustments such as
any equity injection, including a discussion of its adequacy, or stand-by
debt.
e) A financial analysis of repayment ability based on historical income
statements and/or tax returns (if an existing business) and projections,
including the reasonableness of the supporting assumptions.
f) A ratio analysis of the financial statements including comments on any
trends and a comparison with industry averages.
g) An analysis of collateral adequacy, including an evaluation of the
collateral and lien positions offered as well as liquidation values. (For
further guidance, please see SOP 50 51, Loan Liquidation and Acquired
Property.)
h) A discussion of lender's credit experience with the applicant and a review
of business credit reports.
i) The effect any affiliates (as defined in 13 CFR Part 121) may have on the
ultimate repayment ability of the applicant.
j) A site visit consistent with the lender’s internal policy for similarly sized
non-SBA guaranteed commercial loans. (See also Chapter 2, Paragraph
IV.H.7.a)(2) of this Subpart and Paragraph II.C.4 of this Chapter.)
k) A discussion of whether the operating business is the subject of any
Federal, State or local citations (including probation), or other actions
which would preclude it from normal business operations.
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SOP 50 10 5(D) Subpart B
l) Other relevant information (for example, if the application involves a
franchise, lender must review the franchise agreement and all related
documents including the franchise disclosure document and any credit
information provided such as the number of failed franchisees and cash
flow projections provided by the franchisor).
2. For SBA’s Small/Rural Lender Advantage Initiative (S/RLA), the lender’s
analysis must meet the requirements set forth below in place of the lender’s
analysis described in 1 above. (SBA Form 2301, Part B.) All S/RLA loan
applications are submitted to SBA for a final determination on credit and
eligibility will have to meet the requirements set forth below. In addition, such
lenders will have to use the application procedures and documentation set forth
in Chapter 6, Paragraph I.A. of this Subpart for such loans.
a) For S/RLA loans, the lender must submit SBA Form 2301, Parts A, B and
C, as well as the lender’s credit memorandum. The lender’s credit
memorandum must meet reasonable and prudent industry standards,
including, at a minimum:
(1) Description of the history and nature of the business;
(2) Description of and comments on the business plan including:
(a) Management experience of principal(s), particularly in the
industry;
(b) Financial condition of the business; and
(c) Nature of any competition;
(3) Spread of proforma Business Balance Sheet (current business
balance sheet + changes in assets and liabilities as a result of the
loan, other debt, any required equity injection and use of proceeds);
(4) Ratio calculations (based on the proforma Balance Sheet and
historical and projected Income Statements) for the following
financial ratio benchmarks: Current Ratio, Debt/Tangible Net
Worth, Debt Service Coverage, and other ratios the lender considers
significant for the business/industry (e.g., inventory turnover,
receivables turnover, and payables turnover, etc.);
(5) Analysis of working capital adequacy to support projected sales
growth in next 12 months;
(6) Analysis/calculation of cash flow relative to debt service:
(a) Show how historical cash flow would cover total debt service
after the SBA loan. (Lenders may use ―rule of thumb‖ cash
flow, defined as earnings before interest and taxes, plus
depreciation and amortization, less total debt service. Each
component (including total cash flow) must be shown.); and
(b) Show how projected cash flow covers debt service after the
SBA loan. (Lenders may use ―rule of thumb‖ cash flow as
defined above.) Also, provide an analysis of the
reasonableness of the assumptions supporting the projected
cash flow.
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Subpart B SOP 50 10 5(D)
(7) Collateral adequacy assessment (using liquidation values) to offset
risk of default;
(8) Explanation of and justification for the refinancing of any debts as
part of the loan request, particularly Same Institution Debt;
(9) Discussion of credit analysis, including lender’s rationale for
recommending approval;
(10) Discussion of any:
(a) Seller financing;
(b) Stand-by agreements;
(c) 90+day delinquencies; and/or
(d) Trade disputes;
(11) For a change of ownership, discussion/analysis of business valuation
(based on generally accepted valuation methods used for the
pertinent industry) used to support the purchase price. (See
Paragraph II.C.5 of this chapter for business valuation
requirements.);
(12) Discussion of any judgments or bankruptcy filings; and
(13) Any additional information the lender considers relevant to the credit
decision.
b) Some loans may involve complicating eligibility factors, such as affiliates,
refinancing, citizenship, excessive personal resources, etc., that will
require additional information and possibly discussion between SBA and
the lender and/or applicant. As a result, under S/RLA the Agency will
provide participating lenders with specialized support and assistance in
assessing an applicant’s eligibility. This includes an enhanced Eligibility
Questionnaire (SBA Form 2301, Part C), which will help lenders quickly
and easily assess most applicants’ eligibility for an SBA loan.
(1) The Questionnaire has been established to address each eligibility
issue with a statement which, for the applicant to be immediately
eligible, must be answered with a ―True.‖
(2) In cases where ―False‖ is chosen, the lender will need to provide to
SBA additional information. In such cases, lenders should contact
the LGPC at 7aquestions@sba.gov for additional guidance. (Note:
Lenders should review and complete the entire questionnaire for the
applicant/business before contacting the LGPC.)
(3) The lender is required to complete the questionnaire after the
Applicant and lender have reviewed the statements and the lender
must sign the questionnaire.
3. For SBA’s Small Loan Advantage (SLA) initiative, the lender’s analysis must
meet the requirements set forth in paragraph 2 above for S/RLA. In addition,
such lenders will have to use the application procedures and documentation set
forth in Chapter 6, Paragraph I.A. of this Subpart for such loans.
180 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
4. EWCP Credit Standards
a) Lender must submit a credit memorandum with the application and
analyze each EWCP request in a commercially reasonable manner,
consistent with prudent lending standards. EWCP loans are self-
liquidating loans and the conversion of the export trading assets to cash is
the primary source of repayment. The lender’s financial analysis should
pay particular attention to the applicant’s foreign payment terms and the
impact on the applicant’s cash cycle. Lender must specify whether the
request is for a single transaction-specific loan, revolving line of credit
(single or multiple transactions), or an asset based loan.
b) The lender’s analysis must include the following:
(1) An explanation of the use of proceeds and benefits of the loan
guaranty, including details of the underlying transaction(s) for which
the loan is needed and the country(ies) where the buyer(s) is(are)
located;
(2) A description of the history and nature of the business;
(3) A description of and comments on the business plan, including the
financial condition of the business;
(4) A discussion of the owners’ and managers’ relevant experience in
the type of business, including a discussion of any life insurance that
will be required;
(5) A financial analysis of the applicant’s current balance sheet;
(6) A financial analysis of repayment ability based on the applicant’s
cash cycle;
(7) A ratio analysis of the financial statements, including comments on
any trends and a comparison with industry averages;
(8) An analysis of the collateral adequacy, including a discussion of the
payment terms accepted by the applicant and the proposed allowable
foreign receivables to be financed with the EWCP loan;
(9) If the applicant intends to seek advances on ―open account,
uninsured foreign receivables,‖ an analysis on the suitability of these
foreign receivables; and
(10) A discussion of lender’s credit experience with the applicant and a
review of business and personal credit reports.
5. SBA Express, Export Express and Patriot Express Credit Standards
a) SBA has authorized SBA Express, Export Express and Patriot Express
lenders to make the credit decision without prior SBA review. The credit
analysis must demonstrate that there is a reasonable assurance of
repayment. The lender is required to use appropriate, prudent and
generally accepted industry credit analysis processes and procedures
(which may include credit scoring), and these procedures must generally
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Subpart B SOP 50 10 5(D)
be consistent with those used for its similarly sized non-SBA guaranteed
commercial loans. Lenders that do not use credit scoring for their
similarly sized non-SBA guaranteed commercial loans may not use credit
scoring for SBA Express, Export Express or Patriot Express. If lenders
use credit scoring for their similarly-sized non-SBA guaranteed
commercial loans, they must comply with Paragraph 4. below.
b) Lenders must not make an SBA Express, Export Express or Patriot
Express loan which would be inconsistent with SBA’s ―credit not
available elsewhere‖ standard (see Subpart B, Chapter 2 of this SOP), i.e.,
lenders must not make an SBA guaranteed loan that would be available on
reasonable terms from either the lender itself or another source without an
SBA guaranty.
c) The credit decision on SBA Express, Export Express and Patriot Express
loans, including how much to factor in a past bankruptcy or whether to
require an equity injection, is left to the business judgment of the lender.
Also, if the lender requires an equity injection and, as part of its standard
processes for non-SBA guaranteed loans verifies the equity injection, it
must do so for SBA Express, Export Express and Patriot Express loans.
(Lenders must adhere to the requirement that owners of 20% or more must
inject any liquid assets into the business above certain thresholds. See
Subpart B, Chapter 2 of this SOP, regarding the Utilization of Personal
Resources.) While the credit decision is left to the business judgment of
the lender, early loan defaults will be reviewed by SBA pursuant to SOP
50-51.
6. Credit Scoring
As noted above, the lender is required to use appropriate, prudent, and generally
accepted industry credit analysis processes and procedures. This may include a
business credit scoring model (not just consumer credit scores) as long as the
lender is using the business credit scoring model for its similarly sized non-SBA
guaranteed commercial loans. Although SBLCs do not make non-SBA
guaranteed loans, SBA has determined that they may use credit scoring. Lenders
must validate (and document) with appropriate and accepted statistical
methodologies that their business credit scoring model is predictive of loan
performance, and they must provide that documentation to SBA upon request.
In addition, the business credit scoring results must be documented in each loan
file and available for SBA review.
7. SBA Review of Lender’s Credit Analysis
a) SBA’s review of the lender’s credit analysis must conclude that the lender
identified through its credit underwriting that there is a reasonable
expectation that the borrower will repay the loan in a timely manner and
not default and that collateral meets SBA’s collateral requirements.
b) For Standard 7(a), SBA reviews the lender’s credit analysis at time of loan
processing and may ask for and receive additional information beyond the
initial submission requirements. This is because SBA is making the final
credit determination on these loans.
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SOP 50 10 5(D) Subpart B
c) SBA has authorized PLP, SBA Express, Export Express, and Patriot
Express lenders to make credit decisions without SBA review prior to loan
approval. The PLP, SBA Express, Export Express, and Patriot Express
lender’s analysis is subject to SBA’s review and determination of
adequacy, however, when the lender requests SBA to purchase its
guaranty or when SBA is conducting a review of the lender.
B. Equity Requirements
1. Amount of Equity
Adequate equity is important to ensure the long term survival of a business.
The lender must determine if the equity and the pro forma debt-to-worth are
acceptable based on the factors related to that type of business, experience of
the management and the level of competition in the market area. The lender
must include in its credit analysis a detailed discussion of the required equity
and its adequacy.
2. Source of Equity Injection
a) The following may be considered as Equity Injection:
(1) Cash that is NOT borrowed.
(2) Cash that IS borrowed only under the limited circumstances outlined
below:
(a) SBA considers funds borrowed through the use of personal
credit for injection into the business as additional debt, not
equity, with one exception.
(b) If the Small Business Applicant can demonstrate repayment of
this personal loan from sources other than the cash flow of the
business, the cash injection may be considered equity. (Note:
The salary of the business owner does not qualify.)
(c) A lender must disclose any loan made to an individual for the
purpose of providing an equity injection into the business. The
lender’s credit analysis must address the impact on the personal
and business balance sheets and sources of repayment for such
side loans. If the SBA participating lender is providing the
personal loan, the lender must submit the application for
guaranty through standard 7(a) processing.
(3) Assets other than Cash
Lenders must carefully evaluate the value of assets other than cash
that are injected by owners or principals. Therefore, an appraisal or
other valuation by an independent third party is required if the
valuation of the fixed assets is greater than the depreciated value (net
book value). A valuation of the fixed assets provided as part of a
business valuation will not meet these requirements, except as part of
a going concern appraisal as described in paragraph II.C.5.e) below.
(4) Standby debt
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Subpart B SOP 50 10 5(D)
Debt that is on full standby (no payments of principal or interest for
the term of the SBA-guaranteed loan) may be considered acceptable
equity for SBA’s purposes. A debt that is on partial standby (interest
payments only being made) may be considered equity when there is
adequate historical business cash flow available to make the
payments. A copy of the note must be attached to the standby
agreement. (See Chapter 5, Paragraph IV of this Subpart for
additional discussion of standby agreements.)
b) The following may not be considered as Equity Injection:
(1) Value or cost of education; and
(2) Funds that are borrowed and do not meet the exception noted in
subparagraph a)(2) above.
3. Documentation of Equity Injection
a) Lenders must verify the injection prior to disbursing loan proceeds and
must maintain evidence of such verification in their loan files. Lenders
are expected to use reasonable and prudent efforts to verify that equity is
injected and used as intended, and failure to do so may warrant a repair or
partial/full denial. Lenders must submit with each purchase request on a
loan for which the loan authorization required an equity injection,
documentation to show that they verified the equity injection. Verifying a
cash injection requires the following documentation:
(1) A copy of a check or wire transfer along with evidence that the
check or wire was processed showing the funds were moved into the
borrower’s account or escrow;
(2) A copy of the statements of account for the account from which the
funds are being withdrawn for each of the two most recent months
prior to disbursement showing that the funds were available; and
(3) A subsequent statement of the borrower’s account showing that the
funds were deposited or a copy of an escrow settlement statement
showing the use of the cash.
b) A promissory note, ―gift letter‖ or financial statement is not sufficient
evidence of cash injection without corroborating evidence consistent with
paragraph a) above.
II. COLLATERAL
A. General Requirements
1. Adequacy of Collateral
(1) 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 Small Business Applicants that
demonstrate repayment ability but lack adequate collateral to fully
repay the loan if the loan defaults.
(2) SBA does not permit its guaranty to be used as a substitute for
available collateral. SBA requires that the lender collateralize the
184 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
loan to the maximum extent possible up to the loan amount. If
business assets do not fully secure the loan, the lender must take
available personal assets of the principals as collateral.
(3) When loan proceeds will be used to purchase assets, a first security
interest in those assets must be obtained. When loan proceeds will
be used to refinance existing debt, the loan must be secured with at
least the same security as the debt that is being refinanced.
(4) SBA considers a loan as ―fully secured‖ if the lender has taken
security interests in all available assets with a combined "liquidation
value‖ up to the loan amount. ―Liquidation value‖ is the amount
expected to be realized if the lender took possession after a loan
default and sold the asset after conducting a reasonable search for a
buyer and after deducting the costs of taking possession, preserving
and marketing the asset, less the value of any existing liens.
Business operating and trading assets may be assigned a value of up
to 10% of the current book value for the calculation of ―fully
secured‖ because any assets in this category have negligible value in
a liquidation. If the Small Business Applicant anticipates obtaining
other financing secured by these assets and the SBA-guaranteed loan
will be in a subordinate lien position on that financing, then these
assets should not be included in the calculation to determine if the
SBA-guaranteed loan is ―fully secured.‖ Further, if there is a
collateral shortfall on the SBA-guaranteed loan and there is other
available collateral, the lender will be required to take such
collateral, including personal assets of the principals.
(5) Liens on a personal residence or investment property may be limited
to 150% of the equity in the collateral, rather than the loan amount, if
there are tax implications associated with the lien amount in the
particular state where the lien is filed.
2. Personal Residence as Collateral
SBA does not require a lender to collateralize a loan with a personal residence
to meet the ―fully secured‖ definition when the equity in the residence is less
than 25% of the property’s fair market value.
3. Other Personally-Held Assets
Personally-held, publicly-traded stocks, bonds, mutual funds, certificates of
deposit and investment property not included in a retirement account may be
pledged to meet SBA’s collateral requirements. For publicly-traded assets that
are within the borrower’s allowable exemption under the personal resources rule
(see Chapter 2 of this Subpart), lenders must attempt to obtain a lien on these
assets if the loan is not fully secured. If the lender is unable to perfect a lien on
these assets, the lender must document its file as to the steps taken to obtain the
lien and include any supporting documentation.
4. Assets owned by the Small Business Applicant’s Spouse
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Subpart B SOP 50 10 5(D)
When an individual alone or an individual and his or her spouse together own
20% or more of the Small Business Applicant, the lender must consider taking
as collateral assets that are owned individually, as well as assets owned jointly.
This is true even when the spouse has no ownership interest in the business.
The only exception would be if there is a legal impediment to the owner’s
ability to use the spouse’s individually-owned property to secure the loan.
B. Guaranties (13 CFR 120.160(a))
1. Personal Guaranties: Individuals who own 20% or more of a Small Business
Applicant must provide an unlimited full personal guaranty. (SBA Form 148)
Lenders may require other individuals to guarantee the loan as well. The
guaranty by owners of less than 20% may be limited or full. If a limited
guarantee is used, lender must choose one of the payment limitation options in
SBA Form 148L (Unconditional Limited Guarantee) and specify the option in
the Authorization.
a) Lender must obtain a personal financial statement from all individuals
guaranteeing the loan.
b) Guaranty may be secured or unsecured but must meet SBA’s collateral
requirements. If the loan is not fully collateralized by business assets,
available personal assets must be pledged to secure the guaranty.
c) Guaranty of Spouse:
(1) Each spouse owning 5% or more of a Small Business Applicant must
personally guarantee the loan in full when the combined ownership
interest of both spouses is 20% or more
(2) For a non-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.
2. Corporate/Other Guaranties: All entities that own 20% or more of a Small
Business Applicant must provide an unlimited full guaranty. If the entity that
owns 20% or more of the Small Business Applicant is a trust (revocable or
irrevocable), the trust must guarantee the loan with the trustee executing the
guaranty on behalf of the trust and providing the certifications required in
Chapter 2, Paragraph III.F.3. 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.
3. Each loan must be guaranteed by at least one individual or entity: If no one
individual or entity owns 20% or more of the Small Business Applicant, 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 paragraph 2
immediately above must be met.
4. Reducing Ownership Interest
a) Any person subject to the personal guaranty requirements 6 months prior
to the date of the loan application would continue to be subject to the
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SOP 50 10 5(D) Subpart B
requirements even if that person has changed his or her ownership interest
to less than 20%.
b) The only exception to the 6-month rule is when that person completely
divests his or her interest prior to the date of application. Complete
divestiture includes divestiture of all ownership interest and severance of
any relationship with the Small Business Applicant (and any associated
Eligible Passive Concern) 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 a Small Business Applicant, the Plan or
Account cannot guarantee the loan. The Plan or Account must meet all
applicable IRS eligibility 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.
b) The members of the ESOP are not required to personally guarantee the
debt, but all owners of the Small Business Applicant who hold an
ownership interest of 20% or more outside the ESOP are subject to SBA’s
personal guaranty requirements.
c) 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.)
C. Appraisal and Business Valuation Requirements
The regulations governing appraisal requirements are set forth at 13 CFR 120.160(b):
1. Commercial Real Estate
SBA requires a real estate appraisal if the SBA-guaranteed loan is greater than
$250,000 AND is collateralized by commercial real property.
A lender should follow its own regulator’s requirements for real estate
appraisals for loans of $250,000 or less.
a) The appraiser must be:
(1) independent and have no appearance of a conflict of interest (such as
a direct or indirect financial or other interest in the property or
transaction); and
(2) either State-licensed or State-certified with the following exception:
when the commercial property’s estimated value is over $1,000,000,
the appraiser must be State-certified.
b) In order for the appraiser to identify the scope of work appropriately, the
appraisal must identify the lender as the client and/or an intended user of
the appraisal, as those terms are defined in the Uniform Standards of
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Subpart B SOP 50 10 5(D)
Professional Appraisal Practice (USPAP). The lender may not use an
appraisal prepared for the applicant. The cost may be passed on to the
Small Business Applicant.
c) The appraisal must be prepared in compliance with USPAP and use one of
the following options:
(1) a self–contained appraisal report; or
(2) a summary appraisal report.
d) If the loan will be used to finance new construction or the substantial
renovation of an existing building, the appraisal must estimate what the
market value will be at completion of construction. (―Substantial‖ means
rehabilitation expenses of more than one-third of the purchase price or fair
market value at the time of the application.) After construction is
completed, lender must obtain a statement from the appraiser that the
building was built with only minor deviations (if any) from the plans and
specifications upon which the original estimate of value was based. If the
appraiser cannot provide such a statement, then the lender may not close
the loan without SBA’s prior written permission.
e) If the SBA guaranteed loan was used to cover the construction period, the
lender must notify the appropriate SBA CLSC of any deviation(s) and
work with the SBA CLSC to determine an appropriate course of action,
including the securing of additional collateral. The lender’s notification to
SBA must provide a sufficient understanding of the reasons for the
differences in values between the estimated and actual values as well as a
recommendation as to a remedy to offset the difference in values such as
additional equity or additional collateral. If additional collateral is being
required, the lender must identify both the fair market and liquidation
values of the additional collateral. If the appraiser is unable to issue a
statement that the building was built with only minor deviations (if any)
from the plans and specifications upon which the original estimate of
value was based, but is able to provide a new appraisal demonstrating that
the market value meets or exceeds the original estimate of value, then no
additional action on the part of the lender is necessary.
f) If the loan will be used to acquire an existing building that does not
require construction, the appraiser should estimate market value on an as-
is basis. If the appraiser estimates the value other than on an as-is basis,
the narrative must include an explanation of why the as-is basis was not
used.
g) If the appraisal engagement letter asks the appraiser for a business
enterprise or going concern value, the appraiser must allocate separate
values to the individual components of the transaction including land,
building, equipment and business (including intangible assets). When the
collateral is a special purpose property, the appraiser must be experienced
in the particular industry.
188 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
h) When valuing the collateral, the lender must not include the contributory
value of any rental income or the value of any intangible assets contained
in the appraisal.
i) An appraisal may be submitted as part of the loan application to assist
with the underwriting or as part of the loan closing. In no case may the
lender rely on an appraisal that was prepared more than 12 months prior to
the date of the application.
(1) If the lender is going to require the appraisal at closing, the loan
application must include an estimate of the value of the real estate
and the estimate must be identified in the loan authorization with the
requirement for an appraisal that supports the estimated value at time
of closing.
(2) If at time of closing the appraisal:
(a) Comes in at 90% or more of the estimated value, the lender
may close the loan but must include a written explanation as to
why the appraisal is less than the estimated value in the loan
file; or
(b) Comes in at less than 90% of estimated value, the lender may
not close the loan without SBA’s prior written permission (see
exception below for PLP lenders). The lender’s justification to
SBA must provide a sufficient understanding of the reasons for
the differences in values between the estimated and actual
values as well as a recommendation as to a remedy to offset the
difference in values such as additional equity or additional
collateral. If additional collateral is being required, the lender
must identify both the fair market and liquidation values of the
additional collateral.
(3) Exception for PLP Lenders:
PLP lenders are permitted to close a loan when the appraisal is less
than 90% of the estimated value but the lender must include a
written justification as part of its file that may be reviewed by SBA
at time of guaranty purchase or when SBA is reviewing the lender.
The justification must include a thorough analysis by the lender of
the reasons for the appraisal being low and an explanation as to what
steps the lender took to offset the risk to SBA from the low appraisal
such as additional equity or additional collateral.
2. Non-commercial real estate or real estate securing a personal guaranty
SBA has no specific requirements for non-commercial real estate (such as a
residence) or real estate (commercial or non-commercial) taken as collateral to
secure a personal guaranty.
3. Other Fixed Assets
If the valuation of fixed assets is greater than their depreciated value (net book
value), an independent appraisal by a qualified individual must be obtained by
Effective Date: October 1, 2011 189
Subpart B SOP 50 10 5(D)
the lender to support the higher valuation. A valuation of the fixed assets
provided as part of a business valuation will not meet these requirements, except
as part of a going concern appraisal as described in paragraph 5.e) below.
4. Additional Appraisal Requirements for Changes of Ownership
For businesses that have been transferred within 36 months prior to the date of
the loan application and the loan amount is more than $250,000, SBA requires:
a) An appraisal of the business real estate that meets the appraisal
requirements above; and
b) Either a "review" of the appraisal by another appraiser selected directly by
the lender or a site visit by a senior member of the lender's staff. The
lender must document the file and include the date of the visit and a
description of the items reviewed on site.
5. Business Valuation Requirements – Change of Ownership
Determining the value of a business (not including real estate which is
separately valued through an appraisal) is the key component to the analysis of
any loan application for a change of ownership. An accurate business valuation
is required because the change in ownership will result in new debt unrelated to
business operations and create an intangible asset. A business valuation assists
the buyer in making a determination that the seller’s asking price is supported
by historic operations and permits the buyer to make a reasonable return on his
or her investment.
a) If the amount being financed (including any 7(a), 504, seller, or other
financing) minus the appraised value of real estate and/or equipment being
financed is $250,000 or less, the lender may perform its own valuation of
the business being sold, unless the lender’s internal policies and
procedures require an independent business valuation from a qualified
source.
b) If the amount being financed minus the appraised value of real estate
and/or equipment is greater than $250,000 or if there is a close
relationship between the buyer and seller (for example, transactions
between family members or business partners), the lender must obtain an
independent business valuation from a qualified source.
c) A ―qualified source‖ is an individual who regularly receives compensation
for business valuations and is either:
(1) A licensed Certified Public Accountant (CPA) that performs the
business valuation in accordance with the ―Statement on Standards
for Valuation Services‖ published by the American Institute of
Certified Public Accountants (AICPA); or
(2) Accredited by one of the following recognized organizations:
(a) Accredited Senior Appraiser (ASA) accredited through the
American Society of Appraisers;
(b) Certified Business Appraiser (CBA) accredited through the
Institute of Business Appraisers;
190 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(c) Accredited in Business Valuation (ABV) accredited through
the American Institute of Certified Public Accountants;
(d) Certified Valuation Analyst (CVA) accredited through the
National Association of Certified Valuation Analysts; and
(e) Accredited Valuation Analyst (AVA) accredited through the
National Association of Certified Valuation Analysts.
d) In order for the individual performing the business valuation to identify
the scope of work appropriately, the business valuation must be requested
by and prepared for the lender. The scope of work should identify
whether the transaction is an asset purchase or stock purchase and be
specific enough for the individual performing the business valuation to
know what is included in the sale (including any assumed debt). The
business valuation must include the individual’s opinion of value, the
qualifications of the individual performing the valuation and their
signature certifying to the information contained in the valuation. The
lender may not use a business valuation prepared for the applicant or the
seller. The cost of the valuation may be passed on to the Small Business
Applicant.
e) The lender may use a going concern appraisal to meet these requirements
if:
(1) The loan proceeds will be used to purchase a special use property;
(2) The appraisal is performed by an appraiser experienced in the
particular industry and who is either a ―qualified source‖ as
identified in paragraph 5.c) above or has successfully completed the
Appraisal Institute course ―Fundamentals of Separating Real and
Personal Property from Intangible Business Assets‖; and
(3) The appraisal allocates separate values to the individual components
of the transaction including land, building, equipment and intangible
assets.
f) If the application will be submitted to the LGPC, the business valuation
must be submitted as part of the loan application. (See Chapter 6,
Paragraph I.A.1. of this Subpart.)
g) If the application will be submitted under delegated authority, the business
valuation may be obtained and reviewed after the issuance of an SBA loan
number and prior to closing. If the lender is processing the application
under delegated authority and requests the business valuation after
issuance of an SBA loan number, the credit memorandum must include an
estimate of the value of the business. The credit memorandum must be
updated after receipt of the business valuation to include a comparison of
the loan amount and the business valuation.
h) Any amount in excess of the business valuation may not be financed with
the SBA guaranteed loan.
Effective Date: October 1, 2011 191
Subpart B SOP 50 10 5(D)
i) Lender Verification of Business Valuation Financial Data
Lender must obtain a copy of the financial information relied upon by the
individual who performed the business valuation and verify that
information against the seller’s IRS transcripts to ensure the accuracy of
the information.
D. CAPLine Collateral Requirements
1. The CAPLines programs listed below have specific collateral requirements as
follows:
a) For Working Capital CAPLines:
(1) If the lender will disburse the line based on a borrowing base
certificate, the lender must obtain a first lien on the applicant’s
working/trading assets (i.e., accounts receivable, inventory).
(2) If the lender will not use a borrowing base certificate 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 personal
assets of the principals as collateral to ensure there is a 1:1 collateral
ratio. (See Chapter 7, Paragraph IV.H.4 of this subpart for further
guidance.)
b) For Builder’s CAPLines:
(1) 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. If the 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-established payment.
(2) Do 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 in a 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.
c) For Contract CAPLines
(1) 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
192 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
proper UCC filing. As discussed in Chapter 7, Paragraph IV.H.2 of
this Subpart, however, there may be exceptions to when an
assignment is required.
(2) The lender may take additional collateral in accordance with its
policies and procedures governing its similarly sized, non-SBA
guaranteed commercial lines of credit.
2. All liens must be perfected and the lien position verified prior to the initial
disbursement. For seasonal, contract or builder loans which 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.
3. The requirements for personal guaranties are the same as for any other 7(a)
program.
E. SBA Express and Export Express Collateral Requirements
1. For loans of $25,000 or less, lenders are not required to take collateral; and
2. For loans over $25,000, the lender must follow the collateral policies and
procedures that it has established and implemented for its similarly sized non-
SBA guaranteed commercial loans, 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.
3. Lender’s collateral policies must be commercially reasonable and prudent.
4. With respect to collateral taken, lenders must use commercially reasonable and
prudent practices to identify collateral items, which would include conformance
with procedures at least as thorough as those used for their similarly-sized non-
SBA guaranteed commercial loans.
F. Patriot Express Collateral Requirements
1. For loans of $25,000 or less, lenders are not required to take collateral;
2. For loans greater than $25,000 but less than $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. (Lenders must
substantiate their existing, applicable collateral policies in their loan file and
will be required to certify their conformance with those policies for any
purchase request.)
3. For loans of $350,000 or more, lender must follow standard 7(a) collateral
policy.
4. Lender’s collateral policies must be commercially reasonable and prudent.
5. With respect to collateral taken, lenders must use commercially reasonable and
prudent practices to identify collateral items, which would include conformance
with procedures at least as thorough as those used for their non-SBA guaranteed
commercial loans.
G. EWCP Collateral Requirements
1. EWCP loans shall be secured by no less than a first lien on all collateral
associated with the transactions financed. This includes at least the export
Effective Date: October 1, 2011 193
Subpart B SOP 50 10 5(D)
inventory and receivables, assignment of credit insurance, letters of credit
proceeds, and contract proceeds as applicable.
2. In general, the inventory produced and the receivables generated by the export
sales financed will be considered to provide adequate collateral coverage. SBA,
however, may require additional collateral by placing a lien on other business
assets.
3. Standby Letters of Credit: SBA also requires additional collateral if EWCP
loan proceeds are used to support the issuance of a standby letter of credit. In
such situations, the Borrower 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 life of the
standby letter of credit. SBA may, at its discretion, allow export inventory or
export accounts receivable or other acceptable collateral to replace the cash
deposit; however, the lender must obtain SBA’s prior written approval of any
such substitution. In addition, the EWCP Authorization Boilerplate contains
specific provisions related to standby letters of credit.
4. Receivables generated from sales to foreign purchasers are not considered a
foreign asset and may be taken as collateral.
5. Personal guarantee of all 20% or more owners is generally required, but may be
waived by the D/FA.
H. International Trade Loan Collateral Requirements
1. The lender is required to take a first lien on the assets financed with IT loan
proceeds or other assets of the small business concern. 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 small business concern, 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 (1) the loan in the first lien position was not made at or about the
same time as the IT loan (―piggyback financing‖), and (2) 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. 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.5 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.
194 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
III. ENVIRONMENTAL POLICIES AND PROCEDURES
These environmental policies and procedures apply to all lenders on all 7(a)
loan programs, except where otherwise indicated. Failure to comply with the
provisions of this paragraph may result in a denial of SBA’s guaranty.
A. Definitions
Terms that are capitalized in this paragraph are defined in the ―Definitions‖ section in
Appendix 2.
B. The Risks of Environmental Contamination include:
1. The costs of Remediation could impair the borrower’s ability to repay the loan
and/or continue to operate the business;
2. The value and marketability of the Property could be diminished. If the
borrower defaults, lender or SBA might have to abandon the Property to avoid
liability or accept a reduced price for the Property;
3. Lender or SBA could be liable for environmental clean-up costs and third-party
damage claims arising from Contamination if title to contaminated Property is
taken as a result of foreclosure proceedings and/or lender or SBA exercises
operational control at the Property; and
4. If a Governmental Entity cleans a site, it may be able to file a lien for recovery
of its costs which may be superior to SBA’s lien.
C. Environmental Investigations
SBA requires an Environmental Investigation of all commercial Property upon which
a security interest such as a mortgage, deed of trust, or leasehold deed of trust is
offered as security for a loan or debenture. The type and depth of an Environmental
Investigation to be performed varies with the risks of Contamination. This paragraph
provides minimum standards. Prudent lending practices may dictate additional
Environmental Investigations or safeguards.
D. Submission of Environmental Investigation Reports
Lender (except on PLP, SBA Express, Export Express and Patriot Express loans)
must submit the Environmental Investigation Report to the SBA Center processing
the application. The requirements of this section apply to all Environmental
Investigations whether or not the report is required to be submitted to the SBA. All
Transaction Screens, Phase I and Phase II ESAs must be performed by an
Environmental Professional and be accompanied by the Reliance Letter in Appendix
3. (Note that a Reliance Letter is required even if the Environmental Investigation
Report is addressed to the lender.)
E. The Steps of an Environmental Investigation
1. NAICS Codes. For all Property except a unit in a Multi-Unit Building, Lender
must begin by making a Good Faith effort to determine the NAICS code(s) for
the Property’s current and known prior uses and compare the NAICS code(s)
to the list of environmentally sensitive industries in Appendix 4. For a unit in a
Multi-Unit Building, Lender may proceed directly to subparagraphs b)(1) and
(2) below.
Effective Date: October 1, 2011 195
Subpart B SOP 50 10 5(D)
a) If there is a NAICS code match to an environmentally sensitive industry
identified in Appendix 4, the Environmental Investigation must begin with
a Phase I, regardless of the amount of the loan.
If the NAICS code begins with 447 (gas stations with or without
convenience stores), the Environmental Investigation must begin with a
Phase I and the lender must also refer to and, if applicable, comply with
―Environmental Investigation Requirements for Gas Station Loans‖ in
Appendix 5.
b) If there is not a NAICS code match to an environmentally sensitive
industry, or if the Property is a unit in a Multi-Unit Building, the lender
must proceed as follows:
(1) If the loan amount is up to and including $150,000, the
Environmental Investigation may begin with an Environmental
Questionnaire.
(2) If the loan amount is more than $150,000, the Environmental
Investigation must, at a minimum, begin with an Environmental
Questionnaire and Records Search with Risk Assessment.
2. Environmental Questionnaire Results. If the Environmental Questionnaire
reveals it is unlikely that there is environmental contamination at the Property
and that no further investigation is warranted, lender must submit the results of
the Environmental Investigation to SBA with recommendations and seek SBA’s
concurrence.
If at any time an Environmental Questionnaire reveals that further investigation
is warranted, lender must obtain, at a minimum, a Records Search with Risk
Assessment.
3. Environmental Questionnaire & Records Search with Risk Assessment Results
a) If the Environmental Questionnaire reveals that it is unlikely that there is
environmental contamination at the Property and that no further
investigation is warranted, and the Records Search with Risk Assessment
concludes that the Property is a ―low risk‖ for Contamination, lender must
submit the results of the Environmental Investigation to SBA with
recommendations and seek SBA’s concurrence.
b) If the Records Search with Risk Assessment concludes that the Property is
an ―elevated risk‖ or ―high risk‖ for Contamination, lender must obtain a
Phase I ESA.
4. Transaction Screen Results
a) If the Environmental Professional conducting the Transaction Screen
concludes that no further investigation is warranted, the lender must
submit the results of the Environmental Investigation to SBA with
recommendations and seek SBA’s concurrence.
b) If the Environmental Professional conducting the Transaction Screen
concludes that further investigation is warranted, the lender must obtain a
Phase I ESA.
196 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
5. Phase I ESA Results
a) If the Environmental Professional conducting the Phase I ESA concludes
that no further investigation is warranted, the lender must submit the
results of the Environmental Investigation to SBA with recommendations
and seek SBA’s concurrence.
b) If the Environmental Professional conducting the Phase I ESA concludes
that further investigation is warranted (typically a Phase II), and the lender
still wants to make the loan, the lender must proceed as recommended by
the Environmental Professional, or in the alternative submit the results of
the Environmental Investigation to the SBA with recommendations and
seek SBA’s concurrence. In general, SBA will require compliance with
all of an Environmental Professional’s recommendations (including
―housekeeping measures,‖ such as secondary containment,
decommissioning monitoring wells, sealing floor drains, etc.). In the rare
instance where an exception may be warranted, lenders must provide a
rationale for not wanting to follow the Environmental Professional’s
recommendation.
6. Phase II ESA Results
a) If the Environmental Professional conducting the Phase II ESA concludes
that no further investigation is warranted, the lender must submit the
results of the Environmental Investigation to SBA with recommendations
and seek SBA’s concurrence.
b) If the Phase II ESA reveals Contamination and the lender still wishes to
make the loan, lender must ensure that the Environmental Professional has
documented:
(1) Whether the Contamination quantities exceed the reportable or
actionable levels;
(2) Whether Remediation is necessary;
(3) An estimate of any Remediation costs (Environmental Professionals
may use ASTM E2137-01 Standard Guide for Estimating Monetary
Costs and Liabilities for Environmental Matters); and
(4) The projected completion date of any Remediation.
c) If the Environmental Investigation reveals Contamination, the lender
should determine whether disbursement is appropriate under one or more
of the factors identified in subparagraph G below, ―Approval and
Disbursement of loans when there is Contamination or Remediation at the
Property‖.
If at any stage of the Environmental Investigation SBA concurs with a lender’s
recommendation that environmental risk has been sufficiently minimized and
that no further investigation is required, the loan may be disbursed.
F. Legal Responsibilities of SBA Field Counsel and Center Counsel
With respect to environmental investigations that are required to be submitted to an
SBA Loan Processing Center, SBA loan processing personnel must obtain field
Effective Date: October 1, 2011 197
Subpart B SOP 50 10 5(D)
counsel or center counsel’s opinion as to the adequacy of an Environmental
Investigation and whether the risk of Contamination, if any, has been sufficiently
minimized.
G. Approval and Disbursement of Loans When There Is Contamination or Remediation
at the Property
Loans may not be approved or disbursed if there is known Contamination or on-going
Remediation at the Property unless the risks have been minimized to the satisfaction
of SBA Loan Processing Center personnel after consulting with and obtaining the
concurrence of SBA field counsel or center counsel. Lenders seeking loan approval
or disbursement authority despite Contamination or on-going Remediation at the
Property must submit a recommendation to SBA that includes, at a minimum, a
discussion of the following:
1. Nature and Extent of the Contamination including copies of the following
documents pertaining to the Property:
a) All relevant Environmental Investigation Reports;
b) All publicly available Governmental Entity correspondence;
2. Remediation
a) Recommended method of Remediation;
b) Status of on-going Remediation, if any;
c) Environmental Professional’s estimated cost of Remediation;
d) Environmental Professional’s estimated completion date;
e) Governmental Entity’s designation of responsible Person(s);
f) Person(s) paying for on-going Remediation;
3. Collateral Value
a) Proposed loan amount and proposed use of proceeds;
b) Appraised or the estimated value of the Property;
c) Institutional Controls and Engineering Controls, if any, and their impact
on repayment ability, collateral value and marketability of the Property;
and
4. Mitigating Factors
SBA will rely upon one or more of the following factors when deciding to
disburse before completion of Remediation or monitoring.
a) Indemnification. If any Person who possesses sufficient financial
resources to cover the costs of completing Remediation executes the SBA
Environmental Indemnification Agreement in Appendix 6, approval or
disbursement may be considered. Lender must conduct an analysis of the
proposed indemnitor to ensure that it has sufficient assets to honor an
indemnification agreement. The Third Party Indemnitor cannot be the
borrower or the operating company.
The SBA Environmental Indemnification Agreement:
(1) cannot be modified;
198 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(2) must be executed by the Borrower and (if applicable) Operating
Company;
(3) must have a copy of the Environmental Investigation Report attached
to it; and
(4) must be properly recorded in the memorandum format in Exhibit C
to Appendix 6.
All lenders (except when submitting requests through PLP, SBA Express,
Export Express and Patriot Express) must submit the finalized SBA
Environmental Indemnification Agreement to SBA for review and
approval prior to a request that SBA fund the loan.
b) Completed Remediation. If the Governmental Entity has affirmed in
writing that active Remediation is complete but additional monitoring is
required, approval or disbursement may be considered after the following
occurs: (a) monitoring results for the first year are obtained; (b) an
Environmental Professional concludes that the results show no
unacceptable increase in Contamination since Remediation; and (c)
Environmental Professional concludes that the owner/operator of the
Property is in compliance with any continuing obligations, including
activity and use limitations, Engineering and Institutional Controls, and
post-Remedial monitoring required by the Governmental Entity.
c) ―No Further Action‖. If a lender obtains a ―no further action letter‖ or
―closure letter‖ from a Governmental Entity stating that no further
Remediation or monitoring of Contamination previously found is
required, approval or disbursement may be considered.
d) ―Minimal Contamination‖. If the extent of Contamination and cost of
Remediation are de minimis in relation to the value of the Property and/or
the resources of the Person responsible for Remediation, and the
Remediation is projected to be completed within one year, approval or
disbursement may be considered. The lender should identify the
Environmental Professional that will supervise the Remediation and
discuss: (a) the nature of the Contamination; (b) the reliability of the
Remediation estimates; (c) the projected completion date; and (d) the
duration of ongoing monitoring.
e) Clean-up Funds. If lender provides evidence from a Governmental Entity
that the borrower or Property has been approved by a fund to pay for or
reimburse Remediation costs, and the amount allocated is sufficient to
cover the costs of Remediation, approval or disbursement may be
considered. Lender must also address any conditions of Remediation that
might preclude payment or reimbursement and the financial capability of
the fund.
f) Escrow Account. If an escrow account is available which (a) equals a
minimum of 150 percent of the total estimated cost of required
Remediation and (b) is controlled by a 7(a) lender or first mortgage holder
in a 504 loan as trustee, approval or disbursement may be considered. The
Effective Date: October 1, 2011 199
Subpart B SOP 50 10 5(D)
Governmental Entity must concur with the Remediation’s scope. The
Loan Authorization and escrow agreement for the escrow account must
ensure that escrow funds will only be used for Remediation costs. The
source of the escrow funds may not be SBA loan proceeds. Depending
upon the circumstances, an escrow account with more than 150 percent of
the estimated costs of Remediation may be appropriate. The escrowed
funds may be used for Remediation. Any remaining funds in the account
may not be released until the appropriate ―closure letter‖ or ―no further
action letter‖ is received or, in the case of monitoring, when all monitoring
wells related to the Property have been decommissioned.
Note: Lender’s role as trustee of the escrow account is solely to release
funds upon the satisfactory completion of Remediation work – the lender
must not control or manage the Property being Remediated.
g) Groundwater Contamination Originating from Another Site. If
groundwater Contamination on the Property is shown to have come from
another property, approval or disbursement may be considered if:
(1) Another Person with sufficient resources is performing Remediation
pursuant to a Remediation action plan that has been approved by the
appropriate Governmental Entity; or
(2) The state has laws or regulations that provide that an owner or
operator of property will not be responsible for Contamination from
another site; or
(3) The Governmental Entity provides satisfactory written assurance that
it will not hold the Property owner liable for the Contamination.
Lender should attempt to have lender and SBA included by name in
the letter along with the Property owner and future purchasers.
h) Additional or Substitute Collateral. If additional or substitute collateral is
being pledged, or an additional equity contribution is being made,
sufficient to overcome the potential loss due to Contamination, then
approval or disbursement may be considered.
i) ―Other Factor(s)‖. Lender and SBA may rely on factors other than or in
addition to the eight referenced above when considering approval or
disbursement. For example, the existence of adequate environmental
insurance, bonds, agreements not to sue present and future property
owners from the Governmental Entity, Engineering and Institutional
Controls, etc. However, reliance solely upon ―Other Factor(s)‖ requires
clearance from the SBA Environmental Committee. This requirement
extends to PLP, SBA Express, Export Express and Patriot Express
lenders.
PLP, SBA Express, Export Express and Patriot Express lenders must follow these
guidelines, but they do not have to submit documentation or obtain SBA’s
concurrence prior to approval or disbursement of the loan, unless they are relying
solely upon the ―Other Factor(s)‖ in subparagraph 4.i) above.
200 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
H. Special Use Facilities
Prudent lending practices dictate that specific additional environmental assessments
be performed for certain special use facilities. For example, Property constructed
prior to 1980 that will be used for daycare or child care centers or nursery schools or
residential care facilities occupied by children must undergo a lead risk assessment
(for lead based paint) and testing for lead in drinking water, and the results of these
assessments must be submitted to the SBA. Disbursement will not be authorized
unless the risk of lead exposure to infants and small children has been sufficiently
minimized. On-site dry cleaning facilities, which may have utilized tetrachloroethene
(PCE) and trichloroethene (TCE) in the course of their business operations, may
present significant clean-up costs if these contaminants have entered the soil or
groundwater. Prudent lending practices dictate and SBA requires that on-site dry
cleaners in operation for more than five years undergo a Phase II Environmental Site
Assessment in addition to a Phase I which would be required due to the NAICS code
match. Any Phase II performed in connection with an on-site dry cleaning facility
must be conducted by an independent Environmental Professional who holds a
current Professional Engineer’s or Professional Geologist’s license and has the
equivalent of three (3) years of full time relevant experience. Gasoline stations also
present significant clean-up costs if contaminated (for specific requirements
pertaining to gasoline stations, please refer to Appendix 5).
I. Brownfields Sites
SBA encourages the redevelopment of brownfields, and SBA loan guarantees are
available to small businesses interested in locating on revitalized brownfields.
Typically this occurs through utilization of one or more of the 9 factors in
subparagraph G.4 above.
J. Questions on SBA’s Environmental Policy and Appeals
Questions on SBA’s Environmental Policy should be directed to local field counsel
for the area where the Property is located.
Lenders who believe that an environmental decision that has been rendered by SBA is
inconsistent with this SOP may appeal the decision by forwarding a copy of the
decision, along with an explanation of how the determination is perceived to be
inconsistent with this SOP to EnvironmentalAppeals@sba.gov. (NOTE: This e-mail
address cannot receive submissions larger than 10MB. If the e-mail and attachments
exceed this size, the appeal must be sent in more than one e-mail.) Environmental
appeals, including exceptions to Agency environmental policy, will be reviewed by
the SBA Environmental Committee comprised of OGC attorneys appointed by the
Associate General Counsel for Litigation, who may consult with an environmental
engineer. The Associate General Counsel for Litigation retains the authority to
overrule decisions rendered by the SBA Environmental Committee.
Effective Date: October 1, 2011 201
Subpart B SOP 50 10 5(D)
CHAPTER 5: LOAN AUTHORIZATION
The lender sets the terms and conditions for extending credit to the borrower. SBA establishes
the terms and conditions for its loan guaranty. The Authorization is SBA's written agreement
between the SBA and the lender providing the terms and conditions under which SBA will
guarantee a business loan.
I. BASIC LOAN CONDITIONS (13 CFR 120.160)
A. SBA establishes the wording for all standard 7(a), CLP and PLP Authorization
conditions in the National Authorization Boilerplate (―the Boilerplate‖). The
conditions reflect the policies and procedures in effect at the time the Boilerplate is
issued. The Boilerplate is incorporated by reference into this SOP. If there is any
conflict between the Boilerplate and the SOP, the Boilerplate supercedes the SOP.
1. The Boilerplate contains the mandatory national standard language for all SBA
authorizations. There are separate Boilerplates for the Export Working Capital
Program (EWCP) and CAPLines. SBA Express, Export Express and Patriot
Express lenders may use the Boilerplate or the abbreviated version created for
each program.
2. The Wizard is a technical tool intended to make it easier for lenders to create
Authorizations based on the Boilerplate.
B. The latest edition of each Boilerplate can be found at www.sba.gov/for-lenders, then
click on ―Steps in SBA Lending,‖ then ―7(a) Loans,‖ then ―Approval-Authorization,‖
then ―7(a) Loan Package Templates‖ to find the list of authorizations.. The
Authorization for standard 7(a), CLP and PLP loans must use the pre-approved
conditions that are found in the Boilerplate. If the lender chooses to use the
abbreviated Authorizations for loans made under SBA Express, Export Express and
Patriot Express, the Authorization must contain at least the paragraphs included in the
form for that particular program.
C. The party responsible for drafting the Authorization is determined by the program the
loan is processed under.
Loan Program Responsible Party
Standard 7a and CAPLines (non-delegated) SBA drafts and signs the Authorization
Standard EWCP and Preliminary
Commitment Conversions SBA drafts and signs the Authorization
CLP Lender drafts, SBA finalizes and signs
PLP (including PLP-CAPLines), Lender drafts and signs on SBA’s behalf
PLP-EWCP, SBA Express
Patriot Express and Export Express
D. Processing center counsel must review and approve any Authorization that proposes
to deviate from the Boilerplate language with the following exception. PLP lenders,
including PLP-EWCP lenders, may develop Authorization conditions that are not pre-
approved in the Boilerplates and use them without prior SBA approval, provided they
are only used one time. Whenever a PLP Lender, including a PLP-EWCP lender,
202 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
develops and uses a non-standard condition, an explanation for its development must
be in the loan file.
II. INSURANCE REQUIREMENTS (13 CFR 120.160(C))
A. Hazard Insurance
1. SBA requires hazard insurance on all assets pledged as collateral.
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 contain a 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 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, Export Express and Patriot Express: If the lender does not
require hazard insurance (for example, if it would impose an undue burden on a
borrower given the small size of a loan), the lender must document the reason in
its loan file.
B. Marine Insurance
1. 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.
2. The policy must contain a Mortgagee clause providing that the interest of lender
will not be invalidated by any:
a) act, omission, or negligence of the mortgagor, owner, master, agent or
crew of the insured vessel;
b) failure to comply with any warranty or condition out of mortgagee’s
control; or
c) change in title, ownership or management of the vessel.
3. The policy must include Protection and Indemnity, Breach of Warranty, and
Pollution coverage.
Effective Date: October 1, 2011 203
Subpart B SOP 50 10 5(D)
4. The policy or endorsements must provide for at least 10 days prior written
notice to lender of policy cancellation.
C. Flood Insurance
1. SBA flood insurance requirements are based on the Standard Flood Hazard
Determination (FEMA Form 81-93). The mandatory purchase of flood
insurance requirements set forth by the National Flood Insurance Program
(NFIP) apply 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.
2. If any portion of a building that is collateral for the loan is located in a special
flood hazard area, lender must require Borrower to obtain flood insurance for
the building under the NFIP.
3. 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
Borrower to also obtain flood insurance for the Personal Property Collateral
under the NFIP.
4. 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 Borrower 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:
a) Uses prudent lending standards to determine that flood insurance is not
economically feasible or not available; and
b) 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.
5. Insurance coverage must be in amounts equal to the lesser of the insurable value
of the property or the maximum limit of coverage available.
6. 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.
D. Life Insurance
1. Lender must determine if repayment of the loan is dependent upon an owner’s
active participation in the business. In other words, if the owner dies, will the
business operations be adversely affected and the loan default? In these
situations, the lender must require life insurance unless the lender determines
due to the adequacy of collateral and/or the presence of secondary sources of
repayment that life insurance is not necessary. Lender must document this
determination in the credit memo. If the lender determines that life insurance is
not necessary and there is a loss on the loan due to the death of the owner, the
lender will be responsible for the loss.
204 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
2. The amount of life insurance required must be 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.
3. For each policy required under this paragraph, lender must obtain a collateral
assignment, identifying the lender as assignee, that is acknowledged by the
Home Office of the Insurer. The lender must assure that the borrower pays the
premiums on the policy. The lender may utilize an escrow account for the
payment of the premiums on the policy. If the lender chooses to use an escrow
account for this purpose, lender must follow the escrow policy for commercial
real estate taxes and insurance set forth in Chapter 7, Paragraph IV.B.2.c) of this
Subpart.
4. The lender may accept the pledge of an existing life insurance policy. When a
new policy is required, a decreasing term policy is most appropriate. Credit life
insurance or whole life insurance should not be required.
5. SBA Express, Export Express and Patriot Express lenders may follow their
internal policy for similarly sized non-SBA guaranteed commercial loans.
E. Other Insurance
Lender must include any other insurance appropriate to the loan, including but not
limited to:
1. Liability Insurance;
2. Product Liability Insurance;
3. Dram Shop/Host Liquor Liability Insurance;
4. Malpractice Insurance;
5. Disability Insurance;
6. Workers’ Compensation Insurance; and
7. Any State specific insurance requirements.
III. IRS TAX TRANSCRIPT/VERIFICATION OF FINANCIAL INFORMATION
A. SBA’s Tax Verification process is to determine if:
1. The Small Business Applicant filed business tax returns; and
2. The Small Business Applicant’s financial statements provided as part of the
application agree with the business tax returns submitted to the IRS.
B. For a sole proprietorship, the lender must verify the Schedule C.
C. For a change of ownership, the lender must verify the seller’s business tax returns or a
sole proprietor’s Schedule C. Where there is an acquisition of a division or a segment
of an existing business, other forms of verification may be used in lieu of the 4506-T
(e.g. Sales tax payment records).
D. Prior to first disbursement of Loan proceeds, lender must obtain:
1. Verification of Financial Information—
a) Lender must submit IRS Form 4506-T to the Internal Revenue Service to
obtain federal income tax information on Borrower, or the Operating
Effective Date: October 1, 2011 205
Subpart B SOP 50 10 5(D)
Company if the Borrower is an EPC, for the last 3 years (unless Borrower
or Operating Company is a start-up business).
b) If the business has been operating for less than 3 years, lender must obtain
the information for all years in operation.
c) This requirement does not include tax information for the most recent
fiscal year if the fiscal year-end is within 6 months of the date SBA
received the application. If the applicant has filed an extension for the
most recent fiscal year, lender must obtain a copy of the extension along
with evidence of payment of estimated taxes.
d) Lender must compare the tax data received from the IRS with the financial
data or tax returns submitted with the loan application.
e) Borrower must resolve any significant differences to the satisfaction of
lender and the appropriate SBA CLSC. Failure to resolve differences may
result in cancellation of the loan.
f) For a change of ownership, lender must verify financial information
provided by the seller of the business in the same manner as above.
g) If lender does not receive a response from the IRS or copy of the tax
transcript within 10 business days, the lender:
(1) May proceed to close and disburse the loan;
(2) Must follow-up with the IRS to obtain and verify the tax data by
resubmitting a copy of the Form 4506-T to IRS with the notation
―Second Request‖ in the top right hand side;
(3) Must document its file with a dated copy of the second submission;
and
(4) Must perform the verification and resolve any significant differences
discovered.
2. The Internal Revenue Service (IRS) has implemented a new expedited service
through which the financial community can expeditiously confirm the income
of a borrower during the processing of a loan application: Income Verification
Express Service (IVES) program. Under IVES, the IRS can electronically
provide tax return transcript, W-2 transcript and 1099 transcript information
generally within 2 business days to a third party with the consent of the
taxpayer. The transcript information is delivered to a secure mailbox based on
information received from a Form 4506-T. A $4.50 fee is imposed on each
transcript requested. It is expected that this process will replace the current
process, which requires the manual pick-up and delivery of transcripts from the
seven IRS Return and Income Verification Services (RAIVS) units located
across the country. Under the new system, transcripts will be delivered
electronically using the e-Services platform via a secure mailbox. To
participate in the IVES program, lenders will need to register and identify
employees to act as agents to receive electronic transcripts on the lender’s
behalf. To establish access to a secure mailbox, lenders will need to register,
which can be done through the following IRS website:
206 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
http://www.irs.gov/individuals/article/0,,id=161649,00.html. Additional
information on IVES is also available from this website.
3. If the IRS transcript reflects ―Record Not Found‖ for the middle year of the
three years requested, the lender has verified the other two years, AND the
Small Business Applicant has some record of either receiving a refund or
paying the taxes for the missing year, then the lender may reasonably assume
that the Small Business Applicant filed a return for the missing year. If the
lender documents all of these steps in its loan file, the lender has demonstrated
to SBA that it has made a good faith effort to satisfy the verification
requirement.
4. If the IRS advises that it has no record on the applicant, no record of year 1
and/or year 3, or the lender is unable to reconcile the IRS information to the
Small Business Applicant’s financial information, the lender must report the
issue to the appropriate SBA CLSC. If the loan has not been disbursed, either
the loan must be cancelled or the closing must be postponed until the issue is
resolved.
5. If a Small Business Applicant has not filed required federal tax returns, the
applicant is not eligible for SBA financial assistance.
6. SBA Express, Export Express and Patriot Express Programs:
a) If the lender uses business financial information to determine the
creditworthiness of an SBA loan, the lender must follow the IRS tax
verification process set out above. If the lender does not use business
financial information to determine creditworthiness, such as with some
credit scoring models, verification of tax transcripts is not required.
b) For SBA Express, Export Express and Patriot Express, lenders are
authorized to close and disburse a loan immediately if disbursement is
requested by the borrower, however, the lenders must follow-up and
verify the business financial data with IRS tax data and must document the
loan file accordingly. If a material discrepancy appears or the IRS
advises that it has no record on the applicant, the lender must report it
immediately to the appropriate SBA CLSC and document the loan file of
the action taken. The SBA will investigate the issue and may direct the
lender to secure additional information, proceed with loan processing,
rescind approval of the loan (if no disbursement has occurred), suspend
further disbursement, call the loan, or initiate recovery of any disbursed
amounts.
IV. STANDBY AGREEMENTS
A. SBA Form 155 - Standby Agreement Lender may use SBA Form 155 or its own
Standby Agreement Form. A copy of the note must be attached to the standby
agreement.
B. Standby Creditor must subordinate any lien rights in collateral securing the Loan to
lender’s rights in the collateral, and take no action against Borrower or any collateral
securing the Standby Debt without lender’s consent.
Effective Date: October 1, 2011 207
Subpart B SOP 50 10 5(D)
C. For further discussion of standby agreements, see Chapter 4, Paragraph I.B.2. of this
Subpart.
V. 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:
1. An Assignment of Lease with
a) A term including renewal options that equals or exceeds the term of the
loan; and
b) A requirement that the lessor provide a 60-day written notice of default to
the lender with option to cure the default; and
2. A Landlord’s Waiver.
B. 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.
C. If the loan proceeds will finance 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;
c) Hazard insurance proceeds resulting from damage to improvements;
d) Share in condemnation proceeds; and
4. Lender’s or assignee’s rights upon default of the tenant or termination.
D. For lease requirements concerning EPCs and OCs, see Chapter 2 of this Subpart.
E. 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 Assignment of Lease also has to be approved by the Secretary of the
Interior or his/her authorized representative.
VI. CONSTRUCTION LOAN PROVISIONS (13 CFR 120.174)
A. In the construction of a new building or an addition to an existing building, lender
must obtain:
1. Evidence of compliance with the "National Earthquake Hazards Reduction
Program Recommended Provisions for the Development of Seismic Regulations
208 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
for New Buildings" (NEHRP), or a building code that has substantially
equivalent provisions.
a) The NEHRP provisions may be found in the American Society of Civil
Engineers (ASCE) Standard 7 and the International Building Code.
b) Examples of evidence include a certificate issued by a licensed building
architect, construction engineer or similar professional, or a letter from a
state or local government agency stating that an occupancy permit is
required and that the local building codes upon which the permit is based
include the Seismic standards.
2. Lender may charge Borrower a one-time fee not to exceed 2% of the portion of
the Loan designated for construction. The actual fee must not exceed the cost of
the extra service.
B. If the construction component of an SBA-guaranteed loan is more than $350,000:
1. Prior to the commencement of any construction, lender must obtain from
Borrower:
a) Evidence that the contractor has furnished a l00% performance bond and
labor and materials payment bond;
(1) Only a corporate surety approved by the Treasury Department using
an American Institute of Architect's form or comparable coverage
may issue these bonds.
(2) Only Borrower may be named as obligee on the bonds.
b) Evidence that contractor carries appropriate Builder's Risk and Worker's
Compensation Insurance;
c) Evidence that Borrower has injected the required funds into the project
prior to disbursement of the loan, if Borrower is injecting funds into the
construction project;
d) A copy of the final plans and specifications; and
e) A copy of a Construction Contract with:
(1) An acceptable contractor at a specified price; and
(2) An agreement that Borrower will not order or permit any material
changes in the approved plans and specifications without prior
written consent of lender and the surety providing the required
bonds;
2. Lender also must:
a) Obtain evidence of Borrower’s ability to pay cost overruns or additional
construction financing expenses prior to approving any contract
modification. Lender and SBA are not obligated to increase the loan to
cover cost overruns;
b) Make interim and final inspections to determine that construction
conforms to the plans and specifications;
c) Obtain evidence that the building, when completed, will comply with all
state and local building and zoning codes, and applicable licensing and
permit requirements;
Effective Date: October 1, 2011 209
Subpart B SOP 50 10 5(D)
d) Obtain a completed SBA Form 601, Applicant's Agreement of
Compliance; and
e) Obtain lien waivers or releases from all materialmen, contractors, and
subcontractors involved in the construction.
3. SBA has granted a blanket waiver on the requirement of a performance bond
when a third party in the business of providing construction management
services controls the disbursement of the proceeds. Lender must document in
its file that the construction was completed in conformance with the plans and
specifications and that all lien waivers and releases from all materialmen,
contractors, and subcontractors involved in the construction have been obtained.
(13 CFR 120.200)
C. If the construction financing has an SBA guaranty and the construction costs will
exceed $10,000, the lender must obtain a completed SBA Form 601, Applicant's
Agreement of Compliance.
D. ―Do-it-yourself‖ construction and/or installation of machinery and equipment, or
situations where the borrower acts as its own contractor have proven to be generally
unsatisfactory and can cause problems with lien waivers and mechanics liens, causing
potential losses to lender and/or SBA. ―Do-it-yourself‖ construction and/or
installation of machinery and equipment, or situations where the borrower acts as its
own contractor may be permitted, if the lender can justify and document in the loan
file that:
1. The borrower/contractor is experienced in the type of construction and has all
appropriate licenses;
2. The cost is the same as, or less than, what an unaffiliated contractor would
charge as evidenced by 2 bids on the work; and
3. The borrower/contractor will not earn a profit on the construction.
VII. SPECIAL PROVISIONS FOR FRANCHISES
When lending to a franchise, the lender should consider obtaining an agreement from the
franchisor that:
A. Allows lender and SBA access to Franchisor’s books and records relating to
Borrower’s billing, collections and receivables;
B. Upon loan payment default or deferment, defers payment of franchise fees, royalties,
advertising, and other fees until Borrower brings loan payments current;
C. Gives lender 30 days notice of intent to terminate the Franchise Agreement; and/or
D. Gives lender an opportunity to cure any default under the franchise or lease
agreement that is given the franchisee under the same agreements.
VIII. CERTIFICATION REGARDING CHILD SUPPORT (13 CFR 120.171)
The lender must obtain certification from the borrower and any OC that no holder of 50%
or more of the borrower or OC is more than 60 days delinquent on any obligation to pay
child support.
210 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
IX. SPECIAL PROVISION FOR CAPLINES
Zero Balance Period Requirement: There is no requirement that a zero balance be
maintained for any specific time period on any CAPLines except for Seasonal CAPLines.
A ―clean up‖ period may be included in the Authorization at the lender’s option
X. MODIFYING THE AUTHORIZATION
A. For 7(a), CLP, S/RLA, SLA (non-delegated) and CAPLines (non-delegated), the
lender may request modifications to the terms and conditions of the Authorization at
any time after approval. All modification requests through final disbursement must
be approved by the LGPC. (For EWCP loans, submit the request to the appropriate
USEAC.) To request a modification:
1. Submit a written request to the LGPC that includes the name of the lender, name
of the lending officer, phone number, fax number, name of the borrower, SBA
Loan Number and the following information:
a) How it is now;
b) How it should be; and
c) Why – justification for the change and any supporting documentation.
2. Post-approval modifications (except EWCP loans) should be sent by e-mail to
7aLoanMod@sba.gov or by fax to 916-735-1975.
3. After final disbursement, modification requests must be sent to the appropriate
CLSC. (For EWCP loans, submit requests to the appropriate USEAC.)
B. For PLP (including SLA and PLP-CAPLines), PLP-EWCP, SBA Express, Export
Express and Patriot Express loans, the lender may modify the authorization under its
delegated authority but must document its file with a written explanation that includes
justification for the change and any supporting documentation.
Effective Date: October 1, 2011 211
Subpart B SOP 50 10 5(D)
CHAPTER 6: SUBMISSION OF APPLICATION FOR GUARANTY
There are several different ways to submit an application for guaranty depending on which
program the lender chooses and is authorized to use. Depending on which program is used, the
maximum guaranty percentage, the maximum loan amount, the documentation and the turn-
around time vary. This chapter describes the requirements for standard 7(a), S/RLA, CLP, PLP,
SLA, SBA Express, Export Express, Patriot Express, CAPLines and the EWCP.
The application forms for all programs include information on the number of employees at the
time of application and the number of jobs to be created and/or retained as a result of the loan.
Jobs ―created‖ means the number of full-time (or equivalent) employees that the small business
expects to hire as a result of the loan. Jobs ―retained‖ means the number of full-time (or
equivalent) employees on the payroll of the business at the time of application that will be lost if
the loan is not approved.
I. CONTENTS OF LENDER’S APPLICATION FOR GUARANTY:
A. Standard 7(a)
Centralized 7(a) Loan Submission Instructions and a checklist can be found at the
Standard 7(a) Loan Guaranty Processing Center website along with other forms,
telephone numbers and fax numbers: http://www.sba.gov/category/lender-
navigation/find-center/standard-7a-loan-guaranty-processing-center-lgpc-ca
.
For SBA’s Small/Rural Lender Advantage Initiative and Small Loan Advantage, the
procedures and required documentation will be based on the loan amount as set forth
below.
1. All standard 7(a) loan applications, except for Small/Rural Lender Advantage
Initiative loan applications of $350,000 or less and Small Loan Advantage loan
applications of $250,000 or less, must include the following:
a) SBA Form 4, Application for Loan
(1) The following requirements imposed by laws and executive orders
are included in SBA Form 4, Application for Business Loan, for
standard 7(a), CLP and PLP.
(a) Flood Plain and Wetlands Management
(i) SBA has specific requirements for providing financial
assistance to a small business located in a floodplain or a
wetland. See 13 CFR 120.172 and Executive Orders
11990 and 11988 for guidance.
(ii) Executive Orders 11990 - Executive Order 11990
requires the avoidance, to the extent possible, of adverse
impacts through the destruction or modification of
wetlands and the avoidance of direct or indirect support
of new construction in wetlands wherever there is a
practical alternative.
212 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(iii) Executive Order 11988 - Executive Order 11988 requires
SBA to minimize the risk of flood loss and to preserve
the beneficial values served by floodplains.
(b) Lead Based Paint
Refer to 13 CFR 120.173 for requirements related to the use of
lead-based paint.
(c) Earthquake Hazards (13 CFR 120.174)
Executive Order 12699, "Seismic Safety of Federal and
Federally Assisted or Regulated New Building Construction,"
applies to the Agency's loan programs. Its provisions must be
followed even in areas which traditionally do not have
earthquake activity. There are no exceptions.
(d) Coastal Barrier Protections (13 CFR 120.175)
Lender may not make any loan within the Coastal Barrier
Resource System.
(e) Compliance with Other Laws (13 CFR 120.176; and Parts
112, 113 and 117)
(i) All SBA loans are subject to all applicable laws,
including laws prohibiting discrimination on the grounds
of race, color, national origin, religion, sex, marital status,
disability or age.
(ii) For additional guidance see Chapter 2, Paragraph III.C. of
this Subpart concerning the Utilization of Personal
Resources Rule and Chapter 4 of this Subpart concerning
repayment ability, collateral and guaranties.
(f) Right to Financial Privacy Act
All applicants are notified of their rights under the Financial
Privacy Act of 1978 through the "Statements Required by
Laws and Executive Orders." The lender must obtain the
signature of each individual identified on the form.
b) SBA Form 4, Schedule A – Schedule of Collateral. Lenders may use SBA
Form 4, Schedule A or they may use their own form to list collateral and
label it ―Exhibit A.‖
c) SBA Form 912, Statement of Personal History – required of the sole
proprietor, if a sole proprietorship; all general partners and all limited
partners owning 20% or more of the equity of the firm, if a partnership;
all owners of 20% or more of the corporation and each officer and
director, if a corporation; all members owning 20% or more of the
company and each officer, director, and managing member, if a limited
liability company (LLC); and any person hired by the business to manage
day-to-day operations.
d) 7(a) Eligibility Questionnaire
Effective Date: October 1, 2011 213
Subpart B SOP 50 10 5(D)
e) Personal Financial Statement, dated within 90 days of submission to SBA,
on all owners of 20% or more (including the assets of the owner’s spouse
and any minor children), and proposed guarantors. SBA Form 413 is
available, however, lenders may use their own form.
f) Business financial statements dated within 90 days of submission to SBA,
consisting of:
(1) Year End Balance Sheet for the last three years,
(2) Year End Profit & Loss Statements for the last three years,
(3) Reconciliation of Net Worth,
(4) Interim Balance Sheet,
(5) Interim Profit & Loss Statements,
(6) Affiliate & Subsidiary financial statement requirements same as
above, and
(7) Cash flow projection – month-by-month for one year if less than
three fiscal years provided and for all loans with a term of 18 months
or less.
g) History of Business
h) Résumé of Principals
i) Copy of Lease, if applicable
j) Detailed listing of machinery and equipment to be purchased with loan
proceeds and cost quotes
k) Provide the following if real estate is to be purchased with loan proceeds:
(1) Appraisal;
(2) Lender’s environmental questionnaire;
(3) Cost breakdown; and
(4) Copy of purchase agreement.
l) Provide the following if purchasing an existing business with loan
proceeds:
(1) Copy of buy-sell agreement
(2) Copy of business valuation that meets the requirements of Chapter 4
of this Subpart;
(3) Pro forma balance sheet for the business being purchased as of the
date of transfer;
(4) Copy of seller’s financial statements for the last 3 complete fiscal
years or for the number of years in business if less than 3 years; and
(5) Interim statements no older than 90 days from date of submission to
SBA.
(6) If seller’s financial statements are not available the seller must
provide an alternate source of verifying revenues. Lender must
discuss in its credit analysis:
(a) Why financial statements are not available;
214 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(b) How the lender determined the business purchase price was
reasonable; and
(c) How the lender verified business revenue.
m) Equity Injection – explanation of type and source of applicant’s equity
injection. For further information on equity injections, see Chapter 4,
Paragraph I.B. of this Subpart.
n) Franchise – If listed on www.franchiseregistry.com a certification of
franchise documents is required. If not listed on the Registry, a copy of
the Franchise Agreement and Federal Trade Commission Disclosure
Report (FDD) of Franchisor must be submitted.
o) SBA Form 159 (7a), Fee Disclosure and Compensation Agreement, must
be completed for each Agent compensated by the applicant or lender and
RETAINED in lender’s loan file. See Chapter 3, Paragraphs VIII-IX of
this Subpart.
p) IRS Form 4506-T, Request for Copy of Tax Return – See Chapter 5,
Paragraph III. of this Subpart. Identify the date IRS Form 4506-T was sent
to IRS.
q) USCIS Form G-845, Document Verification Request – Submit a copy of
the form sent to USCIS. Prior to disbursement, lenders must verify the
USCIS status of each alien who is required to submit USCIS documents to
determine eligibility. The lender must document the findings in the loan
file. See Chapter 2, Paragraph III.E. of this Subpart.
r) SBA Form 4-I, Lender’s Application for Guaranty – must be completed in
its entirety, including pro forma balance sheet and submitted with the
following:
(1) Explanation of use of proceeds and benefits of the loan.
(2) Lender’s internal credit memorandum.
(3) Justification for new business, including change of ownership. For
new businesses and change of ownership where historical repayment
ability is not demonstrated, lender must provide a narrative
addressing the business plan and cite any areas of concern and
justification to overcome them.
(4) Business Valuation must be supplied by lender for change of
ownerships. See Chapter 4 of this Subpart for SBA’s business
valuation requirements.
s) SBA Form 1846, Statement Regarding Lobbying, must be signed and
dated by lender.
t) Authorization – latest version of the wizard program available at
http://www.sba.gov/aboutsba/sbaprograms/elending/authorizations/bank_
Auth_National_7a.html
2. For Small/Rural Lender Advantage loan applications, lender must submit the
following forms to the Standard 7(a) Loan Guaranty Processing Center:
Effective Date: October 1, 2011 215
Subpart B SOP 50 10 5(D)
a) Complete, signed and dated SBA Form 2301, Part A, Lender Advantage
Initiative. Only 1 principal needs to complete, sign and date the entire
form; all other principals and guarantors only need to complete, sign and
date Section D.
b) Complete, signed and dated SBA Form 2301, Part B, Lender’s
Application for Guaranty.
c) Complete, signed and dated SBA Form 2301, Part C, Eligibility
Questionnaire, including any additional information SBA requires due to
any ―false‖ responses indicated on the form. The lender must sign this
form.
d) Copy of the lender’s credit memorandum addressing all of the
requirements set forth in Chapter 4 of this Subpart.
3. For Small Loan Advantage loan applications submitted by PLP lenders to the
Standard 7(a) Loan Guaranty Processing Center:
a) Complete, signed and dated SBA Form 2301, Part A, Lender Advantage
Initiative. Only 1 principal needs to complete, sign and date the entire
form; all other principals and guarantors only need to complete, sign and
date Section D.
b) Complete, signed and dated SBA Form 2301, Part B, Lender’s
Application for Guaranty.
c) Complete, signed and dated SBA Form 2301, Part C, Eligibility
Questionnaire, including any additional information SBA requires due to
any ―false‖ responses indicated on the form. The lender must sign this
form.
d) Copy of the lender’s credit memorandum addressing all of the
requirements set forth in Chapter 4 of this Subpart.
4. For Small Loan Advantage loan applications submitted by PLP lenders under
their delegated authority:
a) Complete, signed and dated SBA Form 2301, Part A, Lender Advantage
Initiative. Only 1 principal needs to complete, sign and date the entire
form; all other principals and guarantors only need to complete, sign and
date Section D.
b) Complete, signed and dated SBA Form 2301, Part B, Lender’s
Application for Guaranty.
c) Complete, signed and dated SBA Form 2301, Part C, Eligibility
Questionnaire, including any additional information SBA requires due to
any ―false‖ responses indicated on the form. The lender must sign this
form.
d) Lender’s credit memorandum addressing all of the requirements set forth
in Chapter 4 of this Subpart must be retained in lender’s loan file.
B. CLP (Certified Lenders Program)
1. Lender must submit all forms and exhibits listed above for the standard 7(a)
application. CLP Lenders also must submit a draft Authorization.
216 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
2. For loan applications greater than $350,000, in addition to all of the standard
7(a) forms and exhibits, the lender must submit a copy of its written credit
analysis and must discuss SBA eligibility issues.
C. PLP (Preferred Lenders Program) and PLP-EWCP
1. PLP:
a) All forms and exhibits listed above for the Standard 7(a) application are
required to be completed and retained in lender’s file.
b) Forms to be submitted:
(1) Copy of page 1 of SBA Form 4, Application for Business Loan;
(2) Copy of page 1 of SBA Form 4-I, Lender’s Application for Guaranty
or Participation (signed by two authorized officials of Lender);
(3) Copy of SBA Form 1920SX (Part B) ―Supplemental Information for
PLP/SBA Express Processing‖; and
(4) Copy of ―Eligibility‖ checklist.
(5) If the PLP loan is to refinance debt (not same institution debt), a
fully completed business indebtedness schedule must be attached.
NOTE: PLP Lenders may not refinance same institution debt
through PLP procedures; these applications must be processed using
standard 7(a) procedures. See Chapter 2, Paragraph IV.C. of this
Subpart for further information on eligible PLP refinancing.
(6) If the PLP loan is to finance change of ownership and a business
valuation is performed by lender, a synopsis of the analysis must be
submitted.
2. PLP-EWCP:
a) All forms and exhibits listed below for the Standard EWCP application are
required to be completed and retained in lender’s file.
b) Forms to be submitted:
(1) Copy of page 1 of EIB-SBA 84-1, U.S. Small Business
Administration and Export-Import Bank of the United States, Joint
Application for Export Working Capital Guarantee;
(2) Copy of page 1 of SBA Form 4-I, Lender’s Application for Guaranty
or Participation (signed by two authorized officials of Lender);
(3) Copy of SBA Form 1920SX (Part B) ―Supplemental Information for
PLP/SBA Express Processing‖; and
(4) Copy of PLP EWCP Eligibility Checklist.
D. CAPLines (non-delegated)
1. There are 4 subprograms under the CAPLine program. All require:
a) The Standard 7(a) application referenced above in I.A.1.
b) Submission of guaranty fee at time of application for loans with maturities
of 12 months or less. (See Chapter 3, Paragraph V of this Subpart for
more information on payment of guaranty fees.)
2. Additionally, for the following subprograms lender must:
Effective Date: October 1, 2011 217
Subpart B SOP 50 10 5(D)
a) Seasonal CAPLine:
(1) Document the seasonal nature of the business; and
(2) Obtain from applicant a month-to-month cash flow projection for the
upcoming 12 months.
b) Contract CAPLine:
Obtain from applicant:
(1) A project cost schedule depicting all direct material, labor, and
overhead attributable to the contract to be financed. (Profit may not
be included.) The schedule must illustrate each cost by line item;
(2) A current annual income statement depicting the changes
(increases/decreases) in operating, investing and financing cash
flows to establish affordability and to confirm adequate cash flow for
repayment; and
(3) A copy of the contract(s) being financed by the Contract CAPLine.
c) Builders CAPLine:
(1) Obtain month-to-month cash flow for all work to be performed by
applicant;
(2) Obtain a letter from:
(a) A mortgage lender indicating that permanent mortgage money
is available to qualified purchasers to buy such properties;
(b) A real estate broker indicating that a market exists for the
proposed building and that it will be compatible with its
neighborhood; and
(c) An architect, appraiser or engineer agreeing to make
inspections and certifications to support interim disbursements.
(3) A letter from a lender who has its own real estate lending
department, staffed by personnel with appraisal and engineering
experience may be substituted for one or more of the above-
referenced letters.
E. PLP-CAPLines, SBA Express, Export Express and Patriot Express
1. PLP-CAPLine, SBA Express, Export Express and Patriot Express Program
application packages must include the forms and information the lender requires
in order to make an informed eligibility and credit decision. The lender's
application must be certified by the applicant as true and complete.
2. Required Form
a) Except as set forth below, the only documentation required by SBA from
the applicant under PLP-CAPLines, SBA Express, Export Express or
Patriot Express is SBA Form 1919, ―SBA Express, Export Express, and
Pilot Loan Programs (Patriot Express, Community Express and Dealer
218 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
Floor Plan) Borrower Information Form.‖ SBA Form 1919 must be signed
by the following:
(1) For a sole proprietorship, the sole proprietor;
(2) For a partnership, all general partners and all limited partners owning
20% or more of the equity of the firm;
(3) For a corporation, all owners of 20% or more of the corporation and
each officer and director;
(4) For limited liability companies (LLCs), all members owning 20% or
more of the company and each officer, director, and managing
member;
(5) Any person hired by the business to manage day-to-day operations;
and
(6) Any person guaranteeing the loan, if that guaranty is required by
SBA, as set forth in Chapter 4, Paragraph II.B. of this Subpart.
(7) The Form 1919 includes the certifications and requirements
previously set forth in SBA Forms 601, 912, 1261, and 1624. In
addition, the requirements imposed by laws and executive orders
discussed in paragraph I.A.1. of this Chapter are included in SBA
Form 1919 for SBA Express and the Pilot Loan Programs.
3. Additional Forms that may be necessary:
a) Form 159(7(a)): If the applicant or business did not pay anyone to assist
in (a) preparing the loan application or any related materials and/or (b)
referring the loan to the lender (for example, a packager, broker,
accountant or lawyer), the applicant will so indicate on the Form 1919,
and Form 159(7(a)) is not required to be completed by the applicant. If a
packager or referral agent has been used or the lender has charged a fee
associated with the application, the Form 159(7(a)) must be completed. If
the lender has paid a referral fee in connection with an SBA Express loan,
the lender must complete the Form 159(7(a)). The lender retains the Form
159(7(a)) in the loan file and does not send it to SBA. See Chapter 3,
Paragraphs VIII-IX of this Subpart for further guidance on the disclosure
of fees.
b) Form 601: If no construction above $10,000 is involved, the applicant will
so indicate on the Form 1919, and Form 601 is not required. If
construction above $10,000 is involved, the applicant and the contractor
must complete the Form 601. The lender must keep the signed Form 601
in its loan file and does not send it to SBA.
c) Form 912: If question 1, 2, or 3 of Form 1919 is answered negatively,
Form 912 is not required. If question 1, 2, or 3 is answered affirmatively,
the lender may process the loan, but it must have the applicant complete
Form 912 and follow the steps as outlined in Chapter 2, Paragraph
III.D.3.n) of this Subpart.
d) Form 1624: If the applicant has never been debarred, suspended, or
otherwise excluded, the applicant must so indicate on Form 1919, and
Effective Date: October 1, 2011 219
Subpart B SOP 50 10 5(D)
Form 1624 is not required. If the applicant answers affirmatively, the loan
cannot be processed through SBA Express but may be processed through
Standard 7(a) procedures.
4. Although lenders are expected to obtain sufficient borrower eligibility
information, SBA does not require the lender to secure the signed SBA Form
1919 and/or other required documents before requesting a loan number from the
SLPC. The lender must ensure that required SBA documents are properly
executed by all required parties prior to closing or disbursing the loan. Lenders
also must keep a copy of these signed documents in the loan file.
5. Forms to be submitted to request an SBA Loan Number:
a) Eligibility Authorized Lender:
Copy of SBA Form 2238 ―SBA Express Guaranty Request
(Eligibility Authorized).‖
b) Lender without Eligibility Authorization:
(1) Copy of SBA Form 1920SX (Part A);
(2) Copy of SBA Form 1920SX (Part B) ―Supplemental Information for
PLP/SBA Express Processing‖; and
(3) Copy of SBA Form 1920SX (Part C) ―Eligibility Information
Required for Express Submission.‖
All PLP-CAPLine, SBA Express, Export Express and Patriot Express Program forms
above can be found at www.sba.gov/for-lenders, then go to ―Loan Package Tool‖ and
select a program.
F. EWCP
1. EWCP applications must be submitted on EIB-SBA Form 84-1. This is a joint
application form used by both the SBA and the U.S. Ex-Im Bank. This form
eliminates the need for 912 submissions, except from any Subject Individual
with a prior arrest or conviction.
2. For applications to reissue an existing EWCP line of credit that is maturing, the
lender must submit a new EIB-SBA Form 84-1. The lender will not have to re-
submit all of the historical information required with the Form 84-1 because the
USEAC Representative handling the processing and servicing of the line of
credit will have the historical information in the original loan file.
II. WHERE TO SUBMIT APPLICATION FOR GUARANTY
A. Standard 7(a), CLP, CAPLine (non-delegated) and Small/Rural Lender Advantage
Initiative
Applications may be sent to the Standard 7(a) Loan Guaranty Processing Center
electronically or through the mail.
1. Email: 7aloanprogram@sba.gov if attachments are under 9 megabytes in size.
2. Website: http://www.sba.gov/aboutsba/sbaprograms/elending/lgpc/index.html
click on ―Submit 7(a) Document Here.‖
220 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
3. Mail to either of the following locations:
U. S. Small Business Administration
6501 Sylvan Road
Citrus Heights, CA 95610 or
or
U.S. Small Business Administration
262 Black Gold Blvd.
Hazard, KY 41701
B. Small Loan Advantage (SLA)
All SLA applications must be submitted using E-tran (SBA’s electronic origination
program). For those loans that are ineligible to be processed under a lender’s
delegated authority, the lender will submit general application information using E-
tran and then submit the application documentation electronically to the Standard 7(a)
Loan Guaranty Processing Center (LGPC). The lender must retain copies of the
documentation in its loan file for all SLA loans whether submitted under delegated or
non-delegated authority.
Specific steps for submitting all SLA applications:
1. E-tran has been modified to include a SLA choice. After selecting SLA, the PLP
lender will complete the E-tran screens up to the point of ―Eligibility.‖
2. E-tran will then ask the following question: ―Is this loan eligible to be
processed under the PLP lender’s delegated authority?‖
a) If the PLP lender checks ―Yes‖ to indicate the loan is eligible for
submission under its delegated authority, the lender will receive an SBA
Loan Number indicating the loan is approved.
b) If the PLP lender checks ―No‖ to indicate that the loan is not eligible for
submission under its delegated authority, E-tran will generate a message
instructing the lender to e-mail the application forms along with the SBA
Loan Application Number provided by E-tran to the LGPC at
slaloans@sba.gov. The attachments must include:
(1) Form 2301 (Parts A, B and C);
(2) Other SBA forms required by Form 2301 (Part A) in response to
―yes‖ answers on the form [for example, Form 159(7a)
(Compensation Agreement) and/or Form 912 (Statement of Personal
History)]; and
(3) Any required supplemental documents to the forms, such as the
Lender’s Credit Memorandum.
Effective Date: October 1, 2011 221
Subpart B SOP 50 10 5(D)
Please be sure that the contact information (name, e-mail and phone
number) of the lender’s loan officer who can discuss the underwriting of
the loan is on the top of the e-mail to the LGPC.
Once the LGPC receives the e-mail and attachments, the LGPC will begin
reviewing the loan for creditworthiness and eligibility.
C. PLP (including PLP-CAPLines), PLP-EWCP, SBA Express, Export Express and
Patriot Express
Requests for a loan number must be sent through E-Tran. E-Tran is a secure web site
where lenders can enter loan information for a single loan or send multiple
applications simultaneously via an XML (Extensible Markup Language) file transfer.
Several software developers have E-Tran functionality built into their SBA loan
software. For E-Tran information go to: http://www.sba.gov/content/e-tran.
D. Standard EWCP and Preliminary Commitment Conversions
1. Standard EWCP Processing:
a) Applications may be submitted by mail, fax or email to the United States
Export Assistance Center (USEAC) covering the territory where the
business is located. The contact information for each USEAC may be
found at: http://www.sba.gov/content/us-export-assistance-centers.
b) The USEAC Regional Manager will conduct a full eligibility and credit
review in their Loan Officer’s Report (LOR), prepare the loan
authorization and submit a recommendation to the LGPC. The LGPC will
review the LOR and EWCP submission for final approval.
c) If the LGPC concurs with the USEAC approval recommendation, a final
authorization will be sent directly to the lender. If the LGPC does not
concur with the USEAC’s recommendation, the request is sent to the
SBA/OIT for a final decision by the Director, Office of International
Trade (D/OIT) or designee.
2. Preliminary Commitment Conversions:
a) Eligible exporters that are unable to find a lender willing to process an
EWCP request on their behalf have the option of applying directly to their
local USEAC for a ―Preliminary Commitment.‖ SBA will only issue a
Preliminary Commitment to an applicant upon submission of a complete
application and the conclusion that the applicant meets SBA eligibility
requirements as set forth in Chapter 2 of this Subpart.
b) If SBA issues an SBA EWCP Preliminary Commitment, it will outline the
specific terms and conditions under which SBA is prepared to guarantee
an EWCP loan extended by an eligible lender. The Preliminary
Commitment is valid for 90 days. It is the applicant’s responsibility to
find a lender to convert the Preliminary Commitment to a final EWCP
loan approval.
222 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
c) Lenders that wish to convert a Preliminary Commitment to an EWCP loan
must follow the procedures for Standard EWCP processing identified in
paragraph 1 above in order to receive final approval and a loan
authorization.
E. Reconsideration of Declined Standard 7(a), CLP, CAPLine (non-delegated) and
Small/Rural Lender Advantage Initiative Applications (13 CFR 120.193)
1. If a lender believes the reasons for decline have been overcome, it may submit a
request for reconsideration along with a detailed written explanation of how the
Small Business Applicant has overcome the reason(s) for decline. Lender must
submit a request to the Center within 6 months of the date of decline. Any
request submitted more than 90 days after the date of decline must include
current financial statements.
2. If a request for reconsideration is declined by the Center, a second and final
reconsideration may be submitted to the D/FA whose decision is final. The
request for reconsideration must be submitted to the LGPC and must include a
copy of the Center’s decline letter and include additional information that
specifically addresses the reasons identified for decline and how the Small
Business Applicant has overcome those reasons. The LGPC will forward the
request to the D/FA for a final decision.
F. PLP (including PLP-CAPLines), SBA Express, Export Express and Patriot Express
Eligibility Issues
For PLP Lenders, SBA Express, Export Express and Patriot Express lenders not
delegated eligibility authority:
1. If the SLPC notifies the lender that a proposed loan is not eligible and the lender
disagrees, the lender may request reconsideration. The request must be in
writing and must address and resolve the eligibility issue. The lender must send
the request to the SLPC within 30 days of the date of decline.
2. If the SLPC declines the request for reconsideration, the lender may request
further reconsideration. This request must be sent to the SLPC within 30 days
after the last eligibility decision. It must specifically request reconsideration at
the next higher level and say why SBA should reverse the eligibility decision.
The SLPC will send the request to the D/FA or designee for review and final
eligibility decision. The SLPC will inform the lender of the final decision.
3. Loans ineligible for PLP, SBA Express, Export Express and Patriot Express
may, under some circumstances, be eligible for submission under standard 7(a).
If the SLPC denies a PLP, SBA Express, Export Express or Patriot Express loan
number and the lender resubmits the loan to SBA under another loan program,
the lender must notify the Processing Center that the loan was denied a PLP.
SBA Express, Export Express or Patriot Express number by sending a copy of
the SLPC’s denial letter.
Effective Date: October 1, 2011 223
Subpart B SOP 50 10 5(D)
CHAPTER 7: POST-APPROVAL MODIFICATIONS, LOAN CLOSING &
DISBURSEMENT
A thorough review of the Authorization is the first step in closing and disbursing an SBA-
guaranteed loan. If any changes are necessary, the lender must follow the steps in paragraph 1
below. After the lender has determined that the loan conditions in the Authorization are
appropriate for the terms of the credit, the lender must close the loan in accordance with the
provisions of the Authorization, including any SBA-approved post-approval modifications.
I. POST APPROVAL/PRE-DISBURSEMENT REQUESTS FOR CHANGES
A. For SBA loans that have not been closed or fully disbursed, lenders must submit
requests for SBA approval of the following actions:
1. An increase or decrease in the loan amount; or
2. An increase or decrease in the guaranty percentage.
B. Lenders must inform SBA of the following actions (SBA approval of these items is
not necessary, and SBA will not respond in writing):
1. Cancellation of the entire loan;
2. Change in the maturity date;
3. Change in the legal name of the business;
4. Change in the trade name of the business; or
5. Change in the borrower’s business address.
Lenders may inform SBA of these actions either by following the procedures set forth
in paragraph C or D below, or the lender may make the appropriate change using E-
Tran servicing.
C. Standard 7(a), S/RLA, SLA (non-delegated), CLP and CAPLines (non-delegated)
1. To request a post-approval modification, Lenders must submit a written request
to the LGPC that includes the name of the lender, name of the lending officer,
phone number, fax number, name of the borrower, SBA Loan Number and the
following information:
a) How it is now;
b) How it should be; and
c) Why – justification for the change and any supporting documentation.
2. Post-approval modifications should be sent by e-mail to 7aLoanMod@sba.gov
or by fax to 916-735-1975.
3. After final disbursement, modification requests must be sent to the appropriate
CLSC using SBA Form 2237.
D. PLP (including SLA-delegated and PLP-CAPLines), SBA Express, Export Express
and Patriot Express
1. Lenders must submit SBA Form 2237 along with any supporting documentation
to the appropriate CLSC. By signing the SBA Form 2237, the lender certifies
that the request complies with the requirements of this SOP.
224 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
2. For any change in loan amount or guaranty percentage, lender must attach a
memo or e-mail message that explains the reason for the change. .
E. Standard EWCP and PLP-EWCP
1. Standard EWCP: Lender must submit the completed SBA Form 2237 along
with supporting financial statements and/or other documentation to the local
USEAC for processing.
2. PLP-EWCP:
a) Lenders must submit the completed SBA Form 2237 along with any
supporting documentation to the appropriate CLSC.
b) By signing the SBA Form 2237, the lender certifies that the request
complies with the requirements of this SOP.
II. TRANSFER OF GUARANTY BETWEEN PARTICIPATING LENDERS
A. To transfer the guaranty between participating lenders prior to final disbursement,
lender must submit a written explanation to the Standard 7(a) Loan Guaranty
Processing Center along with any supporting documentation. (Transfers after final
disbursement must be sent to the appropriate CLSC in accordance with SOP 50 50.)
B. To transfer the guaranty on more than one loan prior to final disbursement, lender
must submit a written explanation to the Standard 7(a) Loan Guaranty Processing
Center along with any supporting documentation. The LGPC will forward the
request to the D/FA for a decision. (Transfers after final disbursement must be sent to
the appropriate CLSC in accordance with SOP 50 50.)
III. PAYMENT OF GUARANTY FEE
The guaranty fee must be paid within the time frame stated within the Authorization. For
further discussion, see Chapter 3, Paragraph V. of this Subpart.
IV. LOAN CLOSING AND DISBURSEMENT
A. Disbursement Period
1. The disbursement period must be stated in the loan authorization and must be
tailored to meet the requirements of each individual loan. The loan must be
fully disbursed within 48 months of approval or any remaining undisbursed
balance will be cancelled by SBA. SBA considers a revolving line of credit as
fully disbursed at the time of first disbursement.
2. Lenders may use an escrow account for not more than 5 business days to
facilitate a loan closing. A lender must not report the loan on SBA Form 1502
as ―disbursed‖ or charge the borrower the guaranty fee until all funds are
disbursed from the escrow account. The lender may only charge the borrower
interest on funds that have been disbursed out of escrow to the borrower.
3. A loan is considered to be fully disbursed and then may be sold on the
secondary market when the borrower has access to the loan proceeds and is able
to use them in accordance with the loan authorization.
B. Note Terms
1. Maturity:
Effective Date: October 1, 2011 225
Subpart B SOP 50 10 5(D)
The lender may calculate the loan maturity date from either the date of the Note
or the date of first disbursement. If there is a change in the use of proceeds
between the date that the loan is approved and the date that the lender is ready
to close the loan, the maturity date may have to be re-calculated and changes
made to the Authorization.
2. Repayment terms:
Lender must insert the repayment terms into the Note exactly as they are written
in the Authorization. If there is a need for a specific term for a particular loan
that is not in the Authorization, the lender must obtain written approval from
SBA.
a) State-specific language:
If the Borrower moved to another state subsequent to loan approval, lender
must ensure that any necessary state-specific provisions that relate to the
Borrower’s new state of residence are added to the Authorization and loan
documents.
b) Prepayment Terms:
Every Authorization contains prepayment language that must be inserted
into the Repayment Terms section of the Note. For further discussion, see
Chapter 3, Paragraph VI. of this Subpart.
c) Escrow Policy for Commercial Real Estate Taxes and Insurance
(1) When a lender is in a senior lien position on commercial real
property financed with an SBA guaranteed loan (or if SBA is in a
junior lien position and an escrow account does not exist with the
senior lienholder), the borrower and lender may agree to establish an
escrow account for the purpose of collecting and paying the real
estate taxes, hazard insurance, and flood and earthquake insurance
when applicable;
(2) The amount of money collected for an escrow account may not
exceed 105% of the amount charged in the current year by the taxing
authority or insurance company for the total requirement to pay the
annual real estate taxes and insurance;
(3) The account must be FDIC insured and pay the borrower a money
market rate of interest, or the rate typically paid on escrow accounts
for commercial real property on non-SBA guaranteed loans,
whichever is greater;
(4) Except for those items covered in subparagraphs c)(2) and (3) above,
the account must be consistent with accounts required of the lender’s
conventional borrowers and the lender must use similar procedures
to administer the escrow accounts on its SBA loans as it does for its
non-SBA guaranteed loans (Small Business Lending Companies
(SBLCs) must be consistent with the practices followed by federally
regulated financial institutions);
226 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(5) Lender must remit to the borrower all accrued interest on the account
and provide statements regarding the account at least annually,
unless otherwise required by state or Federal law; and
(6) Upon termination of the account, the remaining funds must be
returned to the borrower within 15 business days.
d) CAPLines
(1) Interest only payments for any period exceeding the borrower’s cash
cycle, seasonal cycle, contract completion date, or project
completion date are not permitted.
(2) Master Notes and Sub-Notes: Each loan will have a Master Note to
cover the total loan amount and general repayment period. Lenders
can also utilize a system of sub-notes to establish specific repayment
periods for particular seasons, contract or construction /renovation
project. When the CAPLine will be used to finance the creation of
more than one asset (such as the completion of two contracts) sub-
notes should be used. The conditions of the sub-notes must not
conflict with the conditions of the master note, except for variances
in repayment schedules. See the paragraph immediately below for
the required forms.
C. Required SBA Forms
1. With the exception of the SBA Express, Export Express and Patriot Express,
and paragraphs 2 and 3 below, lenders must use the SBA forms listed in Section
D of the Authorization. Lenders may use computer-generated versions of
mandatory SBA Forms, as long as the text is identical.
2. For SLA loans only, PLP lenders have the option of using their own note and
guaranty agreements rather than the SBA versions (SBA Forms 147, 148 and
148L). If the lender uses its own note form, the lender needs to ensure that the
note is legally enforceable and assignable, has a stated maturity and is not
payable on demand.
3. For all CAPLines, whether processed under non-delegated or delegated
authority, lenders have the option of using their own note and guaranty
agreements rather than the SBA versions (SBA Forms 147, 148 and 148L).
a) If the lender uses its own note form, the lender must ensure that the note is
legally enforceable and assignable, has a stated maturity and is not
payable on demand. In addition, if the lender uses its own note form, the
note must include the following language: ―When SBA is the holder, this
Note will be interpreted and enforced under federal law, including SBA
regulations. Lender or SBA may use state or local procedures for filing
papers, recording documents, giving notice, foreclosing liens, and other
purposes. By using such procedures, SBA does not waive any federal
immunity from state or local control, penalty, tax, or liability. As to this
Note, Borrower may not claim or asset against SBA any local or state law
to deny any obligation, defeat any claim of SBA, or preempt federal law.”
Effective Date: October 1, 2011 227
Subpart B SOP 50 10 5(D)
b) If the lender uses its own guaranty form, the guaranty must include the
following language: ―When SBA is the holder, the Note and this
Guarantee will be construed and enforced under federal law, including
SBA regulations. Lender or SBA may use state or local procedures for
filing papers, recording documents, giving notice, foreclosing liens, and
other purposes. By using such procedures, SBA does not waive any
federal immunity from state or local control, penalty, tax, or liability. As
to this Guarantee, Guarantor may not claim or assert any local or state
law against SBA to deny any obligation, defeat any claims of SBA, or
preempt federal law.”
4. SBA forms and instructions can be found at www.sba.gov/for-lenders, then
click on ―Forms Loan Package Tool‖ listed under ―Forms, Notices, and SOPs‖
towards the bottom of the page to see a listing of all forms. The required forms
are:
a) Note, SBA Form 147, version 4.1;
b) Guaranty, SBA Form 148;
c) Limited Guaranty, SBA Form 148L;
d) Settlement Sheet, SBA Form 1050;
e) Fee Disclosure and Compensation Agreement, SBA Form 159(7a);
f) Agreement of Compliance, SBA Form 601
g) Equal Employment Opportunity Poster, SBA Form 722
h) Tax Return Verification, IRS Form 4506-T
5. Settlement Sheet, SBA Form 1050
a) Lender must disburse the loan proceeds in accordance with the
Authorization. Failure to do so may be a cause for SBA to deny liability
under its guaranty.
b) All lenders must document each disbursement on an SBA-guaranteed
loan. Except under the SBA Express, Export Express and Patriot Express,
lender and borrower must complete and sign SBA Form 1050 at the time
of first disbursement. If there are subsequent disbursements, lender must
document each disbursement and attach the documentation to the original
SBA Form 1050. The documentation must contain sufficient detail for
SBA to determine:
(1) The recipient of each disbursement;
(2) The date and amount of each disbursement; and
(3) The purpose of each disbursement.
c) The lender must obtain evidence to support disbursements, such as
cancelled checks or paid receipts, to ensure that the borrower used loan
proceeds for purposes stated in the Authorization. If the Authorization
identifies working capital as a use of proceeds and those proceeds will be
used to pay normal operating expenses (e.g., payroll, utilities, etc.), then
the working capital disbursement does not need to be documented.
228 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
d) The following documentation is acceptable to verify disbursement in
accordance with the Authorization:
(1) Joint payee checks;
(2) Copies of receipts, invoices or other supporting documentation
marked paid by the seller or vendor; or
(3) Evidence of an electronic funds transfer to a vendor along with a
copy of the invoice.
e) The lender must retain in its loan file the signed SBA Form 1050 as well
as all supporting documents.
6. Fee Disclosure Form and Compensation Agreement, SBA Form 159(7a)
a) When an Agent is paid by either a borrower or a lender an SBA Form
159(7a) must be completed and signed by the borrower and the lender.
For each Agent paid by the borrower to assist it in connection with its
application, the Agent also must complete and sign the form.
b) When an Agent is paid by the lender, the lender must identify the Agent
that it pays on SBA Form 159(7a) and the lender and borrower must sign
the form.
c) See Chapter 3, Paragraphs VIII-IX of this Subpart for further discussion of
compensation of Agents.
7. SBA Form 722
This required form must be provided to the borrower in connection with every
loan closed. The SBA Form 722 is an ―Equal Employment Opportunity Poster.‖
The poster notifies the Borrower’s employees as well as the public that they
have the right under federal law not to be discriminated against. Therefore,
federal law requires the borrower to display this poster ―where it is clearly
visible to employees, applicants for employment, and the public.‖
D. Borrower’s Certifications
1. As part of the terms and conditions of the Authorization, the lender must obtain
certain certifications and agreements from the Borrower and the Operating
Company prior to disbursement of loan proceeds. Borrower and OC must
certify that:
a) They received a copy of the Authorization;
b) That there has been no adverse change in Borrower’s (and Operating
Company’s) financial condition, organization, operations or fixed assets
since the date the Loan Application was signed.
c) No 50% or more owner of the borrower or OC is more than 60 days
delinquent on any obligation to pay child support;
d) They are current on all federal, state and local taxes, including but not
limited to income taxes, payroll taxes, real estate taxes and sales taxes;
e) For any real estate pledged as collateral for the loan or where the borrower
or OC is conducting business operations, they are in compliance with all
local, state and federal environmental laws and regulations and will
Effective Date: October 1, 2011 229
Subpart B SOP 50 10 5(D)
continue to comply with these laws and regulations. Furthermore, they are
unaware of any other actual or potential environmental hazards related to
the collateral or business premises. They agree to fully indemnify lender
and SBA against all liabilities or losses arising from the contamination of
the property before or during the term of the loan.
f) They will reimburse lender for expenses incurred in the making and
administration of the loan;
g) They will maintain proper books and records, allow lender and SBA
access to these records, and furnish financial statements or reports
annually, or whenever requested by lender.
h) They will post SBA Form 722, Equal Opportunity Poster, where it is
clearly visible to employees, applicants for employment and the general
public;
i) To the extent practicable, they will purchase only American-made
equipment and products with the proceeds of the loan;
j) They will pay all federal, state and local taxes, including income, payroll,
real estate and sales taxes of the business when they come due; and
k) That any credit card debt being refinanced was incurred exclusively for
business purposes.
2. Borrower and OC must certify that they will not, without the lender’s prior
written consent:
a) Make any distribution of company assets that will adversely affect the
financial condition of Borrower and/or OC;
b) Change the ownership structure or interests in the business during the term
of the loan; or
c) Sell, lease, pledge, encumber (except by purchase money liens on property
acquired after the date of the Note), or otherwise dispose of any of the
Borrower’s property or assets, except in the ordinary course of business.
3. Additional certifications from Borrower and Operating Company
The Authorization provides for additional certifications from Borrower and
Operating Company regarding:
a) Limitations on acquiring additional fixed assets;
b) Limitations on acquiring additional business location(s);
c) Salary limitations; and
d) Occupancy requirements.
4. Sample Borrower’s Certification
A sample Borrower’s Certification is included in the Authorization as Appendix
D. Lenders may use this form or create and use their own certification form.
5. Separate Loan Agreement
SBA does not require a separate loan agreement to be signed by the borrower. If
the lender requires a separate loan agreement on its non-SBA guaranteed loans,
230 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
it may do so on its SBA-guaranteed loans. The lender may use its own form of
loan agreement or it may use the sample Loan Agreement included in the
Authorization as Appendix D.
E. PLP Program
1. SBA closing requirements are the same for PLP loans as for Standard 7(a) and
CLP loans. With the exception of SLA loans noted above in Paragraph C.2 and
CAPLines noted above in Paragraph C.3, the same SBA forms are required.
2. The lender must obtain all required collateral positions and must meet all other
required conditions before loan disbursement.
3. After closing a PLP loan, the lender must send to the appropriate CLSC a copy
of the executed Authorization. The lender should not send any other closing
documentation to SBA after closing a PLP loan but should retain all documents
in the lender’s loan file.
F. SBA Express, Export Express and Patriot Express
1. For SBA Express, Export Express and Patriot Express loans, a lender must use
the same closing and disbursement procedures and documentation as it uses for
its similarly sized non-SBA guaranteed commercial loans. There must be a
promissory note that is legally enforceable and assignable, in the event that it
would ever have to be assigned to SBA.
2. The lender must obtain all required collateral and must meet all other required
conditions before loan disbursement, including obtaining valid and enforceable
security interests in any loan collateral. These conditions include requirements
identified in the loan write-up, such as standby agreements, appraisals, business
licenses, and cash/equity injections.
3. Before disbursing an SBA Express, Export Express or Patriot Express loan, the
lender must:
a) Use IRS tax transcripts to verify financial information used to support the
loan credit analysis. See Chapter 5, Paragraph III of this Subpart for
further guidance on IRS verification.
b) Obtain evidence of no unremedied adverse change since the date of the
application (or since any of the preceding disbursements in the case of
multiple disbursements), in the financial or any other condition of the
borrower that would warrant withholding any disbursement. For
revolving line of credit disbursements, lenders should essentially follow
the same practices as they do for their non-SBA guaranteed commercial
revolving lines of credit.
c) Obtain required hazard insurance on all assets taken as collateral, as set
forth in Chapter 5, Paragraph II of this Subpart.
d) Make the required flood hazard determination and require flood insurance
(when collateral is taken) pursuant to the flood insurance requirements in
Chapter 5, Paragraph II of this Subpart.
e) In the construction of a new building or an addition to a building, obtain
the borrower's agreement that the construction will conform with the
Effective Date: October 1, 2011 231
Subpart B SOP 50 10 5(D)
"National Earthquake Hazards Reduction Program Recommended
Provisions for the Development of Seismic Regulations for New
Buildings" as discussed in Chapter 5, Paragraph VI of this Subpart.
f) Obtain the borrower's agreement that it will, to the extent feasible,
purchase only American-made equipment and products with the proceeds
of the loan. This certification is included on the SBA Form 1919.
g) For any loan involving construction of more than $10,000, as indicated on
SBA Form 1919, require borrower and contractor to execute SBA Form
601, Applicant's Agreement of Compliance.
h) Obtain a completed and signed SBA Form 159(7a), if applicable.
i) Obtain borrower’s certification that any 50% or more owner of the Small
Business Applicant on SBA Form 1919 is not more than 60 days
delinquent on any obligation to pay child support.
j) Require appropriate environmental reviews and compliance. SBA
Express, Export Express and Patriot Express lenders must follow the
environmental requirements in Chapter 4 of this Subpart. SBA Express,
Export Express and Patriot Express lenders may not request a loan number
for a loan that will be secured by collateral that will not meet SBA’s
environmental requirements or that will require use of a non-standard
indemnification agreement.
4. The lender should not send any closing documentation to SBA after closing an
SBA Express, Export Express or Patriot Express loan but should retain all
documents in the loan file.
5. Access to Funds: SBA Express, Export Express and Patriot Express funds may
be accessed through a variety of methods consistent with the way the lender
normally conducts business for its similarly-sized non-SBA guaranteed
commercial loans. Use of a credit or debit card to access the loan funds is
acceptable under SBA Express, Export Express and Patriot Express. SBA has
the right to deny a request to honor its guaranty for the misuse of credit cards
involving fraud or misrepresentation or if the debtor exceeds his or her credit
card limit for purchases on credit. In providing access through credit or debit
cards, lenders must ensure that these loans are documented by legally
enforceable and assignable promissory notes and/or other equivalent debt
instruments.
G. EWCP
1. All transactions financed by EWCP loans shall be payable in U.S. dollars unless
SBA approves payment in a foreign currency. If the transaction is payable in a
foreign currency, the borrower must show the Lender evidence that the currency
risk has been mitigated through hedging (purchasing of a forward contract,
forward option, or similar mechanism). When advancing against a transaction
payable in a foreign currency, Lender must use an established foreign exchange
rate and must retain documentation showing the exchange rate used and the
Lender’s calculation of the amount of the advance.
232 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
2. On a transaction-based revolving line of credit where draws are made against
foreign purchase orders or contracts, the advance rate shall not exceed 90% of
the purchase order/contract or the borrower’s costs (including overhead),
whichever is less. Receivables will be captured by the lender through the use of
a controlled account, and each transaction will be paid off as the receivables
proceeds are received. For example, if $90,000 is disbursed against a purchase
order of $100,000, when the $100,000 receivable comes in; $90,000 will be
applied to the loan balance.
3. On an asset-based revolving line of credit where advances are made against a
borrowing base of foreign receivables and/or foreign inventory, the maximum
advance rates are 90% on eligible foreign receivables and 75% on eligible
foreign inventory located within the United States. Controlled accounts may be
required at the discretion of the SBA Approving Official. At a minimum, the
borrower will be required to complete a monthly borrowing base submitted to
the lender along with an aging of receivables and listing of inventory, as
appropriate. If the borrowing base shows the borrower is over-advanced, the
lender must immediately require the borrower to make a payment to reduce the
loan balance so it is within the borrowing base formula.
4. Advance rates on foreign purchase orders/contracts or foreign receivables when
sold on open account (no credit insurance or letter of credit to mitigate the
foreign risk) shall not exceed 80%.
5. Accounts Receivable:
a) Terms of Sale: Payment terms must be in compliance with the loan
authorization. The Ex-Im Bank Country Limitation Schedule should be
reviewed for prohibited countries (such countries are identified by Note #
7 on the Schedule), and accounts receivable supported by Ex-Im Bank
Export Credit Insurance shall not exceed 180 days from the invoice date.
Accounts receivable supported by acceptable letters of credit shall not
exceed 364 days, and the loan must mature after the expiration date of any
standby letter of credit, unless approved in writing by SBA. In addition,
payment terms must be in line with prudent lending practices. Typical
terms of sale include but are not limited to:
(1) Confirmed irrevocable letter(s) of credit (SBA or the PLP-EWCP
lender may require for some or all of the borrower’s export-related
accounts);
(2) Irrevocable letter(s) of credit (SBA or the PLP-EWCP lender may
required for some or all of the borrower’s export-related accounts);
(3) Open account insured through Ex-Im Bank export credit insurance
for comprehensive commercial and political risk (SBA or the PLP-
EWCP lender may determine that export credit insurance is required
to enhance the quality of export-related accounts receivable. If
export credit insurance is obtained, the Lender must be named as
Loss Payee on the export credit insurance policy.);
(4) Open account insured through non-Ex-Im Bank export credit
insurance for comprehensive commercial and political risk (SBA or
Effective Date: October 1, 2011 233
Subpart B SOP 50 10 5(D)
the PLP-EWCP lender may determine that export credit insurance is
required to enhance the quality of export-related accounts receivable.
If export credit insurance is obtained, the Lender must be named as
Loss Payee on the export credit insurance policy.);
(5) Cash payment received prior to shipment;
(6) Open account uninsured, with SBA’s prior written consent; and
(7) Sight draft documents against payment, with SBA’s prior written
consent.
b) Jurisdiction and Currency of Accounts Receivable: Receivables held as
collateral should be payable to the borrower in the United States and in
United States dollars. Accounts Receivable due and payable in Non-U.S.
currency may be allowed on a case-by-case basis with SBA’s prior written
consent. Depending on the stability of the currency in question, SBA may
require that the borrower mitigate the risk through hedging (purchasing of
a forward currency contract or similar mechanism) as a condition of such
approval. When advancing against a transaction payable in a foreign
currency, Lender must use an established foreign exchange rate and must
retain documentation showing the exchange rate used and the Lender’s
calculation of the amount of the advance.
c) Control Accounts:
(1) For the ―single transaction-specific‖ and ―transaction based-
revolving line of credit‖ EWCP loans, lenders will be required to set
up a control account to capture the proceeds of foreign receivables as
they are paid by the foreign buyers. The proceeds are required to be
applied against the loan balance, either in their entirety or as a
percentage of the proceeds in a sufficient amount to pay off the
initial advance for that specific transaction.
(2) For asset based loans, lenders normally must have 100% of the
export accounts receivable proceeds applied against the loan balance
and have the borrower request additional advances as needed.
Another available option is to allow for the borrower to maintain a
balance within the Borrowing Base limits and to retain export
accounts receivable proceeds (not apply to the loan balance upon
collection). The borrower must submit an aging of receivables and
listing of inventory and Borrowing Base Certificate no less than
monthly. The lender will review the Borrowing Base to assure the
borrower is not over-advanced according to the available collateral
detailed on the Borrowing Base Certificate. If the borrower is over-
advanced per the Borrowing Base, the lender will require the
borrower to immediately make a payment to reduce the loan balance
to be in compliance. For a company with an asset based loan to be
allowed to retain the accounts receivable proceeds, the company
must meet the following requirements:
(a) Be in business for at least 2 years (no start-ups); and
234 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(b) Have financial records satisfactory to SBA and the ability to
provide a current aging of accounts receivable and a listing of
inventory to determine the allowable loan balance per the
borrowing base.
(3) Restrictions: Unless the lender receives SBA’s prior written
consent, any of the following types of accounts receivable are not
eligible for inclusion in an asset based loan borrowing base:
(a) An account receivable that does not arise from the sale of items
in the ordinary course of the borrower’s business;
(b) An account receivable from a domestic (U.S.) company, unless
the transaction has been approved by SBA as an indirect
export;
(c) An account receivable for which an invoice has not been sent;
(d) An account receivable that is due and payable from a foreign
buyer located in a country with which SBA is legally
prohibited from doing business as set forth in the current Ex-Im
Bank Country Limitation Schedule (such countries are
identified by Note # 7 on the Schedule). (If the borrower has
knowledge that an export to a country in which SBA may do
business, as set forth in the Ex-Im Bank Country Limitation
Schedule, will be re-exported to a country with which SBA is
legally prohibited from doing business, the corresponding
receivables are not eligible for inclusion in the export-related
borrowing base.);
(e) An account receivable that, by its original terms, is due and
payable more than 180 calendar days from the date of the
invoice, except those accounts receivable supported by
acceptable letters of credit;
(f) An account receivable that is still outstanding more than 60
calendar days from its original due date unless insured through
Ex-Im Bank (or other acceptable) export credit insurance for
comprehensive commercial and political risk, in which case
120 calendar days will apply;
(g) An account receivable that the Lender deems uncollectible or
unacceptable; this category includes, but it not limited to,
finance charges or late charges imposed on the foreign buyer
by the borrower as a result of the foreign buyer’s past due
status;
(h) An account receivable that does not comply with the terms of
sale as set forth in the loan authorization;
(i) An account receivable that arises from a bill-and-hold,
guarantee sale, sale-and-return, sale on approval, consignment,
or any other repurchase or return basis or is evidenced by
chattel paper;
Effective Date: October 1, 2011 235
Subpart B SOP 50 10 5(D)
(j) An account receivable that is subject to any offset, deduction,
defense, dispute, or counterclaim, or the buyer is also a creditor
or supplier of the borrower or the account receivable is
contingent in any respect or for any reason;
(k) An account receivable for which any of the items giving rise to
such account receivable have been returned, rejected or
repossessed; and
(l) When 50% or more of the total accounts receivable for a
specific buyer are over 60 calendar days past the original due
date, then the total accounts receivable for that buyer are
excluded.
(4) In addition, the lender shall apply the same policies in reference to
receivables eligible to be included in the borrowing base as the
lender applies to its own similar asset based loans which are not
guaranteed by SBA or any other government entity.
(5) The lender may verify that no ineligible accounts receivable (as
described above) are included in the borrowing base by obtaining a
borrower certification to this extent at the bottom of the Borrowing
Base Certificate or on a separate certification form.
6. Inventory
a) General Guidelines
(1) Export-related inventory taken as collateral must be located within
the United States, until shipped to the foreign buyer.
(2) Export-related inventory must be valued at the lower of actual cost
or market value (including cost of work-in-process inventory) as
determined in accordance with Generally Accepted Accounting
Principles (GAAP).
(3) Export-related inventory may include raw materials, work-in-
process, and finished goods.
(4) Advance rates against eligible export-related inventory may vary
depending on inventory quality.
b) Restrictions: Unless the lender receives SBA’s prior written consent, any
of the following types of export-related inventory are not eligible for
inclusion in the export-related borrowing base:
(1) Inventory that is not subject to a valid, perfected, and enforceable
first priority lien in favor of the lender;
(2) Inventory located at an address that has not been disclosed to the
lender in writing;
(3) Inventory that is not located in the United States, unless being
shipped to the foreign buyer;
(4) Inventory that is placed by the borrower on consignment or held by
the borrower on consignment;
(5) Inventory that is demonstration inventory;
236 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(6) Inventory that consists of proprietary software (i.e., software
designed solely for the borrower’s internal use and not intended for
resale);
(7) Inventory that is damaged, obsolete, returned, defective, recalled or
unfit for further processing;
(8) Inventory that is to be incorporated into items destined for shipment
to a country with which SBA is legally prohibited from doing
business as designated in the current Ex-Im Bank Country Limitation
Schedule (such countries are identified by Note # 7 on the Schedule),
or that the borrower has knowledge will be re-exported by a foreign
buyer to a country in which SBA is legally prohibited from doing
business; and
(9) Inventory that is to be incorporated into items whose sale would
result in an account receivable that would not be an eligible export-
related account receivable.
c) In addition, lender shall apply the same policies in reference to inventory
eligible to be included in the borrowing base as the lender applies to its
own similar asset based loans which are not guaranteed by SBA or any
other government entity.
d) The lender may verify that no ineligible inventory (as described above) is
included in the borrowing base by obtaining a borrower certification to
this extent at the bottom of the Borrowing Base Certificate or on a
separate certification form.
H. CAPLines
1. Seasonal CAPLines
a) Disbursement and Repayment:
(1) Disbursements from the loan are made continually during the
seasonal build-up period when the cash requirement for labor,
materials, and support of accounts receivables exceeds actual cash
receipts. The final disbursement of any Seasonal loan should be
made in time for the funds to be utilized in the business and
converted to cash which can be used to pay off the loan balance at
the commencement of a 30 day clean up period or maturity.
(2) Principal repayments on the loan must occur as soon as the cash
from the seasonal sales has been received by the borrower. Interest
should be paid monthly.
b) Borrowing Base Certificate:
Lender may use Borrowing Base Certificates to monitor the borrower’s
seasonal activity. If the lender does so, the Borrowing Base Certificates
must be submitted by the borrower to the lender no less frequently than
monthly.
2. Contract CAPLines
a) Assignment of Contract Proceeds:
Effective Date: October 1, 2011 237
Subpart B SOP 50 10 5(D)
(1) Subject to the exception noted in (2) below, prior to initial
disbursement on any Contract CAPLine, the entity the borrower has
entered into the contract with must be advised in writing by both the
lender and borrower that an assignment of the contract proceeds is
required. Such assignment must be in place before any disbursement
for a particular contract is made and include a provision for the
lender’s right to receive all payments from the third party. The
lender must receive written acknowledgement from the third party.
(2) Exception to the Assignment of Contract Proceeds: An assignment
of the contract proceeds may be foregone, if at least two of the
following conditions are met:
(a) The term of the contract being financed is 12 months or less;
(b) A successful track record between the borrower and the
contracting authority exists relative to the same or reasonably
similar contracts. (The definition of a ―successful track record‖
includes but is not limited to, any prior contractual arrangement
between the subject parties, where the responsibilities of each
party under the contract were met to the satisfaction of all
parties to the contract.);
(c) Financial analysis of historical income statements and/or tax
returns and pro-forma financial statements show that the
applicant has a Debt Service Coverage ratio that exceeds 1:1;
(d) All contract proceeds are paid directly to the lender by the
contracting authority or, in the instance where a performance
bond is in place, a Funds Control (or escrow or third party
servicer) procedure is implemented; or
(e) There is other available and worthwhile collateral pledged to
secure the line by either the borrower or any owner/guarantor.
b) Prime and Subcontractor Contracts:
Subject to 2.a) above, a contract between a Prime and Subcontractor is
eligible to be financed with a Contract CAPLine, if at least two of the
following conditions are met:
(1) Both the Prime and the Subcontractor have favorable credit ratings
based on an acceptable rating agency (e.g., Builders Industry Credit
Association ―BICA‖);
(2) There is a successful track record between the Prime contractor and
the Subcontractor (borrower);
(3) There is a successful track record between the Prime contractor and
the contracting authority;
(4) The Contract CAPLine amount is less than $300,000;
(5) The term of the contract is 12 months or less;
(6) The financial analysis of historical income statements and/or tax
returns and pro-forma financial statements show that the applicant
has a Debt Service Coverage ratio that exceeds 1:1; or
238 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(7) There is other available and worthwhile collateral pledged by either
the borrower or any owner/guarantor.
c) Contracts with Performance Bonds:
Subject to 2.a) above, a contract requiring a Surety’s performance bond
may be eligible for a Contract CAPLine provided the lender perfects a
UCC security interest in the contract proceeds.
SBA recognizes the following conditions may be necessary to effectuate
the transaction where a contract requires a Surety’s performance bond:
(1) The lender’s perfected UCC security interest in the contract proceeds
will be subordinate to the cost reimbursement claim of the Surety;
and
(2) The Surety may require that a funds control facility be executed.
The funds control facility would disburse directly to suppliers and
laborers. The contracting authority will remit contract proceeds
directly to the funds control facility, which will remit payment to the
lender.
d) Purchase Orders under a Master Agreement:
Purchase Orders (PO) may be substituted for a formal contract, provided
the following conditions exist:
(1) The PO is issued to the borrower under a Master Agreement; and
(2) The combination of the PO and the Master Agreement constitute a
binding agreement.
e) Disbursements are made, when needed, to pay for the costs on a specific
contract. Disbursements will generally be made as the contract
progresses, not with one lump sum disbursement to cover all costs. Only if
the contract performance period was 30 days or less should only one
disbursement for payroll be allowed. However, if a borrowing contractor
wanted to acquire all of their materials up front to take advantage of
volume discounts, and/or pay for all acquired materials within 10 days to
take advantage of prompt pay discounts, the Contract CAPLine Program
will accommodate such a disbursement plan.
f) With the assignment of contract proceeds and direct payment in place, the
lender receives all the payments the borrower would normally receive if it
was internally financing the contract as performance progresses. Because
all performance costs (including direct overhead and allocated
general/administrative expenses) were funded under the CAPLine, all
such payments received by the lender must be applied first to interest due
on the CAPLine, with the remainder applied to the CAPLine balance until
the balance is paid in full.
g) If deemed necessary from a credit standpoint by the lender, the lender may
invoke additional controls over the payments, provided the lender obtains
the borrower’s prior written consent. If such additional controls include
the funding of direct material and labor only, as opposed to all contract
costs, then the lender must inform the borrower in writing of the
Effective Date: October 1, 2011 239
Subpart B SOP 50 10 5(D)
percentage split arrangement regarding the allocation of progress
payments received from the contracting authority.
3. Builder’s CAPLines
a) Prior to disbursement for each individual project, the lien must be
recorded and position verified. Interim disbursements shall be made as
construction progresses at stages approved by lender, but shall be
advanced only on qualified architect, appraiser or engineer’s certification
and personal inspection by proper lender officer(s). Amount of
disbursement shall not exceed 100% of labor, material, and other eligible
costs of construction certified to be complete and shall be supported by
contractor’s statements and lien waivers to date.
b) Prior to final disbursement of construction funds, final lien waivers must
be obtained from borrower/contractor and all subcontractors, materialmen,
and any independent workers involved in the construction. No
disbursement can be made after maturity of the master note.
c) The repayment of all funds disbursed for any individual project shall occur
within 36 months after completion of each individual project or at the time
of sale, whichever is less. A single principal payment is acceptable.
Interest payments must be made at least semi-annually and from the
applicant’s own resources, not from loan proceeds.
4. Working Capital CAPLines
a) For Working Capital CAPLines, lenders have the option of disbursing the
line proceeds based on a borrowing base certificate.
(1) If a lender will not use a borrowing base certificate to determine the
availability of funds for disbursement, the lender must:
(a) Use a combination of factors for the underwriting and credit
decision consistent with its similarly sized, non-SBA
guaranteed commercial lines of credit, including at a minimum;
(i) Cash flow analysis to determine the adequacy, duration
and dependability of cash flow;
(ii) Collateral analysis to establish an estimated value of
collateral; and
(iii) Owner/Guarantor analysis;
(b) 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 personal assets of the principals as
collateral to ensure there is a 1:1 collateral ratio;
240 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(i) To determine if there is a 1:1 collateral ratio, discount the
available collateral based upon the Net Book Value
presented on the borrower’s financial statements. The
total line amount should be supported with accounts
receivable at a maximum of 80% (after discounting a
percentage for any ineligible receivables identified by
reviewing the accounts receivable aging) and inventory
no greater than 50%. Machinery and equipment may be
valued at 50% of Net Book Value or 80% with an
Orderly Liquidation Value minus any prior liens. Real
estate can be supported at 80% of the value and the value
must be determined in accordance with the requirements
set forth in Chapter 4, Paragraph II.C of this Subpart;
(ii) If the line will be secured by fixed assets and the
valuation of fixed assets is greater than their depreciated
value (net book value), an independent appraisal by a
qualified individual must be obtained by the lender to
support the higher valuation. (See Chapter 4, Paragraph
II.C.3 of this Subpart.);
(c) Obtain borrower prepared financial statements and tax returns
if the CAPLine amount is $1,000,000 or less and compiled,
reviewed or audited financial statements and tax returns if the
CAPLine amount is over $1,000,000, consistent with lender’s
policies governing its similarly sized, non-SBA guaranteed
commercial lines of credit;
(d) Use financial covenants consistent with those used on lender’s
similarly sized, non-SBA guaranteed commercial lines of
credit. These balance sheet covenants such as a Current Ratio
or Debt to Tangible Net Worth ratio should be tested quarterly,
semi-annually or annually, consistent with lender’s policies
governing its similarly sized, non-SBA guaranteed commercial
lines of credit; and
(e) Monitor the lines consistent with the lender’s policies and
procedures for its similarly sized, non-SBA guaranteed
commercial lines of credit and, at a minimum, conduct a credit
review including cash flow analysis, collateral analysis to
ensure there is a 1:1 collateral ratio, owner/guarantor credit
review and site visit on an annual basis.
(f) Proceeds from cash sales and receivable collections must pay
down the line as collected.
(g) Lenders must report the initial disbursement on SBA Form
1050 in accordance with paragraph C.6. above.
(2) If the lender will use a Borrowing Base Certificate to determine the
availability of funds for disbursement the lender must adhere to the
following:
Effective Date: October 1, 2011 241
Subpart B SOP 50 10 5(D)
(a) Loan proceeds may be disbursed to the borrower’s operating
account. To calculate the maximum amount available for
disbursement, use the following formula:
(i) Eligible A/R $______________
(ii) Times advance rate %______________
(iii) Equals A/R Borrowing Base $______________
(iv) Eligible inventory $______________
(v) Times advance rate %______________
(vi) Equals inventory Borrowing Base $______________
(vii) Total (iii plus vi) $______________
(viii) Face amount of Note $______________
(ix) Borrowing base (Lesser of vii or viii)
$______________
(x) Loan balance on books $______________
(xi) Amount available for disbursement (ix minus x)
$______________
(b) On a monthly basis, lender should determine the amount of
eligible assets for the borrowing base.
(i) When advancing against receivables, lender should:
(a) Obtain an aging of accounts receivable and
accounts payable
(b) Eliminate all ineligible receivables. The following
types of accounts are not eligible to be included in
the borrowing base:
(i) Any invoice more than 90 days past due.
Exceptions are permitted over the 90 day with
SBA’s prior written concurrence.
(ii) If a customer is delinquent on more than 50%
of its total outstanding invoices, ALL of the
accounts due from that customer are
ineligible. To re-establish the customer’s
accounts as eligible, all delinquent accounts
must be paid in full. Exceptions are permitted
if the lender obtains SBA’s prior written
concurrence.
(iii) All re-billed accounts. (Re-billing is the
practice of issuing a credit to a customer and
re-invoicing the obligation in the current
billing cycle. If the re-billing occurs on the
same day in order to correct a clerical error,
the accounts do not have to be excluded.)
242 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(iv) Foreign receivables not backed by
documentary or standby letters of credit,
factor’s guarantee (of purchase), credit
insurance (either commercial risk or
commercial and political risk combinations),
or Government enhancements such as those
provided by the Export Import Bank or the
World Bank.
(v) Offsetting receivables and payables between
the borrower and one of its creditors (contra
accounts).
(vi) Accounts due from affiliate companies.
(vii) Accounts that require subordination to other
parties, such as Governmental contracts where
the bonding company requires assignment of
the project’s receivables.
(ii) When advancing against inventory, a lender should:
(a) Obtain a description of inventory and its value; and
(b) Limit advances to the following types of inventory:
(i) Finished Goods: Eligible if readily saleable
and not obsolete.
(ii) Work in Progress: Eligible if lender obtains
SBA’s prior written concurrence.
(iii) Commodities or Raw Materials: Eligible.
(iii) The dollar amount of ineligible receivables and inventory
will remain unchanged for the entire month. The actual
borrowing availability may increase or decrease as the
balance on the line changes and the receivables and
inventory are generated or converted back to cash.
(iv) A Borrowing Base Certificate (BBC) is required at least
monthly to determine the amount that can be disbursed.
Lender may require a BBC more frequently consistent
with its policy and procedures on similarly-sized non-
SBA guaranteed commercial lines of credit. Lenders may
use their own forms for the BBC or SBA Forms BBC-1
and BBC-2, which are included in Appendix 7.
(c) Repayments will come from cash sales and receivable
collections. Proceeds must pay down the line as collected with
availability to re-advance as long as the borrower is
conforming to the maximum amount of the borrowing base
certificate.
(d) If a cash collateral account is being used and a balance remains
in the cash collateral account after the loan has been paid down
to zero, those funds may be credited to borrower’s operating
Effective Date: October 1, 2011 243
Subpart B SOP 50 10 5(D)
account. There is no provision for interest only payments.
Interest must be paid at least monthly either from borrower’s
own resources OR from loan proceeds at the time of an
advance. Principal payments should be tied to the borrower’s
cash cycle.
(e) Lenders must report the initial disbursement on SBA Form
1050 in accordance with paragraph C.6. above.
(f) Advance Rate for Accounts Receivable
(i) The maximum advance rate cannot exceed 80% of the
eligible receivables. The maximum advance rate may go
up to 90% of the eligible receivables if the receivable is a
prime Federal contract and the lender has obtained an
assignment of the contract proceeds under the
Assignment of Claims Act of 1940 (the Act), 31 USC
3727, or the borrower is a subcontractor and the prime
contractor has obtained an assignment under the Act and
the contract proceeds will be disbursed by a third party
funds control facility. Additional exceptions may be
permitted if the lender obtains SBA’s prior written
concurrence. The advance rate should not include any
net profit. Factors that should be taken into consideration
when determining the maximum advance rate are:
(a) Control and accounting systems of the borrower;
(b) Enhancements such as credit insurance;
(c) Age of receivables;
(d) Credit quality & borrower’s credit policy;
(e) Turnover history;
(f) Industry orientation and condition; and
(g) Net profit margin.
(ii) After initial disbursement, lenders have unilateral
authority to increase or decrease the advance rate for
receivables by as much as 5% above or below the rate
stated in the Authorization. Increases or decreases in the
advance rate above 5% require SBA’s prior written
concurrence.
(g) Inventory Advance Rate
(i) The maximum advance rate cannot exceed 50% of
eligible inventory. Exceptions are permitted if the lender
obtains SBA’s prior written concurrence. Factors to
consider when determining the maximum advance rate
are:
244 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(a) Material and labor costs in manufacturing or
invoice costs (less discounts) of resale goods in
wholesale distribution;
(b) Nature of the product;
(c) Product liability;
(d) Manufacturer’s buyback agreements; and
(e) Physical location of inventory (single locations are
generally easier to control than multiple locations).
(ii) After initial disbursement, lenders have unilateral
authority to increase or decrease the advance rate for
inventory by as much as 5% above or below the rate
stated in the Authorization. Increases or decreases in the
advance rate above 5% require SBA’s prior written
concurrence.
(h) Examinations
If the Working Capital CAPLine is over $1,000,000, lender
must conduct an annual field examination. The field
examination may be conducted by the lender’s staff or a third
party. An examination is a physical verification of the assets
which compose the borrowing base. Examinations must
include a sampling of the assets (receivables and inventory)
included in the borrowing base. The frequency of the
examinations may be determined by the lender based upon the
quality of the records, risk profile of the borrower and
seasonality of the line. At a minimum, an examination must be
conducted prior to the initial disbursement and annually
thereafter. The lender must describe the level and frequency of
examinations in the credit memorandum for the line.
(i) Monitoring
(i) The minimum monitoring requirements for Working
Capital CAPLines are as follows:
(a) Monthly - Borrowing base certificate; Aging of
accounts receivable/payable; and Inventory listing
(if advanced against);
(b) Quarterly – Borrower prepared financial statements;
and
(c) Annually –
(i) If the Working Capital CAPLine is
$1,000,000 or less, credit review including
cash flow analysis, concentration analysis,
collateral analysis, owner/guarantor credit
review and annual site visit. Accounts from
any one customer that constitute more than
Effective Date: October 1, 2011 245
Subpart B SOP 50 10 5(D)
20% of the total outstanding receivables
should not be included in the eligible
borrowing base unless the account is a high
rated public company, a Federal government
account, the customer has a long-standing
positive credit history with the borrower or the
customer is a prime contractor performing on
a Federal government contract. If the account
meets one of those four conditions, the lender
does not need to obtain SBA’s prior written
concurrence to include the account above the
20% in the eligible borrowing base, but must
include a written justification in the loan file.
If, however, the account does not meet one of
the four conditions, then the lender must
obtain SBA’s prior written consent in order to
include the account in the eligible borrowing
base. Such requests must be sent to the
LGPC.
(ii) If the Working Capital CAPLine is over
$1,000,000, credit review including cash flow
analysis, concentration analysis, collateral
analysis, owner/guarantor credit review and
annual field examination. Accounts from any
one customer that constitute more than 20% of
the total outstanding receivables should not be
included in the eligible borrowing base unless
the account is a high rated public company, a
Federal government account, the customer has
a long-standing positive credit history with the
borrower or the customer is a prime contractor
performing on a Federal government contract.
If the account meets one of those four
conditions, the lender does not need to obtain
SBA’s prior written concurrence to include
the account above the 20% in the eligible
borrowing base, but must include a written
justification in the loan file. If, however, the
account does not meet one of the four
conditions, then the lender must obtain SBA’s
prior written consent in order to include the
account in the eligible borrowing base. Such
requests must be sent to the LGPC.
b) Level of Funds Control
The level of funds control for a Working Capital CAPLine, whether a
246 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
borrowing base certificate is used or not, is determined by the banking
relationship the lender has with the borrower.
(1) If the lender has the borrower’s deposit accounts, the lender is not
required to utilize cash collateral accounts or other types of
controlled accounts, but must follow its established procedures for
its similarly-sized, non-SBA guaranteed commercial lines of credit
to monitor payments received.
(2) If the lender does not have the borrower’s deposit accounts, then the
lender must utilize some form of controlled account as follows:
(i) The customers of the borrower can be instructed to send
their remittances via joint payee checks payable to lender
and borrower to the lender; or
(ii) Lock box (bank account under lender control where
borrower’s customers remit payments for accounts
receivable).
c) For Working Capital CAPLines, final disbursement must occur far enough
in advance of maturity so that a sufficient amount of time is available for
the assets financed with the proceeds to be converted back to cash and
available to make final payment at maturity. The date of final
disbursement must be established in the Authorization and should be
reflective of the time required to permit orderly repayment by the maturity
date. Disbursements after the last cash cycle has begun, but before
maturity, require SBA’s prior written approval. No advances can be made
after maturity. When a balance exists on a CAPLine at maturity, the
lender should consider the following:
(1) Enforce final collection;
(2) Renew the line without SBA’s guaranty;
(3) Renew the line, requesting SBA’s guaranty (new application
required if maturity has reached 10 years);
(4) Term out any outstanding balance, with SBA’s concurrence. SBA’s
guaranty would remain in place but there could be no new advances;
and/or
(5) Commence liquidation of supporting collateral.
Effective Date: October 1, 2011 247
Subpart B SOP 50 10 5(D)
CHAPTER 8: POST-DISBURSEMENT, SECONDARY MARKET, SECURITIZATION
AND LENDER REPORTING (SBA FORM 1502)
I. POST-DISBURSEMENT CHANGES
Lenders may request changes on disbursed loans by contacting the appropriate CLSC.
The CLSC contact information can be found at www.sba.gov/for-lenders, then click on
the appropriate CLSC found under ―Find a Center‖ towards the bottom of the page.
The CLSCs have a loan servicing guide on SBA’s web page at:
http://www.sba.gov/aboutsba/sbaprograms/elending/clc/servicing/index.html
A. SBA Form 2237 for routine servicing request submissions is found at:
http://www.sba.gov/sites/default/files/sba_form_2237_0.pdf.
B. Guidance on loan servicing is also outlined in SOP 50-50 4.
C. 13 CFR 120 Subpart E outlines requirements under SBA loan administration.
II. SECONDARY MARKET FOR SBA GUARANTEED LOANS.
The Secondary Market was established to provide greater liquidity to lenders, and
thereby expand availability of commercial credit for small business. The lender
exclusively makes the decision whether to participate in the Secondary Market program
and on the sale of each specific guaranteed loan. Resources to facilitate the sale of
guaranteed portion on the Secondary Market:
A. SBA’s web page for lenders has specific information on the Secondary Market at:
www.sba.gov/for-lenders, then go to the section on the Secondary Market towards the
bottom of the page.
B. Colson Services Corp. is the fiscal transfer agent (FTA) for the guaranteed portion
which is sold on the Secondary Market. They have helpful information on their web
page http://www.colsonservices.com
C. SBA’s SOP 50-50 4, Chapter 8 provides additional information and can be accessed
at
http://www.sba.gov/idc/groups/public/documents/sba_program_office/bank_sop5050.
pdf.
D. SBA Express and Pilot Loan Program loans may be sold on the secondary market.
For variable rate loans, the base rate must be one of the base rates allowed by 13 CFR
120.214(c). A revolving line of credit loan cannot be sold on the Secondary Market,
unless it has been termed out.
E. Loans sold on the secondary market must either use 30/360 or Actual/365 as an
interest accrual method.
III. SECURITIZATION AND OTHER CONVEYANCES
A. Lenders are permitted to securitize the unguaranteed portion of SBA-guaranteed
loans. The unguaranteed portion is sold to a trust, which issues certificates to
investors. The lender is required to hold a portion of the securities issued by the trust.
The size of the lender’s retention is related to the loss rate of the lender. A discussion
248 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
of the SBA requirements for securitization can be found at 13 CFR 120.420 through
13 CFR 120.428.
B. Lenders are permitted to pledge the guaranteed and unguaranteed portions of SBA
loans under conditions approved by SBA. Lenders may pledge up to 90% with notice
to SBA and more than 90% with SBA’s prior written consent. Regulatory guidance
on pledging and other conveyances can be found at 13 CFR 120.430 through 13 CFR
120.435.
IV. LENDER REPORTING
A. Lenders must provide a monthly report on SBA Form 1502 (―Form 1502‖) that
includes loan status information for all of its SBA guaranteed loans, regardless of
whether the borrower made a payment in the current month. The information
required is identified below in Item 6. International trade lenders that participate in
the EWCP must ensure that this reporting function is addressed within their own
operation. EWCP lenders should determine how this reporting is carried out by any
domestic affiliate group(s), to the extent these affiliates participate in other SBA
programs, and to combine loan portfolio reporting into one source point where
possible.
B. The reporting period begins with the first calendar day of the month and continues
through the last calendar day of the month.
C. Lenders must compute and remit with the Form 1502 either the payment owed if the
guaranteed portion has been sold in the secondary market or the ongoing guaranty fee
if the guaranteed portion has not been sold.
D. The due date for the Form 1502 and payments to the Fiscal and Transfer Agent (FTA)
is the third calendar day of each month, or the next business day if the third day is not
a business day, plus a two business day grace period.
E. Lender must submit the Form 1502 to SBA’s Fiscal and Transfer Agent, (FTA) using
one of the following delivery methods: electronic (includes diskette, e-mail, and
FTA’s web site) or hard-copy via mail or fax (includes U.S. and express mail). Each
method is described below followed by a mailing address and wire instructions:
1. E-Mail
All E-mails with spreadsheets or database file attachments must be
accompanied with a corresponding wire transfer of funds and must be sent to:
1502@colsonservices.com
2. Web Site
FTA provides lenders with the option of using its web site to transmit 1502
information. The Form 1502 Connection is found at www.colsonservices.com.
The web site allows lenders to view their portfolio of loans and enter 1502
information on a 1502 data input screen directly on the site. Lender must call
877-245-6159 for an enrollment form to use the 1502 Connection. All 1502
connection entries must be accompanied with a corresponding wire transfer of
funds.
3. Faxes
Effective Date: October 1, 2011 249
Subpart B SOP 50 10 5(D)
All faxed 1502 forms must be accompanied with a corresponding wire transfer
of funds to 718-315-5170.
4. Wire Transfer should be directed to the following wire address:
The Bank of New York
ABA Routing # 021-000-018
For credit to: Colson Services Corp.
7(a) Collection Account # 8900606797
Text: Bank Name & Payment Information
Please note: this is a different wire address than that used for Secondary Market
payoffs and prepayments.
5. Diskette or Hard Copy
FTA may receive the Form 1502 in hard copy format or on a diskette sent via
U.S. Mail or Express Deliver Service to:
Express Mail Address: Regular Mail Address:
Colson Services Corp. Colson Services Corp.
2 Hanson Place, 7th Floor, P. O. Box 54, Bowling Green Station
Brooklyn, NY 11217 New York, NY 10274
Attn.: Cash Processing Attn.: Cash Processing
When the Form 1502 is mailed, it must be accompanied by a corresponding
check.
F. SBA Form 1502 field descriptions and instructions:
1. Lender Information: Must state the lender’s name, address, contact person,
telephone and fax numbers. Check the box in the upper left-hand corner of the
form when any information changes.
2. Month-Ending Information: Show the last day of the month for which
information is being reported. Check the box in the upper right-hand corner
when your Form 1502 includes secondary market prepayments or late
payments.
a) SBA GP Number: The 10 digit numerical SBA-assigned loan
identification number. The GP number is the key to identifying SBA 7(a)
loans on SBA's and the FTA's databases. If less than 10 digits are
reported, the payment information can not be processed. This field is
MANDATORY.
b) Lender Loan Number: The lender's loan identification number, that is, the
number the lender has assigned to the loan. This field is optional and is
included for use by lenders that wish to cross reference their loan number
with the SBA loan number.
c) Next Installment Due Date: The date the borrower is scheduled to make its
next payment. If the loan is:
(1) Current – report the due date of the next scheduled payment;
250 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
(2) Past Due – report the due date of the first missed scheduled payment;
(3) Deferred (status 4) – report the date the borrower is scheduled to
resume making payments;
(4) In Liquidation (status 5) - leave blank;
(5) Paid-in-Full (status 6) - leave blank;
(6) Transferred (status 7) - leave blank;
(7) Purchased by SBA (status 8) - leave blank; or
(8) Fully Undisbursed (status 9) - leave blank.
Special situations: Frequently, when a late payment is made on a newly
disbursed loan or a loan with a large principal balance, there are
insufficient funds for a principal reduction. In such cases, if the borrower
has made the full payment required in the note, credit the entire payment
amount to interest, advance the paid-to-date, and report the next
installment due date as the next payment date. If the borrower did not
make the full payment required in the note, credit the entire payment
amount to interest, advance the paid-to-date and report the next
installment due date as the date this payment was originally due.
d) Status: If the loan is:
(1) Current - interest paid-to-date is less than 31 days from the month
ending date. For example, if the interest paid-to-date 3/2/YY for the
period ending 3/31/YY, leave Status Code column blank;
(2) 31-60 Days Past Due - interest paid-to-date is 31-60 days from the
month ending date. For example, if the interest paid-to-date is
2/12/YY for the month ending 3/31/YY, leave Status Code column
blank;
(3) Over 60 Days Past Due - interest paid-to-date is over 60 days from
the month ending date. For example, if the interest paid-to-date is
1/3/YY for the month ending 3/31/YY, leave Status Code column
blank;
(4) Deferred - principal or principal and interest (P&I) payments have
been deferred. For example, the P& I payments are deferred and are
to resume on 5/1/YY. Report Next Installment Due Date as 5/1/YY,
the loan status as Status Code 4, and the Interest-To date and
Guaranteed Portion Closing Balance as of last payment received;
(5) In Liquidation - if the lender is liquidating the loan, report the loan
each month as Status Code 5 with an Interest-Paid-To date and
Guaranteed Portion Closing Balance until the liquidation is
complete. If SBA is liquidating the loan and the guaranteed portion
has been purchased, report the loan one final time as Status Code 5,
an Interest-Paid-To date and Guaranteed Portion Closing Balance.
Until SBA purchases the guaranteed portion, continue to report the
loan in liquidation status with an Interest-To date and a Guaranteed
Portion Closing Balance;
Effective Date: October 1, 2011 251
Subpart B SOP 50 10 5(D)
(6) Paid in Full - if a loan is paid in full, report the loan as Status Code
6, with a final Guaranteed Portion Principal amount, an Interest-
Paid-To date as of the payoff date and a Guaranteed Portion Closing
Balance of $0.00. It is only necessary to report the loan as paid in
full once. Note - if the guaranteed portion of the loan has been sold
on the secondary market, do not report the loan as Status Code 6 on
the Form 1502 remittance containing the secondary market payoff;
the Status Code column should be left blank. Instead, report the loan
as Status Code 6 at month end as stated above;
(7) Transferred - if a loan has been transferred to another lender, the
Transferring (selling) lender reports the loan one final time as Status
Code 7 with an Interest-Paid-To date and Guaranteed Portion
Closing Balance as of the transfer date. Do not mark the loan as
Paid in Full if it has been transferred to another lender;
(8) Purchased by SBA - if the guaranteed portion of a loan is purchased
by SBA, report one time as Status Code 8 with an Interest-Paid-To
date and Guaranteed Portion Closing Balance as of the purchase
date;
(9) Purchased by Lender from the Secondary Market - if a lender has
purchased the guaranteed portion from the secondary market because
the borrower is in default or the lender has received special
permission from SBA, but SBA has not purchased the guaranteed
portion from lender, the lender must continue to report on the loan
monthly using the appropriate status code; or
(10) Fully Undisbursed - if a loan has not had any disbursements made to
the borrower, report as Status Code 9 and indicate the Amount
Undisbursed on Total Loan. Revolving loans - once the first
disbursement takes place, the loan must not be reported as Status
Code 9 again, as long as the loan is outstanding, even in instances
where the full amount of the credit line is repaid by the Borrower.
(11) Amt Disbursed this Period on Total Loan - The total amount
disbursed during the reporting month on 100% of the loan. If no
amounts were disbursed, leave blank. Do not reduce the amount
disbursed by borrower principal repayments.
Example: Based on a $100,000.00 loan (100% or total
approved)
3/02/YY: $10,000 disbursed (on total loan)
3/25/YY: $10,000 disbursed (on total loan)
Amount disbursed for month ending 3/31/YY =
$20,000
e) Amt Undisbursed on Total Loan: Of the total approved amount (100%
amount), the amount that has not been disbursed by the lender as of the
month ending date. If fully disbursed, leave blank.
Example: Based on a $100,000.00 loan (100% or total approved)
252 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
3/02/YY: $10,000 disbursed (on total loan)
3/25/YY: $10,000 disbursed (on total loan)
Amount undisbursed for month ending 3/31/YY = $80,000.00
f) Interest Rate:
(1) Sold Loans - the rate of interest used to calculate the interest
payment due the FTA (i.e., the borrower's note rate less the lender's
servicing fee percentage).
Example: Note rate = Prime + 2.50%
Lender's servicing fee = 1.00%
Secondary market rate = Prime + 1.50%
Prime = 6.75%
Rate reported = 8.25%
(2) Unsold Loans - if an interest payment is reported, the rate of interest
charged to the borrower.
Example: Note rate = Prime + 2.50%
Prime = 6.75%
Rate reported = 9.25%
(3) No Payment Received - if no interest payment was received, leave
blank.
g) Guaranteed Portion Interest:
(1) Sold Loans - the interest payment due to the FTA on behalf of the
secondary market investor. That is, the guaranteed portion of the
borrower's interest payment received less the lender's servicing fee.
Example: $100,000.00 x 80% guaranty = $80,000.00
guaranteed portion
Interest payment on total loan @ 12.00% = $1,000.00;
On guaranteed portion = $800.00
Lender's servicing fee = $80,000.00 x 1% ÷ 360 x 30 = $66.67
Interest due to FTA = $800.00 - $66.67 = $733.33
(2) Unsold Loans - the borrower's interest payment received multiplied
by the guaranty percentage. Common reporting errors:
(a) the SBA fee amount or guaranteed portion balance is reported
in this column;
(b) interest on 100% of the loan is reported
Example: Interest payment on total loan
= $1,000.00 x 80% guaranty = $800.00
Effective Date: October 1, 2011 253
Subpart B SOP 50 10 5(D)
(3) No Payment Received - if no interest payment was received, leave
blank.
h) Guaranteed Portion Principal:
(1) Sold Loans- the principal payment due the FTA on behalf of the
secondary market investor. That is, the guaranteed portion of the
borrower's principal payment received.
Example: Principal payment on total loan
= $200.00 x 80% guaranty = $160.00
(2) Unsold Loans - same as for sold loans.
Example: Principal payment on total loan
= $200.00 x 80% guaranty = $160.00
(3) No Payment Received - if no principal payment was received, leave
blank.
Note: For unsold loans, if interest and principal payments due in
prior months (i.e., past due payments) are received in the current
reporting month, report each payment received on this month's Form
1502.
i) Total to FTA: Guar. Portion Payment or Fee: The sum of the guaranteed
portion interest + guaranteed portion principal or SBA's on-going guaranty
fee is reported in this column, depending on whether the loan is sold or
unsold.
(1) Sold Loans - the sum of the guaranteed portion interest + guaranteed
portion principal is reported and remitted to the FTA.
Example: Guaranteed Interest (less servicing fee) = $733.33
Guaranteed Principal = $160.00
Total to FTA = $893.33
(2) Unsold Loans (subject to SBA ongoing guaranty fee) - SBA’s
ongoing guaranty fee is remitted every month the borrower makes an
interest payment.
(3) For term loans, SBA's ongoing guaranty fee calculation is:
[Guaranteed Portion Opening Balance] x [ongoing fee] ÷ [Calendar
Basis] x [# of Days]
Example: Total Loan Amount is $100,000
Guaranty Percentage is 80%
Ongoing Guaranty Fee is 50 basis points
Accrual Method = 360/360
$100,000.00 x 80% guaranty = $80,000.00
254 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart B
$80,000.00 x .005 ÷ 360 x 30 days = $33.33
Total to FTA = $33.33
(4) For revolving loans or term loans with multiple disbursements,
SBA's ongoing guaranty fee calculation is:
[Guaranteed Interest Amount] x [ongoing fee] ÷ [the Note Rate]
Example: Guaranteed Interest Amount = $800.00
$800.00 x .005 ÷ 10.00% = $40.00
Total to FTA = $40.00
(5) Payment Received - if no payment was received, leave blank or fill
with $0.00. The SBA fee is not due to the FTA if the borrower did
not make an interest payment in the reporting month.
j) Interest Period From: The date from which the reported interest started or
accrued from. Leave blank if no interest payment is reported.
k) Interest Period To: The date to which the reported interest is paid or
accrued to. If no interest payment was received from the borrower in this
reporting month, indicate the interest paid-to-date as of the last payment
received.
Example: $100,000.00 total loan; 12.00% interest rate; 30/360 basis
Borrower makes $1,000.00 interest payment on 3/15/YY. Last interest
paid-to-date was 2/15/YY.
Calculation: $100,000.00 x .12 ÷ 360 x 30 days = $1,000.00
For the reporting period ending 3/31/YY
Interest Period From: 2/15/YY Interest Period To: 3/15/YY
For newly disbursed loans that are not in repayment mode, report the date
interest accrues from (either note date or first disbursement date) in this
column. Also, be certain to indicate the Guaranteed Portion Closing
Balance in the appropriate column.
l) # of Days: The number of days covered by the reported interest payment,
determined in accordance with the calendar basis used to compute interest.
If no payment was received, leave blank.
Example: 2/15/YY to 3/15/YY = 30 days on a 30/360 basis
2/15/YY to 3/15/YY = 28 days on a 365/365 basis (non-leap years)
m) Calendar Basis: The interest computation calendar method stated at the
time of the original loan sale into the secondary market (e.g., as on 1086)
or as prescribed in the Loan Authorization Agreement or Note. Acceptable
computation methods for secondary market loans are 30/360 and Actual
days/365.
Effective Date: October 1, 2011 255
Subpart B SOP 50 10 5(D)
n) Guaranteed Portion Closing Balance: The balance remaining after
applying the borrower's most recent principal payment multiplied by the
guaranty percentage.
(1) Sold Loans - the guaranteed principal balance outstanding after the
application of the reported guaranteed portion principal payment.
(2) Unsold Loans - same as for sold loans.
Example: Total loan = $100,000.00 with 80% guaranty
Guaranteed principal balance = $80,000.00
Principal payment = $200.00
Guaranteed principal payment = $160.00 (i.e., $200.00 x 80%)
Total loan closing balance = $99,800.00 (i.e., $100,000.00 -
$200.00)
Guaranteed Portion Closing Balance = $79,840.00 (i.e., $99,800.00
x 80% or $80,000.00 -$160.00)
(3) No Payment Received - if no payment was received from the
borrower, indicate the guaranteed principal balance as of the last
payment received.
o) Remittance Penalty: Penalty amount if the lender does not forward
secondary market payments according to the terms in SBA Form 1086.
p) Total (Total to FTA column): The sum of each of the dollar values in the
Total to FTA column.
q) Total (Penalty column): The sum of each of the dollar values in the
Remittance Penalty column.
r) Grand Total: Sum of the totals in Total to FTA column and Remittance
Penalty column, equals the amount of the check or wire remitted to the
FTA.
s) Check / Wire Amt: The amount of the check or wire sent for this
remittance. This amount should be the same as the total in Field 19.
256 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
SUBPART C
SECTION 504 CERTIFIED DEVELOPMENT COMPANY LOAN PROGRAM
PURPOSE OF THIS SUBPART
This subpart contains the policies and procedures governing SBA’s 504 Certified Development
Company Loan Program. The policies and procedures governing Certified Development
Companies are contained in Subpart A of this SOP.
When the policy set forth in this Subpart does not adequately address the unique circumstances
regarding a particular matter, an exception to policy may be approved by the D/FA. The D/FA
may not approve an exception to policy if such exception would be inconsistent with a statute or
regulation. A request for an exception to policy must be submitted to the SLPC. The SLPC will
analyze the request and make a recommendation to the D/FA, or individual acting in that
capacity, who will make the final decision. The decision must be documented in the file. This
procedure may only be used in situations where a minor deviation from standard policy is
necessary for the specific situation. Exceptions to policy will be considered on a case-by-case
basis and the decision will only apply to the specific request.
CHAPTER 1: GENERAL PROVISIONS
I. PURPOSE OF THE 504 CERTIFIED DEVELOPMENT COMPANY LOAN
PROGRAM
The 504 loan program is an economic development program designed to finance fixed
assets for small businesses on reasonable terms and to stimulate employment through a
job retention/creation goal. 13 CFR 120.800
II. CREDIT STANDARDS
A. Certified Development Companies (CDCs) must analyze each application in a
commercially reasonable manner, consistent with prudent lending standards. On 504
loans, the cash flow of the Small Business Applicant is the primary source of
repayment, not the liquidation of collateral. Thus, if the lender’s financial analysis
demonstrates that the Small Business 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.
B. The CDC’s analysis must include:
1. A financial analysis of the Small Business Applicant’s pro forma balance sheet.
The pro forma balance sheet must reflect the loan proceeds, use of the loan
proceeds, and any other adjustments such as required equity injection or stand-
by debt.
2. A financial analysis of repayment ability based on historical income statements,
tax returns (if an existing business) and projections, including the
reasonableness of the supporting assumptions.
Effective Date: October 1, 2011 257
Subpart C SOP 50 10 5(D)
3. A ratio analysis of the financial statements including comments on any trends
and a comparison with industry averages.
4. A discussion of the owners’ and managers’ relevant experience in the type of
business, as well as their personal credit histories.
5. An analysis of collateral adequacy, including an evaluation of the collateral and
lien position offered as well as the liquidation value. (For further guidance,
please see SOP 50 51, Loan Liquidation and Acquired Property.)
6. A discussion of the Small Business Applicant’s credit experience, including a
review of business credit reports and any experience the CDC may have with
the applicant.
7. Other relevant information (for example, if the application involves a franchise,
the success of the franchise).
III. DEFINITIONS
The following terms have the same meaning wherever they are used in this subpart.
Defined terms are capitalized wherever they appear. 13 CFR 120.802 Also refer to 13
CFR 120.10 for additional definitions.
A. Area of Operations is a geographic area in which a CDC conducts its activities.
B. Central Servicing Agent (CSA) is an entity that receives and disburses funds among
the various parties involved in 504 financing under a master servicing agent
agreement with SBA.
C. Certificate is a document issued by SBA or its agent representing ownership of all or
part of a Debenture Pool.
D. Debenture is an obligation issued by a CDC and guaranteed 100% by SBA, the
proceeds of which are used to fund a 504 loan.
E. Debenture Pool is an aggregation of Debentures.
F. Designated Attorney is the CDC closing attorney that SBA has approved to close
loans under an expedited closing process for a Priority CDC.
G. Interim Financing is any disbursement of funds (other than the borrower’s
contribution) to finance eligible project costs after the loan is approved by SBA but
before the debenture is sold.
H. Investor is an owner of a beneficial interest in a Debenture Pool.
I. Job Opportunity is a full time (or equivalent) permanent, or contracted, job created
within two years of receipt of 504 funds, or retained in the community because of a
504 loan.
J. Lead SBA Office is the SBA District Office designated by SBA as the primary
liaison between SBA and a CDC and with responsibility for managing SBA's
relationship with that CDC.
K. Limited or Special Purpose Property - A limited-market property with a unique
physical design, special construction materials, or a layout that restricts it utility to the
use for which it was built.
L. Loan Program Requirements are requirements imposed upon CDCs by statute,
SBA regulations, any agreement the CDC has executed with SBA, SBA SOPs,
258 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
official SBA notices and forms applicable to the 504 loan program, debentures, and
loan authorizations, as such requirements are issued and revised by SBA from time to
time. 13 CFR 120.10
M. Local Economic Area is an area, as determined by SBA, that is in a State other than
the State in which an existing CDC (or an applicant applying to become a CDC) is
incorporated, is contiguous to the CDC's existing Area of Operations (or the
applicant's proposed Area of Operations) of its State of incorporation, and is a part of
a local trade area that is contiguous to the CDC's Area of Operations (or applicant's
proposed Area of Operations) of its State of incorporation. Examples of a local trade
area would be a city that is bisected by a State line or a metropolitan statistical area
that is bisected by a State line.
N. Multi-State CDC is a CDC that is incorporated in one State and is authorized by
SBA to operate as a CDC in a State contiguous to its State of incorporation beyond
any contiguous Local Economic Areas.
O. Net Debenture Proceeds is the portion of Debenture proceeds that finance eligible
Project costs (excluding administrative costs).
P. New Business is a business that is 2 years old or less at the time the loan is approved.
A business that is more than 2 years old at the time the loan is approved may be
considered a New Business if it is a change of ownership that will result in new,
unproven ownership/management and increased debt unrelated to business
operations. If there is a change of ownership, the CDC must review the management
and level of debt and make a determination whether an additional borrower’s
contribution of 5% is necessary.
Q. Priority CDC is a CDC certified to participate on a permanent basis in the program
(see 13 CFR 120.812) that SBA has approved to participate in an expedited 504 loan
and Debenture closing process.
R. Project is the purchase or lease, and/or improvement or renovation of long-term fixed
assets by a small business, with 504 financing, for use in its business operations.
S. Project Property is one or more long-term fixed assets, such as land, buildings,
machinery, and equipment, acquired or improved by a small business, with 504
financing, for use in its business operations.
T. Special Geographic Areas include Alaska, Hawaii, State-designated Enterprise
Zones, Empowerment Zones, Enterprise Communities and Labor Surplus Areas.
U. Third Party Lender is usually a financial institution that provides the Third Party
Loan and typically has a first lien on the project collateral. SBA does not permit the
CDC to be the Third Party Lender on Projects financed by the CDC.
V. Third Party Loan is a loan from a commercial or private lender, investor, or Federal
(non-SBA), State or local government source that is part of the Project financing.
W. Underwriter is an entity approved by SBA to form Debenture Pools and arrange for
the sale of Certificates.
IV. HOW A 504 PROJECT IS FINANCED
Typical 504 Structures
Standard Financing New Business OR Both New AND
Effective Date: October 1, 2011 259
Subpart C SOP 50 10 5(D)
Structure Limited or Special Limited or Special
Purpose Property Purpose Property
Third Party Lender 50 50 50
CDC/SBA 40 35 30
Borrower 10 15 20
A 504 project has three main partners and generally: a Third Party Lender provides 50%
or more of the financing; a Certified Development Company (CDC) provides up to 40%
of the financing through a 504 debenture (guaranteed 100% by SBA); and an applicant
(borrower) injects at least 10% of the financing. 13 CFR 120.801 and 13 CFR 120.900
No more than 50% of eligible Project costs can be from Federal sources. 13 CFR
120.930(a)
Please see Chapter 7 of this Subpart for a discussion of the maximum debenture amount.
A. Third Party Loan 13 CFR 120.920
1. The Third Party Lender must be in place at the time of application and must be
evidenced by a letter included in the application package outlining the terms and
conditions of the Third Party Loan to enable SBA to evaluate the 504
application.
2. The terms of the Third Party Loan are defined in 13 CFR 120.921.
3. The Third Party Loan may be closed and begin amortizing prior to the
debenture funding as long as the Third Party Lender obtains the borrower’s
written consent.
4. The Third Party Lender’s note and loan documents must not have any cross-
default, ―deem-at-risk,‖ or any other provisions which allow the Third Party
Lender to make demand prior to maturity unless the loan is in default.
5. The Third Party Lender must not establish a preference beyond its rights as a
senior lender on the Third Party Loan without the prior written consent of the
CDC/SBA. If SBA has knowledge (through a letter from the Third Party
Lender presented with the application package) of a requirement by the Third
Party Lender for collateral in addition to the Project Property, SBA’s issuance
of an Authorization will be considered to be prior written consent for the
preference. SBA may or may not choose to take a subordinate position on the
additional collateral based upon the factors listed in Chapter 3. If the Third
Party Lender does take additional collateral or otherwise have a preference, in
the case of liquidation, any proceeds received as a result of a preference must be
applied to the Third Party Lender’s debt prior to the proceeds from liquidation
of common collateral held by the CDC/SBA and the Third Party Lender. If the
additional collateral or other preference no longer exists at the time of
liquidation or has insufficient value to justify the cost of collection, then the
Third Party Lender is not required to liquidate such collateral or other
preference provided the Third Party Lender notified CDC/SBA and obtained
CDC/SBA’s written consent. (13 CFR 120.925)
6. Interest Rate Swap Contracts
260 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
a) An interest rate swap is a contract between two parties where one party
pays a fee in exchange for an agreement by the other party to pay any
interest in excess of an established amount. The contract may last for all
or part of the term of the loan. The swap contract only relates to the
payment of interest.
Example: A borrower has a prime plus 2% interest rate on a Third Party
Loan variable rate loan (presently 5.25%). The borrower could purchase
an interest rate swap contract that would set the interest rate at 7%. When
the Note rate is lower than the rate paid by the borrower on the swap
contract (7%), the swap seller keeps the extra amount as compensation for
the risk that rates will at some point exceed 7%. When the Note rate is
higher than the rate paid by the borrower on the swap contract, the
borrower would continue to pay the fixed rate of 7% and the swap seller
would pay the difference above 7% to the lender. The ability to stabilize
the amount of the loan payment each month is the benefit to the borrower
of an interest rate swap contract.
b) Third Party Loans may use swap contracts. In order to use an interest rate
swap on a Third Party Loan, the interest rate swap contract must meet the
following conditions:
(1) The interest rate swap contract is an agreement between the small
business borrower and the lender or, if the swap seller is not the
lender, a third party. SBA is not a party to the interest rate swap
contract.
(2) SBA will not review swap contracts for borrowers or provide
guidance on their use. While swap contracts should not have a
significant impact on the cost of the loan, SBA will not publish any
guidelines on the cost of these contracts.
(3) Swap contracts may be used on new or existing Third Party Loans.
(4) The swap contract does not have to last for the entire length of the
Third Party Loan.
(5) SBA does not have a standard form for an interest rate swap
contract.
(6) Any fees owed the swap counterparty as a result of the default by the
borrower will be subordinated to the SBA 504 loan.
B. Interim Financing
Loans under the 504 program provide permanent or take-out financing. An interim
lender (either the Third Party Lender or another lender) provides the interim financing
to cover the period between SBA approval of the project and the debenture sale.
After the project is completed, the CDC will close the 504 loan. The proceeds from
the Debenture sale repay the interim lender for the amount of the 504 project costs
that it advanced on an interim basis.
Effective Date: October 1, 2011 261
Subpart C SOP 50 10 5(D)
1. Any experienced, independent source including the third party lender may
supply interim financing provided they meet the conditions described in 13 CFR
120.890. A CDC may provide interim financing but only for a project financed
by another CDC. As stated in the regulation, neither the borrower nor an
Associate of the borrower may supply interim financing.
2. The interim financing must be fully disbursed and the project completed prior to
the sale of the Debenture with one exception. A portion of the debenture
proceeds may be put into an escrow account to complete a minor portion of the
total project. Refer to 13 CFR 120.961 for details.
3. If the Third Party Lender provides the interim loan, it may do so using:
a) An interim note which will be paid in full with the net debenture proceeds
and a permanent note; or
b) A single note, which includes both the interim and permanent financing,
that will be reduced by the net debenture proceeds.
Example of Interim Financing of Eligible Project Costs
Expenses Incurred Prior to the 504 Application:
Purchase of Land (Principal portion of short-term financing) $180,000
Equity in Land 20,000
Purchase of M & E (Within 9 months of application) 100,000
Cost estimates submitted at time of application:
Construction of Building 600,000
Total Project Costs 900,000
Permanent Financing Structure:
First Mortgage Lender 50% 450,000
504 Net Proceeds 40% 360,000
Borrower Equity 10% 90,000
Total Financing 100% $900,000
In this example the interim loan would be $810,000. It must take out all the
eligible pre-application costs other than the required equity in the permanent
financing of $90,000. The borrower cannot be reimbursed directly from the net
debenture proceeds but the lender can refinance these with an interim loan at
any time prior to the loan closing.
4.The interim lender must make a number of certifications at the time of the
debenture closing. The certifications are stated in 13 CFR 120.891 and 120.892.
If the interim lender cannot certify as required, then the debenture cannot be
funded.
C. Borrower’s Contribution 13 CFR 120.910, 120.911, 120.912 and 120.913
1. The borrower must inject at least 10% of the Project cost.
2. New businesses must inject at least 15%.
3. Businesses with a Limited or Special Purpose Property also must inject 15%.
SBA considers only the following as a Limited or Special Purpose Property:
262 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
a) Amusement parks;
b) Bowling alleys;
c) Car wash properties;
d) Cemeteries;
e) Clubhouses;
f) Cold storage facilities where more than 50% of total square footage is
equipped for refrigeration;
g) Dormitories;
h) Farms, including dairy facilities;
i) Funeral homes with crematoriums;
j) Gas stations;
k) Golf courses;
l) Hospitals, surgery centers, urgent care centers and other health or medical
facilities;
m) Hotels and motels;
n) Marinas;
o) Mines;
p) Museums;
q) Nursing homes, including assisted living facilities;
r) Oil wells;
s) Quarries, including gravel pits;
t) Railroads;
u) Sanitary landfills;
v) Service centers (e.g., oil and lube, brake or transmission centers) with pits
and in ground lifts;
w) Sports arenas;
x) Swimming pools;
y) Tennis clubs;
z) Theaters; and
aa) Wineries.
4. If a Project finances both a New Business and a Limited or Special Purpose
Property, the applicant is required to inject 20% of the project cost.
5. The additional borrower’s contribution will reduce the SBA’s portion of the
financing.
6. The borrower’s equity in land previously acquired may be counted toward the
borrower’s contribution. The borrower also may count toward its contribution,
equity in land and buildings that will be part of the Project if they are adding a
new building to the same property.
7. If the borrower’s contribution is borrowed:
Effective Date: October 1, 2011 263
Subpart C SOP 50 10 5(D)
a) Any lien position on the Project Property must be subordinate to the 504
loan;
b) The borrower may not pay the loan for its contribution at a faster rate than
the 504 loan (13 CFR 120.912) unless it is approved by the D/FA or
designee; and
c) If the borrowed contribution is collateralized by assets other than the
Project Property, the borrower must demonstrate repayment of the loan for
its contribution from the cash flow of the business or other sources.
264 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
CHAPTER 2: ELIGIBILITY
I. INTRODUCTION
This section discusses the steps necessary to determine if an applicant is eligible for a 504 loan.
The eligibility issues that apply to the CDC or the structure of the loan are discussed elsewhere.
(13 CFR 120.100, 120.101, 120.102, 120.110, 120.860, 120.861, 120.880 and 120.881)
Eligibility should be determined as early in the loan making process as possible. The small
business must meet the eligibility requirements at the time of application and, with the exception
of the size standard, must continue to meet these requirements through the closing and
disbursement of the loan. (See 504 Eligibility Checklist.)
II. SUMMARY OF ELIGIBLITY REQUIREMENTS
A. The Small Business Applicant must:
1. Be an operating business;
2. Be organized for profit;
3. Be located in the United States (includes territories and possessions);
4. Be small (as defined by SBA); and
5. Demonstrate a need for the desired credit; (13 CFR 120.100)
B. CDC must certify that credit is not available elsewhere on reasonable terms; (13 CFR
120.101)
C. The Small Business Applicant must show that the funds are not available from
alternative sources, including personal resources of the principals; (13 CFR 120.102)
D. The following businesses are ineligible (13 CFR 120.110):
1. Non-profit businesses (for profit subsidiaries are eligible);
2. Financial businesses primarily engaged in the business of lending, such as
banks, finance companies, and factors (pawn shops, although engaged in
lending, may qualify in some circumstances);
3. Passive businesses owned by developers and landlords that do not actively use
or occupy the assets acquired or improved with the loan proceeds (except
Eligible Passive Companies);
4. Life insurance companies;
5. Businesses located in a foreign country (businesses in the U.S. owned by aliens
may qualify)
6. Pyramid sales distribution plans;
7. Businesses deriving more than one-third of gross annual revenue from legal
gambling activities;
8. Businesses engaged in any illegal activity;
9. Private clubs and businesses which limit the number of memberships for
reasons other than capacity;
10. Government-owned entities (except for businesses owned or controlled by a
Native American tribe);
Effective Date: October 1, 2011 265
Subpart C SOP 50 10 5(D)
11. Businesses principally engaged in teaching, instructing, counseling or
indoctrinating religion or religious beliefs, whether in a religious or secular
setting;
12. Consumer and marketing cooperatives (producer cooperatives are eligible);
13. Loan packagers earning more than one third of their gross annual revenue from
packaging SBA loans;
14. Businesses with an Associate who is incarcerated, on probation, on parole, or
has been indicted for a felony or a crime of moral turpitude;
15. Businesses in which the CDC or any of its Associates owns an equity interest;
16. Businesses which present live performances of a prurient sexual nature; or
derive directly or indirectly more than 5% of their gross revenue through the
sale of products or services, or the presentation of any depictions or displays of
a prurient sexual nature;
17. A business or applicant involved in a business which defaulted on a Federal
loan or Federally assisted financing resulting in a loss to the government. A
compromise agreement shall also be considered a loss;
18. Businesses primarily engaged in political or lobbying activities; and
19. Speculative businesses (such as oil wildcatting).
III. ELIGIBILITY REQUIREMENTS
A. The Small Business Must Be Organized for Profit
1. All small business applicants must be organized for profit. Non-profit
businesses are not eligible for SBA business loan assistance.
2. For-profit businesses owned by a non-profit business are eligible if they meet
SBA’s other eligibility requirements. The non-profit affiliate must be included
in the calculation of the size of the business. This may result in a determination
that the for-profit entity is not considered small by SBA size standards and
therefore not eligible. In addition, if the non-profit affiliate owns 20% or more
of the for-profit business but cannot or will not guarantee the loan, the for-profit
business is not eligible for SBA assistance. If the loan proceeds are used for the
benefit of the non-profit rather than the for-profit business, the for-profit
business is not eligible.
3. Documentation that may be reviewed to determine for-profit status:
a) Articles of Incorporation-- filed with Secretary of State or similar
department in the state where the applicant is organized or conducts
operations;
b) Articles of Organization-- (for a Limited Liability Corporation (LLC))
filed with Secretary of State or similar department in the state where the
applicant is organized or conducts operations;
c) Corporate By-Laws and any amendments;
d) Partnership Agreements;
e) Association By-laws; and
f) Tax Returns.
266 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
B. The Applicant Must Be Small Under SBA Size Requirements Applicable to 504
Financial Assistance (13 CFR 121.301(b))
1. The applicant business (considering its affiliates, if any) must meet either the
same size standards applicable to 7(a) business loans set forth in 13 CFR
121.301(a) (see also Subpart B, Chapter 2 of this SOP) or the size standards for
development company loans set forth in 13 CFR 121.301(b) , which are as
follows:
The Small Business Applicant and its Affiliates (affiliation defined at 13 CFR
121.103) must have:
a) A Tangible net worth of $15 million or less; and
b) Average net income after Federal income taxes (excluding any carry-over
losses) for the preceding two completed fiscal years of $5 million or less.
2. When size status of an applicant is determined (13 CFR 121.302)
The size of an applicant for SBA financial assistance is determined as of the
date the application for such financial assistance is accepted for processing by
SBA. Changes in the size of the business subsequent to the applicable date
when size is determined will not disqualify an applicant for assistance, even if
the financing resulted in the business becoming large.
3. The applicable size standards are increased by 25% when the applicant agrees to
use all of the financial assistance within a labor surplus area. Labor surplus
areas are designated by the Department of Labor. (13 CFR 121.301(e))
4. Formal size determinations
a) By signing the application, a small business applicant is deemed to have
certified that it is small under the applicable size standard. SBA or CDC
may request additional information concerning the applicant’s size based
on information supplied in the application or any other source. A PCLP
CDC may accept as true the size information provided by an applicant,
unless credible evidence to the contrary is apparent.
b) Prior to denial of eligibility based on size, a formal size or affiliation
determination may be requested by a small business applicant, the SBA
loan application processing office or a CDC. The request must be made to
the Government Contracting Area Director serving the area in which the
headquarters of the applicant is located, regardless of the location of the
parent company or affiliates. 13 CFR 121.303
5. Review of Franchise/License/Dealer/Jobber or Similar Agreements
The discussion in this section applies to franchise agreements, license
agreements, dealer agreements (with the exception of dealer agreements from
new car manufacturers which are not reviewed for eligibility), jobber or similar
agreements. A finding of that the agreement is acceptable under this section
means that the agreement does not impose unacceptable control provisions
on the Small Business Applicant which would result in affiliation. The fact
that the agreement is acceptable does not mean that the Small Business
Applicant is eligible.
Effective Date: October 1, 2011 267
Subpart C SOP 50 10 5(D)
Franchise development agreements (often referred to as Master Franchise
Agreements) are ineligible as they have been determined to be inherently
speculative and are considered to be passive investments. Development
agreements may include, but are not limited to: (a) agreements which provide
the developer a geographic area with which to grow additional franchise units;
and (b) agreements where the developer’s income is derived from the royalty
payments of each franchise unit in the developer’s geographic territory.
Franchise development agreements should not be confused with area
development rights within a franchise agreement, which allow a specific
franchisee to operate a number of franchises within a specified geographic area.
An agreement containing area development rights may be eligible if it complies
with the guidance in this section.
a) Affiliation can exist through:
(1) Common ownership;
(2) Common management;
(3) Excessive restrictions upon the sale/transfer of the franchise interest;
or
(4) Control by a franchisor/licensor/dealer/jobber, etc. either directly or
through an affiliated entity or agent such that the applicant does not
have the independent right to both profit from its efforts and bear the
risk of loss commensurate with ownership. (13 CFR 121.103 (i))
b) Review
SBA requires in all cases a determination as to whether affiliation exists
when the applicant has or will have a Franchise/License/Dealer/Jobber or
similar relationship. Regardless of the title of the agreement, if the
franchisor/licensor/dealer/jobber, etc. provides a product or service that is
critical to the Small Business Applicant’s business operation and/or
provides a trademark critical to the Small Business Applicant’s business
operation, then the agreement and any related documents must be
reviewed.
c) Review and determination must be conducted by:
(1) SBA--for all Regular and ALP loans; and
(2) CDC --for PCLP loans.
(3) In all cases, the Franchise/License/Dealer/Jobber or similar
agreement, including any amendments and/or addendums must be
executed by all parties prior to submission of the closing package to
SBA for funding.
d) Franchise Information Assistance
CDCs must go to http://www.sba.gov/content/franchise-findings to check
the SBA Franchise Findings List for information with respect to a specific
268 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
Franchise/License/Dealer/Jobber or similar agreement to review specific
findings and see if there have been any findings for a particular
Franchise/License/Dealer/Jobber or similar agreement, which if still in the
Agreement, would make the Agreement ineligible. CDCs may also
contact SBA at franchise@sba.gov to request statistical information on
SBA lending to a specific franchise operation. The mailbox is not
designed to evaluate franchise material, so lenders should not send
franchise documents to this mailbox for review. In addition, CDCs
may contact SBA Counsel in the District Office or the SBA Franchise
Counsel for specific questions regarding eligibility determinations.
e) Registry of approved franchise/license/dealer/jobber or similar agreements
To facilitate the review of these agreements, the Franchise Registry
(―Registry‖) lists franchise agreements that have been approved by SBA.
CDC must ensure that the documents with the loan application are the
same as the documents listed on the Registry.
CDCs must follow the procedures set forth below to determine franchise
program eligibility for a loan application.
(1) Check www.franchiseregistry.com to determine if the agreement is
listed.
(a) Process to determine if Listed on Registry
CDC must log into the Lender’s section from the Home Page
of the Franchise Registry using their password. Upon logging
into the Lender’s section, CDC should type the name of the
franchise system in the Search Box to determine if a specific
franchise system has been listed on the Registry.
If the franchise system is not listed, CDC should follow the
procedure under (b) below.
If the franchise system is listed, CDC should click on the plus
(+) box to determine if the specific year (effective date) of the
Agreement has been listed. Agreements have been organized
into loan folders.
If the specific year of the Agreement is not listed as a loan
folder, CDC should follow the procedure under (b) below.
(CDCs are no longer able to use the generic Certification of No
Material Change Form.)
If the specific year of the Agreement is listed as a loan folder,
CDC should open the loan folder. CDC should then click on
―View Agreement Detail‖ to review the specific eligibility of
the specific Agreement. CDC should review the Agreement
Application Summary page for the following information:
Effective Date: October 1, 2011 269
Subpart C SOP 50 10 5(D)
(i) Determination Date (Approval) of the Agreement;
(ii) Addendum required; and
(iii) Specific Eligibility Notes (formally Footnotes).
CDC should return to the Loan Folder to print the Certification
of Franchise Documents.
In order for a franchise agreement to be eligible under the
Franchise Registry the CDC’s file must include the following:
(i) Executed franchise/license/dealer/jobber Agreement and
any approved attachments and exhibits;
(ii) Executed Addendum (if required);
(iii) Executed Certification of Franchise Documents; and
(iv) Compliance with any required eligibility notes.
(b) Not Listed on Registry
(i) If the Agreement is not listed on the Registry, a review
must be made of the Agreement and all related
documents.
(ii) CDCs must consult the franchise findings list at
http://www.sba.gov/content/franchise-findings to see if
there have been any findings for a particular
Franchise/License/Dealer/Jobber or similar agreement,
which if still in the Agreement, would make the
Agreement ineligible. The information provided by the
SBA Franchise Findings List should be used by CDCs to
ensure they are making informed eligibility
determinations. CDCs should consult the findings list
under the ―fix available‖ category to see if there is a fix to
remedy the specific issues noted on the findings list.
(iii) If an Agreement has no negotiated fix available and the
noted findings remain in the
Franchise/License/Dealer/Jobber or similar agreement,
then the Agreement should be determined to be ineligible.
CDC may contact the SBA Franchise Counsel for
additional guidance.
(2) Affiliation Issues to Consider
The following are examples of common situations that should be
examined to determine if affiliation exists.
270 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
(a) Control
The provisions of the Agreement may not:
(i) Set the Applicant’s net profit;
(ii) Require the payment of excessive
Franchise/License/Dealer/Jobber, etc. continuing fees;
(iii) Directly control the applicant’s employees including
hiring or terminating (unless under a short term step-in
agreement);
(iv) Require the Applicant to deposit all receipts or revenues
into an account which Franchisor/Licensor/Dealer/Jobber,
etc. controls, or from which withdrawals may be made
only with Franchisor/Licensor/Dealer/Jobber, etc. consent
(whether or not a fee is charged to the franchisee);
(v) Include an option to purchase the applicant’s personal
property upon expiration or breach of the Agreement,
where the Franchisor/Licensor/Dealer/Jobber, etc. has the
ability to control the price at the time of purchase (right
of first refusal is allowed provided it is on commercially
reasonable terms);
(vi) Allow the hiring of the applicant’s employees by the
Franchisor/Licensor/Dealer/Jobber, etc. (in the temporary
personnel industry, consider temporary employees hired
by the franchisee to be employees of the franchisor); or
(vii) Require that the billing activities for the applicant be
handled by the Franchisor/Licensor/Dealer/ Jobber, etc.
or a Third Party chosen by the
Franchisor/Licensor/Dealer/Jobber, etc.
(viii) Require the franchisee or EPC owner to sell their real
property (or lease) to the franchisor upon expiration or
breach of the Agreement. (This type of provision can be
found in the agreement itself or recorded against the real
estate as a purchase option or deed restriction.)
(ix) Include a Right of First Refusal on a partial transfer of
ownership within a franchise entity.
(b) Leasing from Franchisor/Licensor/Dealer/Jobber, etc.
During the term of the SBA-guaranteed loan,
Franchisor/Licensor/Dealer/Jobber, etc. may not terminate any
Real Estate Lease unless an uncured default has occurred under
the terms of the Real Estate Lease or the Franchise Agreement
(c) Transfer
Any transfer provision which requires a
Franchisor/Licensor/Dealer/Jobber, etc.’s consent must state
Effective Date: October 1, 2011 271
Subpart C SOP 50 10 5(D)
―Consent must not be unreasonably withheld or delayed‖ or its
equivalent. SBA will not infer this into a Franchise Agreement.
Reasonable Business Judgment is not an acceptable standard.
(d) Termination
A Franchisor/Licensor/Dealer/Jobber, etc.’s power to cancel
without cause does not confer upon it power to control the
applicant and is not an indication of affiliation
(e) Independent Contractor
Franchisor/Licensor/Dealer/Jobber, etc. and applicant must
maintain an Independent Contractor Relationship.
Example: Insurance Agents who sell policies issued by one
insurance company have been found to be independent
contractors when the Agents performed their services at their
own business locations and paid all of the expenses of
maintaining their own offices.
(f) Insurance Industry
Based on the Industry standard established by the Insurance
Agency, it is common practice for the franchisor to own the
Insurance Policies as well as receive the payments on the
policy. This type of arrangement, by itself, does not create
affiliation.
(g) Fitness Industry
Fitness centers that appear to cater to one gender but have a
policy that allows both men and women to use the facility must
submit the following additional documentation with the loan
application:
(i) Affidavit that men and women are allowed to use the
facility; and
(ii) Diagrammed layout of the facility clearly showing two
separate bathrooms/changing rooms.
(h) Gasoline Industry
Based on the Industry standard established by the Gasoline
Industry, it is common practice for the oil company to install a
credit card system to provide for payment of gasoline products.
This type of arrangement, by itself, does not create excessive
control or affiliation.
Most Dealer Agreements are for a term of three years with
limited or no renewal terms. In situations where a gasoline
272 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
supplier is leasing the real property to the dealer, the Petroleum
Marketing Practices Act controls and contains detailed
provisions on the authority and procedure for non renewal or
termination. This type of lease arrangement, by itself, does not
place inappropriate control in the oil company/dealer.
(i) Eligibility Determination. The eligibility determination
for all Gas Station Loans must include a review of the
relevant documents. The documentation associated with
Gas Station Loans is voluminous, complex and frequently
contains provisions that (1) enable an oil company or
another non-small Person to exert significant control over
the small business loan applicant resulting in affiliation
(13 CFR 121.103); (2) have a significant negative impact
on the marketability and collateral value of the Property;
and (3) impair the applicant's repayment ability.
Therefore, all "Relevant Documents" must be reviewed to
determine whether a single provision or based on the
"totality of the circumstances" (13 CFR 121.103(a)(5))
execution of the Relevant Documents by the small
business would render it ineligible for SBA financial
assistance.
(a) Relevant Documents. For purposes of this
paragraph, the term "Relevant Documents" includes
but is not limited to (1) the report containing the
preliminary results of a search of the title to the
Property including the documents listed in the
abstract of title (hereafter the "Title Report"), (2)
the small business concern’s oil company supply
agreement and convenience store franchise
agreement, if any, and (3) if the loan is to purchase
the Property, all purchase and sale documents
including the exhibits, addendums, amendments,
etc., (hereafter the "Purchase and Sale
Documents"). While titles vary, examples of
Relevant Documents that must be reviewed include:
the Real Estate Sale Agreement; Terms and
Conditions of Sale Contract; Escrow Instructions;
Escrow Agreement; Franchise Agreement; Contract
Dealer Gasoline Agreement; Branded Reseller
Agreement; Memorandum of Gasoline Agreement
for Dealer-Owner, Franchisee-Operated Facility;
Branded Gas Sales Restriction and Covenant;
Special Warranty Deed; Bill of Sale; Use
Restriction Addendum; Right of First Refusal
Agreement; Repurchase Option; Subordination
Agreement; Environmental Release; Environmental
Effective Date: October 1, 2011 273
Subpart C SOP 50 10 5(D)
Declaration; Environmental Matters, Remediation
and Indemnification Addendum; and Site Access
Agreement.
(b) Subordination is not sufficient to overcome the
unacceptable results of objectionable provisions that
are of record or to be recorded. This is because to
clear the title, SBA's lien would need to be
foreclosed and doing so would prevent the small
business concern from selling the gas station as a
going concern and significantly diminish SBA's
recovery in the event of default.
(c) Examples of Unacceptable Document Review
Findings:
(i) Affiliation. Provisions in the Relevant
Documents that give an oil company or
another non-small Person significant control
over the small business applicant are not
acceptable. (See 13 CFR 120.100 (d).)
Examples include: (1) Purchase or
Repurchase Options. Purchase or repurchase
options that allow an oil company or other
Person to acquire the small business concern's
primary business asset (e.g. real estate) if the
small business concern violates a condition,
covenant, restriction or other provision.
(Distinction: A "purchase option" is different
from a "right of first refusal". A right of first
refusal that allows an oil company or other
Person to match a third party's offer is
generally acceptable to SBA.) Please note
that a right of first refusal on a partial transfer
of an interest in the small business concern is
NOT acceptable.; (2) Deed/Use Restrictions.
Provisions that give an oil company or other
Person the right to record deed or use
restrictions that enable the oil company or
other Person to control the use of the Property
thereby preventing the small business owner
from fully benefiting commensurate with
ownership. Note that certain deed restrictions
pertaining to the use of the property, which are
intended to protect the health and safety of
occupants, may be acceptable. Examples of
uses in deed restrictions based upon
environmental concerns which may be
acceptable may include: residential use, use
274 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
as a day care center for children or seniors,
use as a school, or use as a hospital.
(ii) Significant Impairment of Collateral Value or
Repayment Ability. Provisions in the
Relevant Documents that impose
requirements, restrictions or consequences that
could significantly impair (1) the collateral
value and marketability of the Property or (2)
the small business concern's repayment ability
are not acceptable. The fact that the collateral
will consist solely of personal property, such
as buildings and trade fixtures located on
leased land, is irrelevant since they would
ordinarily be sold in-place in the event of
foreclosure, e.g., a carwash, mini-mart, or fuel
pumping equipment. Examples include: (1)
Deed restrictions, covenants, easements,
reversionary interests and other provisions that
restrict the use of the Property for the benefit
of the seller, an oil company, or any other
Person such as those that restrict the brand of
fuel that can be sold on the Property or require
subsequent owners of the Property to
indemnify an oil company or other Person;
and (2) Engineering Controls that require the
small business concern 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.
(iii) Alteration of SBA/Lender’s Legal Rights,
Remedies or Responsibilities. Provisions in
the Relevant Documents that alter SBA or
Lender's legal rights, remedies or
responsibilities or impose additional duties are
not acceptable. Examples include provisions
that require SBA/Lender to: (1) Release or
Waive their legal rights, remedies or claims
against the seller, an oil company or other
Person; (2) Subordinate the SBA/Lender lien;
(3) Indemnify the seller, an oil company or
any other Person; (4) Notice. Provide the
seller, an oil company or any other Person
with special notice of default or foreclosure;
or (5) Forbearance. Provide the oil company
or another Person with an exclusive period of
Effective Date: October 1, 2011 275
Subpart C SOP 50 10 5(D)
time in which to decide what action to take
before SBA/Lender can initiate liquidation
activities in the event of default on the SBA
loan.
f) Questions on SBA’s Franchise Policy, Requests for Reconsideration and
Appeals
(1) Questions on SBA’s Franchise Policy should be directed to local
field counsel, center counsel, or SBA Senior Franchise Counsel.
(2) CDCs that believe that a franchise decision that has been rendered by
SBA is inconsistent with this SOP may appeal the decision by
forwarding a copy of the decision, along with an explanation of how
the determination is perceived to be inconsistent with this SOP to
FranchiseAppeals@sba.gov. Franchise appeals will be reviewed by
the SBA Franchise Committee comprised of OGC attorneys
appointed by the Associate General Counsel for Financial Law &
Lender Oversight. The Associate General Counsel for Financial Law
& Lender Oversight will retain the authority to overrule decisions
rendered by the SBA Franchise Committee.
C. The Small Business Applicant Must Demonstrate a Need for the 504 Loan.
1. The Small Business Applicant’s need for the loan is determined by applying the
―Credit Elsewhere Test.‖ The purpose of the Credit Elsewhere test is to
determine if the Small Business Applicant along with its principals have the
ability to obtain some or all of the requested loan funds from alternative sources
without causing undue hardship. 13 CFR 120.101
2. The CDC must determine that:
a) The Small Business Applicant is unable to obtain the loan on reasonable
terms without a Federal government guaranty, and
b) Some or all of the loan is not available from any of the following sources:
(1) The resources of the applicant business; or
(2) The personal resources of the principals of the applicant concern.
If some or all of the loan applied for is otherwise available on reasonable
terms from any of these sources, the loan application must be reduced or
declined.
3. The CDC must substantiate the factors that prevent the financing from being
accomplished without SBA support and retain the explanation in the Small
Business Applicant’s file. The file must contain documentation that specifically
identifies the factors in the present financing that meet the Credit Elsewhere
Test.
4. Acceptable factors that demonstrate an identifiable weakness in the credit or
that show the credit will exceed the policy limits of the Third Party Lender
include:
276 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
a) The business needs a longer maturity than the Third Party Lender’s policy
permits (for example, the business needs a loan that is not on a demand
basis);
b) The requested loan exceeds either the Third Party Lender’s legal lending
limit or policy limit regarding the amount that it can lend to one customer;
c) The collateral does not meet the Third Party Lender’s policy requirements;
d) The Third Party Lender’s policy normally does not allow loans to new
businesses or businesses in the applicant’s industry; and/or
e) Any other factors relating to the credit that, in the CDC’s opinion, cannot
be overcome without the 504 loan. These other factors must be
specifically documented in the loan file.
5. Unacceptable factors include:
a) Addressing the Third Party Lender’s Community Reinvestment Act
(CRA) compliance; or
b) Refinancing debt already on reasonable terms. (For eligible debt
refinancing, see Chapter 2, Paragraph III.H.4.b of this Subpart.)
6. The CDC must certify that credit is not otherwise available by signing the CDC
Official block on the appropriate application form.
7. Utilization of personal resources – As part of the credit elsewhere test, SBA
requires the personal resources of any owner of 20% or more of the Small
Business Applicant be reviewed. 13 CFR 120.102
a) The rule also applies to each person when the combined ownership of the
spouses and dependent children is 20% or more.
b) If the Small Business Applicant is owned by a Trust, the rule applies to the
Trustor. All donors to the trust will be deemed to have Trustor status for
eligibility purposes.
c) The utilization of the personal resources rule does not apply to the
business resources of an associate or affiliated business.
d) Once it is determined that an individual owner is subject to the utilization
of personal resources rule, his or her percentage of ownership has no
effect on the amount of the required injection.
8. Personal Resources of Spouses and Dependent Children
a) The SBA’s lending programs qualify as a ―Special-Purpose Credit
Program‖ under the Federal Reserve’s Regulation B relating to the Equal
Credit Opportunity Act (ECOA). This regulation stipulates that
information pertaining to the applicant’s marital status, sources of
personal income, alimony, child support, and spouse’s financial resources
can be obtained and considered in determining program eligibility.
Therefore, the CDC has the right to obtain the signature of an applicant’s
spouse (whether an owner of the business or not) or other person on an
application or credit instrument if it is required by Federal or State law.
b) Unless there is some legal impediment to access the personal resources of
the spouse such as those held by an independent trustee of an irrevocable
Effective Date: October 1, 2011 277
Subpart C SOP 50 10 5(D)
trust, the applicant is presumed to have access to the personal resources of
his/her spouse and minor children. The personal resources of close
relatives (excluding spouse and dependent children), including children
above the age of majority, living in the household are not considered to be
available to the applicant for injection into the business.
c) SBA or the CDC can require injection of the available personal resources
of the individual’s minor children.
d) SBA or the CDC cannot require the injection of the spouse’s personal
resources, but can determine that the applicant is ineligible because of
access to personal resources.
9. Liquid Assets
a) Only liquid assets are subject to being injected into the project (this
includes liquid assets held in a revocable trust). Liquid assets include:
(1) Cash;
(2) Certificates of deposit;
(3) Marketable securities and bonds;
(4) Cash surrender value of life insurance; and
(5) Similar assets.
CDCs should consider carefully the transfer of assets or other actions of
the applicant to avoid compliance with the intent of this provision. At a
minimum, liquid assets transferred by applicants within 6 months of
application for SBA assistance will not be exempt.
b) Liquid assets do not include:
(1) Closely held non-marketable stocks or bonds;
(2) Individual retirement accounts (IRAs), 401(k), 403(b), 529 accounts,
Keoghs, or other established retirement accounts subject to
withdrawal restrictions or penalties; Health Savings Accounts; tax-
advantaged Educational Savings Accounts; and other similar assets;
(3) Equity in real estate or other fixed assets; or
(4) Assets pledged as security on debt obtained over 6 months prior to
the loan application. The dollar value of the pledged liquid assets
that exceeds the amount of the debt being secured is considered a
liquid asset.
10. Utilization of Personal Resources Rule (13 CFR 120.102)
a) The CDC must determine the overall dollar value of the allowable
exemption, which is defined as the amount of personal resources that do
not have to be injected into the business. The allowable exemption is
determined on the basis of the ―total financing package.‖ The total
financing package includes the SBA loan, together with any other loans,
equity injection, or business funds used or arranged for at the same
general time for the same project as the SBA loan.
b) If the total financing package:
278 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
(1) Is $250,000 or less, the exemption is two times the total financing
package or $100,000, whichever is greater;
(2) Is from $250,001 up to and including $500,000, the exemption is one
and one-half times the total financing package or $500,000,
whichever is greater; or
(3) Exceeds $500,000, the exemption is one times the total financing
package or $750,000, whichever is greater;
c) Once the exemption is determined, it is subtracted from the liquid assets.
If the result is positive, that amount must be injected into the project.
d) Liquid assets required to be injected into the business under the utilization
of personal resources rule can not be pledged as an alternative to injection.
e) SBA or the CDC may require additional capitalization beyond that
required by the utilization of personal resources rule.
11. Determining the Amount of the Allowable Exemption
CDCs must use the following procedures to make, as of the date of the loan
application, a written determination of the allowable exemption which must be
kept in the file, available for SBA’s review:
a) Carefully review the personal financial statements required from the
owners of 20% or more of the equity of the business (including the
resources of spouse and dependent children);
b) Determine the value of the liquid assets subject to the rule for each
individual; and
c) Subtract the allowable exemption from the liquid assets of each individual
subject to the rule (including their immediate family).
Note: A husband and wife and their dependent children are only entitled to one
exemption.
12. Reducing Ownership Interest
a) Any person subject to the utilization of personal resources rule 6 months
prior to the date of the loan application would continue to be subject to the
rule even if that person has changed his or her ownership interest to less
than 20%.
b) The only exception to the 6-month rule is when that person completely
divests his or her interest prior to the date of application. Complete
divestiture includes divestiture of all ownership interest and severance of
any relationship with the Small Business Applicant (and any associated
Eligible Passive Concern) in any capacity, including being an employee
(paid or unpaid).
D. Ineligible Types of Businesses
1. To determine if a business is eligible for SBA assistance, the CDC must:
a) Determine the primary business industry of the Small Business Applicant.
13 CFR 121.107
Effective Date: October 1, 2011 279
Subpart C SOP 50 10 5(D)
b) Determine whether the Small Business Applicant is one of the types of
business listed as ineligible in SBA regulations. 13 CFR 120.110
2. SBA may not provide financial assistance to a Small Business Applicant for the
benefit of an ineligible affiliated business.
3. SBA cannot provide financial assistance to any of the following types of
businesses:
a) Businesses organized as a non-profit (for-profit subsidiaries are eligible).
(13 CFR 120.110(a))
b) Businesses Engaged in Lending (13 CFR 120.110(b))
(1) SBA cannot provide financial assistance to businesses primarily
engaged in lending or investment, or to an otherwise eligible
business for the purpose of financing investment not related or
essential to the business. This prohibits loans to:
(a) Banks;
(b) Life Insurance Companies (not independent agents);
(c) Finance Companies;
(d) Factors;
(e) Investment companies;
(f) Bail Bond companies; and
(g) Other businesses whose stock in trade is money and which are
engaged in financing.
(2) The following are exceptions to this regulation:
(a) 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.
(b) A business that provides financing in the regular course of its
business (such as a business that finances credit sales) is
eligible provided not more than 50% of its revenue is from
financing its sales.
(c) A mortgage servicing company that disburses loans and sells
them within 14 calendar days of loan closing is eligible.
Mortgage companies are eligible when they are primarily
engaged in the business of servicing loans. Mortgage
companies that make loans and hold them in their portfolio are
not eligible.
(d) A check cashing business is eligible if it receives more than
50% of its revenue from the service of cashing checks.
c) Passive Businesses (13 CFR 120.110(c))
(1) Passive businesses owned by developers and landlords that do not
actively use or occupy the assets acquired or improved with the loan
proceeds (except Eligible Passive Companies under 120.111) are not
eligible.
280 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
(2) Businesses primarily engaged in subdividing real property into lots
and developing it for resale on its own account are not eligible.
(3) Businesses that are primarily engaged in owning or purchasing real
estate and leasing it for any purpose are not eligible. For example,
shopping centers are not eligible and businesses that lease land for
the installation of a cell phone tower or wind turbine also are not
eligible; however, the business operating the cell phone tower or
wind turbine is eligible.
(4) Apartment buildings and mobile home parks are not eligible. But,
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. 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.
(5) Residential facilities that are licensed as nursing homes or assisted
living facilities are eligible.
(6) Businesses that are engaged in leasing equipment, household goods
or other items are eligible. (See subparagraph b) above regarding the
eligibility of businesses engaged in lending.)
(7) Businesses such as barber shops, hair salons, nail salons, and similar
types of businesses are eligible, regardless of whether they have
employees or contract with individuals to provide the services.
(8) An ineligible passive business cannot obtain an SBA loan for any
purpose, including the purchase or construction of a building for its
own use.
d) Life Insurance Companies (13 CFR 120.110(d))
(1) Life insurance companies are not eligible.
(2) Even if a life insurance agent writes insurance for only one
company, he or she may qualify as an eligible independent
contractor if the business meets all of the following factors:
(a) If the insurance agent is subject to the control or direction of
another merely as to the result to be accomplished and not as to
the means and methods for accomplishing the result;
(b) If the insurance agent hires, supervises and pays employees he
or she needs to help perform his or her services;
(c) If the insurance agent performs his or her services at his or her
own place of business rather than at the company’s place of
business;
(d) If the insurance agent is paid by the job or on a commission
basis, rather than by the hour, week or month;
Effective Date: October 1, 2011 281
Subpart C SOP 50 10 5(D)
(e) If the insurance agent is responsible for paying his or her own
business expenses;
(f) If the insurance agent provides a significant amount of his or
her tools, materials, and other equipment, even if the insurance
company provides some forms, manuals, or other materials;
(g) If the insurance agent invests in facilities that are used by him
or her 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
(h) If the insurance agent can realize a profit or incur a loss as a
result of his or her services.
e) Business Located in a Foreign Country or Owned by Undocumented
(Illegal) Aliens (13 CFR 120.110(e))
(1) Businesses are not eligible if the business is:
(a) Located in a foreign country with no activities in the United
States; or
(b) Owned in whole or in part by undocumented (illegal) aliens.
(2) Businesses are eligible if the business:
(a) Is located in the U.S.;
(b) Operates primarily in the U.S.; and
(c) Is authorized to operate in the state or territory where they seek
SBA financial assistance; OR
(d) Makes a significant contribution to the U.S. economy through
the:
(i) Payment of taxes to the U.S.; or
(ii) Use of American products, materials, and labor.
(3) The proceeds for an eligible loan must be used exclusively for the
benefit of the domestic operations. As a result the business and its
employees are subject to U.S. and local taxes.
(4) Businesses involved in international trade are subject to U.S. trade
restrictions.
(5) Businesses owned by legal permanent residents are eligible. See
Paragraph III.E. of this Chapter.
f) Businesses Selling Through a Pyramid Plan (13 CFR 120.110(f))
Pyramid or multilevel sales distribution plans are not eligible for SBA
assistance.
g) Businesses Engaged in Gambling (13 CFR 120.110(g))
(1) Small businesses that obtain more than one-third of their annual
gross income for the prior year, including rental income, from legal
gambling activities are not eligible.
282 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
(2) Small businesses are eligible if they obtain one-third or less of their
annual gross income, including rental income, from:
(a) Commissions from official State lottery ticket sales under a
State license; or
(b) Gambling activities licensed and supervised by state authority
in those states where the activities are legal.
(3) If the purpose of the business is gambling, such as a pari-mutuel
betting racetrack or a gambling casino, it is not eligible, regardless of
the percentage of gross income derived from gambling.
h) Businesses Engaged in any Illegal Activity (13 CFR 120.110(h))
A Small Business Applicant engaged in illegal activity or who makes,
sells, services, or distributes products or services used in connection with
illegal activity, is not eligible unless such use can be shown to be
completely outside of the Small Business Applicant’s intended market.
i) Businesses Which Restrict Patronage (13 CFR 120.110(i))
Businesses that restrict patronage for any reason other than capacity are
not eligible. For example, a men’s only or women’s only health club is not
eligible.
j) Government-Owned Entities, Excluding Native American Tribes (13 CFR
120.110(j))
(1) Municipalities and other political subdivisions are not eligible.
(2) Special Requirements Applicable to Native American Businesses
A Native American tribe is a Governmental entity and is not eligible.
A small business owned in whole or in part by a Native American
tribe is eligible if:
(a) It establishes that it is a separate legal entity from the tribe and
submits the documents authorizing its existence; and
(b) The tribe waives sovereign immunity with respect to the
collateral for the loan and collection of the loan from the
borrower, OR agrees to a ―sue and be sued‖ clause specifically
naming U.S. Federal courts as ―courts of competent
jurisdiction.‖
CDCs 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.
k) Businesses Engaged in Promoting Religion (13 CFR 120.110(k))
(1) A Small Business Applicant is not eligible if principally engaged in
teaching, instructing, counseling or indoctrinating religion or
religious beliefs, whether in a religious or secular setting.
(2) A Small Business Applicant is not ineligible merely because it offers
religious books, music, ceremonial items and other religious articles
Effective Date: October 1, 2011 283
Subpart C SOP 50 10 5(D)
for sale. The CDC must consider the overall activities and business
environment of the Small Business Applicant. SBA has a worksheet
to assist with this process. (SOP 70 50, Legal Responsibilities,
Appendix 3a, Religious Eligibility)
l) Cooperatives (13 CFR 120.110(l))
(1) Consumer and marketing cooperatives are not eligible.
(2) Producer Cooperatives.
A producer cooperative is eligible if:
(a) It is engaged in a business activity;
(b) The purpose of the cooperative is to obtain financial benefit for
itself as an entity AND its members in their capacity as
businesses; and
(c) Each member of the cooperative is small.
m) Businesses engaged in loan packaging (13 CFR 120.110(m))
A Small Business Applicant that receives more than 1/3 of its gross annual
revenue from packaging SBA loans is not eligible.
n) Businesses with an Associate of Poor Character (13 CFR 120.110(n))
(1) SBA cannot provide financial assistance to businesses with
Associates who are incarcerated, on probation, on parole, or have
been indicted for a felony or a crime of moral turpitude.
(2) An application can be accepted for processing if the individual
indicates an arrest record, but was acquitted or the indictment was
dismissed and the individual is not incarcerated, on probation or on
parole for any offense.
(3) An individual with a deferred prosecution is treated as if the
individual is on probation or parole. Such an applicant is not
eligible.
(4) To determine eligibility under this section, 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
Applicant, Trustor (if the Small Business 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. The
completion of an SBA Form 912, Statement of Personal History
(―912‖), by each Subject Individual is required as part of the
character evaluation process and the form must be completed within
90 days of submission of the application to SBA. Every person
completing a 912 must answer each question fully giving details
about any ―yes‖ response. NOTE: A ―yes‖ is required even when
the record is allegedly sealed, expunged or otherwise unavailable.
(This information is kept private and confidential.) There are no
exceptions to or waivers of this policy.
284 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
(a) If every Subject Individual answers questions 7, 8 and 9 as
―no,‖ normal loan processing may proceed.
(b) If a Subject Individual answers ―yes‖ to question 7, then the
Small Business Applicant is not eligible.
(c) If a Subject Individual answers ―yes‖ to question 8 or 9, then
that individual must go through a background check and
character determination unless the charge resulting in a ―yes‖
answer was a single misdemeanor that was subsequently
dropped without prosecution. (Documentation from the
appropriate court or prosecutor’s office must be attached to the
SBA Form 912 and maintained in the CDC’s loan file.) If the
individual pled guilty to the charges or to lesser charges the
background check and character determination must be
conducted. Currently, SBA conducts two types of background
checks: (1) a Name Check, which requires a search of available
records based on a person’s name and social security number
(SSN); and (2) a Fingerprint Check, which searches available
records based on the person’s name and SSN plus a complete
and legibly written FD-258 Fingerprint Card.
(d) If there is a ―yes‖ response, the CDC must take the following
actions:
(i) The CDC must obtain a complete understanding of the
reason(s) for the ―yes‖ response and when necessary for
clarification, the CDC must obtain additional written
explanation from the Subject Individual to include the
following:
(a) Date of the offense(s) including month, day and
year. If the actual day is not known, include the
month and year.
(b) City and state or the county and state where the
offense(s) occurred.
(c) The specific charge(s) (DUI, assault, forgery,
robbery etc.) AND the level of the charge (either a
misdemeanor or felony).
(d) Disposition of the charge(s). This may include but
is not limited to the following:
(i) Any fines imposed;
(ii) Any class or workshop to be attended;
(iii) Any jail time served;
(iv) If applicable, the terms of probation (including
evidence and dates of successful conclusion of
the probation); or
(v) Any other court conditions (such as
registration as a sex offender).
Effective Date: October 1, 2011 285
Subpart C SOP 50 10 5(D)
(e) Assuming the court’s conditions have been met, the
applicant should state that all conditions of the court
have been satisfied in his explanation and provide
court documents evidencing that these conditions
were met.
(f) The borrower’s dated signature on the explanation.
(ii) When an applicant discloses a felony arrest a Fingerprint
Check is required and a Fingerprint Card (FD 258) must
be completed. Local law enforcement agencies will
usually assist the individual with the fingerprinting.
CDCs may obtain the FD 258 from their local field
office.
(iii) When an applicant discloses a past offense(s) that was
classified as a misdemeanor, the background check may
either be a Name Check or a Fingerprint Check.
(iv) Regardless of whether the past offense was a felony or
misdemeanor, the CDC must submit the complete 912
package to the SLPC before loan processing can proceed.
Copies of the documents are to be submitted to the SLPC.
The CDC must retain the originals in its loan file. SBA
recommends that the CDC submit the 912 package as
soon as possible.
(v) The SLPC will send the complete 912 package to the
Office of Inspector General/Office of Security Operations
(OIG/OSO) at SBA Headquarters. When a 912 with a
―yes‖ response is forwarded to the OIG/OSO, CDC
personnel must not make any statement to anyone outside
the SBA about action being taken regarding the 912
information submitted. Exceptions are only permitted
when in compliance with the provisions of the Privacy
Act. (See SOP 40 04.)
(e) Decisions Available to the SBA When Processing a 912 with a
―yes‖ response:
(i) Clear the 912 to permit processing, approval and
disbursement;
(a) SBA will clear a positive 912 for processing and
waive the fingerprint requirement only when the
reason for the ―yes‖ response meets the following
criteria:
(i) A single minor (misdemeanor) offense or
arrest; OR
(ii) Up to 3 minor offenses (arrests and/or
convictions at one time or separately),
286 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
concluded more than 10 years prior to the date
of the SBA application; OR
(iii) A Prior Offense cleared by the Director,
Office of Financial Assistance (D/FA) or
designee on a previous application where no
other offenses have occurred since the
previous application was cleared by the D/FA
or designee. This clearance is only valid for
six months from date of issuance.
NOTE: Only the D/FA or designee may authorize
the processing center or CDC to process and
subsequently disburse a loan when the Form 912 is
not cleared.
(b) The SLPC cannot clear felony arrests or convictions
for loan processing.
(c) When the SLPC receives the completed 912
package and decides to clear it for processing, it
will notify the CDC that the application has been
cleared for processing and will submit the 912
package to the OIG/OSO for a Name Check.
(d) When the SLPC clears the 912 and the Name Check
corroborates the information on the 912, OIG/OSO
will advise the SLPC, which will then notify the
CDC.
(e) When the Name Check results contradict the
disclosure on the 912, or the disclosed criminal
history raises a question about the character of the
individual, OIG/OSO will refer the matter to the
D/FA. If the loan was already processed and
approved, the CDC shall be notified of the adverse
change. If the loan has not been funded, the CDC
will not be permitted to close the loan. If the loan
has been funded, the CDC must contact the
appropriate CLSC to determine the proper course of
action.
(f) The D/FA or designee can overrule the clearance by
the SLPC in either situation.
(ii) Place the processing of the application on hold for further
investigation;
(a) The CDC must obtain from the Subject Individual a
Form FD 258, SBA Fingerprint Card, and submit it
to the SLPC to forward to OIG/OSO for a
Fingerprint Check. The processing of the
application will remain on hold until the results of a
Effective Date: October 1, 2011 287
Subpart C SOP 50 10 5(D)
Fingerprint Check are received at which time the
application will either proceed or be declined.
(b) If additional criminal activity is revealed,
information pertaining to the additional criminal
activity will be provided to the D/FA or designee
who will notify the field office that an adverse
condition exists.
(iii) Decline the application because the information supplied
on the Subject Individual shows the offense is open and
has not been adjudicated or the Subject Individual is on
probation or parole.
(f) 912 Decision Appeals
(i) SBA will consider a request submitted by a Subject
Individual for reconsideration of a determination of lack
of good character. Factors that contribute to a favorable
reconsideration include: (1) additional information
provided by the Subject Individual that satisfactorily
explains the circumstances of the prior offense(s); (2) a
statement from the Subject Individual indicating that he
or she understands the significance of the previous
offense(s); and/or (3) the passage of time between the
date of the prior offense(s) and the date of 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.
(ii) The Subject Individual should send a written request for
reconsideration through the CDC to: Director, Office of
Financial Assistance, U.S. Small Business
Administration, Office of Financial Assistance, 409 3rd
Street, SW, Suite 8300, Washington, DC 20416.
(g) PCLP 912 Procedures.
(i) If, in connection with a PCLP loan, a Subject Individual
answers question 8 or 9 with ―yes,‖ then that individual
must go through a background check and character
determination unless the charge resulting in a ―yes‖
answer was a single misdemeanor that was subsequently
dropped without prosecution. (Documentation from the
appropriate court or prosecutor’s office must be attached
to the SBA Form 912 and maintained in the CDC’s loan
file.) If the individual pled guilty to the charges or to
lesser charges the background check and character
determination must be conducted. The application may
be processed using PCLP Procedures after the CDC has
requested and received written clearance of the character
issue(s) from the SLPC.
288 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
(ii) To request clearance from the SLPC, the CDC must
submit a cover letter with the CDC’s contact information,
a brief description of the business along with
SBA Form 912 and any required attachments.
(h) If the 912 is incomplete, it cannot be processed and will be
returned to the CDC. The CDC must submit a corrected 912
before processing continues.
(i) Reducing Ownership to Avoid Submitting Form 912
A Subject Individual may not reduce his or her ownership in a
Small Business Applicant for the purpose of avoiding
completion of Form 912. Anyone who would have been
considered a Subject Individual within 6 months prior to the
application must complete Form 912. The only exception to
the 6-month rule is when a Subject Individual completely
divests his or her interest prior to the date of application.
Complete divestiture includes divestiture of all ownership
interest and severance of any relationship with the Small
Business Applicant (and any associated Eligible Passive
Concern) in any capacity, including being an employee (paid or
unpaid).
o) Equity Interest by CDC or Associates in Applicant Concern (13 CFR
120.110(o))
A CDC or any of its associates may not obtain an equity position, either
directly or indirectly, in the Small Business Applicant. The only exception
is when the associate of the CDC is a Small Business Investment
Company (SBIC), in which case the requirements of 13 CFR 120.104
apply. See 13 CFR 120.140 for a list of ethical requirements that apply to
CDCs.
p) Businesses Providing Prurient Sexual Material (13 CFR 120.110(p))
(1) A business is not eligible for SBA assistance if:
(a) It presents live or recorded performances of a prurient sexual
nature; or
(b) 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.
(2) By law SBA must consider the public interest in granting or denying
financial assistance. The SBA has determined that financing lawful
activities of a prurient sexual nature is not in the public interest. The
CDC must consider whether the nature and extent of the sexual
component causes it, in view of community standards, to be prurient.
q) Prior Loss to the Government (13 CFR 120.110(q)) and Delinquent
Federal Debt (31 CFR 285.13)
Effective Date: October 1, 2011 289
Subpart C SOP 50 10 5(D)
(1) Unless waived by SBA for good cause, SBA cannot provide
assistance to a Small Business 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 following:
(a) Loss on the sale or other disposition of collateral acquired after
default;
(b) Compromise, i.e., resolution or settlement of a loan balance for
less than the full amount due;
(c) Bankruptcy by a borrower and/or any guarantors; and
(d) Any unreimbursed advance payments by a Federal agency.
(2) Unless waived by SBA for good cause, SBA cannot provide
assistance to a Small Business Applicant if there is a Delinquent
Federal Debt:
(a) 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.
(b) A debt is not considered ―delinquent‖ if:
(i) The creditor agency has released the obligor from paying
the debt;
(ii) The obligor is subject to, or has been discharged in, a
bankruptcy proceeding;
(iii) The obligor has entered into a satisfactory written
repayment agreement and is current; or
(iv) 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
paragraph q)(1) immediately above.)
(3) ―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, federally-backed student loans and
disaster loans (excluding any amount forgiven as a condition of the
loan at the time of origination). It does not include
unpaid/delinquent taxes or any loss incurred by the Federal Deposit
Insurance Corporation (FDIC) when it sells a loan at a discount.
(4) These rules apply to:
290 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
(a) The Small Business Applicant;
(b) Any business in which an Associate of the Small Business
Applicant owned, operated or controlled a business that
incurred the Delinquent Federal Debt or caused the Prior Loss;
(c) Any business controlled by the same person(s) who
controls/controlled the business that incurred the Delinquent
Federal Debt or caused the Prior Loss;
(d) Any Associate of the Small Business Applicant who has (or
guaranteed) a Delinquent Federal Debt or caused a Prior Loss
(either directly or as a guarantor); and
(e) Any guarantor who has (or guaranteed) a Delinquent Federal
Debt or caused a Prior Loss (either directly or as a guarantor).
(5) PCLP-CDCs are responsible for checking the Credit Alert
Verification Reporting System (CAIVRS) to determine if any of the
individuals or businesses identified in paragraph (4) immediately
above has either a Delinquent Federal Debt or a Prior Loss which
would result in the Small Business Applicant being ineligible for
SBA financial assistance.
(a) CAIVRS allows the CDC to enter multiple tax id numbers
(either SSN or EIN) to search for an outstanding Delinquent
Federal Debt or Prior Loss in connection with a loan
application.
(b) CDCs may obtain instructions for accessing CAIVRS at
http://www.hud.gov/offices/hsg/sfh/sys/caivrs/caivrs_faq.cfm.
(6) Waiver Requests:
(a) When there are compelling circumstances, the CDC may send
a written request for a waiver to the SLPC. The CDC must
identify the Delinquent Federal Debt or Prior Loss to the
Government, explain the relationship of the Small Business
Applicant to the individual or business causing the delinquency
or prior loss and the circumstances.
(b) For Delinquent Federal Debt, the Chief Financial Officer
(CFO) (who may only delegate this authority to the Deputy
Chief Financial Officer) will make the final decision on the
request.
(c) For Prior Loss to the Government, the D/FA or designee will
make the final decision on the request.
(7) If the 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 CDC’s delegated
authority. The CDC must document its file as to how the debt or
loss has been fully satisfied.
Effective Date: October 1, 2011 291
Subpart C SOP 50 10 5(D)
r) Businesses primarily engaged in political or lobbying activities (13 CFR
120.110(r))
A Small Business Applicant that derives over 50% of its gross annual
revenue from political or lobbying activities is not eligible.
s) Speculation (13 CFR 120.110(s))
(1) Speculative businesses are not eligible. This prohibits loans to a
Small Business Applicant for:
(a) The sole purpose of purchasing and holding an item until the
market price increases; or
(b) Engaging in a risky business for the chance of an unusually
large profit.
(2) Speculative businesses include:
(a) Wildcatting in oil;
(b) Dealing in stocks, bonds, commodity futures, and other
financial instruments;
(c) Mining gold or silver in other than established fields; and
(d) Building homes for future sale.
Note: Construction of homes for future sale with no sales contract in
place (spec homes) is eligible under the Builder’s CAPLine program.
13 CFR 120.391
(3)
Non-speculative businesses which are eligible include:
(a) A business, such as a grain elevator, that uses a commodity
contract to lock in a price;
(b) A farmer who uses a commodity contract to lock in the sale
price of his or her harvest;
(c) A business engaged in drilling for oil in established fields; and
(d) A business engaged in building a home under contract with an
identified purchaser.
E. 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 US provided the persons are
lawfully in the US. The processing procedures and the terms and conditions will
vary, depending upon the status of the owners assigned by the United States
Citizenship and Immigration Services (USCIS).
SBA requires all CDCs, 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.
SBA does not expect CDCs to duplicate the procedures of the Third Party Lender if
the Third Party Lender is regulated by a Federal functional regulator (as defined in 31
CFR 1010.100) and submits annual certifications to the CDC that it (the Third Party
Lender or its agent) will comply with the CIP requirements of 31 CFR 1020.220 with
292 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
respect to all third-party financings of 504 loans. Under these circumstances, it is
acceptable to SBA if a CDC’s CIP states that the CDC will rely on the Third Party
Lender to verify the identity of the SBA customer. The CDC has the option of
performing its own verification of the identity of the SBA customer even if a Third
Party Lender has already complied with 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 912 reflects that he or she is a citizen, no further
verification is required.
2. 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 administrative hearing.
a) The USCIS Form I-551 (551) is evidence of LPR status. USCIS has two
versions of the 551:
(1) Resident Alien Card; and
(2) Permanent Resident Card. (This is the most recent version.)
b) USCIS requires replacement of the 551 every 10 years to update the
photograph and security measures. Replacements may also be necessary
if the 551 is lost, the individual changes name, etc. Replacement of the
551 may take more than a year. LPR status is not in jeopardy merely
because the 551 document lapses.
Acceptable forms of evidence when the 551 has been submitted to USCIS
for replacement or has an expired date include the following:
(1) A temporary stamp by USCIS on the individual’s passport that says
―Processed for I-551 – Temporary Evidence of Lawful Permanent
Residence;‖
(2) USCIS Form I-327, ―Re-entry Permit,‖ issued to LPRs in lieu of a
visa, which is valid for only 2 years;
(3) USCIS Form I-797, ―Notice of Action,‖ a receipt issued to an alien
when the 551 is lost or surrendered for renewal or changes (e.g., a
name change because of marriage or divorce).
(4) SBA requires that the 551 or an acceptable substitute must be current
at the time it is submitted with an application or it will be returned
and not processed.
3. Businesses owned by the following persons may be eligible:
a) Non-immigrant aliens residing in the US. 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 United States
Citizenship and Immigration Services (USCIS) document, such as a visa.
(1) They must have current/valid USCIS documentation permitting them
to reside in the U.S. legally; and
(2) The documentation/status of each alien must be verified with
USCIS.
Effective Date: October 1, 2011 293
Subpart C SOP 50 10 5(D)
b) Asylees and refugees (persons who receive temporary refuge in the United
States) with LPR status.
4. Businesses owned by aliens who are subject to the Immigration Reform and
Control Act of 1986 (IRCA) might be eligible under limited circumstances.
a) IRCA vests USCIS with the authority to grant illegal aliens lawful
temporary resident status. IRCA prohibits financial assistance to
businesses owned 20% or more by such individuals for a period of 5 years
after USCIS grants lawful temporary resident status.
b) This disqualification does not apply to Cuban or Haitian entrants or alien
entrants subject to IRCA who are aged, 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 4 or SBA Form 1919, which includes the ―Statements
Required by Law and Executive Orders.‖ This includes a certification that
IRCA does not apply to them.
5. Documentation to evidence and verify an alien principal’s status.
At time of application, for any alien required to complete SBA Form 912, the
following applies:
a) Aliens must provide their alien registration number on SBA Form 912,
―Statement of Personal History.‖
b) CDCs must obtain a copy of the individual’s USCIS documentation and
maintain in the loan file.
c) All CDCs must register designated personnel with the SLPC at
Sacramento504Register@sba.gov. The SLPC will respond to such
requests by providing instructions on how to complete the registration and
to use the electronic verification process. The CDC submits a USCIS
Form G-845 (845), ―Document Verification Request,‖ with supporting
information to the SLPC. The CDC must state on the 845 that the request
is for an SBA loan.
d) As required by USCIS, SBA will release information about the status of
an alien to CDCs 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.
(1) As required by USCIS, SBA accepts either of the following
authorization statements:
(a) I authorize the U.S. Citizenship and Immigration Services to
release information regarding my immigration status to [name
of CDC] because I am applying for a U.S. Small Business
Administration loan.
(b) I authorize the U.S. Citizenship and Immigration Services to
release alien verification information about me to [name of
294 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
CDC] because I am applying for a U.S. Small Business
Administration loan.
(2) As required by USCIS, all verification requests must include an
authorization with the original signature of the alien for SBA to
release information to the CDC on the status of a verification. The
original Document Verification Request (Form G-845) and
authorization for release must be maintained by the CDC in the
borrower’s file for review by SBA and USCIS, if requested.
(3) 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.
(4) The authorization statement must not be on SBA or CDC stationery.
e) CDCs must receive verification of the status of each alien required to
submit USCIS documents prior to submission of the application to SBA.
The notification received from the SLPC must be submitted to SBA with
the application. PCLP CDCs must retain the notification from the SLPC
in the borrower’s loan file.
f) 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.
6. 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.
7. 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.)
(2) The personal guaranty of management must be considered as a loan
condition and if not required, the decision must be explained in the
loan file.
Effective Date: October 1, 2011 295
Subpart C SOP 50 10 5(D)
b) The applicant must pledge collateral within the jurisdiction of the U.S.
sufficient to pay the loan in full at any time during its life. If the small
business applicant owned by foreign nationals, foreign entities or non-
immigrant aliens residing in the US does not have sufficient collateral, the
applicant is not eligible for a 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.
F. The Eligible Passive Company Rule
The Eligible Passive Company (EPC) rule is an exception to SBA regulations which
prohibit financing assets which are held for their passive income. Because the EPC
rule is an exception, it is interpreted strictly.
1. Conditions necessary to qualify as an EPC. 13 CFR 120.111
a) Under SBA regulations, an EPC can take any legal form or ownership
structure. 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 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.
b) An EPC must use loan proceeds 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 (OC) for conducting the OC’s
business.
2. Conditions that apply to all legal entities:
a) 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 subject to 1.b) above;
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.
d) The EPC must lease the project property directly to the OC and:
(1) The lease must be in writing;
(2) The lease must be subordinated to the SBA’s mortgage, trust deed
lien, or security interest on the property;
(3) The lease must have a term, including options to renew exercisable
solely by the OC, at least equal to the term of the loan;
(4) The EPC (as landlord) must furnish as collateral for the loan an
assignment of all rents paid under the lease. An assignment of the
296 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
lease is only required when necessary to perfect the assignment of
rents or to enable CDC to exercise the tenant’s rights upon default;
(5) The rent or lease payments cannot exceed the amount necessary to
make the loan payment to the CDC and Third Party Lender, and an
additional amount to cover the EPC’s expenses of holding the
property, such as maintenance, insurance and property taxes; and
(6) 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 borrowers must
comply.
(7) If in acquiring the Project 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 CDC must take the following
actions if applicable:
(a) If subordination is not possible, the CDC Closing Counsel
must opine to that effect.
(b) If the mineral lease has been terminated, the CDC should
attempt to have it removed from the Title Policy.
(c) If the CDC is unable to have the lease removed from the Title
Policy, the CDC Closing Counsel must include language in the
Opinion of Counsel indicating that they have examined and
relied upon the accuracy of the assignment document 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).
e) The OC must be a guarantor or a co-borrower on the loan. The OC must
be a co-borrower if any of the Project funds are used to purchase fixed
assets to be owned by the OC.
f) Each holder of an ownership interest constituting at least 20% of either the
EPC or the OC must:
(1) Guarantee the loan (if the holder is a trust, then the Trustee shall
execute the guarantee on behalf of any trust); and
(2) Must comply with the Utilization of Personal Resources Rule. See
Paragraph III.C.7.- 11. of this Chapter.
3. Conditions that apply to trusts.
a) 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.
Effective Date: October 1, 2011 297
Subpart C SOP 50 10 5(D)
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.
(2) Beneficiaries usually do not have any control over the actions of the
trust and, therefore, do not have to meet the guaranty and personal
resource requirements.
e) The Trustee shall certify in writing to SBA that:
(1) The Trustee has authority to act;
(2) The trust has authority to borrow funds, pledge trust assets, and lease
the property to the OC;
(3) The Trustee has provided accurate, pertinent language from the trust
agreement confirming the above; and
(4) The Trustee has provided and will continue to provide SBA with a
true and complete list of all trustors and donors.
f) The trust itself does not have to be small by SBA size standards.
4. Size Determinations under the EPC rule
a) If the EPC and the OC are affiliated the two companies are combined for
determining size.
(1) If there is only one OC, use the OC’s NAICS code.
(2) If there 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.
(3) If the multiple OCs are affiliated, then use the rules detailed in 13
CFR 121.107 (13 CFR 121.107) for determining the primary
industry of affiliated businesses. The NAICS code of the primary
industry of the OCs shall be the identifying NAICS code.
b) If the EPC and the OC are not affiliated, each entity must be small. 13
CFR 121.301(b)
c) 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.
d) An EPC (including a trust) may engage in a business activity other than
leasing the property to the OC.
5. Multiple OCs can be separately owned.
6. Multiple EPCs in one transaction are not permitted. (See discussion above on
tenancy in common.)
7. When sending data to SBA, use the same NAICS Code that was used to
determine size for the Small Business Applicant.
8. Submission of Financial Statements by the EPC and the OC
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SOP 50 10 5(D) Subpart C
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.
G. Special Requirements for Loans Where Collateral May Be Included in the National
Register of Historic Places
If a loan will in any way affect properties included or eligible to be included in the
National Register of Historic Places, lender must consult with local SBA counsel for
further guidance.
H. 504 Program-Specific Eligibility Factors
1. Economic Development Objectives of a 504 Project 13 CFR 120.860 and
120.861
a) Job Creation or Retention
(1) At least 1 job for every $65,000 of project debenture ($100,000 for
Small Manufacturers).
(2) Job Opportunity is defined in Chapter 1 of this Subpart.
(3) A Job Opportunity does not have to be at the project facility, but
75% of the jobs must be in the community where the project is
located.
(4) Job Retention may only be used if the CDC can reasonably show
that jobs would be lost to the community if the project was not done.
(5) CDCs must list estimated jobs created or retained in its Annual
Report, and at the 2 year anniversary of each loan’s disbursement,
the CDC must list the actual jobs created and/or retained for that
loan (whether the initial approval was based on job creation/retention
or some other 504 goal).
b) Or meet one of 14 community development or public policy goals found
in 13 CFR 120.862. If any of the community development or public
policy goals set out in 13 CFR 120.862 or set forth below is met, then the
applicant is eligible even if it does not meet the job creation or job
retention requirements provided the CDC meets its required Job
Opportunity average:
(1) Additional Public Policy Goals:
If any of the following public policy goals are met, then the applicant
can qualify for a larger debenture amount (up to $5,000,000 with the
exception of items (a) and (c) below, which may go up to $5,500,000
Section 502(2)(A)(ii) of the SBI Act):
(a) Reduction of existing energy consumption by at least 10% (this
cannot apply to a startup business, however, an existing
business buying a building may be eligible if the new location
uses at least 10% less energy than the prior location);
Effective Date: October 1, 2011 299
Subpart C SOP 50 10 5(D)
(b) Increased use of sustainable designs, including designs that
reduce the use of greenhouse gas emitting fossil fuels or low-
impact design to produce buildings that reduce the use of non-
renewable resources and minimize environmental impact; or
(c) Plant, equipment and process upgrades of renewable energy
sources such as the small-scale production of energy for
individual buildings or communities consumption, commonly
known as micropower, or renewable fuel producers including
biodiesel and ethanol producers. Note: the terms in
subparagraphs (b) and (c) have the meanings given those terms
under the Leadership in Energy and Environmental Design
(LEED) standards for green building certifications.
(2) Additional guidance for assisting small manufacturers:
For a small manufacturer (NAICS Codes 31-33), to qualify for a
$5,500,000 debenture the project must either:
(a) Create or retain 1 Job Opportunity per $100,000 in 2 years; or
(b) Meet one of the community development or public policy
goals.
(3) Additional guidance for the public policy goal to assist small
businesses adversely affected by base closings. 13 CFR
120.862(b)(9)
(a) This only applies when:
(i) A community has been adversely affected by a base
closing; and
(ii) The community continues to be adversely affected.
(b) Continuing adverse effect is presumed if the base closing was
within 10 years of the date the application was submitted.
(c) For applications submitted more than 10 years after a base
closing, the CDC must provide supporting documentation with
the application and retain a copy of its finding of adverse effect
in the loan file.
(4) The CDC must have a job opportunity average of 1 Job Opportunity
created or retained for every:
(a) $65,000; or
(b) $75,000 for Projects located in Special Geographic Areas
(Alaska, Hawaii, State-designated enterprise zones,
empowerment zones, enterprise communities, and labor surplus
areas) A CDC may choose to separate these loans from the
remainder of its portfolio for the purpose of calculating the
averages.
300 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
(c) Loans to Small Manufacturers (See Chapter 7 - Debenture
Pricing & Funding for definition) are excluded from this
average.
(5) If the project cannot meet any of these guidelines then the amount of
the debenture must be reduced to meet the job creation or retention
requirement. (See Chapter 7 of this Subpart – Debenture Pricing &
Funding.)
2. Basic Eligibility Requirements for 504
To be an eligible Borrower for a 504 loan 13 CFR 120.880:
a) The Small Business Applicant must use the Project Property (except that
an EPC may lease to an OC); and
b) Meet the size requirements set out in paragraph III.B. of this Chapter.
3. Ineligible 504 Projects 13 CFR 120.881
a) Relocation out of a Community – A Project cannot be approved under the
504 program, if the Project involves the relocation of a business out of a
community and will either have a net reduction of one-third of its jobs or
cause a substantial increase in unemployment in any area of the country.
An exception may be allowed if the CDC can justify the relocation as
outlined in 120.881(a)(1) and (2).
b) Projects in foreign countries
4. Eligible and Ineligible Project Costs
a) Eligible project costs 13 CFR 120.882
(1) Land and Necessary Land Improvements -- (For example, grading,
new streets including curbs and gutters, parking lots, utilities and
landscaping.)
(a) No matter how long the land has been owned;
(b) The value of the land will be:
(i) Only counted at cost if it was bought less than 2 years
prior to the date of the application; and
(ii) Fair market value based upon an appraisal if held for 2
years or more;
(2) Short Term debt (―Bridge Financing‖) on the Project land as long as:
(a) There is no building currently on the land; and
(b) The financing is for a term of 3 years or less;
(3) Building and Building Improvements -- Integral costs for
improvements to the building such as facade expenditures, heating,
electrical, plumbing and roofing costs;
(4) Machinery and Equipment –
(a) All costs associated with the purchase, transportation,
dismantling or installation of machinery and equipment;
Effective Date: October 1, 2011 301
Subpart C SOP 50 10 5(D)
(b) The machinery and equipment has to have a useful life of at
least 10 years;
(c) If the borrower owns equipment that is heavy or highly
calibrated (such as a large printing press) that must be moved
as an essential part of the Project then any special moving costs
(including dismantling and installation) may be included in the
project costs;
(5) Expenditures within 9 months of the date of the application,
including land and buildings, and/or equipment, can be included in
the project costs and be reimbursed by the interim lender net of the
borrower’s contribution. Costs incurred prior to that date may be
included solely at the SBA’s discretion.
(6) Furniture and Fixtures - If essential to and a minor part of the Project
which will not affect the weighted average maturity (13 CFR
120.884(d)(1));
(7) Professional Fees – Directly attributable and essential to the Project
with the exception of attorney’s fees incurred in closing the Interim
and Third Party Loans. Examples of project-related costs that may
be included in this section are: title insurance, title searches and
abstract costs, surveys and zoning matters.
(8) Interim financing – Repayment of interim financing including points,
fees and interest; and
(9) Contingency Fund - May not exceed 10% of the Project
construction costs:
(a) If the residual contingency amount does not exceed 2% of the
debenture just prior to closing, it may be refunded to the small
business at the time the debenture is funded.
(b) If the contingency residual is in excess of 2%, the debenture
has to be reduced by the excess amount.
(10) ―Do-it-yourself‖ construction and/or installation of machinery and
equipment, or situations where the borrower acts as its own
contractor have proven to be generally unsatisfactory and can cause
problems with lien waivers and mechanics liens, causing potential
losses to lender and/or SBA.
―Do-it-yourself‖ construction and/or installation of machinery and
equipment, or situations where the borrower acts as its own
contractor may be permitted, if the CDC can justify and document in
the loan file that:
(a) The borrower/contractor is experienced in the type of
construction and has all appropriate licenses;
(b) The cost is the same as, or less than, what an unaffiliated
contractor would charge as evidenced by 2 bids on the work;
and
302 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
(c) The borrower/contractor will not earn a profit on the
construction.
b) Permissible Debt Refinancing (13 CFR 120.882(e))
504 Projects may include a limited amount of debt refinancing, as follows: If
the Project involves expansion of a small business applicant, any amount of
existing indebtedness that does not exceed 50% of the cost of the expansion
may be refinanced. The debt being refinanced will be added to the expansion
cost to establish the total project costs, if all the conditions discussed below are
met. ―Expansion‖ includes any Project that involves the acquisition,
construction or improvement of land, building or equipment for use by the small
business applicant.
In its loan analysis submitted to SBA for non-PCLP loans, the CDC must
include a conclusion that the proposed debt refinancing meets all the conditions
listed below with supporting analysis and documentation. For PCLP loans, the
PCLP CDC will transmit the Eligibility Information Required for PCLP
Submission (SBA Form 2234, Part C), in which the PCLP CDC is required to
address these conditions, and must maintain the analysis and documentation in
its file.
(1) Substantially all (85% or more) of the proceeds of the indebtedness
were used to acquire land, including a building situated thereon, to
construct a building thereon, or to purchase equipment. The assets
acquired must be eligible for financing under the 504 loan program.
If the acquisition, construction or purchase of the assets was
originally financed through a commercial loan that would have
satisfied the ―substantially all‖ requirement and that was
subsequently refinanced one or more times, with the current
commercial loan being the most recent refinancing, the current
commercial loan will be deemed to satisfy this paragraph (1);
(a) Whether the new project is within the CDC’s area of operation is
based on the assets newly acquired for the business not the assets
securing the debt being refinanced. If the assets refinanced or any
collateral securing the loan are outside the CDC’s Area of
Operations, it is the CDC’s responsibility to establish that the CDC
is capable of closing and servicing the loan and monitoring the
collateral. Evidence must be approved by SBA with the exception
of PCLP CDCs which must document the file with evidence
regarding the CDC’s capability to close and service the loan and
monitor the collateral.
(b) Instruments resulting in transfer of ownership of the property to the
Small Business Applicant may be eligible for refinancing,
Effective Date: October 1, 2011 303
Subpart C SOP 50 10 5(D)
including, but not limited to, land sales contracts, contracts for
deed or capital leases.
(c) The purchase of property under an operating lease is eligible for
504 financing, but the operating lease itself is not eligible for debt
refinancing.
(d) In order to be eligible for debt refinancing, a copy of the
corresponding debt and lien instruments must be submitted with
the application.
(2) The existing indebtedness is collateralized by fixed assets.
The 504 eligible fixed assets collateralizing any debt to be
refinanced, or relating to the portion of debt being refinanced in the
case of a partial refinance, must also collateralize the 504 Loan
unless SBA [Sacramento Loan Processing Center (SLPC)] approves
a waiver due to extraordinary circumstances. PCLP CDCs may not
use their delegated authority to approve a loan requiring this waiver.
The lender of the existing indebtedness must release, subordinate (if
the total existing indebtedness is not being refinanced) or assign its
lien on the 504 eligible fixed assets to the lien of SBA and/or the
Third Party Lender so that the Third Party Lender and/or SBA will
maintain the same lien position on the collateral that was held by the
lender whose debt is being refinanced.
(3) The existing indebtedness was incurred for the benefit of the small
business concern.
(a) The small business for which debt is refinanced must be the same
small business for which any new Project costs are incurred. The
debts being refinanced may be owed by an Operating Company, an
Eligible Passive Company or both.
(b) An existing 504 loan may be refinanced if it meets the conditions
of Paragraph b, ―Permissible Debt Refinancing‖. A Third Party
Loan may not be refinanced with an SBA guaranteed loan. (13
CFR 120.920(b))
(c) An existing 7(a) loan may be refinanced in whole or in part only if
the CDC has provided verification that the present lender is either
unwilling or unable to modify the current payment schedule. In the
case of Same Institution Debt, if the Third Party Lender or the
CDC affiliate [as authorized under 13 CFR 120.852(a)] is the 7(a)
lender, the loan will be eligible for 504 refinancing only if the
lender is unable to modify the terms of the existing loan because a
304 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
secondary market investor will not agree to modified terms.
(4) The financing will be used only for refinancing existing indebtedness
or costs relating to the Project financed.
(a) Debt being refinanced does not need to be for assets at the same
location or for the same type of property as the Project being
financed as long as the operation at the other location has the same
NAICS code as the operation at the Project location.
(b) Costs essential to the refinancing, such as prepayment penalties,
financing fees or other refinancing costs, required by the original
terms of the debt instrument, may be included in the debt refinance
portion of a Project.
(c) The total debt being refinanced may consist of one or more loans.
(5) The financing will provide a substantial benefit to the borrower when
prepayment penalties, financing fees, and other financing costs are
accounted for.
―Substantial Benefit‖ means that the portion of the new installment
amounts attributable to the debt being refinanced must be at least
10% less than the existing installment amount(s). The total
installment amount is determined by adding the two installment
amounts attributable to the refinancing using the interest rate of the
most recent debenture funding on the 504 loan and the committed
interest rate of the Third Party Lender loan. The total amount must
be 10% less than the existing installment amount(s).
(a) Prepayment penalties, financing fees, and other financing costs
must also be added to the amount being refinanced in calculating the
percentage reduction in the new installment payment.
(b) Loans with seasonal payments would meet the Substantial
Benefit test if there was a 10% improvement in the installment when
calculated by averaging all payments over the most recent twelve
month period from date of application and comparing that to the new
installment amount attributable to the debt being refinanced.
(c) Loans with balloon payments meet the Substantial Benefit test.
(d) Exceptions to the 10% reduction requirement may be approved
by the D/FA or designee for good cause. PCLP CDCs may not use
their delegated authority to approve a loan requiring this exception.
Effective Date: October 1, 2011 305
Subpart C SOP 50 10 5(D)
(6) The borrower has been current on all payments due on the existing
debt for not less than 1 year preceding the date of refinancing.
―Date of refinancing‖ refers to the date the 504 loan is approved by
SBA. The CDC must submit a transcript of account, or similar
documentation containing detailed payment history from the lender
whose debt is being refinanced reflecting that the loan has been
current (not to exceed 30 days in arrears) for one year (or for the time
the debt has been open if less than one year). Any unremedied
delinquency after approval must be reported to SBA as an adverse
change.
(7) The financing under section 504 will provide better terms or rate of
interest than the existing indebtedness on the date of refinancing.
―Better terms or rate of interest‖ may include longer maturity (but
always commensurate with the assets’ useful life), a lower interest
rate committed on the Third Party Lender Loan or projected on the
504 Loan, improved collateral conditions, or less restrictive loan
covenants.
(8) A 504 Project cannot be approved to refinance debt owed:
(a) To an Associate, which is prohibited by 13 CFR 120.130(a);
(b) To an SBIC, which is prohibited by 13 CFR 120.130(b); or
(c) To any creditor in a position to sustain a loss causing a shift to
SBA of all or a part of a potential loss from an existing debt. 13
CFR 120.884(b)
(9) PCLP authority must not be used to refinance Same Institution Debt.
―Same Institution Debt‖ is defined as any debt of the CDC or the
Third Party Lender financing the new project, or of affiliates of
either. 13 CFR 120.882(e)(8)
(Note: Equity in land and/or building that is being refinanced may
be included as Borrower’s equity as set forth under present policy.)
c) Eligible Administrative Costs 13 CFR 120.883
The administrative costs set out in 13 CFR 120.883 are not part of the Project
costs but are added to the Net Debenture to calculate the Gross Debenture
amount. Examples of borrower’s out-of-pocket costs include:
(1) Settlement agent’s fees;
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SOP 50 10 5(D) Subpart C
(2) Overnight delivery, postage and messenger services;
(3) Certifications required by SBA (such as earthquake, flood, IRS,
Certificate of Occupancy, and certificate of completion); and
(4) Copying costs attributable to the above.
d) Ineligible Costs for 504 Loans
Any costs not directly attributable to or necessary for the Project may not be
paid with proceeds of the 504 loan. Examples can be found in 13 CFR 120.884.
5. Pre-Existing Debt on the Project Property 13 CFR 120.922
The Third Party Loan may include consolidation of existing debt on the Project
Property so long as it does not improve the Third Party Lender’s lien position
on the existing debt, unless the debt is a previous Third Party Loan.
6. Leasing
a) Leasing policies specific to 504 loans
(1) The borrower may use 504 loan proceeds to acquire or build a
building or install machinery or equipment on leased land. There are
specific requirements which must be followed in this case and they
may be found at 13 CFR 120.870.
(2) The CDC must not subsidize the project by charging an amount less
than enough to pay the CDC’s costs for the project.
(3) The borrower may not use 504 loan proceeds for interior tenant
improvements and such improvements may not secure the Third
Party Loan. 13 CFR 120.871(a)
b) Leasing part of a building acquired with loan proceeds 13 CFR 120.131
(1) Amount of rentable property that can be leased:
(a) For an existing building, a small business must occupy 51% of
the rentable property and may lease up to 49%; and
(b) For new construction, a small business must occupy 60% of the
rentable property, may lease long term up to 20% and
temporarily lease an additional 20% with the intention of using
some of the additional 20% within three years and all of it
within 10 years. 13 CFR 120.870(b)
(c) An EPC must lease 100% of the rentable property to an OC.
The OC must follow (a) and (b) above.
(d) Circumstances may justify allowing a period of time after
closing of the SBA loan to comply with the above occupancy
requirements. For example, a pre-existing lease may have a
few more months to run. In no case may the small business
have more than 1 year to meet occupancy requirements.
(e) The restrictions in (a) and (b) above apply regardless of
whether the rentable property is leased to a commercial or
residential tenant.
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Subpart C SOP 50 10 5(D)
(2) ―Rentable Property‖ is the total square footage of all buildings or
facilities used for business operations (13 CFR 120.10) excluding
vertical penetrations (stairways, elevators, and mechanical areas that
are designed to transfer people or services vertically between floors),
and including common areas (lobbies, passageways, vestibules, and
bathrooms). Rentable property excludes all outside areas.
(3) Only the D/FA or designee can classify outside areas as usable
square footage or common area.
7. Residential Space as Part of the Business
a) If the nature of the business requires a resident owner or manager, loan
proceeds may be used for the purchase of an existing building(s) or
construction of a new building(s) that includes residential space, however,
such residential space may not exceed 49% of the total property. The
residential space must be an essential part of the business. For example, a
horse-breeding facility traditionally requires that someone be on premises
24/7 to care for the horses. In this case, the residential property would be
considered to be a part of the business rather than leased property.
b) If the small business applicant leases residential space to a third party, the
leased space must meet the requirements set out in paragraph 6.b)
immediately above.
8. Change of Ownership Projects
a) Loan proceeds may be used to acquire long term fixed assets in
conjunction with a change of ownership as long as either:
(1) Jobs will be retained because of the change of ownership (there has
to be a reasonable demonstration that the jobs would be lost without
the change of ownership); or
(2) The Project meets one of the community development or public
policy goals.
b) The Project costs must not exceed the value of the 504-eligible fixed
assets.
c) Loan proceeds must not be used to purchase stock.
9. Loan Proceeds to Finance a Third Party Lender’s Other Real Estate Owned
(OREO) (13 CFR 120.923):
Where loan proceeds will be used to finance a Third Party Lender’s own OREO
property, the application must:
a) Be submitted to the SLPC (delegated authority may not be used to process
these applications);
b) Include an independent real estate appraisal that meets the requirements
found in Chapter 3 of this Subpart (the appraisal requirement cannot be
delayed until loan closing); and
c) Include an explanation of the circumstances surrounding the Third Party
Lender’s acquisition of the real estate. If the acquisition of the property
was triggered by a business failure at that particular location, the Third
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SOP 50 10 5(D) Subpart C
Party Lender must submit a detailed explanation of why the new small
business borrower will succeed at that same location.
Effective Date: October 1, 2011 309
Subpart C SOP 50 10 5(D)
CHAPTER 3: COLLATERAL, APPRAISALS AND ENVIRONMENTAL POLICIES
I. COLLATERAL
A. SBA’s 504 Collateral Policy 13 CFR 120.934
SBA usually takes a 2nd lien position on Project Property, but may have a shared lien
(pari passu) with the Third Party Lender.
B. Adequacy of Collateral
1. SBA’s 2nd lien position will be considered adequate when the applicant meets
all of the following criteria:
a) Strong, consistent cash flow that is sufficient to cover the debt;
b) Demonstrated, proven management;
c) The applicant business has been in operation for more than 2 years; and
d) The proposed Project is a logical extension of the applicant’s current
operations.
2. If all four factors are present, no additional collateral or Borrower’s contribution
is required.
3. If one or more of the above factors is not met, additional collateral and/or
increased Borrower’s contributions may be required.
4. Because leasehold improvements provide minimal collateral value, the CDC
must consider requiring additional collateral.
5. Caution: Do not encumber assets or require additional contributions that the
Borrower needs to sustain ongoing operations. Taking additional collateral with
minimal liquidation value only serves to limit the Borrower’s ability to obtain
additional short-term financing while offering little or no additional protection
to SBA.
C. Third Party Loan
1. The Third Party Lender usually has a 1st lien on the Project Property, and SBA
cannot guarantee these loans. (13 CFR 120.920)
2. When the Third Party Lender is the property seller, the Third Party Loan must
be subordinate to the 504 loan except under the following circumstances (13
CFR 120.923):
a) The borrower assumes an existing note as part of the total financing;
b) The FDIC has carry-back financing; or
c) The property is classified as ―Other Real Estate Owned‖ (OREO), by a
national bank, a State-chartered, or other federally regulated lender and
the property is of sufficient value to support the 504 loan.
3. SBA’s lien position must not be subordinate to loans made from the proceeds of
a tax-exempt obligation.
4. The borrower must not prepay any subordinate financing without SBA’s prior
written consent.
D. Mixed-Use Collateral
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SOP 50 10 5(D) Subpart C
When one 504 debenture finances both real estate and significant shorter term assets,
such as machinery and equipment and furniture and fixtures, the CDC should
consider the following:
1. Taking, along with the Third Party Lender, lien positions based upon
proportional shares in the financing of the Project;
2. Taking a 1st lien position on the shorter term assets. SBA requires at least a 2nd
lien position unless there is a lien from an existing 504 loan on the assets;
3. Requiring additional equity or collateral; or
4. Removing the shorter term assets from the Project and have them financed by
another source.
E. Guaranties
1. Personal Guaranties: Individuals who own 20% or more of a Small Business
Applicant must provide an unlimited full personal guaranty. SBA/CDC may
require other individuals to guarantee the loan as well. (13 CFR 120.160(a))
The guaranty by owners of less than 20% may be limited or full. If a limited
guarantee is used, CDC must choose one of the payment limitation options in
SBA Form 148L (Unconditional Limited Guarantee) and specify the option in
the Authorization.
a) CDC must obtain a personal financial statement from all individuals
guaranteeing the loan.
b) Guaranty may be secured or unsecured but must meet SBA’s collateral
requirements. If the loan is not fully collateralized by business assets,
available personal assets must be pledged to secure the guaranty.
c) Guaranty of Spouse:
(1) Each spouse owning 5% or more of a Small Business Applicant must
personally guarantee the loan in full when the combined ownership
interest of both spouses is 20% or more.
(2) For a non-owner spouse, CDC 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.
2. Corporate/Other Guaranties: All entities that own 20% or more of a Small
Business Applicant must provide an unlimited full guaranty. SBA/CDC may
require other entities to guarantee the loan as well. If the entity that owns 20%
or more of the Small Business Applicant is a trust (revocable or irrevocable),
the trust must guarantee the loan with the trustee executing the guaranty on
behalf of the trust and providing the certifications required in Chapter 2,
Paragraph III.F.3.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.
3. Reducing Ownership Interest
a) Any person subject to the personal guaranty requirements 6 months prior
to the date of the loan application would continue to be subject to the
Effective Date: October 1, 2011 311
Subpart C SOP 50 10 5(D)
requirements even if that person has changed his or her ownership interest
to less than 20%.
b) The only exception to the 6-month rule is when that person completely
divests his or her interest prior to the date of application. Complete
divestiture includes divestiture of all ownership interest and severance of
any relationship with the Small Business Applicant (and any associated
Eligible Passive Concern) in any capacity, including being an employee
(paid or unpaid).
4. Employee Stock Ownership Plans (ESOPs) and 401(k) Accounts: When an
ESOP or 401(k) owns 20% or more of a Small Business Applicant, the Plan or
Account cannot guarantee the loan. CDC must ensure that the Plan or Account
meets all applicable IRS eligibility requirements. In addition, the following
loan conditions must be met:
a) The owner(s) of the 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.
b) The members of the ESOP are not required to personally guarantee the
debt, but all owners of the Small Business Applicant who hold an
ownership interest of 20% or more outside the ESOP are subject to SBA’s
personal guaranty requirements.
c) The application cannot be structured as an EPC/OC. 13 CFR
120.111(a)(6) (SBA regulations require that each 20% or more owner of
the EPC and each 20% or more owner of the OC guarantee the loan, and
the regulation does not provide for an exception.)
II. APPRAISAL REQUIREMENTS
The regulations governing appraisal requirements are set forth at 13 CFR 120.160(b).
A. Commercial Real Estate
1. SBA requires a real estate appraisal if the estimated value of the Project
Property is:
a) Greater than $250,000; or
b) $250,000 or less, if such appraisal is necessary for appropriate evaluation
of creditworthiness.
2. The appraiser must be:
a) Independent and have no appearance of a conflict of interest (such as a
direct or indirect financial or other interest in the property or transaction);
and
b) Either State-licensed or State-certified with the following exception:
when the Project Property’s estimated value is over $1,000,000, the
appraiser must be State-certified.
3. The appraisal report must be prepared in compliance with Uniform Standards of
Professional Appraisal Practice (USPAP) and use one of the following options:
312 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
a) A self–contained appraisal report; or
b) A summary appraisal report.
4. In order for the appraiser to identify the scope of work appropriately, the
appraisal must identify the CDC and SBA as the client and/or an intended user
of the appraisal, as those terms are defined in the Uniform Standards of
Professional Appraisal Practice (USPAP). It is acceptable to SBA if the
appraisal identifies the Third Party Lender as the client and the CDC and SBA
as intended users. The CDC may not use an appraisal prepared for the
applicant. The cost may be passed on to the borrower.
5. If the loan will be used to finance new construction or the substantial renovation
of an existing building, the appraisal must estimate what the market value will
be at completion of construction. (―Substantial‖ means rehabilitation expenses
of more than one-third of the purchase price or fair market value at the time of
the application.) After construction is completed, CDC must obtain a statement
from the appraiser that the building was built with only minor deviations (if
any) from the plans and specifications upon which the original estimate of value
was based. If the appraiser cannot provide such a statement, then the CDC
cannot close the loan without the SLPC’s prior written permission.
6. If the loan will be used to acquire an existing building that does not require
construction, the appraiser should estimate market value on an as-is basis. If the
appraiser estimates the value other than on an as-is basis, the narrative must
include an explanation of why the as-is basis was not used.
7. If the appraisal engagement letter asks the appraiser for a business enterprise or
going concern value, the appraiser must allocate separate values to the
individual components of the transaction including land, building, equipment
and business (including intangible assets). When the collateral is a special
purpose property, the appraiser must be experienced in the particular industry.
8. An appraisal must be submitted and approved by the SLPC (except on PCLP
loans) prior to closing. If the appraisal comes in:
a) at 90% or more of the estimated value, the CDC may close the loan but
must include a written explanation in the loan file if the appraisal is less
than the estimated value; or
b) at less than 90% of estimated value, the debenture must be reduced or, if
available, the CDC must secure additional collateral or additional
investment from the borrower and/or guarantors that will be added to the
required Borrower’s Contribution and will be sufficient to address the gap
in value. If additional collateral or additional investment is not available,
but the applicant demonstrates strong, consistent cash flow sufficient to
support the debt, then the SLPC can approve the appraisal and the CDC
may close the loan.
9. An appraisal must be submitted to the SLPC with the application under the
following circumstances:
a) Equity in land owned for 2 years or more is being contributed as part of
Borrower’s contribution;
Effective Date: October 1, 2011 313
Subpart C SOP 50 10 5(D)
b) The real estate is Third Party Lender’s OREO; or
c) The Project is not an arms-length transaction (e.g., family members).
B. Non-commercial real estate or real estate securing a personal guaranty
SBA has no specific requirements for non-commercial real estate (such as a
residence) or real estate (commercial or non-commercial) taken as collateral to secure
a personal guaranty.
III. ENVIRONMENTAL POLICIES AND PROCEDURES
These environmental policies and procedures apply to all 504 loans.
A. Definitions
Terms that are capitalized in this paragraph are defined in the ―Definitions‖ section in
Appendix 2.
B. The Risks of Environmental Contamination include:
1. The costs of Remediation could impair the borrower’s ability to repay the loan
and/or continue to operate the business;
2. The value and marketability of the Property could be diminished. If the
borrower defaults, CDC or SBA might have to abandon the Property to avoid
liability or accept a reduced price for the Property;
3. CDC or SBA could be liable for environmental clean-up costs and third-party
damage claims arising from Contamination if title to contaminated Property is
taken as a result of foreclosure proceedings and/or CDC or SBA exercises
operational control at the Property; and
4. If a Governmental Entity cleans a site, it may be able to file a lien for recovery
of its costs which may be superior to SBA’s lien.
C. Environmental Investigations
SBA requires an Environmental Investigation of all commercial Property upon which
a security interest such as a mortgage, deed of trust, or leasehold deed of trust is
offered as security for a loan or debenture. The type and depth of an Environmental
Investigation to be performed varies with the risks of Contamination. This paragraph
provides minimum standards. Prudent lending practices may dictate additional
Environmental Investigations or safeguards.
D. Submission of Environmental Investigation Reports
The CDC (except on PCLP loans) must submit the Environmental Investigation
Report to the SBA Center processing the application. The requirements of this
section apply to all Environmental Investigations whether or not the report is required
to be submitted to the SBA. All Transaction Screens, Phase I and Phase II ESAs
must be performed by an Environmental Professional and be accompanied by the
Reliance Letter in Appendix 3. (Note that a Reliance Letter is required even if the
Environmental Investigation Report is addressed to the CDC.)
E. The Steps of an Environmental Investigation
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SOP 50 10 5(D) Subpart C
1. NAICS Codes. For all Property except a unit in a Multi-Unit Building, CDC
must begin by making a Good Faith effort to determine the NAICS code(s) for
the Property’s current and known prior uses and compare the NAICS code(s)
to the list of environmentally sensitive industries in Appendix 4. For a unit in a
Multi-Unit Building, Lender may proceed directly to subparagraphs b)(1) and
(2) below.
a) If there is a NAICS code match to an environmentally sensitive industry
identified in Appendix 4, the Environmental Investigation must begin with
a Phase I, regardless of the amount of the loan.
If the NAICS code begins with 447 (gas stations with or without
convenience stores), the Environmental Investigation must begin with a
Phase I and the CDC must also refer to and, if applicable, comply with
―Environmental Investigation Requirements for Gas Station Loans‖ in
Appendix 5.
b) If there is not a NAICS code match to an environmentally sensitive
industry, or if the Property is a unit in a Multi-Unit Building, the CDC
must proceed as follows:
(1) If the loan amount is up to and including $150,000, the
Environmental Investigation may begin with an Environmental
Questionnaire.
(2) If the loan amount is more than $150,000, the Environmental
Investigation must, at a minimum, begin with an Environmental
Questionnaire and Records Search with Risk Assessment.
2. Environmental Questionnaire Results. If the Environmental Questionnaire
reveals it is unlikely that there is environmental contamination at the Property
and that no further investigation is warranted, CDC must submit the results of
the Environmental Investigation to SBA with recommendations and seek SBA’s
concurrence.
If at any time an Environmental Questionnaire reveals that further investigation
is warranted, CDC must obtain, at a minimum, a Records Search with Risk
Assessment.
3. Environmental Questionnaire & Records Search with Risk Assessment Results
a) If the Environmental Questionnaire reveals it is unlikely that there is
environmental contamination at the Property and that no further
investigation is warranted, and the Records Search with Risk Assessment
concludes that the Property is a ―low risk‖ for Contamination, CDC must
submit the results of the Environmental Investigation to SBA with
recommendations and seek SBA’s concurrence.
b) If the Records Search with Risk Assessment concludes that the Property is
an ―elevated risk‖ or ―high risk‖ for Contamination, CDC must obtain a
Phase I ESA.
4. Transaction Screen Results
Effective Date: October 1, 2011 315
Subpart C SOP 50 10 5(D)
a) If the Environmental Professional conducting the Transaction Screen
concludes that no further investigation is warranted, the CDC must submit
the results of the Environmental Investigation to SBA with
recommendations and seek SBA’s concurrence.
b) If the Environmental Professional conducting the Transaction Screen
concludes that further investigation is warranted, the CDC must obtain a
Phase I ESA.
5. Phase I ESA Results
a) If the Environmental Professional conducting the Phase I ESA concludes
that no further investigation is warranted, the CDC must submit the results
of the Environmental Investigation to SBA with recommendations and
seek SBA’s concurrence.
b) If the Environmental Professional conducting the Phase I ESA concludes
that further investigation is warranted (typically a Phase II), and the CDC
still wants to make the loan, the CDC must proceed as recommended by
the Environmental Professional, or in the alternative submit the results of
the Environmental Investigation to the SBA with recommendations and
seek SBA’s concurrence. In general, SBA will require compliance with
all of an Environmental Professional’s recommendations (including
―housekeeping measures,‖ such as secondary containment,
decommissioning monitoring wells, sealing floor drains, etc.). In the rare
instance where an exception may be warranted, CDCs must provide a
rationale for not wanting to follow the Environmental Professional’s
recommendation.
6. Phase II ESA Results
a) If the Environmental Professional conducting the Phase II ESA concludes
that no further investigation is warranted, the CDC must submit the results
of the Environmental Investigation to SBA with recommendations and
seek SBA’s concurrence.
b) If the Phase II ESA reveals Contamination and the CDC still wishes to
make the loan, CDC must ensure that the Environmental Professional has
documented:
(1) Whether the Contamination quantities exceed the reportable or
actionable levels;
(2) Whether Remediation is necessary;
(3) An estimate of any Remediation costs (Environmental Professionals
may use ASTM E2137-01 Standard Guide for Estimating Monetary
Costs and Liabilities for Environmental Matters); and
(4) The projected completion date of any Remediation.
c) If the Environmental Investigation reveals Contamination, the CDC
should determine whether disbursement is appropriate under one or more
of the factors identified in subparagraph G below, ―Approval and
Disbursement of loans when there is Contamination or Remediation at the
Property‖.
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SOP 50 10 5(D) Subpart C
If at any stage of the Environmental Investigation SBA concurs with a CDC’s
recommendation that environmental risk has been sufficiently minimized and
that no further investigation is required, the loan may be disbursed.
F. Legal Responsibilities of SBA Field Counsel and Center Counsel
With respect to environmental investigations that are required to be submitted to an
SBA Loan Processing Center, SBA loan processing personnel must obtain field or
center counsel’s opinion as to the adequacy of an Environmental Investigation and
whether the risk of Contamination, if any, has been sufficiently minimized.
G. Approval and Disbursement of loans when there is Contamination or Remediation at
the Property
Loans may not be approved or disbursed if there is known Contamination or on-going
Remediation at the Property unless the risks have been minimized to the satisfaction
of SBA Loan Processing Center personnel after consulting with and obtaining the
concurrence of SBA field counsel or center counsel. CDCs seeking loan approval or
disbursement authority despite Contamination or on-going Remediation at the
Property must submit a recommendation to SBA that includes, at a minimum, a
discussion of the following:
1. Nature and Extent of the Contamination including copies of the following
documents pertaining to the Property:
a) All relevant Environmental Investigation Reports;
b) All publicly available Governmental Entity correspondence;
2. Remediation
a) Recommended method of Remediation;
b) Status of on-going Remediation, if any;
c) Environmental Professional's estimated cost of Remediation;
d) Environmental Professional's estimated completion date;
e) Governmental Entity's designation of responsible Person(s);
f) Person(s) paying for on-going Remediation;
3. Collateral Value
a) Proposed loan amount and proposed use of proceeds;
b) Appraised or the estimated value of the Property;
c) Institutional Controls and Engineering Controls, if any, and their impact
on repayment ability, collateral value and marketability of the Property;
and
4. Mitigating Factors
SBA will rely upon one or more of the following factors when deciding to
disburse before completion of Remediation or monitoring:
a) Indemnification. If any Person who possesses sufficient financial
resources to cover the costs of completing Remediation executes the SBA
Environmental Indemnification Agreement in Appendix 6, approval or
disbursement may be considered. CDC must conduct an analysis of the
Effective Date: October 1, 2011 317
Subpart C SOP 50 10 5(D)
proposed indemnitor to ensure that it has sufficient assets to honor an
indemnification agreement. The Third Party Indemnitor cannot be the
borrower or operating company.
The SBA Environmental Indemnification Agreement:
(1) Cannot be modified;
(2) Must be executed by the Borrower and (if applicable) Operating
Company;
(3) Must have a copy of the Environmental Investigation Report
attached to it; and
(4) Must be properly recorded in the memorandum format in Exhibit C
to Appendix 6.
All CDCs must submit the finalized SBA Environmental Indemnification
Agreement to SBA for review and approval no less than two weeks in
advance of submission of the loan closing package to the SBA District
Office.
b) Completed Remediation. If the Governmental Entity has affirmed in
writing that active Remediation is complete but additional monitoring is
required, approval or disbursement may be considered after the following
occurs: (a) monitoring results for the first year are obtained; (b) an
Environmental Professional concludes that the results show no
unacceptable increase in Contamination since Remediation; and (c)
Environmental Professional concludes that the owner/operator of the
Property is in compliance with any continuing obligations, including
activity and use limitations, Engineering and Institutional Controls, and
post-Remedial monitoring required by the Governmental Entity.
c) ―No Further Action‖. If a CDC obtains a ―no further action letter‖ or
―closure letter‖ from a Governmental Entity stating that no further
Remediation or monitoring of Contamination previously found is
required, approval or disbursement may be considered.
d) ―Minimal Contamination‖. If the extent of Contamination and cost of
Remediation are de minimis in relation to the value of the Property and/or
the resources of the Person responsible for Remediation, and the
Remediation is projected to be completed within one year, approval or
disbursement may be considered. The CDC should identify the
Environmental Professional that will supervise the Remediation and
discuss: (a) the nature of the Contamination; (b) the reliability of the
Remediation estimates; (c) the projected completion date; and (d) the
duration of ongoing monitoring.
e) Clean-up Funds. If CDC provides evidence from a Governmental Entity
that the borrower or Property has been approved by a fund to pay for or
reimburse Remediation costs, and the amount allocated is sufficient to
cover the costs of Remediation, approval or disbursement may be
considered. CDC must also address any conditions of Remediation that
318 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
might preclude payment or reimbursement and the financial capability of
the fund.
f) Escrow Account. If an escrow account is available which (a) equals a
minimum of 150 percent of the total estimated cost of required
Remediation and (b) is controlled by a 7(a) Lender or first mortgage
holder in a 504 loan as trustee, approval or disbursement may be
considered. The Governmental Entity must concur with the
Remediation’s scope. The Loan Authorization and escrow agreement for
the escrow account must ensure that escrow funds will only be used for
Remediation costs. The source of the escrow funds may not be SBA loan
proceeds. Depending upon the circumstances, an escrow account with
more than 150 percent of the estimated costs of Remediation may be
appropriate. The escrowed funds may be used for Remediation. Any
remaining funds in the account may not be released until the appropriate
―closure letter‖ or ―no further action letter‖ is received or, in the case of
monitoring, when all monitoring wells related to the Property have been
decommissioned.
Note: Lender’s role as trustee of the escrow account is solely to release
funds upon the satisfactory completion of Remediation work -- the Lender
must not control or manage the Property being Remediated.
g) Groundwater Contamination Originating from Another Site. If
groundwater Contamination on the Property is shown to have come from
another property, approval or disbursement may be considered if:
(1) Another Person with sufficient resources is performing Remediation
pursuant to a Remediation action plan that has been approved by the
appropriate Governmental Entity; or
(2) The state has laws or regulations that provide that an owner or
operator of property will not be responsible for Contamination from
another site; or
(3) The Governmental Entity provides satisfactory written assurance that
it will not hold the Property owner liable for the Contamination.
CDC should attempt to have CDC and SBA included by name in the
letter along with the Property owner and future purchasers.
h) Additional or Substitute Collateral. If additional or substitute collateral is
being pledged, or an additional equity contribution is being made,
sufficient to overcome the potential loss due to Contamination, then
approval or disbursement may be considered.
i) ―Other Factor(s)‖. CDC and SBA may rely on factors other than or in
addition to the eight referenced above when considering approval or
disbursement. For example, the existence of adequate environmental
insurance, bonds, agreements not to sue present and future property
owners from the Governmental Entity, Engineering and Institutional
Controls, etc. However, reliance solely upon ―Other Factor(s)‖ requires
clearance from the SBA Environmental Committee. This requirement
extends to PCLP CDCs.
Effective Date: October 1, 2011 319
Subpart C SOP 50 10 5(D)
PCLP CDCs must follow these guidelines, but they do not have to submit
documentation or obtain SBA’s concurrence prior to approval or disbursement
of the loan unless they are relying solely upon the ―Other Factor(s)‖ in
subparagraph 4.i) above. However, all CDCs, including PCLP CDCs, must
forward each finalized SBA Environmental Indemnification Agreement (located
in Appendix 6) to the SBA District Office for review and approval no less than
two weeks in advance of submission of the loan closing package to the SBA
District Office if they want the loan to be considered in that closing cycle.
H. Special Use Facilities
Prudent lending practices dictate that specific additional environmental assessments
be performed for certain special use facilities. For example, Property constructed
prior to 1980 that will be used for daycare or child care centers or nursery schools or
residential care facilities occupied by children must undergo a lead risk assessment
(for lead based paint) and testing for lead in drinking water, and the results of these
assessments must be submitted to the SBA. Disbursement will not be authorized
unless the risk of lead exposure to infants and small children has been sufficiently
minimized. On-site dry cleaning facilities, which may have utilized tetrachloroethene
(PCE) and trichloroethene (TCE) in the course of their business operations, may
present significant clean-up costs if these contaminants have entered the soil or
groundwater. Prudent lending practices dictate and SBA requires that on-site dry
cleaners in operation for more than five years undergo a Phase II Environmental Site
Assessment in addition to a Phase I which would be required due to the NAICS code
match. Any Phase II performed in connection with an on-site dry cleaning facility
must be conducted by an independent Environmental Professional who holds a
current Professional Engineer’s or Professional Geologist’s license and has the
equivalent of three (3) years of full time relevant experience. Gasoline stations also
present significant clean-up costs if contaminated (for specific requirements
pertaining to gasoline stations, please refer to Appendix 5).
I. Brownfields Sites
SBA encourages the redevelopment of brownfields, and SBA loan guarantees are
available to small businesses interested in locating on revitalized brownfields.
Typically this occurs through utilization of one or more of the nine factors in
subparagraph G.4 above.
J. Questions on SBA’s Environmental Policy and Appeals
Questions on SBA’s Environmental Policy should be directed to local field counsel
for the area where the Property is located.
CDCs who believe that an environmental decision that has been rendered by SBA is
inconsistent with this SOP may appeal the decision by forwarding a copy of the
decision, along with an explanation of how the determination is perceived to be
inconsistent with this SOP to EnvironmentalAppeals@sba.gov. (NOTE: this e-mail
address cannot receive submissions larger than 10MB. If the e-mail and attachments
exceed this size, the appeal must be sent in more than one e-mail.) Environmental
appeals, including exceptions to Agency environmental policy, will be reviewed by
320 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
the SBA Environmental Committee comprised of OGC attorneys appointed by the
Associate General Counsel for Litigation, who may consult with an environmental
engineer. The Associate General Counsel for Litigation retains the authority to
overrule decisions rendered by the SBA Environmental Committee.
Effective Date: October 1, 2011 321
Subpart C SOP 50 10 5(D)
CHAPTER 4: LOAN APPLICATION PROCEDURES AND CONTROLS
I. CDC’S 504 APPLICATION
The CDC must complete in full Application for Section 504 Loan, SBA Form 1244.
II. MINIMUM DEBENTURE AMOUNT
The minimum dollar amount for a debenture must be at least $25,000. 13 CFR
120.930(b)
III. SUBMITTING THE APPLICATION
A. Regular 504 Loans
1. All 504 loans are processed in the SLPC. Pre-application inquiries may be
emailed to Sacramento504@sba.gov.
2. The CDC completes the following documents which can be found at
http://www.sba.gov/aboutsba/sbaprograms/elending/programguides/BANK_LO
AN_PROG_INFO_FORMS.html (scroll down to ―504 Documents‖):
a) CDC Checklist for Submitting a 504 Loan Application;
b) Eligibility Information Required for 504 Submission; and
c) Supplemental Information for 504 Processing.
3. Send the completed items along with SBA Form 1244, the CDC’s credit
analysis, and a disk of the Authorization) to:
Sacramento Loan Processing Center
Small Business Administration
6501 Sylvan Road, Suite 111
Citrus Heights, CA 95610-5017
4. In lieu of submitting a disk, the CDC may email the Authorization to
Sacramento504Authorizations@sba.gov. (Include the SBA Loan Name of the
Small Business Applicant in the subject line of your email.) Please include a
copy of this email in the loan package.
B. PCLP Loans
1. The PCLP CDC completes the following documents which can be found at
www.sba.gov/for-lenders, then go to ―Forms Loan Package Tool‖ which is
found under ―Forms, Notices, and SOPs‖ towards the bottom of the page to find
a listing of all forms.
a) PCLP Guarantee Request (SBA Form 2234 (Part A));
b) Copy of pages 2 and 7 of SBA Form 1244;
c) Copy of ―Supplemental Information for PCLP Processing‖ (Part B); and
d) Copy of ―Eligibility Information Required for PCLP Submission‖ (Part
C).
2. Send the completed items to the SLPC by mail to the above address or by fax to
916-735-0640.
C. Processing times for complete application packages
322 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
1. Regular loans: within 6 business days.
2. ALP loans: 3 business days.
D. Abridged Submission Method (ASM)
1. SBA has established a streamlined loan application processing procedure known
as ASM. Under this process, the CDC is required to collect and retain all
exhibits to SBA Form 1244, but is only required to submit the documents not
marked with an asterisk on the instructions. See SBA Form 1244. The
application includes:
a) Credit memorandum,
b) Draft loan authorization,
c) SBA Form 1244.
d) Only the following exhibits to the 1244:
(1) Eligibility checklist (Exhibit 2);
(2) SBA Forms 912 (Exhibit 3);
(3) Franchise documentation (Exhibit 13);
(4) Key costs documents (Exhibit 14);
(5) Collateral appraisals (Exhibit 16);
(6) Environmental documentation (Exhibit 17);
(7) Participating Lender Letter (Exhibit 19);
(8) INS Verification (Exhibit 21); and
(9) Copies of debt and lien instruments and a transcript of account or
equivalent (Exhibit 24).
2. The CDC files including the Exhibits must be available for review by SBA at
any time.
3. When SBA has the capability to accept scanned and/or digitized documents
electronically, we will notify ASM participants that they may use that option.
4. Criteria for ASM
a) SLPC selects CDCs to participate in ASM. To be selected, CDCs must
submit complete, quality loan applications.
b) To submit loans using ASM, a CDC must:
(1) Be an ALP;
(2) Be Premier Certified Lenders Program (PCLP): or
(3) Have submitted at least 10 loans in the last 12 months, and have
passed benchmark measures using the most recent loans processed;
and
(4) Earn an average ―loan package score‖ (LPS) numeric equivalent
rating of no more than ―2.0‖ among the most recent 25 loans
submitted as determined by the SLPC upon the review of the
comprehensiveness and quality of the loan application package.
Effective Date: October 1, 2011 323
Subpart C SOP 50 10 5(D)
5. Monitoring
SBA will monitor CDC’s continued eligibility to use ASM by reviewing 1 loan
out of 10 loan applications based upon the following:
(1) Each CDC will have at least 1 loan reviewed during a 12 month
period.
(2) No CDC will have more than 12 loans reviewed during a 12 month
period.
(3) SLPC will send CDC a written notice for review, and CDC will have
3 business days to submit the entire file to the SLPC.
(4) The CDC will lose its ASM status if:
(a) The average ―loan package score‖ (LPS) for the most recent 25
applications (or all applications since inception as ASM, if
fewer than 25) submitted to the SLPC exceeds 2.0, the CDC
will lose its ASM status until the average LPS returns to 2.0 or
less.
(b) The average LPS of the ASM loans reviewed in the CDC’s
annual review of ASM applications by SLPC exceeds 2.0, the
CDC will lose its ASM status for a period of not less than 90
days.
(c) A CDC fails to meet the required portfolio performance
standards or any other criteria for ASM.
(d) SBA will rely more heavily on the analysis of the CDCs
therefore, continued quality performance of the CDCs portfolio
is essential.
(5) The SLPC Center Director or designee may approve or remove ASM
status at any time for good cause including, but not limited to,
misrepresentation, quality of post-approval actions and findings of
internal or external audits of the CDC.
324 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
CHAPTER 5: LOAN CONDITIONS/AUTHORIZATION REQUIREMENTS
I. AUTHORIZATION BOILERPLATE/WIZARD
The Authorization is SBA's written agreement between the SBA and the CDC providing
the terms and conditions under which SBA will guarantee a business loan.
A. Basic Loan Conditions
120.160 Loan conditions. 13 CFR 120.160
1. SBA establishes the wording for the standard 504 Authorization conditions in
the National Authorization Boilerplate (―the Boilerplate‖). These conditions
reflect the policies and procedures in effect at the time the Boilerplate is issued.
The Boilerplate is incorporated by reference into this SOP. If there is any
conflict between the Boilerplate and the SOP, the Boilerplate supercedes the
SOP.
a) The Boilerplate contains the mandatory national standard language for all
SBA authorizations.
b) The Wizard is a technical tool intended to make it easier for CDCs to
create Authorizations based on the Boilerplate.
2. The Authorization for 504 loans must use the pre-approved conditions that are
found in the Boilerplate.
3. The party responsible for drafting the SBA Authorization is determined by the
program the loan is processed under.
Loan Program Responsible Party
Regular/ALP CDC drafts and SBA finalizes and executes
PCLP CDC drafts and executes on SBA’s behalf
4. SBA Counsel must review and approve any Authorization that proposes to
deviate from the Boilerplate language with the following exception. PCLP
CDCs may develop Authorization conditions that are not pre-approved in the
Boilerplates and use them without prior SBA approval, provided they are only
used one time. Whenever a PCLP CDC develops and uses a non-standard
condition, an explanation for its development must be in the loan file.
B. Disbursement Period, Interest Rates and Loan Maturity
1. Disbursement Period: The loan must be disbursed within 48 months from the
date of approval. There will be no extensions. SBA will automatically cancel
undisbursed dollars. The Denver Finance Center (DFC) will make a reasonable
effort to mail an initial message to the CDC approximately 3 months prior to
taking action on undisbursed funds. The message will inform the CDC of the
undisbursed dollar amount and will provide a date on which the dollars will be
automatically cancelled. After the 3-month message has expired, DFC will
make a reasonable effort to mail a second message on the day the automatic
cancellation is processed.
Effective Date: October 1, 2011 325
Subpart C SOP 50 10 5(D)
2. Interest Rate: The interest rate for 10 and 20 year 504 debentures is based on
market conditions for long-term government debt at the time of sale. 13 CFR
120.932
3. Maturity is 10 or 20 years based upon the useful life of the property being
financed and is generally:
a) 20 years for real estate;
b) 10 years for machinery and equipment; and
c) 10 or 20 years based upon a weighted average of the useful life of the
assets being financed.
C. Interim and Third Party Lender Requirements
CDC must insert the names of the Interim and Third Party Lenders and the amounts
of the loans into the Authorization.
D. Insurance Requirements
1. Hazard Insurance 13 CFR 120.160(c)
a) SBA requires hazard insurance on all assets pledged as collateral.
b) Real Estate:
(1) Coverage must be in the amount of the full replacement cost.
(2) If full replacement cost insurance is not available, coverage must be
for the maximum insurable value.
(3) Insurance coverage must contain a MORTGAGEE CLAUSE (or
substantial equivalent) in favor of the CDC/SBA. 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 CDC/SBA.
The policy or endorsements must provide for at least 10 days prior
written notice to CDC/SBA of policy cancellation.
c) Personal Property:
(1) Coverage must be in the amount of full replacement cost.
(2) If full replacement cost insurance is not available, coverage must be
for maximum insurable value.
(3) Insurance coverage must contain a LENDER'S LOSS PAYABLE
CLAUSE in favor of CDC/SBA. 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 CDC/SBA. The policy or
endorsements must provide for at least 10 days prior written notice
to CDC/SBA of policy cancellation.
2. Marine Insurance
a) Coverage in the amount of the full insurable value on the vessel(s) with
CDC/SBA designated as "Mortgagee" must be obtained when the vessel is
the collateral on the loan.
326 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
b) The policy must contain a Mortgagee clause providing that the interest of
CDC/SBA will not be invalidated by any:
(1) Act, omission, or negligence of the mortgagor, owner, master, agent
or crew of the insured vessel;
(2) Failure to comply with any warranty or condition out of mortgagee’s
control; or
(3) 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 CDC/SBA of policy cancellation.
3. Flood Insurance
a) SBA flood insurance requirements are based on the Standard Flood
Hazard Determination (FEMA Form 81-93). The mandatory purchase of
flood insurance requirements set forth by the National Flood Insurance
Program (NFIP) apply 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.
b) If any portion of a building that is collateral for the loan is located in a
special flood hazard area, CDC must require Borrower to obtain flood
insurance for the building under the National Flood Insurance Program
(NFIP).
c) If any equipment, fixtures or inventory that is collateral for the loan
(―Personal Property Collateral‖) is in a building any portion of which that
is located in a special flood hazard area and that building is collateral for
the loan, CDC must require Borrower to also obtain flood insurance for
the Personal Property Collateral under the NFIP.
d) 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, CDC must require Borrower to obtain flood insurance for the
Personal Property Collateral. The CDC may request a waiver of this
requirement from the SLPC. The CDC must submit with its request a
written justification 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. PCLP CDCs may waive this
requirement when the building is not collateral for the loan if it:
(1) Uses prudent lending standards to determine that flood insurance is
not economically feasible or not available; and
(2) Includes 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.
e) Insurance coverage must be in amounts equal to the lesser of the insurable
value of the property or the maximum limit of coverage available.
Effective Date: October 1, 2011 327
Subpart C SOP 50 10 5(D)
f) Insurance coverage must contain a MORTGAGEE CLAUSE/LENDER'S
LOSS PAYABLE CLAUSE (or substantial equivalent) in favor of
CDC/SBA. 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 CDC/SBA.
4. Life Insurance
a) CDC must determine if the viability of the business is tied to an individual
or individuals. In these situations, the CDC must require life insurance.
b) Life insurance required must be consistent with the size and term of the
loan. The amount and type of collateral available to repay the loan in the
event of the death of the borrower may be factored into the determination
of the appropriate amount of life insurance.
c) For each policy required under this paragraph, CDC must obtain a
collateral assignment, identifying the CDC/SBA as assignee, that is
acknowledged by the Home Office of the Insurer. The CDC must assure
that the borrower pays the premiums on the policy.
d) The CDC may accept the pledge of an existing life insurance policy.
When a new policy is required, a decreasing term policy is most
appropriate. Credit life insurance or whole life insurance should not be
required.
5. Other Insurance
CDC must include any other insurance appropriate to the loan, including but not
limited to:
a) Liability Insurance;
b) Product Liability Insurance;
c) Dram Shop/Host Liquor Liability Insurance;
d) Malpractice Insurance;
e) Disability Insurance;
f) Workers’ Compensation Insurance; and
g) Any State specific insurance requirements.
E. IRS Tax Transcript/Verification of Financial Information
1. SBA’s Tax Verification process is to determine if:
a) The Small Business Applicant filed business tax returns; and
b) The Small Business Applicant’s financial statements provided as part of
the application agree with the business tax returns submitted to the IRS.
2. For a sole proprietorship, the CDC must verify the Schedule C.
3. For a change of ownership, the CDC must verify the seller’s business tax
returns or a sole proprietor’s Schedule C. Where there is an acquisition of a
division or a segment of an existing business, other forms of verification may be
used in lieu of the 4506-T (e.g. Sales tax payment records).
4. Prior to first disbursement of Loan proceeds, CDC must obtain:
328 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
a) Verification of Financial Information—
(1) Within 10 days of receipt of the Authorization, the CDC must submit
IRS Form 4506 - T with SBA logo to the Internal Revenue Service
to obtain federal income tax information on Borrower, or the
Operating Company if the Borrower is an EPC, for the last 2 years
unless the 7(a) size standard is used which requires 3 years.
(2) If the business has been operating between zero and 2 years, CDC
must obtain the information for all years in operation.
(3) This requirement does not include tax information for the most
recent fiscal year if the fiscal year-end is within 6 months of the date
SBA received the application. If the applicant has filed an extension
for the most recent fiscal year, CDC must obtain a copy of the
extension along with evidence of payment of estimated taxes.
(4) CDC must compare the tax data received from the IRS with the
financial data or tax returns submitted with the loan application.
(5) Borrower must resolve any significant differences to the satisfaction
of CDC and the SLPC. Failure to resolve differences may result in
cancellation of the loan.
(6) For a change of ownership, CDC must verify financial information
provided by the seller of the business in the same manner as above.
(7) If CDC does not receive a response from the IRS or copy of the tax
transcript within 10 business days, the CDC:
(a) May proceed to close and disburse the loan;
(b) Must follow-up with the IRS to obtain and verify the tax data
by resubmitting a copy of the Form 4506-T to IRS with the
notation ―Second Request‖ in the top right hand side;
(c) Must document its file with a dated copy of the second
submission; and
(d) Must perform the verification and resolve any significant
differences discovered.
b) The Internal Revenue Service (IRS) has implemented a new expedited
service through which the financial community can expeditiously confirm
the income of a borrower during the processing of a loan application:
Income Verification Express Service (IVES) program. Under IVES, the
IRS can electronically provide tax return transcript, W-2 transcript and
1099 transcript information generally within 2 business days to a third
party with the consent of the taxpayer. The transcript information is
delivered to a secure mailbox based on information received from a Form
4506-T. A $4.50 fee is imposed on each transcript requested. It is
expected that this process will replace the current process, which requires
the manual pick-up and delivery of transcripts from the seven IRS Return
and Income Verification Services (RAIVS) units located across the
country. Under the new system, transcripts will be delivered
electronically using the e-Services platform via a secure mailbox. To
Effective Date: October 1, 2011 329
Subpart C SOP 50 10 5(D)
participate in the IVES program, CDCs will need to register and identify
employees to act as agents to receive electronic transcripts on the CDC’s
behalf. To establish access to a secure mailbox, CDCs will need to
register, which can be done through the following IRS website:
http://www.irs.gov/individuals/article/0,,id=161649,00.html. Additional
information on IVES is also available from this website.
c) If the IRS transcript reflects ―Record Not Found‖ for the middle year of
the three years requested, the lender has verified the other two years, AND
the Small Business Applicant has some record of either receiving a refund
or paying the taxes for the missing year, then the lender may reasonably
assume that the Small Business Applicant filed a return for the missing
year. If the lender documents all of these steps in its loan file, the lender
has demonstrated to SBA that it has made a good faith effort to satisfy the
verification requirement.
d) If the IRS advises that it has no record on the applicant, no record of year
1 and/or year 3, or the CDC is unable to reconcile the IRS information to
the Small Business Applicant’s financial information, the CDC must
report the issue to the appropriate SBA CLSC. If the loan has not been
disbursed, either the loan must be cancelled or the closing must be
postponed until the issue is resolved.
e) If a Small Business Applicant has not filed required federal tax returns, the
applicant is not eligible for SBA financial assistance.
F. Standby Agreements
1. SBA Form 155 - Standby Agreement. CDC may use SBA Form 155 or its own
Standby Agreement Form. A copy of the note must be attached to the standby
agreement.
2. Standby Creditor must subordinate any lien rights in collateral securing the
Loan to CDC’s rights in the collateral, and take no action against Borrower or
any collateral securing the Standby Debt without CDC’s consent.
G. Assignment of Lease and Landlord’s Waiver
1. 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 CDC must obtain:
a) 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 CDC with option to cure the default; and
b) A Landlord’s Waiver.
2. The Landlord's Waiver gives the CDC 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.
330 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
3. If the loan proceeds will finance improvements on a leasehold interest in land,
the underlying ground lease must include, at a minimum, detailed clauses
addressing the following:
a) Tenant's right to encumber leasehold estate;
b) No modification or cancellation of lease without CDC's or assignee's
approval;
c) CDC's or assignee's right to:
(1) Acquire the leasehold at foreclosure sale or by assignment and right
to reassign the leasehold estate (along with right to exercise any
options) by CDC or successors; lessor may not unreasonably
withhold, condition or delay the reassignment;
(2) Sublease;
(3) Hazard insurance proceeds resulting from damage to improvements;
(4) Share in condemnation proceeds; and
4. CDC’s or assignee’s rights upon default of the tenant or termination.
5. For lease requirements concerning EPCs and OCs, see Chapter 2 of this
Subpart.
6. 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 Assignment of Lease also has to be approved by the
Secretary of the Interior or his/her authorized representative.
H. Construction Loan Provisions
1. In the construction of a new building or an addition to an existing building,
CDC must obtain:
a) Evidence of compliance with the "National Earthquake Hazards Reduction
Program Recommended Provisions for the Development of Seismic
Regulations for New Buildings" (NEHRP), or a building code that has
substantially equivalent provisions. 13 CFR 120.174
(1) The NEHRP provisions may be found in the American Society of
Civil Engineers (ASCE) Standard 7 and the International Building
Code.
(2) Examples of evidence include a certificate issued by a licensed
building architect, construction engineer or similar professional, or a
letter from a state or local government agency stating that an
occupancy permit is required and that the local building codes upon
which the permit is based include the Seismic standards.
b) The CDC must certify that the Project was completed in accordance with
the final plans and specifications unless a minor portion of the project has
been escrowed for a valid reason. 13 CFR 120.891
2. If the interim financing comes from a CDC, the following additional conditions
must be required in the Authorization:
a) Mortgages must be recorded prior to beginning construction.
Effective Date: October 1, 2011 331
Subpart C SOP 50 10 5(D)
b) Inspections must be made by a qualified engineer, appraiser, or other party
satisfactory to SBA prior to all progress disbursements.
c) The small business must furnish a firm construction contract to the CDC
from an acceptable contractor at a specified price, including a provision
that no material changes are to be made without the prior written consent
of the CDC;
d) The contractor must furnish builder’s risk and workers’ compensation
insurance;
e) One complete set of plans and specifications of the proposed construction
must be submitted to the CDC;
f) Where the CDC or the small business is to inject funds into the
construction project, these funds must be used prior to the disbursement of
the interim financing;
g) The CDC must make and document periodic inspections of construction;
and
h) When loan funds will be used to improve buildings on leased land,
assignment of the lease must be obtained.
I. Special Provisions for Franchises
When lending to a franchise, the CDC should consider obtaining an agreement
from the franchisor that:
1. Allows CDC and SBA access to Franchisor’s books and records relating to
Borrower’s billing, collections and receivables;
2. Upon loan payment default or deferment, defers payment of franchise fees,
royalties, advertising, and other fees until Borrower brings loan payments
current;
3. Gives CDC 30 days notice of intent to terminate the Franchise Agreement;
and/or
4. Gives CDC the same opportunity to cure any defaults under the franchise or
lease agreement that is given the franchisee under the same agreements.
J. Certifications of the CDC
The certifications required of the CDC are listed on SBA Form 2101. (Scroll down
and click on link entitled ―504 streamlining notice and related documents.)
K. Certifications of the Borrower
The certifications required of the Borrower are listed on SBA Form 2289. (Scroll
down and click on link entitled ―504 streamlining notice and related documents.)
L. Certifications of the Interim Lender
The certifications required of the Interim Lender are listed on SBA Form 2288.
(Scroll down and click on link entitled ―504 streamlining notice and related
documents.)
332 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
II. MODIFYING THE AUTHORIZATION
The CDC may request in writing modifications to the terms and conditions of the
Authorization at any time after approval, but before funding. All modifications must be
approved by a 327 action by the same level of delegated authority at which the loan was
originally approved, except as stated elsewhere in this SOP and by delegation of
authority.
A. For an increase or decrease in the amount of an approved loan, the 327 action must
clearly support the need for the change in the amount and address the effects on
repayment ability, collateral and jobs created or retained. The 327 action must also
provide the revised breakdown of the private sector lender, debenture, and CDC/small
business injection, including a revised use of funds.
B. Neither the amount nor the maturity of a loan can be modified after the debenture
closing has been completed.
C. PCLP CDCs may modify and extend the loan authorization unilaterally and must
notify SLPC of any change in loan amount.
D. Post-approval modifications (327 actions) may be sent by email to
Sacramento504Servicing@sba.gov or by fax to 916-735-0641.
Effective Date: October 1, 2011 333
Subpart C SOP 50 10 5(D)
CHAPTER 6: CLOSINGS
I. RESPONSIBILITY FOR CLOSING THE 504 LOAN AND DEBENTURE
A. The CDC is responsible for the 504 Loan closing, including compliance with all SBA
Loan Program Requirements. Each CDC has its own division of labor and dictates
the CDC counsel’s role. Although SBA Counsel is available for advice and
assistance, the CDC and its attorney are ultimately responsible for the 504 Loan
closing. 13 CFR 120.960 and 120.10.
B. The debenture closing is the joint responsibility of the CDC and SBA. CDC must
prepare the documents necessary for closing the debenture. SBA Counsel reviews the
loan closing package for legal sufficiency and opines whether SBA may guarantee the
debenture. 13 CFR 120.960.
II. THE CLOSING PACKAGE
A. Types of Loan Closing Packages
There are two types of loan closing packages:
1.A regular closing package submitted by either non-Priority CDCs or Priority
CDCs who are not using a Designated Attorney; and
2. An expedited closing package submitted by a Priority CDC using a Designated
Attorney under the expedited closing process.
B. The Closing Package
1. SBA has adopted a 504 Debenture Closing Checklist (Checklist) (SBA Form
2286). (Scroll down and click on link entitled ―504 streamlining notice and
related documents.) CDCs and SBA must use this Checklist for all 504
debenture closings. The Checklist lists the documents SBA requires to
determine whether the debenture can be sold to fund the loan. It is not intended
to include all the items the CDC will need to properly close the loan.
2. SBA requires that the CDC submit to SBA Counsel for review:
a) For regular closings, the 25 items on the Checklist; or
b) For expedited closing packages, the first 12 items on the Checklist to SBA
for SBA Counsel’s review after closing.
c) With either type of loan closing package, in rare circumstances if an
additional document is necessary, the CDC may submit it along with an
explanation of the significance.
3. Mandatory Forms:
a) Documents on the Checklist that have an SBA form number
b) Opinion of CDC Counsel (Appendix D to the 504 Authorization
Boilerplate); and
c) The SBA-approved environmental indemnification agreement.
d) CDCs may use their own forms for the lien instruments on Project
Property and secondary collateral, those forms must be either state bar-
approved forms or approved by SBA Counsel prior to submission.
334 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
e) Specific guidance on how the CDC must complete each document on the
Checklist is in ―Legal Responsibilities‖ SOP 70-50, Chapter 4, Paragraph
4.
III. SPECIFIC RESPONSIBILITIES AND PROCEDURES FOR CLOSING AND
POST-CLOSING ACTIVITIES
A. CDC’s Responsibilities
The CDC must:
1. Notify SBA Counsel in writing of planned debenture closings at least 30 days
before the Field Office deadline for CDCs to submit closing packages. This
notification is for SBA Counsel’s planning purposes only and the CDC may
ultimately submit more, fewer or different closing packages.
2. Request from the SLPC all necessary modifications to the Authorization before
submitting closing packages as far in advance of submitting the loan closing
package as possible. The CDC must obtain SBA approval of all such issues
before submitting the closing package to the field office.
3. CDCs must issue an opinion that to the best of its knowledge there has been no
unremedied substantial adverse change in the Borrower's (or Operating
Company's) ability to repay the 504 loan since its submission of the loan
application to SBA (―finding‖). For all 504 loans except ALP and PCLP, CDCs
must provide its finding to the SLPC along with copies of the financial
statements current within 120 days supporting that finding. The CDC’s finding
of no adverse change must be made no more than 14 calendar days prior to
submission to the SLPC at the time the CDC is requesting that SLPC transmit
the file to District Counsel for debenture closing. The SLPC either will notify
the CDC of its approval or, if SBA disagrees with the CDC’s determination of
no adverse change, the debenture will not close until SBA has been satisfied
that any adverse change has been remedied. ALP and PCLP CDCs must make
a finding of no unremedied substantial adverse change 14 calendar days prior to
submission of the closing package to District Counsel and retain the finding and
copies of the financial statements on which they relied in their files. If the
debenture closing is not consummated in the month following the finding, all
CDCs must make and submit (except PCLP and ALP CDCs which must retain
the finding in the file) a new finding of No Adverse Change and request for
transmission of the file including SLPC’s approval of the new finding to District
Counsel.
4. Request each Authorization be transmitted by the SLPC to the field office for
closing in time to meet the field office’s deadline for submission of loan closing
packages. CDCs must not request a transmission unless the debenture is ready
for closing and sale during the month following the request. If an Authorization
has not been received in the field office by its loan closing package submission
deadline, SBA Counsel may hold over the package for the next month’s
debenture sale.
Effective Date: October 1, 2011 335
Subpart C SOP 50 10 5(D)
5. Submit closing packages by the deadline established by SBA Counsel. CDCs
may submit a closing package electronically, by facsimile or hard copy. SBA
Counsel may hold late packages over for the next month’s debenture sale.
6. Use only the 504 Debenture Closing Checklist and submit documents in the
order appearing on the Checklist. In the column labeled ―CDC‖ on the
Checklist, the CDC must check off each document the CDC has included in the
closing package or for documents not applicable to a particular transaction,
write ―NA‖ in the block. CDC must submit only a copy of each document, and
must retain the original until SBA Counsel completes his or her review. After
the debenture sale, the CDC must retain a copy of the closing package in its
files and make it available to SBA upon request.
7. Hold all original loan documents until SBA gives the CDC written notification
that SBA has completed its review of the closing package and approved the
debenture sale. If SBA Counsel determines that the loan is ready for funding,
SBA Counsel must notify the CDC and CSA that the debenture is ready for
sale. If the SBA Counsel determines that changes are needed in the closing
documents, SBA must notify the CDC of such changes before the cut-off-date
by which the CSA must receive documents from the CDC for the debenture
sale. After the CDC makes the necessary changes and SBA has approved the
changes, SBA must notify the CDC and CSA that the debenture is ready for
sale.
8. Send by overnight mail to the CSA the necessary debenture closing documents
for the debenture sale. After SBA sends the CDC notice of which debentures
SBA has approved for sale, the CDC must send to the CSA by overnight mail
the following debenture closing documents for each debenture to be sold:
a) Servicing Agent Agreement (SBA Form 1506) (original)
b) Development Company 504 Debenture (SBA Form 1504) (original)
c) Note (CDC/504 Loans) (SBA Form 1505) (copy)
d) Authorization Agreement for Preauthorized Payment (Debit) and voided
check (original)
e) Request for Taxpayer ID Number and Certification (IRS Form W-9)
(original)
f) Third Party Lender participation fee check (if not being deducted from the
CDC processing fee) (original)
9. Forward the original of all documents listed on the 504 Debenture Closing
Checklist (which serves as the original collateral listing) to the appropriate
CLSC within 30 days after the debenture sale.
a) The CDC must forward the collateral file containing all the original
documents listed on the Checklist to the CLSC. The CDC must use the
Checklist as the collateral listing. The CDC must maintain the collateral
file in a manner acceptable to SBA.
b) If the CDC has not yet received all original documents by 30 days after the
debenture sale date, the CDC must send the documents it does have and
336 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
must send additional documents along with a collateral listing upon
receipt.
10. Ensure that all recorded documents are canceled of record (officially canceled at
the place of recordation, as required by law), if a 504 loan is canceled after
closing but before funding.
B. What are SBA Counsel’s Responsibilities?
SBA Counsel must comply with the procedures for loan and debenture closings
outlined in SOP 70 50, ―Legal Responsibilities,‖ Chapter 4, paragraphs 4 and 5,
including the conduct of Quality Assurance Reviews and Complete File Reviews.
1. Quality Assurance Reviews (QARs). SBA Counsel must conduct QARs of a
random selection of closing packages submitted by Priority CDCs to assure the
quality of the expedited closing process. A QAR is a review by SBA Counsel
of the closing package as if it were a regular closing package submitted by a
non-Priority CDC.
2. Complete File Reviews (CFRs). SBA Counsel must conduct a CFR of a
random selection of all loan closings, whether those closing packages were
submitted by Priority CDCs or non-Priority CDCs, to ensure program integrity.
A Complete File Review consists of a review of the items listed on the
Checklist for Complete File Review, SBA Form 2303.
C. Central Servicing Agent’s (CSA) Responsibilities
1. Review debenture closing documents, package and price debenture for sale, and
conduct debenture sale. The CSA notifies the CDC of any changes that need to
be made or additional information to be provided before the debenture sale can
occur:
2. Complete the Servicing Agent Agreement and Note: The CSA fills in the
remaining blanks on the Note and Servicing Agent Agreement, generating
conformed pages, and executes the Servicing Agent Agreement.
3. Distribute post-closing documents. The CSA will provide the following
documents on-line:
a) The first page of the Note;
b) The Note amortization and prepayment schedules; and
c) Pages 3 and 4 of the Servicing Agent Agreement.
D. The Trustee’s responsibilities
The Trustee will provide copies of the Debenture and the Debenture amortization and
prepayment schedules to the CDC, CSA, or SBA, as directed.
IV. USE OF CONSTRUCTION ESCROW ACCOUNT (13 CFR120.961)
With SBA’s prior approval, if acquisition of machinery and equipment or other portions
of a project (such as a parking lot, landscaping, etc.) represent a relatively minor portion
of the total project, and it has been contracted for delivery at a specified price and date,
but cannot be installed or delivered prior to acquisition or completion of the plant, the
Effective Date: October 1, 2011 337
Subpart C SOP 50 10 5(D)
debenture may be sold, provided (see Chapter 5 of this Subpart, Construction Loan
Provisions):
A. The proceeds authorized for acquisition of such assets are held in escrow by the CSA,
title company, CDC attorney, or bank to complete Project components;
B. All required lien positions and collateral are obtained prior to closing;
C. Disbursement from such account(s) must be approved by the CDC and SBA,
supported by invoices, and be made payable jointly to the small business and the
designated contractor; and
D. Funds not disbursed after one year will be applied to pay down the Third Party
Lender’s loan.
E. No other escrow closings are permitted.
338 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
CHAPTER 7: DEBENTURE PRICING & FUNDING
I. PRICING A 504 DEBENTURE 13 CFR 120.971
A. Terms
1. Net Debenture Proceeds is defined in Chapter 1 of this Subpart.
2. Gross Debenture: The net debenture proceeds plus the administrative costs.
See Chapter 2 in this Subpart for eligible administrative costs.
The Gross Debenture cannot exceed:
a) $5,000,000 for each small business concern (which includes any prior
SBA loan guaranties, committed or outstanding, 7(a) or 504, to the
applicant and its affiliates) for:
(1) Regular 504 loans; and
(2) Public Policy Projects (See Section 502(2)(A)(ii) of the SBI Act and
Chapter 2 of this Subpart, Eligibility)
b) $5,500,000 for:
(1) Each Project for Small Manufacturers (defined as a business with its
primary NAICS Code in Sectors 31, 32, and 33, and all of its
production facilities are located in the United States);
(2) Each Project that reduces the Borrower’s energy consumption by at
least 10%; and
(3) Each Project for plant, equipment and process upgrades of renewable
energy sources such as the small-scale production of energy for
individual buildings or communities consumption, commonly known
as micropower, or renewable fuel producers including biodiesel and
ethanol producers.
There can be more than one Project (for small manufacturers and
eligible energy projects) for the same applicant or for its affiliates.
The $5,500,000 per Project is not reduced by other prior SBA loan
amounts outstanding because the $5,500,000 is a limit per Project
not a limit for each small business concern.
Note: 504 loans made for Projects for small manufacturers or
eligible energy loans as described above do not reduce the
$5,000,000 limit for each small business concern for regular 504
loans and loans for Public Policy Projects.
B. Determining SBA’s Share of the Project Costs
To price a debenture, you must determine SBA’s share of a project’s total cost. The
following hypothetical project will identify the amount of funds required to fund both
the eligible project costs (Net Debenture) plus the administrative costs totals the
Gross Debenture amount
Effective Date: October 1, 2011 339
Subpart C SOP 50 10 5(D)
To illustrate, assume that total project costs (land, building and machinery and
equipment and eligible soft costs) are $1,000,000. Assuming SBA will finance 35%
of the project costs for 20 years, participation in project financing would be as
follows:
% Participation Amount
50% Third-Party Lender $500,000
35% 504 Net Debenture $350,000
15% Small Business Injection $150,000
100% Total Project Costs $1,000,000
C. Steps to Calculate the Gross Debenture
Use the following step by step pricing model procedures to determine the
administrative costs and the Gross Debenture amount. Except for the underwriting
fee and closing costs, each administrative cost is based on the amount of the Net
Debenture.
1 Net Debenture Determine the Net Debenture: $350,000.00
2 SBA Guaranty Fee (0%) multiply $350,000 by 0.000 = $0.00
3 Funding Fee (.25%) multiply $350,000 by .0025 = $875.00
4 CDC Processing Fee (1.5%) multiply $350,000 by .015 = $5,250.00
5 Eligible Closing Costs* = $2,500.00
6 Gross Debenture Amount To calculate the Gross Debenture, add items 1 through 5
above and divide the total by 0.996 for 20-year debentures
(For 10-year debentures, this number would be 0.99625).
This step adds the Underwriter’s Fee to the total debenture.
Round this number up to the next even thousand.
Net Debenture Proceeds $350,000.00
SBA Guaranty Fee $0.00
Funding Fee $875.00
CDC Processing Fee $5,250.00
Closing Costs $2,500.00
Total $358,625.00
Divide by 0.99600 $360,065.20
(0.99625 for 10-Year Debenture)
Round up to the next even $361,000.00
thousand
The Gross Debenture in this example is $ 361,000.00.
Note: The Gross Debenture is calculated first because the Underwriter’s Fee is based on
the Gross Debenture, not the Net Debenture.
340 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
To determine the exact amount of the underwriter’s fee,
7 Underwriter’s Fee
multiply the 20-year Gross Debenture by .004.
(For 10-year debentures, this number would be .00375.)
Multiply $361,000.00 by .004= $1,444.00
8 Balance to Borrower.
The difference between the Gross Debenture amount ($361,000.00) and the sum of Net
Debenture proceeds ($350,000.00), processing and closing fees ($8,625.00), and
underwriters fee ($1,444.00) goes to the borrower.
In this example, the Balance to Borrower is:
$361,000.00 – ($350,000.00 + $8,625.00 + $1,444.00) = $931.00.
*For Eligible Project Costs and fees, see Chapter 2 of this Subpart.
D. Separate Payment of the Debenture Fees
1. The CDC’s Processing Fee and the closing costs are the only fees that can be
paid upfront and deleted from the Gross Debenture calculations.
2. If the borrower chooses to pay the CDC’s Processing Fee upfront, the Borrower
may be reimbursed for the CDC’s Processing Fee from the debenture proceeds.
a) If the Borrower is reimbursed, the CDC’s Processing Fee will be included
in calculating the Gross Debenture. The CDC will receive the fee as
usual. The CDC then must reimburse the borrower.
b) If the borrower does not want to be reimbursed for the CDC’s Processing
Fee from the debenture proceeds, the Gross Debenture calculation must
include the CDC’s Processing Fee in order to determine the correct
Underwriter’s Fee. Once the Underwriter’s Fee is calculated, a zero is
then entered on the CDC’s Processing Fee line in the SBA Form 1506,
and the dollar amounts are re-totaled and rounded to the next higher
thousand for the new Gross Debenture amount.
E. When the Debenture is Priced
1. A Debenture is priced at time of application. If there are any changes in the 504
portion of the project costs between loan approval and project completion, the
Debenture must be re-priced.
2. If the borrower does not use the full amount of any contingency fund, then the
Debenture may be re-priced as follows:
a) If the amount of the unused contingency fund is 2% or less of the
approved Gross Debenture amount, the difference must be refunded to the
borrower from the Gross Debenture proceeds by the CSA. No change is
needed in the Debenture amount, and this does not require a loan
modification request.
b) If the amount of the unused contingency fund is greater than 2% of the
approved Gross Debenture amount, the CDC must request a loan
modification from the SLPC prior to closing to reduce the Net Debenture
Effective Date: October 1, 2011 341
Subpart C SOP 50 10 5(D)
proceeds by the amount of the unused contingency fund, and the
Debenture amount is recalculated. 13 CFR 120.930(c)
II. FUNDING THE DEBENTURE
The 504 Debentures are normally sold and proceeds disbursed on the Wednesday after
the second Sunday of each month. The Fiscal Agent normally negotiates the final rate
and fees with underwriters on the Tuesday after the first Sunday of each month.
A. Disbursement of Debenture Proceeds
On the scheduled sale date, the Gross Debenture proceeds, less the Underwriter’s Fee,
will be wired to the CSA. Upon receipt of the proceeds, the CSA must:
1.
Deduct an amount sufficient to cover the following:
a) Its initiation fee as computed and identified by SBA in the Servicing
Agent Agreement, if applicable (not presently applicable); and
b) A guaranty fee payable to SBA, as in effect at the time of loan approval.
2. Disburse the balance of the proceeds within 48 hours of receipt of funds as
follows:
a) Payoff the interim lender of the Net Debenture amount;
b) CDC’s Processing Fee; and
c) Balance to Borrower based on the CSA’s computations under the pricing
model.
B. Community Adjustment and Investment Program (CAIP)
CAIP was established in 1993 to assist U.S. companies doing business in areas of the
country that have been negatively affected by the North American Free Trade
Agreement (NAFTA). CAIP loans allow for the reimbursement of the guaranty fee
on eligible 504 loans.
1. Eligibility
To be eligible for CAIP, the small business must reside in a county, or a defined
area within a county, noted as being negatively affected by NAFTA based on
job losses and the unemployment rate of the county. There is also a job creation
component of one job created for every $65,000 of the debenture.
2. Eligible CAIP Communities
To find out if the business is in an eligible area, go to the listing of the counties
at www.sba.gov at All CAIP. This listing is updated several times a year.
3. Debt Refinancing under CAIP
a) No more than 49% of loan principal made available under CAIP may be
used to refinance existing long-term debt (i.e., debt with a remaining term
of more than 24 months) or to finance a change of ownership.
b) For purposes of this limitation, the following are not considered to be
long-term debt refinancing and, accordingly, are not subject to the
limitation:
342 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
(1) Converting short-term debt (i.e., debt with a remaining term of 24
months or less) to long-term debt;
(2) Converting interim debt (i.e., a bridge loan) to long-term debt;
(3) Converting line of credit or revolving credit debt to long-term debt;
(4) If the debt was incurred to open a new facility, expand operations at
an existing facility, enter new markets, or improve a small business’s
competitive position;
(5) Bringing trade payables to a current status or buying out a factor;
and
(6) A change of ownership (e.g., acquisition, merger or consolidation)
that is essential to sustain the existence of the business.
4. Application Process
Once the 504 loan is approved by SBA (as evidenced by an SBA loan number),
the CDC must submit a completed Form 2021 to the SLPC. The SLPC will
review the form and, if the CAIP application meets all eligibility requirements,
will forward it to the Office of Financial Assistance (OFA). In addition to the
completed form, SBA’s loan accounting information must reflect that the
guaranty fee has already been paid.
OFA then prepares a package to be submitted to and considered by the CAIP
Finance Committee, which is comprised of officials from the Departments of
Agriculture and Treasury and the North American Development Bank.
If the CAIP Finance Committee approves the application, SBA will refund the
guaranty fee to the CDC who, in turn, refunds any fee paid by the borrower to
the borrower. (Note: The CAIP Finance Committee meets infrequently, and
funds for this initiative are limited and may not always be available.)
Effective Date: October 1, 2011 343
Subpart C SOP 50 10 5(D)
CHAPTER 8: ALLOWABLE FEES
I. ALLOWABLE FEES THAT A 504 BORROWER MAY BE CHARGED
The fees that a 504 borrower may be charged can be found at: 13 CFR 120.971 and
120.972 and are described in the table below.
504 Fees
CDC Fees -- 13 CFR 120.971(a)
Up to1.5% of the Net
(1) Processing fee (Packaging fee) Debenture Paid by borrower to CDC
CDC may charge a reasonable
closing fee --sufficient to
reimburse it for the expenses
Maximum of $2500 may of its in-house or outside legal
be financed from the counsel, and other
debenture proceeds. 13 miscellaneous closing costs.
(2) Closing Fee CFR 120.883(e) Paid by Borrower.
Minimum of 0.625%/year.
Maximum of 2%/year
Note: Maximum 1.5% for
rural areas and 1% for Based on the unpaid principal
everywhere else without balance of the loan – paid by
(3) Servicing fee (monthly) prior SBA approval. borrower to CDC
Loan payments received
after the 15th of each
month may be subject to a
late payment fee of 5% of
the late payment or $100,
(4) Late fees whichever is greater.
Not to exceed 1% of the
outstanding principal
(5) Assumption fee
balance of the loan being Upon SBA’s written approval–
assumed. paid by borrower to CDC
On-going fee of 0.1% per
year is charged. 1) July 26,
2007 thru July 25, 2009,
CSA receives 2/64th. 2) For
CSA Fees – 13 CFR 120.971(b)
July 26, 2009 thru July 25,
2012 (option years) CSA
receives 3/64th. Remainder
goes to SBA.
Other Agents Fees – 13 CFR
120.971(c)
344 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
Underwriters’ fee for 20 year Paid by borrower to
Debenture Upfront fee of 0.4% underwriter
Underwriters’ fee for 10 year Paid by borrower to
Debenture Upfront fee of 0.375% underwriter
504 Fees(Continued)
SBA Fees -- 13 CFR 120.971(d)
(1) SBA Guaranty Fee -- (up-front 0% (FY 2011)
fee) 0.5% (FY 2012) One time fee
Fee is adjusted annually by
cohort year (based on date the
0.749% (FY 2011)
(2) Annual Fee -- (Ongoing fee) individual loan was approved)
0.9375% (FY 2012)
and is charged on the unpaid
principal balance of the loan.
0.25% of the net Debenture Charged to cover the costs
Funding Fee -- 13 CFR 120.971(e)
Proceeds incurred by the trustee, fiscal
agent and transfer agent.
3rd Party Lender & CDC -- 13
CFR 120.972
A one-time fee from the Third
Party Lender if in a senior lien
0.50 % of the senior
(a) Participation Fee -- Senior position to SBA in the project.
mortgage loan -- One Time
Lienholder The fee may be paid by the
fee
Third Party Lender, CDC or
borrower.
The fee must be paid from the
servicing fees collected by the
On-going fee to SBA of CDC and cannot be paid from
0.125% of the outstanding any additional fees imposed on
principal balance of the the Borrowers (loans approved
(b) CDC Fee debenture -- Annual Fee by SBA after 9/30/1996)
II. FEES FOR OTHER SERVICES
A. The CDC may be compensated for other services provided to a small business such as
packaging and servicing a 7(a) loan or providing management assistance. Such fees
are to be charged pursuant to a formal agreement between the CDC and the 7(a)
Lender setting forth the roles and relationships of the parties as well as terms and
conditions and must be in compliance with SBA regulations.
Effective Date: October 1, 2011 345
Subpart C SOP 50 10 5(D)
B. CDC referral fees for locating third party financing 13 CFR 120.926
The CDC may earn a fee for this service provided it is:
1. Based upon a contractual agreement between the Third Party Lender paying the
referral fee and the CDC; and
2. Not paid by the borrower or funded from the debenture proceeds.
III. DISCLOSURE OF FEES AND EXPENSES (13 CFR Part 103)
A. Disclosure of Fees and Identification of Agents
Section 13 of the Small Business Act (15 U.S.C. §642) requires that a Small Business
Applicant identify the names of persons engaged by or on behalf of the Small
Business Applicant for the purpose of expediting the application and the fees paid or
to be paid to any such person. SBA regulations at 13 CFR 103.5 require any agent to
execute and provide to SBA a compensation agreement (―Agreement‖). Each
Agreement governs the compensation charged for services rendered or to be rendered
to the Small Business Applicant or CDC in any matter involving SBA assistance.
―Agent‖ means an authorized representative, including an attorney, accountant,
consultant, packager, lender service provider, or any other person representing an
applicant, or participant by conducting business with SBA.
B. SBA Form 159(504) ―Fee Disclosure Form and Compensation Agreement‖
1. The Small Business Applicant or the CDC, depending on who paid or will pay
the Agent, must use SBA Form 159(504), ―Fee Disclosure Form and
Compensation Agreement,‖ to document the fees. The Small Business
Applicant, the Agent and the CDC must sign the SBA Form 159(504). A
separate SBA Form 159(504) must be executed for each Agent.
2. Information on this form will be used to monitor the Agents, fees charged by
Agents, and the relationship between Agents and CDCs. CDCs must make sure
that all of the appropriate data fields on SBA Form 159(504) are completed.
3. The following are not considered Agents for purposes of this Agreement and,
therefore, are not required to complete SBA Form 159(504):
a) Applicant’s accountant for the preparation of financial statements required
by the applicant in the normal course of business and not related to the
loan application;
b) A state-certified or state-licensed appraiser employed by the CDC to
appraise collateral in connection with the SBA loan;
c) An environmental professional employed by the CDC to conduct an
environmental assessment of the collateral in connection with an SBA
loan;
d) Any attorney in connection with the SBA loan closing; and
e) A real estate agent who is receiving a commission for the sale of real
estate in connection with the SBA loan.
4. The CDC must inform the applicant in writing that the applicant does not have
to employ an Agent or representative (including the CDC) to assist the applicant
346 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
with the loan application. If an applicant employs an Agent or representative,
the fee paid must bear a reasonable relationship to the services actually
performed. The SBA does not allow contingency fees (fees paid only if the loan
is approved) or charges for services which are not reasonably necessary in
connection with an application.
5. If the total compensation exceeds $2,500, the compensation must be itemized.
IV. AGENTS
A. SBA regulations at 13 CFR Part 103 govern the activities of Agents, the disclosure of
fees, and the circumstances that would result in revocation or suspension.
1. Agent – (13 CFR 103.1(a))
a) SBA defines an ―Agent‖ to mean an authorized representative, including
an attorney, accountant, consultant, packager, lender service provider, or
any other person representing an applicant, or participant by conducting
business with SBA.
b) For individuals or entities operating under a professional services contract,
SBA approves the written agreement or contract with the CDC and the
SBA Form 159(504) is not required. (13 CFR 103.5(c) and 120.824)
(Professional Services Contracts are used under the 504 Program rather
than Lender Service Provider Agreements. See Subpart A, Chapter 3 for
guidance on Professional Service Contracts.) Fees paid by the CDC in
accordance with the professional services contract cannot be passed onto
the Small Business Applicant other than for reasonable costs associated
with assisting the Small Business Applicant with its portion of the
application (loan packaging).
c) For all other Agents, paid by either a Small Business Applicant or a CDC,
an SBA Form 159(504) must be completed and signed by the Small
Business Applicant and the CDC. For each Agent paid by the Small
Business Applicant to assist it in connection with its application, the
Agent also must complete and sign the form. When an Agent is paid by
the CDC, the CDC must identify the Agent on SBA Form 159(504) and
the CDC and Small Business Applicant must sign the form.
d) The only situation where an Agent can receive compensation from both
the CDC and the Small Business Applicant is when the Agent is providing
different services by providing packaging services to the Small Business
Applicant and receiving a referral fee from the CDC. (13 CFR 103.4(g))
e) The SBA does not allow contingency fees (fees paid only if the loan is
approved) or charges for services which are not reasonably necessary in
connection with an application.
2. Referral Agents – (13 CFR 103.1(f))
―Referral Agent‖ means a person or entity that identifies and refers an applicant
to a CDC or a CDC to an applicant. The referral agent may be employed and
compensated by either an applicant or a CDC. Each referral agent, including
Effective Date: October 1, 2011 347
Subpart C SOP 50 10 5(D)
loan packagers, must disclose the name of its customer and all fees charged in
connection with the SBA loan transaction on SBA Form 159(504).
B. Agents and Privacy Act Considerations
Private information about a loan cannot be discussed with anyone who claims to be
an Agent for a Small Business Applicant or CDC without evidence of representation.
Proprietary information is protected by the Right to Financial Privacy Act and the
Privacy Act. Without proper authorization, SBA and CDCs may not discuss private
information with even a spouse or other close relative of the Applicant.
C. Employment of Agent Initiated by Applicant
CDCs and Agents must clearly inform any Small Business Applicant that the SBA
does not require the use of an Agent for packaging or referring a loan application.
When a Small Business Applicant employs an Agent:
1. The Agent may bill and be paid by the Small Business Applicant for providing
packaging services as long as compensation is reasonable and customary for
those services; the compensation is not based on a percentage of the loan
amount; and the compensation is not contingent on the loan being approved.
2. The Agent who works for an Small Business Applicant as a packager may also
work as a loan referral agent for the Small Business Applicant and receive a
referral fee from the Small Business Applicant.
3. The Agent may be a loan referral agent for a CDC and a packager for a Small
Business Applicant, provided both the Small Business Applicant and the CDC
are aware of both relationships, and the Agent does not receive a referral fee
from the Small Business Applicant or a packaging fee from the CDC.
4. SBA Form 159(504) must be completed by the Agent and the Small Business
Applicant for all fees paid by the Small Business Applicant.
V. WHO MAY CONDUCT BUSINESS WITH SBA (13 CFR 103.2)
A. Any person or entity applying for SBA assistance does not need an Agent to conduct
business with SBA. The term ―conduct business with SBA‖ is defined at 13 CFR
103.1(b).
1. Those Agents debarred under the SBA or Government-wide debarment
regulations may not conduct business with SBA. SBA may require that an
Agent supply written evidence of his or her authority to act on behalf of an
applicant or CDC as a condition of revealing any information about the
applicant’s or CDC’s current or prior dealings with the SBA. CDCs may
consult the Excluded Parties List System (EPLS) to determine if an Agent has
been debarred or suspended by SBA or another federal agency. (www.epls.gov.)
2. SBA may, for good cause, suspend or revoke the privilege of an Agent to
conduct business with the government. The suspension or revocation remains in
effect during any administrative proceedings under SBA regulations at 13 CFR
Part 134. The meaning of ―good cause‖ may be found at 13 CFR 103.4.
B. Illegal Activity of an Agent Must Be Reported
348 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
CDCs should report any illegal activity of Agents to the Office of the Inspector
General, Attention: Assistant Inspector General for Investigations. Any substantiating
evidence should be included when contacting the Office of the Inspector General.
C. Review of Agent Fees
1. CDCs must review the Agent’s services and related fees to determine if the fees
are necessary and reasonable when:
a) There is an indication from a third party that an Agent’s fees might be
excessive; or
b) When an Applicant complains about the fees charged by an Agent.
2. In cases where fees appear to be unreasonable, CDCs should contact the
D/OCRM to report the fees.
3. If an SBA investigation determines an Agent fee is excessive, the Agent must
reduce the fee to an amount SBA deems reasonable, refund any sum in excess
of that amount to the Applicant, and refrain from charging or collecting from
the Applicant any funds in excess of the amount SBA deems reasonable.
Effective Date: October 1, 2011 349
Subpart C SOP 50 10 5(D)
CHAPTER 9: BORROWER’S DEPOSIT, DEBENTURE POOLS AND
POST-DISBURSEMENT ISSUES
I. RULES GOVERNING THE BORROWER’S DEPOSIT
A. At the time of application, the CDC may require a deposit from the Borrower of
$2,500 or 1% of the Net Debenture Proceeds, whichever is less. For additional
information relating to this fee, see 13 CFR 120.935.
B. Agreements Regarding the Deposit
1. A written agreement between the CDC and the Small Business Applicant should
include the following:
a) If the CDC or SBA declines the application, the deposit will be refunded
in full within 10 business days after decline, including any period for
reconsideration;
b) If SBA approves the loan, the deposit may be applied toward the CDC
processing fee described in 13 CFR 120.883; and
c) If the applicant withdraws its loan application at any time before SBA
issues the Authorization, the CDC may deduct its reasonable and
necessary costs incurred in packaging and processing the loan application.
Such costs must be documented and cannot be a percentage of the loan.
Any remaining deposit balance must be remitted to the applicant within
ten business days of the withdrawal.
2. A copy of the agreement must be placed in the CDC’s file.
II. DEBENTURE POOLS
Neither a Borrower nor an Associate of the Borrower may purchase an interest in a
Debenture Pool in which the Debenture that funded its 504 loan has been placed. 13
CFR 120.939
III. MISCELLANEOUS
See 13 CFR 120.990 and 120.991 on the impact of current rules on older loans and the
effect of other laws.
IV. POST-DISBURSEMENT ISSUES
A. A CDC may request changes on disbursed 504 loans by contacting the appropriate
CLSC.
1. The CLSCs have a loan servicing guide on SBA’s web page.
2. Guidance on loan servicing is also outlined in SOP 50-50 4, Loan Servicing.
3. 13 CFR 120 Subpart E- outlines lender requirements under SBA loan servicing,
liquidation and debt collection litigation.
B. Prepayment. The borrower may prepay its 504 loan. More information may be found
at:
1. SBA’s SOP 50-50 4, Chapter 11 contains information on prepayment or
purchase of a development company loan or debenture.
350 Effective Date: October 1, 2011
SOP 50 10 5(D) Subpart C
2. Colson Services Corp. is the current central servicing agent (CSA) for closed
SBA 504 loans. Colson’s Services Corp’s web page has a secure log on site for
the CDC which calculates prepayment information on a specific 504 loan.
3. 13 CFR 120.940 addresses prepayment of the 504 loan or debenture.
Effective Date: October 1, 2011 351
Appendix 1 SOP 50 10 5(D)
APPENDIX 1: RESTRICTIONS ON FOREIGN CONTROLLED ENTERPRISES
Various Federal laws prohibit foreign controlled U.S. enterprises from certain types of activities.
These activities are listed below for your guidance. Exercise special care in processing loans
involving these types of enterprises.
General restrictions for foreign controlled enterprises
Foreign controlled enterprises operating in the United States, whether in branch or
subsidiary form, may not do the following:1
A. Engage in operations involving the utilization or production of atomic energy (42
U.S.C. 2133(d)).
B. Own vessels which transport merchandise or passengers between U.S. ports or
tow U.S. vessels carrying such merchandise or passengers between U.S. ports (46
U.S.C. 50501, 55102). There are exceptions to this general rule, one of which
permits a foreign controlled U.S. manufacturing or mining company to engage in
shipping activities related to its principal business (46 U.S.C. Appx. 833-1).
C. Acquire rights of way for oil pipelines or leases or interests therein for mining
coal, oil, or certain other minerals on Federal lands other than the outer
continental shelf if the foreign investor’s home country does not permit such
mineral leasing to U. S. controlled enterprises (30 U.S.C. 181, 185).
D. Engage in radio or television broadcasting unless the Federal Communications
Commission (FCC) finds the grant of a license to be in the public interest (47
U.S.C. 301). The FCC has granted licenses for broadcasting activities ancillary to
another business of a foreign controlled enterprise.
E. Acquire control of a company engaged in any phase of aeronautics (49 U.S.C.
40102, 41101, 41309).
F. Be issued permits for intra-United States air commerce or navigation. There are
exceptions to this when certain requirements are met (49 U.S.C. 41302, 41703).
G. Obtain a fishery loan from the Secretary of Interior for the financing or
refinancing or the cost of purchasing, constructing, or operating commercial
fishing vessels or gear (16 U.S.C. 742c(b)(7)).
H. Receive a preferred ship mortgage (46 U.S.C. 31322, 12103).
I. Obtain special Government emergency loans from the USDA for agricultural
purposes after a natural disaster (7 U.S.C. 1961) or USDA loans to individual
farmers or ranchers to purchase and operate family farms (7 U.S.C. 1922, 1941).
J. Establish an Edge Act corporation to engage in international or foreign banking
(12 U.S.C. 619).2
K. Purchase Overseas Private Investment Corporation (OPIC) insurance or
guarantees (22 U.S.C. 2198(c)).
L. Obtain construction-differential or operating-differential subsidies for vessel
construction or operation (46 U.S.C. 50501, 53101).
1
In certain cases foreign enterprises can acquire a minority interest in corporations engaging in the activities noted
but certain management requirements may have to be met.
2
In addition to its limitations on stock ownership by foreign enterprises, the Edge Act requires that all the directors
of the corporation be United States citizens.
352 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 1
M. During war or a national emergency, acquire or charter U.S. flag vessels, vessels
owned by a U.S. citizen or shipyard facilities or acquire controlling interest in
corporations owning the vessels or facilities described above without the approval
of the Secretary of Commerce (46 U.S.C. 56102).
Management-related restrictions on foreign enterprises
In certain cases, a foreign controlled enterprise operating in the United States must meet
certain requirements relating to management in order to engage in particular activities.
The foreign investor, however, can continue to own all the equity in the enterprise
because the laws in question do not contain limitations relating to stock ownership.
Unless these management requirements are met, foreign controlled enterprises may not
do the following:
A. Organize a national bank (all directors must be United States citizens) (12 U.S.C.
72).
B. Engage in dredging or salvaging operations in U.S. waters (To register a vessel to
engage in these activities, the president or chief executive officer of a domestic
corporation and the chairman of its board must be U.S. citizens. The foreign
citizens serving as directors cannot be more than a minority of the number
necessary to constitute a quorum.) (46 U.S.C. 55109, 55111).
C. Fish in the territorial water of the United States, land fish caught on the high seas
and, except for corporations of countries with traditional fishing rights, fish in the
United States fishing zone. (16 U.S.C. 1801, 1821)3
D. Transport certain commodities procured by or financed for export by the United
States Government or an instrumentality thereof. There are certain statutory
exceptions to this rule (46 U.S.C. 55305, 55314).
E. Obtain certain types of vessel insurance. (46 U.S.C. 53903)
F. Obtain licenses to operate as customs-house brokers (19 U.S.C. 1641). (At least
one of the officers must be U.S. citizens.)
Restrictions applicable to foreign branches or individuals
A. In certain cases the form of business organization chosen by a foreign controlled
enterprise will determine whether it will be treated differently from an enterprise
controlled by United States citizens. If a foreign controlled enterprise chooses to
operate through a sole proprietorship or a branch office rather than a corporation
organized under the laws of one of the states, it may not:
i. Obtain licenses to construct dams, reservoirs, houses, and
transmission lines (16 U.S.C. 797(e));
ii. Obtain licenses to develop and utilize geothermal steam and
associated resources on Federal lands (30 U.S.C. 1015); or
iii. Obtain certain rights of way, mining rights, leases or other rights on
Federal lands. (See, generally, 43 CFR 2000-4000, ex. 43 CFR
3472, also 30 U.S.C. 22.)
These restrictions would not apply if the foreign controlled enterprises operated through a
domestic subsidiary.
3
To the extent that these activities involve the coast wise trade, certain limitations on stock ownership would have
to be met (Cf. Sec. 1).
Effective Date: October 1, 2011 353
Appendix 1 SOP 50 10 5(D)
B. In addition to restrictions previously noted, foreign citizens may not:
iv. Act as officers and serve in certain other positions on certain vessels
(Cf. 46 U.S.C. 8103); or
v. Function as operators in radio or television stations (47 U.S.C.
303(1) and 310).
Obtaining Ex-IM Bank’s Country Limitation Schedule
The Country Limitation Schedule (CLS) is made available by Ex-ImBank and is updated
as needed or annually. A current schedule can be obtained via the internet @
http://www.exim.gov/tools/country/country_limits.cfm.
354 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 2
APPENDIX 2: DEFINITIONS
For purposes of the environmental portions of this SOP, the following definitions apply. Terms
that are not defined below but are defined in CERCLA, 13 CFR or 40 CFR shall have the
meaning provided in CERCLA, 13 CFR or 40 CFR.
“Acquisition” or “Acquisition Date” means the date on which a Person acquires title to the
Property.
“Adjoining Properties” means any real property or properties the border of which is (are)
shared in part or in whole with that of the Property, or that would be shared in part or in whole
with that of the Property but for a street, road, or other public thoroughfare separating the
properties (See 40 CFR § 312.20).
“All Appropriate Inquiries” (AAI) means the standards and practices set forth in 40 CFR
§ 312.20.
“ASTM” refers to ASTM International. www.astm.org
“At”, whether capitalized or not, when used with respect to the Property or Adjoining Properties,
means "at, on, in, into, under, above, from or about."
“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, 42 U.S.C. §§ 9601 et seq.
“Contamination” means the presence of any Hazardous Substance at or affecting the Property,
including any Hazardous Substances that have migrated to or from the Property, in such
quantities or under such conditions as to render the Property or the operations conducted thereon
subject to, or potentially subject to, a directive or order from a Governmental Entity.
“Engineering Control” means a device or structure constructed at the Property to prevent
people from coming into contact with Contamination or to prevent mobile Contamination such
as groundwater Contamination from moving off site. Examples include asphalt or concrete caps,
fences, extraction wells, trenches and subsurface barrier walls.
“Environmental Investigation” refers to the process of assessing the environmental conditions
at a Property. For example, an Environmental Investigation may include one or more of the
following: an Environmental Questionnaire, Records Search with Risk Assessment, Transaction
Screen Analysis, Phase I Environmental Site Assessment (Phase I ESA) or Phase II
Environmental Site Assessment (Phase II ESA).
“Environmental Investigation Report” (or the “Report”) means the written account of the
Environmental Investigation of the Property prepared by the Person who conducted the
Environmental Investigation.
Effective Date: October 1, 2011 355
Appendix 2 SOP 50 10 5(D)
“Environmental Laws” means any and all applicable federal, state, tribal and local statutes,
laws, rules, regulations, ordinances, codes, judicial or administrative orders, consent decrees,
judgments, or other binding determinations of any judicial or regulatory authority, now or
hereafter in effect, imposing liability, establishing standards or otherwise relating to protection of
the environment, health and safety.
“Environmental Professional” means a person who meets the requirements set forth in 40 CFR
§ 312.10(b). The All Appropriate Inquiries standards defines an Environmental Professional as
―a person who possesses sufficient specific education, training, and experience necessary to
exercise professional judgment to develop opinions and conclusions regarding conditions
indicative of releases or threatened releases…on, at, in, or to a property, sufficient to meet the
objectives and performance factors [of the rule].‖ 40 CFR 312.10(b). An Environmental
Professional must:
1. Hold a current Professional Engineer’s or Professional Geologist’s license or registration
from a state, tribe, or U.S. territory (or the Commonwealth of Puerto Rico) and have the
equivalent of three (3) years of full-time relevant experience; or
2. Be licensed or certified by the federal government, a state, tribe, or U.S. territory (or the
Commonwealth of Puerto Rico) to perform environmental inquiries as defined in §
312.21 and have the equivalent of three (3) years of full-time relevant experience; or
3. Have a Baccalaureate or higher degree from an accredited institution of higher education
in a discipline of engineering or science and the equivalent of five (5) years of full-time
relevant experience; or
4. Have the equivalent of ten (10) years of full-time relevant experience.
Further, SBA requires that an Environmental Professional be impartial and maintain a minimum
coverage of one million dollars per claim (or occurrence) in errors and omissions insurance.
“Environmental Questionnaire” means the questionnaire used by a Lender to determine the
likelihood that Contamination may be present at Property offered to secure an SBA guaranteed
loan. Environmental Questionnaires must be completed or reviewed by a Lender that has made
at least one site visit to the Property and a good faith effort to conduct an interview with the
current owner or operator of the Property. An Environmental Professional may, but is not
required to, assist with the responses to the questionnaire. An Environmental Questionnaire may
be considered if it was completed up to one year prior to submission. The current owner or
operator of the Property must sign the Environmental Questionnaire. If the current owner or
operator of the Property will not sign the Environmental Questionnaire it cannot be used and
lender must then, at a minimum, obtain a Transaction Screen.
Prudent lending practices dictate that an Environmental Questionnaire must, at a minimum,
inquire into the following areas:
Past and present uses of the Property and Adjoining Properties, with particular attention
paid to those uses by environmentally sensitive industries;
Past and present identification of any Hazardous Substances at the Property and
Adjoining Properties;
356 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 2
Storage, generation, treatment, emission or disposal of Hazardous Substances at the
Property and Adjoining Properties;
Possession of permits to use, store, generate, treat, emit or dispose of Hazardous
Substances by businesses operating at the Property and Adjoining Properties;
Evidence of Contamination at the Property and Adjoining Properties;
Potential sources of Contamination4 at the Property and Adjoining Properties;
Knowledge on the part of the borrower, seller or Lender of any past evidence of
Contamination or sources of Contamination at the Property and Adjoining Properties;
Knowledge on the part of the borrower, seller or Lender of any past, threatened or
pending lawsuits or administrative proceedings concerning a Release or threatened
Release at the Property and Adjoining Properties;
Existence of any regulatory actions by any Governmental Entity for environmental
conditions at the Property and Adjoining Properties;
Identification of any previously performed environmental risk studies environmental
documents pertaining to the Property (attach copies); and
Presence of lead paint, asbestos, or Polychlorinated Biphenyls (―PCBs‖) at the Property.
As an alternative, SBA will accept the ASTM questionnaire utilized for Transaction Screens
(currently ASTM E1528-06) for all purposes that an EQ is required by this SOP. (ASTM
licenses the use of these forms, which can be obtained through www.astm.org.)
“Good Faith” means the absence of any intention to seek unfair advantage or to defraud another
party; and honest and sincere intention to fulfill one’s obligations in the conduct or transaction
concerned.
“Governmental Entity” means any federal, state, commonwealth, tribal or local government
branch, authority, district, agency, court, tribunal, department, officer, official, board,
commission or other instrumentality that exercises any form of jurisdiction or authority under
any Environmental Law.
“Hazardous Substance” means and includes any substance, material or waste regulated by
CERCLA or any other Environmental Law, and specifically includes petroleum products.
“Institutional Control” means a legal or administrative action or requirement imposed on the
Property to minimize the potential for human exposure to Contamination or to protect the
integrity of Remediation. Examples include deed notices, deed restrictions, and long-term site
monitoring or site security requirements.
4
Sources of Contamination may include, but are not limited to, the following: (1) damaged or discarded automotive
or industrial batteries; (2) pesticides, paints or other chemicals stored in individual containers greater than 5 gallons
in volume or 50 gallons in the aggregate; (3) chemicals in industrial drums or sacks; (4) pits, ponds or lagoons used
for waste disposal or storage; (5) fill dirt from a contaminated or unknown source; (6); underground or above-
ground storage tanks; (7) vent pipes, fill pipes or access ways indicating a fill pipe protruding from the ground; (8)
flooring drains or walls within a facility that are stained by substances other than water and/or are emitting noxious
odors; (9) clarifiers, pits or sumps; (10) dry wells
Effective Date: October 1, 2011 357
Appendix 2 SOP 50 10 5(D)
“Lender” refers to banks, non-bank lenders, credit unions, certified development companies,
and any other entities that participate as a lender in SBA programs. The term Lender does not
include the Third Party Lender on a 504 loan.
“Multi-Unit Building” means any non-industrial, multi-unit building that is comprised of four
or more individual units.
“Person” means an individual, firm, corporation, limited liability company, limited liability
partnership, association, partnership, consortium, joint venture, commercial entity, tribe or trust,
public, governmental or interstate body, agency or instrumentality.
“Phase I Environmental Site Assessment” (Phase I ESA) means an AAI compliant Phase I
ESA conducted by an Environmental Professional in accordance with the most recently adopted
standard for a Phase I ESA established by ASTM International, currently ASTM E1527-05.
A person who does not qualify as an Environmental Professional may assist in the conduct of All
Appropriate Inquiries if such person is under the supervision or responsible charge of a person
meeting the definition of an Environmental Professional when conducting such activities,
provided an Environmental Professional reviews and signs the Phase I ESA.
A Phase I ESA must contain an opinion by the Environmental Professional as to whether the
inquiry has identified conditions indicative of Releases or threatened Releases at the Property.
Additionally, SBA requires that all Phase I ESAs contain a conclusion by the Environmental
Professional that performs the assessment that either: (1) the risk of Contamination at the
Property is so minimal that no further investigation is warranted; or (2) there is risk sufficient to
warrant additional investigation. Alternatively, the Environmental Professional may include a
similar statement to this effect. If further investigation is warranted, the Environmental
Professional should provide a detailed description of the recommendation.
All Phase I ESAs must be performed within the Environmental Protection Agency’s AAI
regulatory time frames. A Phase I ESA may be relied upon if it was completed less than 180
days prior to the Acquisition Date. A Phase I ESA performed within one year of the Acquisition
Date may be updated by an Environmental Professional if the following requirements are met:
The Phase I ESA was prepared as part of a previous All Appropriate Inquiries
investigation of the Property; and
Components of the previously conducted Phase I ESA are conducted or updated within
180 days prior to the Acquisition Date of the Property. (See 40 CFR § 312.20 for the
specific requirements for updating a Phase I ESA.)
“Phase II Environmental Site Assessment” (Phase II ESA) means an Environmental
Investigation, which at a minimum, is conducted by an Environmental Professional in
accordance with the most recently adopted standard for a Phase II ESA process established by
ASTM International, currently ASTM E1903-97 (2002). SBA will recognize a Phase II ESA
conducted in accordance with generally-accepted industry standards of practice and consisting of
358 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 2
a scope of work that would be considered reasonable and sufficient to identify the presence,
nature and extent of a Release.
“Property” means any interest in commercial real estate upon which a security interest such as a
mortgage, deed of trust, or leasehold deed of trust is required as collateral for a loan or
debenture.
“Records Search with Risk Assessment” means and includes (1) a search of the government
databases identified in 40 CFR § 312.265 for an AAI compliant Phase I as well as a search of
historical use records (for example, aerial photography, city directories, reverse directories
and/or fire insurance maps) pertaining to the Property and Adjoining Properties; and (2) a risk
assessment by an Environmental Professional based on the results of the records search as to
whether the Property is either ―low risk‖ or ―elevated risk‖ or ―high risk‖ for Contamination. The
choice of historical records to be reviewed on any particular site is at the discretion of the
Environmental Professional. The report must identify by name the Environmental Professional
that performed the risk assessment. (Note that this report need not be addressed to the SBA and
need not be accompanied by a Reliance Letter.) A Records Search with Risk Assessment may
be considered if it was completed up to one year prior to submission.
“Release” means the presence of or any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, seeping, migrating, dumping or disposing of any
Hazardous Substance into the environment including the abandonment or discarding of barrels,
drums, tanks, and similar receptacles and containers, containing Hazardous Substances.
“Reliance Letter” means SBA’s standard Reliance Letter pertaining to Environmental
Investigation Reports, a copy of which is located in Appendix 3.
“Remediation” or “Remedial Action” and their derivatives (such as “Remediate”) means and
includes any clean-up, corrective action or monitoring required to comply with applicable
Environmental Laws including all actions within the definition of ―removal‖ and ―remedial‖
actions as those terms are defined in applicable Environmental Laws.
“SBA Environmental Indemnification Agreement” or “SBA Indemnification Agreement”
means SBA’s standard environmental indemnification agreement, a copy of which is located in
Appendix 6.
“Transaction Screen” means an Environmental Investigation pursuant to the most recently
adopted standard practice for limited environmental due diligence established by ASTM
International, currently ASTM E1528-06. The basic elements of a Transaction Screen include:
(1) an interview with the owner or operator of the Property; (2) a visit to the Property; (3)
completion of an environmental questionnaire, and (4) a review of government records and
historical sources. Additionally, SBA requires that an Environmental Professional supervise the
site reconnaissance and conclude either (a) the risk of contamination at the site is so minimal that
no further investigation is warranted; or (b) there is risk sufficient to warrant additional
5
For a detailed list of databases to be searched, lenders may go to
http://edocket.access.gpo.gov/cfr_2007/julqtr/pdf/40cfr312.26.pdf.
Effective Date: October 1, 2011 359
Appendix 2 SOP 50 10 5(D)
investigation. Alternatively, the Environmental Professional may include a similar statement to
this effect. If further investigation is warranted, the Environmental Professional should provide a
detailed description of the recommendation. A Transaction Screen may be considered if it was
completed up to one year prior to submission.
360 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 3
APPENDIX 3: RELIANCE LETTER
[Letterhead of Environmental Professional or Environmental
Professional’s Firm]
RELIANCE LETTER
[Date]
To: [Lender/CDC Name and Address] (―Lender‖)
and
U.S. Small Business Administration (―SBA‖)
Re: Borrower Name:
Project Address (―Property‖):
Environmental Investigation Report Number(s):
Dear Lender and SBA:
[Name of Environmental Professional] (―Environmental Professional‖) meets the definition of an
Environmental Professional as defined by 40 C.F.R. § 312.10(b) and has performed the
following ―Environmental Investigation(s)‖ (check all that apply):
____A Transaction Screen of the Property dated ______________, 20____, conducted in
accordance with ASTM International’s most recent standard (currently ASTM E1528-
06);
____An Phase I (or an Updated Phase I) Environmental Site Assessment of the Property
dated ______________, 20____, conducted in accordance with ASTM International’s
most recent standard (currently ASTM E1527-05). In addition, the Environmental
Professional has addressed the performance of the ―additional inquiries‖ set forth at 40
C.F.R. § 312.22;
____A Phase II Environmental Site Assessment of the Property dated ______________,
20____, conducted in accordance with generally-accepted industry standards of practice
and consisting of a scope of work that would be considered reasonable and sufficient to
identify the presence, nature and extent of a Release as it impacts the Property.
Reliance by SBA and Lender. Environmental Professional (and Environmental Professional’s
firm, where applicable) understand(s) that the Property may serve as collateral for an SBA
guaranteed loan, a condition for which is an Environmental Investigation of the Property by an
Environmental Professional. Environmental Professional (and Environmental Professional’s
Effective Date: October 1, 2011 361
Appendix 3 SOP 50 10 5(D)
firm, where applicable) authorize(s) Lender and SBA to use and rely upon the Environmental
Investigation. Further, Environmental Professional (and Environmental Professional’s firm,
where applicable) authorize(s) Lender and SBA to release a copy of the Environmental
Investigation to the borrower for information purposes only. This letter is not an update or
modification to the Environmental Investigation. Environmental Professional (and
Environmental Professional’s firm, where applicable) makes no representation or warranty,
express or implied, that the condition of the Property on the date of this letter is the same or
similar to the condition of the Property described in the Environmental Investigation.
Insurance Coverage. Environmental Professional (and/or Environmental Professional’s firm,
where applicable) certifies that he or she or the firm is covered by errors and omissions liability
insurance with a minimum coverage of $1,000,000 per claim (or occurrence) and that evidence
of this insurance is attached. As to the Lender and SBA, Environmental Professional (and
Environmental Professional’s firm, where applicable) specifically waive(s) any dollar amount
limitations on liability up to $1,000,000.
Waiver of Right to Indemnification. Environmental Professional and Environmental
Professional’s firm waive any right to indemnification from the Lender and SBA.
Impartiality. Environmental Professional certifies that (1) to the best of his or her knowledge,
Environmental Professional is independent of and not a representative, nor an employee or
affiliate of seller, borrower, operating company, or any person in which seller has an ownership
interest; and (2) the Environmental Professional has not been unduly influenced by any person
with regard to the preparation of the Environmental Investigation or the contents thereof.
Acknowledgment. The undersigned acknowledge(s) and agree(s) that intentionally falsifying or
concealing any material fact with regard to the subject matter of this letter or the Environmental
Investigations may, in addition to other penalties, result in prosecution under applicable laws
including 18 U.S.C. § 1001.
_______________________________________________
Environmental Professional
Printed Name:
(Note: The Environmental Professional must always sign this letter above. If the
Environmental Professional is employed or retained by an Environmental Firm, then an
authorized representative of the firm must also sign below).
_______________________________________________
Signature of representative of firm who is authorized to sign this letter
Printed Name & Title:
Name of Environmental Firm:
Enclosure: Evidence of Insurance
362 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 4
APPENDIX 4: NAICS CODES OF ENVIRONMENTALLY SENSITIVE INDUSTRIES
NAICS CODES OF ENVIRONMENTALLY SENSITIVE INDUSTRIES*
How to determine if an industry is included on this list:
A 3 digit NAICS code includes all industries beginning with those 3 digits.
A 4 digit NAICS code includes all industries beginning with those 4 digits.
A 5 digit NAICS code includes all industries beginning with those 5 digits.
A 6 digit NAICS code includes only that industry under that industrial code.
211 OIL & GAS EXTRACTION
212 MINING (EXCEPT OIL & GAS)
213 SUPPORT ACTIVITIES FOR MINING
237 HEAVY & CIVIL ENGINEERING CONSTRUCTION
311 FOOD MANUFACTURING (if underground fuel tanks present)
312 BEVERAGE & TOBACCO PRODUCT MANUFACTURING
313 TEXTILE MILLS (not required if sewing, weaving, or hemming only)
314 TEXTILE PRODUCT MILLS (not required if sewing, weaving, or hemming only)
316 LEATHER & ALLIED PRODUCT MANUFACTURING
321 WOOD PRODUCT MANUFACTURING (if finishing occurs on site)
322 PAPER MANUFACTURING
323 PRINTING & RELATED SUPPORT ACTIVITIES
324 PETROLEUM & COAL PRODUCTS MANUFACTURING
325 CHEMICAL MANUFACTURING
326 PLASTICS & RUBBER PRODUCTS MANUFACTURING
327 NONMETALLIC MINERAL PRODUCTS MANUFACTURING
331 PRIMARY METAL MANUFACTURING
332 FABRICATED METAL PRODUCT MANUFACTURING
333 MACHINERY MANUFACTURING (not required if assembly only)
334 COMPUTER & ELECTRONIC PRODUCT MANUFACTURING (not required if
assembly only)
335 ELECTRICAL EQUIPMENT, APPLIANCE & COMPONENT MANUFACTURING (not
required if assembly only)
336 TRANSPORTATION EQUIPMENT MANUFACTURING
337 FURNITURE & RELATED MANUFACTURING (if finishing occurs on site)
339 MISCELLANEOUS MANUFACTURING (only required if hazardous materials are
involved)
42311 AUTOMOBILE & OTHER MOTOR VEHICLE MERCHANT WHOLESALERS (if service
bays present)
42314 MOTOR VEHICLE PARTS (USED) MERCHANT WHOLESALERS
4235 METAL & MINERAL MERCHANT WHOLESALER
42393 RECYCLABLE MATERIAL MERCHANT WHOLESALER
4246 CHEMICAL & ALLIED PRODUCTS MERCHANT WHOLESALERS
4247 PETROLEUM & PETROLEUM PRODUCTS MERCHANT WHOLESALERS
441 MOTOR VEHICLE AND PARTS DEALERS (if service bays present)
447 GASOLINE STATIONS
Effective Date: October 1, 2011 363
Appendix 4 SOP 50 10 5(D)
45431 FUEL DEALERS (not required for propane or firewood dealers)
481 AIR TRANSPORTATION
482 RAIL TRANSPORTATION
486 PIPELINE TRANSPORTATION
53212 TRUCK, UTILITY TRAILER, AND RV (RECREATIONAL VEHICLE) RENTAL &
LEASING (if repairs, maintenance or vehicle washing are performed onsite)
53241 CONSTRUCTION, TRANSPORTATION, MINING & FORESTRY MACHINERY &
EQUIPMENT RENTAL & LEASING (if repairs, maintenance or vehicle washing are
performed onsite)
53249 OTHER COMMERCIAL & INDUSTRIAL MACHINERY & EQUIPMENT RENTAL &
LEASING (if repairs, maintenance or vehicle washing are performed onsite)
54138 TESTING LABORATORIES
56171 EXTERMINATING & PEST CONTROL
562 WASTE MANAGEMENT & REMEDIATION SERVICES
6221 GENERAL MEDICAL & SURGICAL HOSPITALS (if fuel tanks are present)
71391 GOLF COURSES & COUNTRY CLUBS
71392 SKIING FACILITIES
71393 MARINAS
7212 RV (RECREATIONAL VEHICLES) PARKS & RECREATIONAL CAMPS (if fuel tanks
are present or if vehicle repairs or maintenance is performed onsite)
8111 AUTOMOTIVE REPAIR & MAINTENANCE (except for “car wash only” facilities, for
which a Transaction Screen is an acceptable starting point)
8112 ELECTRONIC & PRECISION EQUIPMENT REPAIR & MAINTENANCE (not required
if assembly only)
8113 COMMERCIAL & INDUSTRIAL MACHINERY & EQUIPMENT REPAIR &
MAINTENANCE
8122 DEATH CARE SERVICES
8123 LAUNDRY & DRY CLEANING SERVICES (if dry cleaning operations have ever
existed on site)
812921PHOTOFINISHING LABORATORIES (except one hour)
*A Phase I should always be obtained if the business sells, supplies or dispenses fuel,
gasoline, heating oil, even if the NAICS code for the business is not identified on this list
of environmentally sensitive industries.
A complete list of industries and corresponding NAICS codes is available online at
http://www.census.gov/naics/2007/NAICOD07.HTM.
364 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 5
APPENDIX 5: REQUIREMENTS PERTAINING TO GAS STATION LOANS
ENVIRONMENTAL INVESTIGATION REQUIREMENTS
FOR GAS STATION LOANS
NOTE: Lenders are reminded that documentation associated with gas station
loans can be voluminous and complex. Apart from environmental concerns
there are affiliation and credit issues that Lenders must analyze in order to
make the initial loan eligibility determination.
The Environmental Investigation requirements set forth below apply to all loans
secured by a lien or security interest on real property (a fee simple or leasehold
mortgage, deed of trust, etc.) or personal property (gas station fixtures or equipment
such as tanks, pumps, lines, etc.) currently used to operate a gas station or
commercial fueling facility ("Gas Station Loans"). These requirements would not
apply when the applicant operates a business, such as a convenience store associated
with a gas station, in which the applicant only leases the real or personal property
and neither the real nor personal property is used as collateral for the loan. Nor do
these requirements apply to situations where the only collateral for the loan is
something other than gas station equipment (for example, food inventory, shelving,
etc.).
a. Environmental Site Assessment. The Environmental Investigation for all Gas Station
Loans (including those secured by gas station equipment only) must: (1) begin with a
Phase I ESA with the additional requirement that it be conducted by an independent
Environmental Professional; (2) include an analysis of all relevant environmental
records concerning the Property and Adjoining Properties, including any records
provided by the seller if the loan is to purchase the Property; (3) include the
equipment testing described in b. below (even if the loan is secured by real property
only); (4) include the results of any further investigation, which may include a Phase
II, recommended by the Environmental Professional (Any Phase II performed in
connection with a Gas Station Loan must be conducted by an independent
Environmental Professional who holds a current Professional Engineer’s or
Professional Geologist’s license and has the equivalent of three (3) years of full time
relevant experience.); and (5) if the Property is Contaminated, include a detailed
description of and cost estimate for the recommended Remediation.
b. The Environmental Investigation performed by the Environmental Professional must
include a determination whether or not the gas station is in compliance with all state
requirements, if any, pertaining to tank and equipment testing. A loan may not be
disbursed until full compliance is achieved. Further, any leaking or otherwise
defective equipment, systems, containment devices, etc., must be replaced or repaired
prior to disbursement.
Effective Date: October 1, 2011 365
Appendix 5 SOP 50 10 5(D)
c. Results of Environmental Investigation.
(1) Property is not Contaminated. If the Environmental Professional concludes
that the Property is not Contaminated, the Lender (except on PLP, SBA Express,
Export Express, Patriot Express and PCLP loans) must submit the results of the
Environmental Investigation to SBA with recommendations and seek SBA’s
concurrence.
(2) Property is Contaminated. If the Environmental Professional concludes that
the Property is Contaminated, Lender can either: (1) decline the loan; or (2) follow
the requirements set forth in paragraph III.G. of the Environmental Policies and
Procedures sections of this SOP entitled, "Approval and Disbursement of loans
when there is Contamination or Remediation at the Property,‖ provided that at a
minimum, the SBA Indemnification Agreement as described at paragraph G.4.a)
must always be obtained and signed by the seller. (There may be situations where
it is not practical to require the seller to sign the indemnification agreement; for
example, the property is being sold from a probate estate or through a trustee in
bankruptcy. Waivers may be sought from the SBA Environmental Committee at
environmentalappeals@sba.gov on a case-by-case basis. A mere unwillingness on
the part of a seller to execute the indemnification agreement is not a sufficient basis
for a waiver. PLP, SBA Express, Export Express and Patriot Express Lenders and
PCLP CDCs do not have the authority to grant a waiver and are also required to
follow this procedure.) In addition, prudent lending practices may require a Lender
to utilize some of the other listed mitigating factors such as requiring additional
collateral.
d. When Waiver and Release of Right to Indemnification from SBA/Lender
Required. If any oil company or other Person has a right to indemnification from
subsequent owners of the Property (e.g., SBA/Lender after acquiring Property through
foreclosure or other means), then they must execute either the SBA Indemnification
Agreement or another document in which they waive all known and unknown rights and
release all claims and causes of action whether now or hereafter in existence against SBA
and Lender related to Contamination at the Property including the right to
indemnification. The document containing the waiver and release must be recorded.
Lenders and CDCs, except when submitting requests through PLP, SBA Express, Export
Express and Patriot Express, must submit all waiver and releases to the SBA center
processing the loan for review and approval by SBA counsel, along with a copy of the
title report, the document providing for indemnification, and the purchase and sale
documents, if any. PCLP CDCs must also submit the waiver and release to the SBA for
review and approval prior to a request that SBA fund the loan.
366 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
APPENDIX 6: SBA ENVIRONMENTAL INDEMNIFICATION AGREEMENT
SBA Loan No: _______________________
This SBA Environmental Indemnification Agreement ("Agreement") effective ______________, is
executed by ___________________ ("Borrower"), _____________________________ [insert
name(s) of indemnitor(s) not obligated on the Loan)] ("Third Party Indemnitor"), (Borrower and
Third Party Indemnitor collectively referred to as "Indemnitors"), _______________________
[Insert name of Certified Development Company or 7(a) Lender] ("Lender") and the U.S. Small
Business Administration ("SBA").
The parties to this Agreement mutually agree as follows:
I. RECITALS
A. Borrower has applied for an SBA loan from Lender in the principal amount of
$_______________________ [insert full loan amount] (the "Loan") to be evidenced by a
promissory note (the "Note") and secured by a "Mortgage" encumbering certain real and personal
property (collectively, the "Property") described in the "Loan Documents" including the land
located at ____________________ [insert address] and described in Exhibit "A" attached hereto.
B. SBA and Lender are not willing to make the Loan without the execution and
delivery of this Agreement.
II. DEFINITIONS
For purposes of this Agreement: (1) whenever the singular form of a word is used it includes
the plural, and whenever the plural form of a word is used it includes the singular; (2) the word "or"
has the inclusive meaning represented by the phrase "and/or"; (3) terms used in this Agreement that
are not defined below but are defined in either 13 CFR, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. §§ 9601-9875 ("CERCLA") or 40
CFR, shall have the meaning provided in 13 CFR, CERCLA or 40 CFR; and (4) unless the context
otherwise clearly requires, the following definitions apply:
A. "Adjoining Properties" means any real property or properties the border of
which is (are) shared in part or in whole with that of the Property, or that would be shared in part
or in whole with that of the Property but for a street, road, or other public thoroughfare
separating the properties.
B. "At", whether capitalized or not, when used with respect to the Property or
Adjoining Properties, means "at, on, in, into, under, above, from or about."
C. "Borrower" means the Person(s) identified as the Borrower in the Loan
Documents and the first paragraph of this Agreement and includes any successor in interest by
virtue of assumption, merger, acquisition, transfer, assignment or otherwise.
Effective Date: October 1, 2011 367
Appendix 6 SOP 50 10 5(D)
D. "Contamination" means the presence of any Hazardous Substance at or
affecting the Property, including any Hazardous Substances that have migrated to or from the
Property, provided such Hazardous Substances are present in such concentrations or under such
conditions as to create a violation, liability or duty to conduct a response under any
Environmental Law.
E. "Engineering Control" means a device or structure constructed at the Property
to prevent people from coming into contact with Contamination or to prevent mobile
Contamination such as groundwater Contamination from moving off site. Examples include
asphalt or concrete caps, fences, extraction wells, trenches and subsurface barrier walls.
F. "Environmental Activity" means any use, storage, holding, existence, Release,
emission, discharge, generation, processing, abatement, removal, disposition, handling or
transportation of any Hazardous Substance.
G. "Environmental Claim" means any written complaint, summons, action,
citation, notice of violation, directive, order, claim, litigation, investigation, judicial or
administrative proceeding or action, judgment, lien, demand, letter or communication from any
Person alleging non-compliance with any Environmental Law, Institutional Control or
Engineering Control, relating to any actual or threatened Release, or arising from an
Environmental Activity.
H. "Environmental Investigation" means an investigation of the Property that: (1)
is conducted by an independent Environmental Professional; (2) begins with a Phase I Site
Assessment in accordance with ASTM E1527-05 that includes a review of all relevant and
material environmental records concerning the Property and Adjoining Properties in the actual or
constructive possession, custody or control of the Borrower including, if any, those provided by
the seller; and (3) includes any other investigation recommended by the Environmental
Professional conducting the Phase I to determine and document the nature and extent of any
Contamination and the cost to remediate it such as record reviews, soil and water testing, or
underground storage tank inspections.
I. "Environmental Investigation Report" (or the "Report") means the written
account of the Environmental Investigation of the Property attached as Exhibit "B", which: (1) is
signed by the Environmental Professional who conducted the Environmental Investigation; (2)
includes a reliance letter that specifically grants SBA and Lender the right to rely on the Report;
and (3) includes a detailed list of all relevant and material environmental records utilized by the
Environmental Professional to establish the nature and extent of Contamination including those
pertaining to past or on-going Remediation at the Property or Adjoining Properties.
J. "Environmental Laws" means any and all applicable federal, state tribal and
local statutes, laws, rules, regulations, ordinances, codes, principles of common law, judicial
orders, administrative orders, consent decrees, judgments, permits, licenses or other binding
determinations of any judicial or regulatory authority, now or hereafter in effect, imposing
liability, establishing standards of conduct or otherwise relating to protection of the environment
(including natural resources, surface water, groundwater, soils, and indoor and ambient air),
health and safety, land use matters or the presence, use, generation, treatment, storage, disposal,
Release or threatened Release, transport or handling of Hazardous Substances.
K. "Environmental Professional" means a person who meets the requirements set
forth in 40 CFR Section 312.10(a).
368 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
L. "Governmental Entity" means any federal, state, commonwealth, tribal or local
government branch, authority, district, agency, court, tribunal, department, officer, official,
board, commission or other instrumentality that exercises any form of jurisdiction or authority
under any Environmental Law.
M. "Hazardous Substance" means and includes any substance, material or waste
regulated by CERCLA or any other Environmental Law, and specifically includes petroleum
products, radioactive materials, asbestos, polychlorinated biphenyls, and radon gas.
N. "Including", and its derivatives such as ―include‖ and ―includes‖, whether or not
capitalized, means including without limitation.
O. "Indemnified Parties" means and includes SBA and Lender.
P. "Institutional Control" means a legal or administrative action or requirement
imposed on the Property to minimize the potential for human exposure to Contamination or to
protect the integrity of a Remedy. Examples include deed notices, deed restrictions, and long-
term site monitoring or site security requirements.
Q. "Lender" means the Person identified as the Lender in the first paragraph of this
Agreement and any successor in interest by virtue of merger, acquisition, transfer, assignment or
otherwise including any Person acquiring the Property or the Loan from Lender or SBA.
R. "Loan Documents" means and includes the Note, the Mortgage and any other
document regarding the Loan. This Agreement is one of the Loan Documents, but it is not
secured by the Mortgage.
S. "Mortgage" means the Mortgage identified in the Recitals section of this
Agreement and includes all liens that secure the Loan regardless of their method of creation
including those created by recording a mortgage, deed of trust, assignment of rents, collateral
assignment of purchaser's interest in land sale contract or a Uniform Commercial Code financing
statement. The Mortgage secures the Loan and all extensions, modifications, replacements,
renewals, substitutions or consolidations thereof, including increases to the principal balance of
the Note resulting from payment of expenses incurred to enforce the terms of the Note or other
Loan Documents, or to preserve or dispose of the collateral securing the Loan, such as payments
for property taxes, prior liens, insurance, appraisals, and attorney's fees and costs.
T. "Mortgage Release Date" means the earlier of the following two dates: (1) the
date on which the indebtedness and obligations secured by the Mortgage have been fully paid
and performed and the Mortgage has been released of record; or (2) the date on which the
Mortgage is foreclosed, or a conveyance by a deed in lieu of foreclosure is effective, and
possession of the Property has been given to and accepted by a Person other than Lender or SBA
free of occupancy, redemption rights or any other claim by Borrower or guarantors of the Loan.
U. "Person" means an individual, firm, corporation, limited liability company,
limited liability partnership, association, partnership, joint venture, commercial entity, tribe,
trust, or Government Entity.
Effective Date: October 1, 2011 369
Appendix 6 SOP 50 10 5(D)
V. "Property" means all or any portion of the real and personal property identified
in the Recitals section of this Agreement, including all improvements, fixtures and equipment,
soil, ground water, surface water, air, waterways, and water bodies associated with the real
property.
W. "Purchase and Sale Documents" means and includes every document
memorializing each agreement related to Borrower's acquisition of the Property including the
purchase and sale agreement and amendments thereto, and all related documents such as supply
agreements, deeds, environmental declarations, rights of first refusal, options, etc.
X. "Release", when used with respect to the Property or Adjoining Properties,
means the presence of or any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, seeping, migrating, dumping or disposing of any
Hazardous Substance into the environment including the abandonment or discarding of barrels,
drums, tanks, and similar receptacles and containers, containing Hazardous Substances.
Y. "Remediation" or "Remedial Action" and their derivatives (such as
―Remediate‖) means and includes any investigation, clean-up, corrective action or monitoring
required to comply with applicable Environmental Laws including all actions within the
definition of ―removal‖ and ―remedial‖ actions as those terms are defined in applicable
Environmental Laws.
Z. "Third Party Indemnitor" means, individually and collectively, the Person(s)
identified as the Third Party Indemnitor in the first paragraph of this Agreement and includes any
successor in interest by virtue of merger, acquisition, transfer, assignment or otherwise.
III. REPRESENTATIONS AND WARRANTIES
A. Full Disclosure of Property Purchase and Sale Agreement. If the Loan is to
enable Borrower to acquire the Property, Borrower represents and warrants that all of the
relevant and material terms and conditions of the purchase and sale of the Property have been
disclosed to Lender and that Borrower has provided Lender with an accurate and complete copy
of the Purchase and Sale Documents.
B. Control of Property. If the Loan is to enable Borrower to acquire the Property
from Third Party Indemnitor, Third Party Indemnitor represents and warrants that the Property is
free from all encumbrances that could enable Third Party Indemnitor or its affiliates to control
the use or ownership of the Property e.g., options to purchase or repurchase the Property; deed
restrictions; or restrictive covenants such as those that limit the brand of fuel that can be sold on
the Property.
C. Condition of Equipment. If the loan is to enable the Borrower to acquire the
Property associated with the operation of a gas station, Indemnitors warrant that all fuel
dispensing equipment located on the Property has been tested by an independent contractor
370 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
within the preceding twelve months and that all leaking or otherwise defective equipment,
systems, containment devices, etc., have been or will be replaced or repaired prior to closing.
D. Disclosure of Environmental Information.
1. Full Disclosure by Third Party Indemnitor. Third Party Indemnitor represents
and warrants that Third Party Indemnitor has provided Borrower with an accurate and
complete copy of each record pertaining to the Property, (regardless of origin or
method by which it was produced, recorded or preserved), in Third Party Indemnitor's
actual or constructive possession, custody or control that pertain to the Property
including those that materially relates to: (1) Contamination; (2) Hazardous
Substances at the Adjoining Properties; or (3) compliance with any Environmental
Law, Institutional Control or Engineering Control concerning the Property.
2. Full Disclosure by Borrower. Borrower represents and warrants that Borrower
provided the Environmental Professional who signed the Report with an accurate and
complete copy of each record, (regardless of origin or method by which it was
produced, recorded or preserved and including all records provided to Borrower by
Third Party Indemnitor), in Borrower's actual or constructive possession, custody or
control that materially relates to: (1) Contamination; (2) Hazardous Substances at the
Adjoining Properties; (3) compliance with any Environmental Law, Institutional
Control or Engineering Control concerning the Property; or (4) any other matter
addressed by this Agreement.
E. Environmental Investigation of Property.
1. Conducted by Independent Environmental Professional. Lender and Borrower
represent and warrant to SBA that an independent Environmental Professional has
conducted an Environmental Investigation of the Property and that a complete and
accurate copy of the Environmental Investigation Report is attached hereto as Exhibit
"B".
a. Lender's Warranty. Lender represents and warrants to SBA that:
(1) the Environmental Professional who prepared the Report is not a
representative, employee, associate or affiliate of, Lender or any Person in which
Lender has an ownership interest; and (2) no influence has been exerted over the
Environmental Professional with regard to the preparation of the Report or the
contents thereof by Lender or by any of Lender's attorneys, agents, employees,
associates or affiliates.
b. Indemnitors' Warranty. Each Indemnitor independently represents
and warrants to SBA that to the best of Indemnitor's knowledge: (1) the
Environmental Professional who prepared the Report is not a representative,
employee, associate or affiliate of, Indemnitor or any Person in which Indemnitor
has an ownership interest; and (2) no influence has been exerted over the
Environmental Professional with regard to the preparation of the Report or the
contents thereof by Indemnitor or by any of Indemnitor's attorneys, agents,
employees, associates or affiliates.
Effective Date: October 1, 2011 371
Appendix 6 SOP 50 10 5(D)
2. Report Establishes Environmental Baseline of Property. Lender and each
Indemnitor independently represent and warrant to SBA that they have no knowledge of
any facts or circumstances that could result in the Report containing incomplete or
inaccurate information.
F. Execution and Performance of Agreement. Each Indemnitor independently
represents and warrants to SBA and Lender that:
1. Authority and Financial Capability. Indemnitor is either an individual or a
duly organized, validly existing business entity in good standing and duly qualified to do
business in each jurisdiction where the conduct of its business requires such qualification;
and Indemnitor has and will maintain full power, financial capability and authority to
enter into this Agreement, and to perform Indemnitor's obligations hereunder.
2. Validity of Agreement. This Agreement is a legal, valid, and binding
obligation of Indemnitor enforceable according to its terms.
3. Authority to Sign. Indemnitor has proper authority to execute this Agreement
as evidenced by, and has, if required, provided Lender with a complete and accurate
copy of a valid, certified resolution or other evidence confirming such authority.
IV. COVENANTS
In addition to their obligations and liabilities under applicable law, Indemnitors covenant
and agree as follows:
A. Borrower Covenants
1. Notice to Lender. Borrower shall immediately notify Lender upon becoming
aware of any of the following: (1) Any Release on the Property that must be reported to
any Governmental Entity under applicable Environmental Laws; (2) Any Contamination,
or imminent threat of Contamination, or any violation of Environmental Laws in
connection with the Property or operations conducted thereon; (3) Any order, notice of
violation, fine or penalty or similar action by any Governmental Entity relating to
Hazardous Substances or Environmental Laws and the Property or the operations
conducted thereon; (4) Any expiration or revocation of any required environmental
permit, registration or authorization with regard to the Property or the operations
conducted thereon; (5) Any Environmental Claim relating to the Property or the
operations conducted thereon; or (6) Any matters relating to Hazardous Substances or
Environmental Laws that would give a reasonably prudent lender cause to be concerned
that the value of their security interest in the Property may be reduced or threatened or
that may impair or threaten to impair Borrower's ability to perform any of Borrower's
obligations under this Agreement when such performance is due.
2. Use of Property. Borrower shall not allow Hazardous Substances or the occurrence
of any Environmental Activity at the Property except as necessary to operate the type of
business specified in the Loan Documents.
3. Compliance with Environmental Laws. Borrower shall not cause, commit, permit
or allow non-compliance with any Environmental Law, Institutional Control or
Engineering Control with respect to the Property and shall obtain, keep in effect and
372 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
comply with all permits, registrations and authorizations required by Environmental
Laws with respect to the Property and operations conducted thereon.
4. Environmental Insurance. Borrower shall include Lender as a loss payee on all
environmental insurance policies held by Borrower relating to the Property.
5. UST Reimbursement Funds. If the Property securing the Loan is associated
with the operation of a gas station, Borrower shall register for all participate in any
available federal, state or local petroleum storage tank fund programs that Borrower is
eligible to participate in, which permitting full or partial reimbursement of costs incurred
for the assessment or Remediation of Contamination, even if such program is voluntary.
B. Borrower and Third Party Indemnitor Covenants
1. Record Retention. Until the Mortgage Release Date, Indemnitors shall retain and
make available to SBA and Lender upon request an accurate and complete copy of each
record, (regardless of origin or method by which it was produced, recorded or preserved),
in Indemnitor's actual or constructive possession, custody or control that materially
relates to: (1) Contamination; (2) Hazardous Substances at the Adjoining Properties; (3)
compliance with any Environmental Law, Institutional Control or Engineering Control
concerning the Property; or (4) any other matter addressed by this Agreement.
2. Control of Property. Prior to the Mortgage Release Date, Indemnitors shall
not record or cause to be recorded any document containing a provision that could enable
any Person to control the use or ownership of the Property, such as a purchase option;
repurchase option; or restrictive covenant such as one that limits the brand of fuel that
can be sold on the Property.
V. REMEDIATION
A. Corrective, Preventive and Remedial Action. Indemnitors shall, at their own
cost and expense, in a manner that is in compliance with all applicable laws, and at times that
will not unreasonably interfere with Borrower’s use of the Property, promptly undertake,
continuously and diligently pursue and complete any and all Remedial Action that is necessary
to: (1) Remediate any Contamination; (2) correct non-compliance with any Environmental Law,
Institutional Control or Engineering Control concerning the Property; or (3) respond to any
threatened or pending Environmental Claim regarding the Property.
B. Limitation on Third Party Indemnitor's Duty to Remediate. If Third Party
Indemnitor is the seller or prior owner of the Property, Third Party Indemnitor's duty under this
section of the Agreement shall be limited to Remedial Action: (1) necessitated by acts,
omissions, events or conditions existing or occurring in connection with the condition, use or
occupancy of the Property on or before the date title to the Property is transferred to Borrower
under the Purchase and Sale Documents as disclosed in the Environmental Investigation Report;
or (2) created or caused by Third Party Indemnitor, (including Third Party Indemnitor's
employees, representatives, agents, contractors, or consultants), at any time after the date title to
Effective Date: October 1, 2011 373
Appendix 6 SOP 50 10 5(D)
the Property is transferred to Borrower. As set forth in Paragraph VII herein, provided that
neither SBA nor Lender has acquired title to the Property, Third Party Indemnitor may also limit
its duty to Remediate under this Agreement by paying the entire balance due under the Loan
Documents including any applicable pre-payment penalty.
C. Remediation Standards. Remediation required under this Agreement shall, at a
minimum, meet the applicable, relevant and appropriate requirements and standards in the
Environmental Laws ("ARARs") that must be met before the responsible Government Entity will
issue a No Further Action letter or the written equivalent thereof.
D. Duration of Responsibility to Remediate. Indemnitors' responsibility for
Remediation under this Agreement shall continue until the earlier of: (1) the Mortgage Release
Date; or (2) the responsible Governmental Entity issues a No Further Action Letter or equivalent
written assurance that the applicable, relevant and appropriate requirements and standards in the
Environmental Laws ARARs have been met. Provided, however, that Indemnitors'
responsibility for Remediation shall resume if the responsible Governmental Entity thereafter
determines that additional Remedial Action is necessary with respect to any Contamination
covered by this Agreement.
VI. INDEMNIFICATION
A. SBA and Lender's Right to Indemnification. Except as provided below, upon
demand by an Indemnified Party, Indemnitors agree to indemnify and defend (by counsel
selected by Indemnitors and reasonably acceptable to SBA and Lender) Indemnified Parties from
and against any and all "Environmental Risks." For purposes of this Agreement, "Environmental
Risks" means and includes any and all actual or threatened losses, (including loss of use and
diminution in value of the Loan or the Property), all direct and indirect costs associated with
Remedial Action (including the repair, replacement or restoration of improvements and
equipment; and monitoring and other closure requirements imposed by any Governmental
Entity), liabilities, demands, claims and causes of action (including those asserted by third parties
for personal injury, illness, death, and damage to real and personal property), damages (including
natural resource damages, consequential damages and punitive damages), expenses (including
experts' and consultants' fees and disbursements), reasonable attorneys' fees and disbursements
for in-house and outside counsel (including those incurred at trial, on appeal, or in enforcing this
Agreement, and regardless of the outcome), fines, assessments, penalties, forfeitures, judgments,
settlements, orders, equitable relief of any kind, suffered, paid, incurred by, or sought from an
Indemnified Party by any Person in connection with, in whole or in part, or arising or allegedly
arising, directly or indirectly out of: (1) the inaccuracy or breach of any representation, warranty
or covenant contained in this Agreement; (2) the presence, suspected presence, or threat of
Contamination; (3) non-compliance with any Environmental Law, Institutional Control or
Engineering Control; (4) any Environmental Claim; or (5) the filing or imposition of any
environmental lien against the Property.
1. Limitation on Third Party Indemnitor's Duty to Indemnify. If Third Party
Indemnitor is the seller or a prior owner of the Property, Third Party Indemnitor's duty to
indemnify and defend Indemnified Parties shall be limited to Environmental Risks arising
from acts, omissions, events or conditions existing or occurring in connection with the
374 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
condition, use or occupancy of the Property: (1) on or before the date title to the Property
is transferred to Borrower; or (2) created or caused by Third Party Indemnitor, (including
Third Party Indemnitor's employees, representatives, agents, contractors, or consultants),
at any time after the date title to the Property is transferred to Borrower. As set forth in
Paragraph VII herein, provided that neither SBA nor Lender has acquired title to the
Property, Third Party Indemnitor may also limit its duty to indemnify under this
Agreement by paying the entire balance due under the Loan Documents including any
applicable pre-payment penalty.
2. Duration of Indemnitors' Duty to Indemnify. Indemnitors' duty to
indemnify and defend Indemnified Parties shall continue until the earlier of the following
dates: (1) the Mortgage Release Date or (2) the date after which all pending and potential
causes of action that could be asserted against any or all of the Indemnified Parties
arising from Contamination or other matters addressed by this Agreement are finally
resolved and satisfied in full, dismissed with prejudice and all appeal rights exhausted, or
otherwise barred by the applicable statute of limitation.
B. Demand for Indemnification or Tender of Defense.
1. Procedure. In connection with any demand for indemnification or defense
made pursuant to this Agreement, the Indemnified Party servicing the Loan shall notify
the responsible Indemnitor(s) in writing as soon as reasonably practical and shall specify,
to the best of Indemnified Parties' knowledge, the facts giving rise to the demand for
indemnification or the need for legal defense.
2. Amounts Payable. Any amount to be paid to Indemnified Parties by
Indemnitors under this Agreement shall be a demand obligation, immediately due and
payable, which Indemnitors hereby promise to pay, and shall bear interest at the
monetary default interest rate provided for in the Note. Payments under this Agreement
shall not reduce Borrower's obligations and liabilities under the Note or other Loan
Documents.
3. Subrogation. In the event Indemnitors pay Indemnified Parties any
amount under this Agreement, Indemnitors shall be subrogated to any rights of
Indemnified Parties relating thereto, provided, however, that such subrogation shall not
be in derogation of any rights of Indemnified Parties under this Agreement, and shall not
be construed to limit the obligations of Indemnitors hereunder.
VII. THIRD PARTY INDEMNITOR'S ELECTION TO PAY LOAN BALANCE.
In the event that either SBA or Lender makes a written demand on Third Party
Indemnitor pursuant to this Agreement, and provided that neither SBA nor Lender has acquired
title to the Property, Third Party Indemnitor may elect to pay the entire balance due under the
Loan Documents, including any applicable pre-payment penalty, in exchange for (1) a release
from all liability under this Agreement; and (2) an assignment of SBA and Lender's interest in
the Loan Documents to Third Party Indemnitor.
Effective Date: October 1, 2011 375
Appendix 6 SOP 50 10 5(D)
VIII. RELEASE AND WAIVER
A. Liability Related to Contamination. Each Indemnitor waives all known and
unknown rights and releases all claims and causes of action whether now or hereafter in
existence that Indemnitor may have against SBA and Lender related to Contamination at the
Property including the right, if any, to indemnification in the event SBA or Lender acquires title
to the Property.
B. Alteration of SBA or Lender's Legal Rights. If any document has been
recorded that could alter SBA or Lender's legal rights, remedies or responsibilities such as
provisions requiring lien subordination, special notice of default, or forbearance from initiating
liquidation activities; or provisions requiring subsequent Property owners to waive legal rights
and remedies, release claims or indemnify another Person, Indemnitors waive the right to enforce
such provisions against SBA and Lender.
C. Buyout of Duty to Remediate. If any document gives Third Party Indemnitor
the option to pay a lump sum or provide other consideration to Borrower, whether directly or
indirectly, in lieu of Remediating the Property, Third Party Indemnitor waives the right to
enforce such provision without the prior written consent of SBA and Lender, and Borrower
waives the right to receive such consideration without the prior written consent of SBA and
Lender.
IX. SUBORDINATION
A. Priority of Mortgage. As set forth in greater detail in Exhibit "C", any lien to secure
the performance of any of Borrower's monetary or non-monetary obligations to Third Party
Indemnitor shall be unconditionally subordinate to the Mortgage.
B. Indemnitor's Consent to Subordination. Each Indemnitor independently
represents and warrants that: (1) Lender has provided Indemnitor with the opportunity to
examine the terms of the Mortgage and Loan Documents; and (2) Indemnitor understands that
Lender has no obligation to Third Party Indemnitor to advance any funds under its Mortgage or
see to the application of the Mortgage funds, and that any application or use of such funds for
purposes other than those provided for in the Loan Documents shall not defeat, in whole or in
part, the subordination of Third Party Indemnitor's rights and interests in the Property.
X. LOAN DEFAULT
In the event of default on the Loan, SBA and Lender's obligation to Third Party
Indemnitor shall not extend beyond complying with applicable law regardless of conflicting
provisions, if any, in the Purchase and Sale Documents such as those requiring notice of Loan
default, notice of Mortgage foreclosure, or forbearance prior to initiating liquidation activities on
the Loan.
XI. GENERAL PROVISIONS
376 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
A. Consideration. Indemnitors acknowledge that: (1) they will receive direct and
indirect benefits from the Loan; (2) that SBA and Lender have relied and will rely on the
representations, warranties, covenants and agreements herein in closing and funding the Loan;
and (3) that the execution and delivery of this Agreement is an essential condition but for which
SBA and Lender would not make the Loan.
B. Primary and Unconditional Nature of Obligations. Indemnitors' liability under
this Agreement is direct and primary and not that of a guarantor or surety. Unless otherwise
specified, the representations, warranties, covenants, agreements and other obligations set forth
in this Agreement: (1) are not conditioned on fault or on any other event, occurrence, matter or
circumstance; (2) are in addition to, and not in substitution for, any provisions regarding related
matters in the Loan Documents; (3) shall not terminate on the Mortgage Release Date or be
discharged or satisfied by payment or satisfaction of the Loan or foreclosure of the Mortgage; (4)
shall continue in effect after any sale or transfer of the Loan or Property, including transfers
pursuant to foreclosure proceedings or in lieu thereof; (5) shall apply regardless of whether or
not a Governmental Entity issues an order requiring Remediation, indemnification or any other
obligation of Indemnitors under this Agreement; and (6) shall not be affected or impaired by: (a)
the voluntary or involuntary liquidation of all or substantially all of any Indemnitor's assets,
including liquidation through a receivership, bankruptcy, reorganization or other similar
proceedings; (b) SBA or Lender's failure to give any Indemnitor notice of any event or matter
under this Agreement, the Loan Documents, or otherwise; (c) any finding or allegation that
Lender or SBA is or was an "owner" or "operator" of the Property; (d) any extension of time for
performance under any Loan Document; (e) any exculpatory provision in the Note, Mortgage or
other Loan Documents limiting SBA or Lender's recourse to the Property or other security, or
limiting SBA or Lender's right to a deficiency judgment; (f) the release of Borrower or any other
Person from performance or observance of any agreement, covenant, term or condition in the
Note, Mortgage, other Loan Documents or this Agreement; (g) the release or substitution in
whole or in part of any collateral for the Loan; (h) the determination by a Governmental Entity
that a third party is responsible for the Contamination or its Remediation; or (i) any other act or
omission of SBA or Lender other than those specially found by a court of law to have arisen out
of gross negligence or willful misconduct.
C. Exhibits Incorporated by Reference. All Exhibits hereto are deemed a part of
this Agreement, incorporated and made a part of this Agreement, including: (1) Exhibit "A" –
Legal Description of Real Property Securing Loan; (2) Exhibit "B" – Environmental Investigation
Report; and (3) Exhibit "C" – Memorandum of SBA Environmental Indemnification Agreement.
D. Disclaimer. This Agreement constitutes neither a finding by SBA or Lender, nor
knowledge on their part, as to the risks to human health or the environment posed by any
Contamination; nor does it constitute a representation by SBA or Lender that the Property is fit
for any particular purpose.
E. Headings and Font Style. The headings and font style (including bold lettering)
used in this Agreement are for convenience of reference only and shall not be used to define the
meaning of any provision.
Effective Date: October 1, 2011 377
Appendix 6 SOP 50 10 5(D)
F. Rights Not Exclusive. SBA and Lender's rights and remedies under this
Agreement are in addition to any explicit or implied rights and remedies SBA and Lender may
have against Indemnitors or any other Person under the Loan Documents, at law, or in equity.
G. No Waiver; Rights Cumulative. The rights and remedies available to SBA and
Lender may be exercised separately or together, and as many times, and in any order that SBA or
Lender choose. SBA and Lender may delay or forgo enforcing any of their rights without giving
any up. Any waiver, consent or approval under this Agreement must be in writing and signed by
all of the parties to be effective.
H. Assignment. Indemnitors shall not assign, transfer or delegate this Agreement or
any obligation of Indemnitors hereunder without the prior written consent of SBA and Lender
which shall not be unreasonably withheld. Any attempted assignment, transfer or delegation
without SBA and Lender's prior written consent shall be null and void. SBA and Lender may
assign or transfer, in whole or in part, conditionally or otherwise, any interest in this Agreement
without impairing the indemnification granted to SBA and Lender, which shall continue to exist
for the benefit of SBA and Lender notwithstanding any such assignment or transfer.
I. Notice. All notices, demands, consents and other communications required or
that any party desires to give under this Agreement shall be in writing and delivered by fax,
hand, courier, or by registered or certified United States mail, postage pre-paid, return receipt
requested, to the appropriate address or, if applicable, facsimile number, specified at the end of
this Agreement or to such other address or facsimile number as Indemnitors, SBA or Lender may
designate in a written notice given to all parties to this Agreement. Notices that are delivered by
facsimile, hand or courier shall be deemed received upon delivery or transmission. Notices that
are deposited in the United States mail shall be deemed received three days after the date mailed.
Notwithstanding the foregoing, a copy of any notice sent by facsimile shall also be delivered to
the addressee by hand, overnight courier or United States mail, and any notice of change of
address shall not be effective until actual receipt.
J. Consent to Jurisdiction. Indemnitors consent to the jurisdiction of the United
States District Court for the Federal District in which the Property is located for all purposes in
connection with any action or proceeding that arises out of or relates to this Agreement.
K. Construction. This Agreement shall be governed by and its provisions construed
in accordance with federal law, and to the extent not inconsistent therewith, the laws of the state
where the Property is located without regard to its choice of law principles. In the event a court
of law or equity finds any provision of this Agreement, or the application thereof to any party or
circumstance, to be invalid or unenforceable, the remainder of this Agreement, or the application
of such provision to parties or circumstances other than those as to which it is invalid or
unenforceable, shall not be affected thereby, and each provision shall be valid and enforced to
the fullest extent permitted by law or equity.
L. Modification or Termination. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed by an authorized
representative of each party.
378 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
M. Integration and Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes and merges all other written and oral negotiations,
commitments, understandings and agreements relating to the subject matter hereof among the
parties including contradictory provisions that would otherwise apply to Indemnified Parties, if
any, contained in the Purchase and Sale Documents.
N. Counterparts. The parties may sign this Agreement in identical counterparts. The
signature pages from the separately signed counterparts may be attached to one copy of this
Agreement to form a single document.
O. Memorandum of Agreement. Concurrently with the execution of this
Agreement, the parties shall execute a Memorandum of SBA Environmental Indemnification
Agreement (the "Memorandum"), in the form attached hereto as Exhibit "C." The executed
Memorandum shall be immediately recorded in the official records of the appropriate county or
other government office in the state where the Property is located. In the event of a conflict
between the terms of the Memorandum and this Agreement, the terms of this Agreement shall
control.
P. Intentional Omission or False Statement. Each party signing this Agreement
acknowledges that intentionally falsifying or concealing any material fact with regard to the
subject matter of this Agreement may result in prosecution under applicable laws including 18
U.S.C. 1344, which provides for fines up to $1,000,000 and imprisonment for up to 30 years.
[Add additional signature blocks as necessary including a signature block for the Operating
Company, if any, identified in the Loan Documents.]
Borrower:
____________________________________ [Insert name of Borrower]
By: _____________________________________________________
Name and Title: ________________________________________
Address: ______________________________________________
Telephone Number: _____________________________________
Facsimile Number: ______________________________________
[Add notary acknowledgement]
Third Party Indemnitor:
___________________________ [Insert name of Third Party Indemnitor]
By: _____________________________________________________
Name and title: _________________________________________
Effective Date: October 1, 2011 379
Appendix 6 SOP 50 10 5(D)
Address: ______________________________________________
Telephone Number: _____________________________________
Facsimile Number: ______________________________________
[Add notary acknowledgement]
Lender:
_____________________ [Insert name of CDC or lending institution]
By: _____________________________________________________
Name and Title: ________________________________________
Address: ______________________________________________
Telephone Number: _____________________________________
Facsimile Number: ______________________________________
[Add notary acknowledgement]
U. S. Small Business Administration
By: _____________________________________________________
Name and Title: ________________________________________
Address: ______________________________________________
Phone Number: ________________________________________
Fax Number: __________________________________________
[Add notary acknowledgement]
A copy of each notice, demand and other correspondence with regard to this
Agreement must include the SBA loan number and be sent to:
Associate General Counsel for Litigation
Office of General Counsel
U.S. Small Business Administration
409 3rd Street S.W.
Washington, DC 20416
And to:
Legal Counsel for _________________ [Insert name of SBA District Office]
Name: ________________________________________________
Address: ______________________________________________
Phone Number: ________________________________________
380 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
Fax Number: __________________________________________
Exhibit "A"
Legal Description of Real Property Securing Loan
[To be inserted]
Exhibit "B"
Environmental Investigation Report
[To be inserted]
Exhibit "C"
Memorandum of SBA Environmental Indemnification Agreement
Effective Date: October 1, 2011 381
Appendix 6 SOP 50 10 5(D)
Sample Recording Information
Return Address:
Please print or type information
Document title(s) (or transactions contained therein): Memorandum of SBA Environmental
Indemnification Agreement
Grantor(s):
[Insert names of Borrower(s) and Third Party Indemnitor(s). For individuals, type last name
first, then first name and middle initial. Add additional lines as necessary.]
1.
2.
3.
Grantee(s):
1. [Insert name of Lender.]
2. U.S. Small Business Administration, an Agency of the United States Government
Legal Description:
[Insert legal description or abbreviated legal description of Property: i.e., lot, block, plat or
section, township, range.]
Assessor's Property Tax Parcel or Account Number at the time of recording:
[Insert Property tax ID number.]
Reference Number(s) of subordinated document(s):
[Insert recording number(s) of Third Party Indemnitor's document(s) to be subordinated to
Mortgage securing SBA Loan and other lien instruments.]
Reference Number(s) of Document subordinated to:
[Insert recording number(s) of Mortgage securing SBA Loan and other lien instruments]
382 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
EXHIBIT "C"
MEMORANDUM OF SBA ENVIRONMENTAL INDEMNIFICATION AGREEMENT
SBA Loan No.________________________
This Memorandum of SBA Environmental Indemnification Agreement ("Memorandum")
dated ____________________ [insert date of SBA Environmental Indemnification Agreement]
is executed by _______________________ (whether one or more, ―Borrower‖),
__________________ [insert name of indemnitor(s) not obligated on the SBA Loan] (whether one
or more, "Third Party Indemnitor"), _______________________ [Insert name of Certified
Development Company or Lending Institution] (―Lender‖), and the U.S. Small Business
Administration (―SBA‖).
I. PURPOSE OF MEMORANDUM
The purpose of this Memorandum is to provide constructive notice of the un-recorded SBA
Environmental Indemnification Agreement of even date with this Memorandum entered into by
Borrower, Third Party Indemnitor, SBA and Lender (the "Agreement") pertaining to the real and
personal property described therein including the land located at ________________ [Insert
address] and legally described in Exhibit "A" attached hereto (collectively, the "Property"). The
Agreement contains, but is not limited to, the following provisions, which are addressed in greater
detail therein:
A. Indemnification and Remediation. Borrower and Third Party Indemnitor agree to
indemnify SBA and Lender against certain losses, liabilities, damages, etc., including attorney
fees and costs, related to environmental contamination associated with the Property and other
matters addressed and more fully set forth in the Agreement.
B. Indemnitor's Election to Pay Loan Balance. Third Party Indemnitor may, under
certain conditions, limit its duty to remediate and indemnify under the Agreement by paying the
entire balance due under the Loan Documents including any applicable pre-payment penalty.
C. Release and Waiver. Borrower and Third Party Indemnitor release and waive all
rights, claims and causes of action against SBA and Lender with regard to environmental
contamination at the Property and other matters addressed in the Agreement including the right
to enforce any provision recorded in the chain of title to the Property that alters SBA or Lender's
legal rights, remedies or responsibilities.
D. Warranties and Covenants. Indemnitors warrant, among other things, that there
are no documents recorded against the Property that would enable Third Party Indemnitor or its
affiliates to control the use or ownership of the Property, such as a right of first refusal, purchase
option, repurchase option, restrictive covenant, deed restriction, etc.; and covenant, among other
Effective Date: October 1, 2011 383
Appendix 6 SOP 50 10 5(D)
things, not to record or cause to be recorded any such document before Borrower's SBA Loan
has been paid in full.
E. Subordination. Third Party Indemnitor unconditionally subordinates to SBA and
Lender's Mortgage recorded in volume _________________ of __________________, page
_________________________, under auditor's file number ________, records of
__________________ County, State of ___________________________ any right, title or
interest Third Party Indemnitor has with respect to the Property, whether of record or not,
including the following:
Third Party Indemnitor's _____________________________ [Insert description of lien,
e.g., deed of trust, mortgage, UCC Financing Statement, etc.] dated ______________,
recorded in volume _______ of _______, page______ under auditor's file number
_________________, records of _______________________ County, State of
_____________________.
[Add additional blocks as necessary.]
II. CONFLICTING TERMS OR PROVISIONS
Terms used in this Memorandum that are not defined herein, but are defined in the
Agreement, shall have the meaning provided in the Agreement. To the extent any term or provision
of this Memorandum conflicts with any term or provision of the Agreement, the terms and
provisions of the Agreement shall control.
III. COUNTERPARTS
The parties may sign this Memorandum in identical counterparts. The signature pages from
the separately signed counterparts may be attached to one copy of this Memorandum to form a
single document.
[Add additional signature blocks as necessary including a signature block for the Operating
Company, if any, identified in the Loan Documents.]
Borrower:
____________________________________ [Insert name of Borrower]
By: _____________________________________________________
Name and Title: ________________________________________
Address: ______________________________________________
Telephone Number: _____________________________________
Facsimile Number: ______________________________________
[Add notary acknowledgement]
384 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
Third Party Indemnitor:
___________________________ [Insert name of Third Party Indemnitor]
By: _____________________________________________________
Name and title: _________________________________________
Address: ______________________________________________
Telephone Number: _____________________________________
Facsimile Number: ______________________________________
[Add notary acknowledgement]
Lender:
_________________________ [Insert name of CDC or lending institution]
By: _____________________________________________________
Name and Title: ________________________________________
Address: _____________________________________________
Telephone Number: _____________________________________
Facsimile Number: ______________________________________
[Add notary acknowledgement]
U. S. Small Business Administration
By:
_____________________________________________________
Name and Title: ________________________________________
Address: ______________________________________________
Phone Number:_________________________________________
Fax Number: ___________________________________________
[Add notary acknowledgement]
A copy of each notice, demand and other correspondence with regard to this
Agreement must include the SBA loan number and be sent to:
Associate General Counsel for Litigation
Office of General Counsel
U.S. Small Business Administration
Effective Date: October 1, 2011 385
Appendix 6 SOP 50 10 5(D)
409 3rd Street S.W.
Washington, DC 20416
And to:
Legal Counsel for _________________ [Insert name of SBA District Office]
Name: ________________________________________________
Address: ______________________________________________
Phone Number: ________________________________________
Fax Number: ___________________________________________
ATTACHMENTS:
Exhibit "A" - Legal Description of Real Property Securing Loan
386 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
Effective Date: October 1, 2011 387
Appendix 7 SOP 50 10 5(D)
APPENDIX 7 – CAPLINES PROGRAM DOCUMENTS
388 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 6
BORROWING BASE CERTIFICATE & REPORT TO LENDER
FOR THE PERIOD ENDING , 20 EFFECTIVE DATE OF LAST REPORT:
THIS FORM SHALL BE INITIALLY COMPLETED BY ALL ASSET BASED BORROWERS TO REPORT AND RECONCILE THEIR ACCOUNTS RECEIVABLE AND INVENTORY.
THE VALUES HEREIN DO NOT PREVENT THE LENDER FROM MAKING THEIR OWN DETERMINATION OF APPROPRIATE VALUES.
ACCOUNTS RECEIVABLE (As of This Period)
1. Accounts Receivable From Previous Report $
2. (+) New Total Sales From Last Report $
3. (-) Less Cash Sales From Last Report $
4. (=) Total Credit Sales Since Last Report $
5. (-) Account Receivable Collection Since Last Report $
6. (+/-) Adjustments
(-) Non-Trade Receivables $
(-) Affiliated Company Receivables $
( ) Other: $
7. (=) Net Accounts Receivable (As Of Period End) $
8. (-) Accounts Receivable Over 90 Days $
9. (=) Eligible Accounts Receivable (As Of Period End) $
10. (X) % of Eligible Accounts Receivable $
INVENTORY (As of This Period)
11 RAW MATERIAL INVENTORY $
12. (+/-) Adjustments
() $
() $
13. (=) Total Eligible Raw Material Inventory: $
14. (X) % of Raw Material Inventory $
15. WORK IN PROGRESS INVENTORY $
16. (+/-) Adjustments
() $
() $
17. (=) Total Eligible Work In Progress Inventory: $
18. (X) % of Work In Progress Inventory $
19. FINISHED GOODS INVENTORY $
20. (+/-) Adjustments
() $
() $
21. (=) Total Eligible Finished Goods Inventory: $
22. (X) % of Eligible Finished Goods $
RECONCILIATION
23. Total Lines 10, 14, 18, & 22 $
24. Face Amount of Note: $
25. Borrowing Base (Lesser of Line 23 or 24) $
26. Loan Balance form Previous Report $
27. (+) Plus Total Advances Since Last Report $
28. (-) Less Total Payments Since Last Report $
29. (=) Loan Balance Per Borrowers Books (Line 26 + 27 - 28) $
30. Approximate Amount Available To Borrower (Line 25 - 29) $
The Above Is Certified To Be In Accordance With The Revolving Line Of Credit Authorization (SBA Form 529B)
Borrower: Loan Number: _____________
Authorized Signature: Date: ___________________
* A Current Listing And Aging Of Accounts Receivable And Accounts Payable Are Attached
** Description Of Inventory And Certification Of Values Are Attached.
Effective Date: October 1, 2011 389
Appendix 7 SOP 50 10 5(D)
BORROWING BASE CERTIFICATE & REPORT TO LENDER
FOR THE PERIOD ENDING: , 20
DATE OF LAST REPORT: , 20
THIS FORM SHALL BE INITIALLY COMPLETED BY ALL CAPLINES ASSET BASED SUB-PROGRAMS BORROWERS TO REPORT AND RECONCILE THEIR
ACCOUNTS RECEIVABLE AND INVENTORY. THE VALUES HEREIN DO NOT PREVENT THE LENDER FROM MAKING THEIR OWN DETERMINATION OF
APPROPRIATE VALUES.
Pursuant to the Loan Authorization and the Note between undersigned (Borrower) and (Lender) dated ( ), the Borrower hereby requests an additional loan as
follows:
1. Loan Balance on Previous Report $
2. Advances Since Last Report $
3. Total Payments Since Last Report $
(agrees w/#4 on reverse as long as loan balance exceeds collections)
4. Loan Balance on Books $
5. Amount Available to Borrow $
(from Collateral Reconciliation)
6. Amount Requested (If #5 above is positive) $
7. Check attached for balance (If #5 above id Negative) $
BORROWING BASE
a. Total Accounts Receivable $
b. Ineligible Accounts Receivable $
c. Eligible Accounts Receivable $
d. Accounts Receivable Advance Rate Percentage %
e. Borrowing Level For Accounts Receivable $
f. Total Inventory $
g. Ineligible Inventory $
h. Eligible Inventory $
i. Inventory Advance Rate Percentage %
j. Borrowing Level For Inventory $
k. Borrowing Base (e + i) $
The Above Is Certified To Be In Accordance With The Revolving Line Of Credit Authorization (SBA Form 529B)
Borrower:
Loan Number:
Authorized Signature: Date:
* A Current Listing and Aging of Accounts Receivable and Accounts Payable are Attached
** Description Of Inventory And Certification Of Values Are Attached.
SBA Form BBC-2
390 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 7
BORROWING BASE CERTIFICATE & REPORT TO LENDER
COLLATERAL RECONCILIATION
ACCOUNTS RECEIVABLE
1. Accounts Receivable Last Report $
2. Credit Sales Since Last Report $
3. Total $
4. Collections Since Last Report $
5. Accounts Receivable Per Books $
6. Ineligible Accounts Receivable $
7. Eligible Accounts Receivable $
INVENTORY
8. Inventory Per Books $
9. Ineligible Inventory $
10. Eligible Inventory $
RECONCILIATION
11. Accounts Receivable Borrowing Base $
( percent of 7 above)
12. Inventory Borrowing Base $
( percent of 10 above)
13. Total $
14. Face Amount of Note $
15. Borrowing Base $
16. Loan Balance on Books $
17. Amount Available to Borrow $
(#15 minus 16)
SBA Form BBC-2
Effective Date: October 1, 2011 391
Appendix 7 SOP 50 10 5(D)
BORROWING BASE CERTIFICATE & REPORT TO LENDER
LISTING OF INELIGIBLE ACCOUNTS RECEIVABLE AND INVENTORY
ACCOUNTS RECEIVABLE
A. Accounts Receivable over 90 days $
B. Contra Accounts $
C. Foreign Accounts $
D. Affiliate Accounts $
E. Retention, Dated Sales, Consigned Sales $
F. Credit Memo/Balances $
G. Bonded Jobs $
H. Pre-Billed Accounts $
I. Total Ineligible Accounts Receivables $
INVENTORY
J. Work in Progress $
K. Other Ineligibles $
(specify)
L. Total Ineligible Inventory $
SBA Form BBC-2
392 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 7
APPLICATION QUESTIONS FOR WORKING CAPITAL CAPLINES
MAY BE INCLUDED WITH LENDER’ S CREDIT MEMORANDUM (OPTIONAL)
THIS FORM MAY BE COMPLETED AND INCLUDED WITH LENDER’ S CREDIT MEMORANDUM TO APPLY FOR SBA WORKING CAPITAL CAPLINES
NAME OF BUSINESS:
BUSINESS ADDRESS:
ACCOUNTS RECEIVABLES
1. DO YOU SELL PRODUCT(S) ON CREDIT? YES: NO:
IF YES, ANSWER ALL PARTS OF QUESTION 1:
1A. WHAT PERCENTAGE OF YOUR TOTAL SALES IS FOR CREDIT? %
1B. WHAT ARE THE CREDIT TERMS YOU PROVIDE YOUR CUSTOMERS?
1C. DESCRIBE THE PROCEDURES YOUR BUSINESS USES WHEN EXTENDING CREDIT/TERMS TO ITS CUSTOMERS:
1D. DO ANY OF YOUR CREDIT CUSTOMERS ACCOUNT FOR OVER 10% OF YOUR TOTAL CREDIT SALES?
YES NO IF YES, LIST THESE CUSTOMERS:
1E. DO YOU MAINTAIN CREDIT INSURANCE TO COVER YOUR RECEIVABLES? YES: NO:
IF YES, WHAT PERCENTAGE OF TOTAL SALES ARE COVERED BY THIS INSURANCE? %
1F. DESCRIBE THE DISCOUNT POLICY OF YOUR BUSINESS:
1G. THE TOTAL DOLLAR AMOUNT OF RECEIVABLES WRITTEN OFF LAST FISCAL YEAR WAS: $
2. DESCRIBE THE WARRANTIES, GUARANTIES, OR OTHER DEVICES PROVIDED BY YOUR BUSINESS TO SUPPORT
PRODUCT QUALITY:
3. FOR YOUR BUSINESS' MOST RECENTLY COMPLETED FISCAL YEAR:
TOTAL CREDIT SALES WERE: $ TOTAL RETURNS WERE: $
TOTAL ALLOWANCES WERE: $ TOTAL CREDITS WERE: $
4. DO YOU SELL TO OTHER BUSINESSES ON CREDIT WHICH ALSO SELL TO YOU?
YES: NO:
5. DO YOU SELL OVERSEAS? YES: NO:
6. DESCRIBE THE PRIMARY INDUSTRY(S) TO WHOM YOU SELL ON CREDIT:
SBA Form AB-4
Effective Date: October 1, 2011 393
Appendix 7 SOP 50 10 5(D)
PAGE 2 ADDITIONAL WORKING CAPITAL CAPLINES APPLICATION QUESTIONS
INVENTORY
1. DESCRIBE THE METHOD OF ACCOUNTING FOR INVENTORY YOUR BUSINESS USES (LIFO, FIFO, WEIGHTED AVERAGE,
ETC.):
2. HOW MANY DIFFERENT STOCK KEEPING UNITS (SKU) DO YOU MAINTAIN?
3A. DO YOU CARRY ITEMS FOR SALE THAT ARE CONSIGNED BY OTHERS? YES: NO:
IF YES, WHAT PERCENTAGE? %
3B. DO YOU CONSIGN ANY OF YOUR ITEMS FOR SALE TO OTHERS?
YES: NO:
IF YES, WHAT IS ITS PERCENTAGE OF TOTAL SALES? %
4. DESCRIBE YOUR BUSINESS' PROCEDURE FOR MAINTAINING AND PHYSICALLY COUNTING ITS INVENTORY:
5. THE DOLLAR VALUE OF TOTAL SALES RETURNED LAST YEAR WAS: $
6. DO YOU MAINTAIN PRODUCT LIABILITY INSURANCE? YES: NO:
7. NAME ANY CREDITORS WHO HOLD PURCHASE MONEY LIENS AGAINST YOUR INVENTORY:
8. DO YOU MAINTAIN ANY INVENTORY OFF PREMISES WHICH YOU OWN? YES: NO:
9. IN HOW MANY DIFFERENT LOCATIONS DO YOU MAINTAIN INVENTORY?
10.HOW FREQUENTLY DO YOU CONDUCT A PHYSICAL INVENTORY?
11. DO YOU SEPARATE "SECONDS" OR RETURNED INVENTORY FROM FIRST LINE MERCHANDISE?
YES: NO:
12. DO YOU HOLD NON-OWNED GOODS/INVENTORY FOR OTHER INDIVIDUALS OR FIRMS?
YES: NO:
IF YES, THE APPROXIMATE DOLLAR VALUE OF THE ITEMS IS: $
13. EXPLAIN YOUR METHOD(s) FOR BILLING CUSTOMERS:
AUTHORIZED SIGNATURE: DATE:
PRINTED NAME & TITLE:
SBA Form AB-4
394 Effective Date: October 1, 2011
SOP 50 10 5(D) Appendix 7
Effective Date: October 1, 2011 395