Full text
SOP 50 10 5(G)
Lender and Development Company
Loan Programs
U.S. Small Business Administration
Office of Financial Assistance
SOP 50 10 5(G)
TABLE OF CONTENTS
SUBPART A................................................................................................................................... 6
PURPOSE OF THIS SUBPART ............................................................................................. 6
Chapter 1: 7(a) Lenders .............................................................................................................. 7
THE 7(A) LOAN PROGRAM ............................................................................................... 7
BECOMING A 7(A) LENDER .............................................................................................. 7
HOW SBA OVERSEES 7(A) LENDERS ........................................................................... 14
TYPES OF 7(A) LENDERS WITH DELEGATED AUTHORITY .................................... 17
CHAPTER 2: SMALL BUSINESS LENDING COMPANIES ................................................... 40
A SMALL BUSINESS LENDING COMPANY ................................................................. 40
PROCESS FOR ACQUIRING AN SBLC ........................................................................... 40
CHAPTER 3: CERTIFIED DEVELOPMENT COMPANIES ................................................ 43
SUBPART B ................................................................................................................................. 70
PURPOSE OF THIS SUBPART ........................................................................................... 70
Chapter 1: GENERAL DESCRIPTION OF THE 7(a) LOAN PROGRAMS .......................... 71
VARIOUS DELIVERY METHODS ................................................................................... 71
USE OF LOAN PROCEEDS ............................................................................................... 71
SPECIAL PURPOSE LOANS ............................................................................................. 72
DEFINITIONS APPLICABLE TO THE 7(A) LOAN PROGRAMS .................................. 73
CHAPTER 2: ELIGIBILITY FOR 7(A) GUARANTY LOAN PROGRAM .......................... 74
INTRODUCTION ................................................................................................................ 74
SUMMARY OF ELIGIBLITY REQUIREMENTS ............................................................. 74
ELIGIBILITY REQUIREMENTS ....................................................................................... 75
The Small Business Must be Organized for Profit. .................................................................. 75
The Applicant Must Be Small Under SBA Size Requirements ................................................ 75
The Small Business Applicant Must Demonstrate a Need for a Guaranty on the Loan. .......... 84
Ineligible Types Of Businesses ................................................................................................. 85
Businesses Owned by Non-US Citizens ................................................................................... 98
The Eligible Passive Company (EPC) Rule............................................................................ 101
Special Requirements For Loans Where Collateral May Be Included In The National Register
Of Historic Places ................................................................................................................... 104
Additional Eligibility Requirement For SBLCs ..................................................................... 104
Additional Eligibility Requirement For EWCP ...................................................................... 106
Additional Eligibility Requirements For CAPLines ............................................................... 106
ELIGIBLE USES OF LOAN PROCEEDS ........................................................................ 107
CHAPTER 3: LOAN TERMS AND CONDITIONS ............................................................. 122
MAXIMUM LOAN AMOUNTS ....................................................................................... 122
MAXIMUM GUARANTY AMOUNTS ............................................................................ 125
LOAN MATURITIES ........................................................................................................ 127
INTEREST RATES ............................................................................................................ 131
SBA GUARANTY FEES ................................................................................................... 137
OTHER FEES ..................................................................................................................... 142
PROHIBITED FEES .......................................................................................................... 147
DISCLOSURE OF FEES AND LENDER EXPENSES .................................................... 148
AGENTS ............................................................................................................................. 149
Effective Date: October 1, 2014 2
SOP 50 10 5(G)
WHO MAY CONDUCT BUSINESS WITH SBA ............................................................ 151
CHAPTER 4: CREDIT STANDARDS, COLLATERAL AND ENVIRONMENTAL
POLICIES ............................................................................................................................... 154
CREDITWORTHINESS/CREDIT UNDERWRITING ..................................................... 154
COLLATERAL .................................................................................................................. 161
ENVIRONMENTAL POLICIES AND PROCEDURES ................................................... 171
CHAPTER 5: LOAN AUTHORIZATION ............................................................................ 179
BASIC LOAN CONDITIONS ........................................................................................... 179
INSURANCE REQUIREMENTS ...................................................................................... 180
IRS TAX TRANSCRIPT/VERIFICATION OF FINANCIAL INFORMATION ............. 182
STANDBY AGREEMENTS .............................................................................................. 184
ASSIGNMENT OF LEASE AND LANDLORD’S WAIVER .......................................... 184
CONSTRUCTION LOAN PROVISIONS ......................................................................... 185
SPECIAL PROVISIONS FOR FRANCHISES ................................................................. 187
CERTIFICATION REGARDING CHILD SUPPORT ...................................................... 187
SPECIAL PROVISION FOR CAPLINES ......................................................................... 187
MODIFYING THE AUTHORIZATION ....................................................................... 187
CHAPTER 6: SUBMISSION OF APPLICATION FOR GUARANTY ............................... 189
CONTENTS OF LENDER’S APPLICATION FOR GUARANTY .................................. 189
WHERE TO SUBMIT APPLICATION FOR GUARANTY ............................................ 195
CHAPTER 7: POST-APPROVAL MODIFICATIONS, LOAN CLOSING &
DISBURSEMENT .................................................................................................................. 199
POST APPROVAL/PRE-DISBURSEMENT REQUESTS FOR CHANGES .................. 199
TRANSFER OF GUARANTY BETWEEN PARTICIPATING LENDERS .................... 200
PAYMENT OF GUARANTY FEE.................................................................................... 200
LOAN CLOSING AND DISBURSEMENT ...................................................................... 200
CHAPTER 8: POST-DISBURSEMENT, SECONDARY MARKET, SECURITIZATION
AND LENDER REPORTING (SBA FORM 1502) ............................................................... 221
POST-DISBURSEMENT CHANGES ............................................................................... 221
SECONDARY MARKET FOR SBA GUARANTEED LOANS ...................................... 221
SECURITIZATION AND OTHER CONVEYANCES ..................................................... 221
LENDER REPORTING ..................................................................................................... 222
SUBPART C ............................................................................................................................... 230
PURPOSE OF THIS SUBPART ......................................................................................... 230
CHAPTER 1: GENERAL PROVISIONS .............................................................................. 230
PURPOSE OF THE 504 CERTIFIED DEVELOPMENT COMPANY LOAN PROGRAM
............................................................................................................................................. 230
CREDIT STANDARDS ..................................................................................................... 230
Definitions........................................................................................................................... 231
HOW A 504 PROJECT IS FINANCED ............................................................................ 232
CHAPTER 2: ELIGIBILITY .................................................................................................. 238
INTRODUCTION .............................................................................................................. 238
SUMMARY OF ELIGIBLITY REQUIREMENTS ........................................................... 238
ELIGIBILITY REQUIREMENTS ..................................................................................... 239
The Small Business Must Be Organized for Profit ................................................................. 239
Effective Date: October 1, 2014 3
SOP 50 10 5(G)
The Applicant Must Be Small Under SBA Size Requirements Applicable to 504 Financial
Assistance ............................................................................................................................... 239
The Small Business Applicant Must Demonstrate a Need for the 504 Loan ......................... 247
Ineligible Types of Businesses................................................................................................ 248
Businesses Owned by Non-US Citizens ................................................................................. 261
The Eligible Passive Company Rule....................................................................................... 264
Special Requirements for Loans Where Collateral May Be Included in the National Register
of Historic Places .................................................................................................................... 267
504 Program-Specific Eligibility Factors ............................................................................... 267
CHAPTER 3: COLLATERAL, APPRAISALS AND ENVIRONMENTAL POLICIES ..... 278
COLLATERAL .................................................................................................................. 278
APPRAISAL REQUIREMENTS ....................................................................................... 280
ENVIRONMENTAL POLICIES AND PROCEDURES ................................................... 282
CHAPTER 4: LOAN APPLICATION PROCEDURES AND CONTROLS ........................ 290
CDC’S 504 APPLICATION............................................................................................... 290
MINIMUM DEBENTURE AMOUNT .............................................................................. 290
SUBMITTING THE APPLICATION ................................................................................ 290
CHAPTER 5: LOAN CONDITIONS/AUTHORIZATION REQUIREMENTS ................... 293
AUTHORIZATION BOILERPLATE/WIZARD ............................................................... 293
MODIFYING THE AUTHORIZATION ........................................................................... 300
CHAPTER 6: CLOSINGS ...................................................................................................... 302
RESPONSIBILITY FOR CLOSING THE 504 LOAN AND DEBENTURE ................... 302
THE CLOSING PACKAGE............................................................................................... 302
SPECIFIC RESPONSIBILITIES AND PROCEDURES FOR CLOSING AND POST-
CLOSING ACTIVITIES .................................................................................................... 303
USE OF CONSTRUCTION ESCROW ACCOUNT ......................................................... 306
CHAPTER 7: DEBENTURE PRICING & FUNDING ......................................................... 307
PRICING A 504 DEBENTURE ......................................................................................... 307
FUNDING THE DEBENTURE ......................................................................................... 310
CHAPTER 8: ALLOWABLE FEES ...................................................................................... 312
ALLOWABLE FEES THAT A 504 BORROWER MAY BE CHARGED ...................... 312
FEES FOR OTHER SERVICES ........................................................................................ 313
DISCLOSURE OF FEES AND EXPENSES ..................................................................... 314
AGENTS ............................................................................................................................. 315
WHO MAY CONDUCT BUSINESS WITH SBA ............................................................ 316
CHAPTER 9: BORROWER’S DEPOSIT, DEBENTURE POOLS AND ............................ 318
RULES GOVERNING THE BORROWER’S DEPOSIT .................................................. 318
DEBENTURE POOLS ....................................................................................................... 318
MISCELLANEOUS ........................................................................................................... 318
POST-DISBURSEMENT ISSUES .................................................................................... 318
APPENDIX 1: RESTRICTIONS ON FOREIGN CONTROLLED ENTERPRISES................ 320
APPENDIX 2: DEFINITIONS ................................................................................................... 323
APPENDIX 3: RELIANCE LETTER ........................................................................................ 329
APPENDIX 4: NAICS CODES OF ENVIRONMENTALLY SENSITIVE INDUSTRIES ..... 331
APPENDIX 5: REQUIREMENTS PERTAINING TO GAS STATION LOANS .................... 333
APPENDIX 6: SBA ENVIRONMENTAL INDEMNIFICATION AGREEMENT ................. 335
Effective Date: October 1, 2014 4
SOP 50 10 5(G)
I. RECITALS .................................................................................................................... 335
II. DEFINITIONS ............................................................................................................. 335
III. REPRESENTATIONS AND WARRANTIES ........................................................ 338
IV. COVENANTS ............................................................................................................. 340
V. REMEDIATION ......................................................................................................... 341
VI. INDEMNIFICATION ................................................................................................ 342
VII. THIRD PARTY INDEMNITOR'S ELECTION TO PAY LOAN BALANCE .. 344
VIII. RELEASE AND WAIVER ..................................................................................... 344
IX. SUBORDINATION .................................................................................................... 344
X. LOAN DEFAULT ........................................................................................................ 345
XI. GENERAL PROVISIONS ........................................................................................ 345
APPENDIX 7 – CAPLINES PROGRAM DOCUMENTS ........................................................ 355
APPENDIX 8 – Religious ELIGIBILITY Worksheet ............................................................... 362
Effective Date: October 1, 2014 5
SOP 50 10 5(G)
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). For Export Working Capital Program (EWCP) and International Trade (ITL) loans, an exception to
policy may be approved by the Director, International Trade Finance (D/ITF). For Export Express loans, an
exception to policy may be approved by the D/ITF with the concurrence of the Director, Office of Credit Risk
Management (D/OCRM). The D/FA or D/ITF 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, including EWCP, ITL and Export Express loan
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 D/ITF, as applicable or an individual
acting in that capacity, who will make the final decision (with the concurrence of the D/OCRM for Export
Express loans). The decision must be documented in the appropriate Agency loan 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.
Effective Date: October 1, 2014 6
SOP 50 10 5(G)
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 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 (NFRLs), including State regulated lenders without federal
deposit or share insurance protection; and
b) Small Business Lending Companies (SBLCs)
B. The following lenders may not apply to participate with SBA as a 7(a) lender:
1. SBA-licensed Small Business Investment Companies (SBICs);
2. Certified Development Companies (see 13 CFR §§120.852, except with respect to the
Community Advantage Pilot Program); and
3. Bank holding companies
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:
i. 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.
ii. 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.
Effective Date: October 1, 2014 7
SOP 50 10 5(G)
iii. 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.
iv. 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) A lender must be in good standing with its state regulator and Federal Financial Institution
Regulator (FFIR) as determined by SBA. For purposes of participation in the 7(a) program, SBA
considers a lender to be in good standing with its state/FFIR if it has satisfactory financial condition
and satisfactory small business credit administration and servicing policies, procedures and
practices. Accordingly, the lender’s written request to participate must include a written statement
that to the best of its knowledge, the lender has satisfactory: i) financial condition (e.g., capital and
liquidity); ii) small business credit administration policies, procedures, and practices that it
continues to adhere to in its operations; and iii) small business servicing policies, procedures, and
practices that it continues to adhere to in its operations. When reviewing good standing, SBA will
look to see that a lender does not have significant deficiencies or weaknesses in these areas.
“Significant” may be evidenced by the number or seriousness of the deficiencies, as determined by
SBA in its discretion. SBA will verify any good standing statement where possible with public
(e.g., Cease and Desist Orders and Call Reports) and/or non-public information from the lender’s
primary and/or other regulators.
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. NFRLs are authorized by the Administrator to make loans pursuant to section 7(a)
of the Small Business Act. NFRLs are subject to additional regulations specific to SBA Supervised
Lenders (see 13 C.F.R. §§ 120.460-120.465) as well as all other 7(a) regulations specific to loan
processing, servicing, and liquidation. NFRLs must have internal controls that meet the
requirements set forth for SBLCs in Chapter 2, Paragraph 1.F.3 of this Subpart.
b) The lender’s application must include:
i. Lender’s name, address, telephone number and email address;
ii. A copy of lender’s Articles of Incorporation and by-laws certified by an appropriate
officer;
iii. Amount of the lender’s capital and additional paid-in capital;
iv. The lender’s proposed geographical area of operations;
Effective Date: October 1, 2014 8
SOP 50 10 5(G)
v. 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.
vi. 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.
vii. An organizational chart showing the relationship of the lender to any Associates.
viii. 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 v.
ix. A copy of the lender’s policies and procedures governing business loan origination,
servicing, and liquidation.
x. A certification that the lender will not be engaged primarily in financing the operations of
an Affiliate, as defined in 13 CFR §§121.103.
xi. 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.
xii. 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.
xiii. A copy of the most recent audited financial statements of the lender.
xiv. A copy of the license, if any, issued to the lender by a regulatory authority.
xv. 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.
xvi. 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:
i. Review and comment on the sufficiency of all of the requested items in the application.
ii. Comment on the qualifications of the lender, including SBA’s participation requirements in
13 CFR §§120.410; and
iii. 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.
f) Change of Ownership or Control: SBA’s prior written consent is required for any change of
ownership or control of ten percent [10%] or more of any class of an NFRL’s stock or ownership
interests. SBA’s prior written consent is also required for any proposed transaction or event that
results in Control by any entity or person(s) not previously approved by SBA. Control as defined in
Effective Date: October 1, 2014 9
SOP 50 10 5(G)
this paragraph means the possession, direct or indirect, or the power to direct or cause the direction
of the management or policies of an NFRL, whether through the ownership of voting securities, by
contract, or otherwise.
g) A new application in accordance with subparagraph 2.b) above must be submitted for SBA’s
prior written consent with respect to any change of ownership or control transaction set forth in
subparagraph 2.f) above. The lender will also have to reapply for any delegated authorities.
3. Small Business Lending Companies (“SBLCs”). 13 C.F.R. §§ 120.460 – 120.490)
A Small Business Lending Company (SBLC) is a non-depository lending institution that is SBA
licensed and is authorized by SBA to only make loans 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 for more information on SBLCs and becoming an SBA licensed SBLC.
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 greater than 12 months. A lender must execute
this agreement prior to submitting any applications for guaranty to SBA. SBA Form 750B governs
loans with a maturity of 12 months or less. If the lender intends to approve loans with a maturity of
12 months or less, 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 57 and regulations.
f) Liquidate the loan in accordance with SOP 50 57 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) SBA Loan
Program Requirements, center contacts and other information can be found at
http://www.sba.gov/for-lenders.
h) Individuals and entities suspended, debarred, revoked, or otherwise excluded under the SBA or
Government-wide debarment regulations are not permitted to conduct business with SBA, including
participating in an SBA-guaranteed loan. Lenders are responsible for consulting the System for
Awards Management’s (SAM) Excluded Parties List System (EPLS) or any successor system to
Effective Date: October 1, 2014 10
SOP 50 10 5(G)
determine if an employee or an Agent has been debarred, suspended or otherwise excluded by SBA
or other federal agency. (http://www.sam.gov.)
i) Additionally, lenders are responsible for reviewing SBA’s webpage list of Agents that have
been subject to an enforcement action or have been otherwise excluded from the privilege of
conducting business with SBA and must refrain from doing business with any Agent appearing on
the list during the time that an Agent is suspended or revoked from SBA programs. See
http://www.sba.gov/about-sba-services/18351.
2. 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.
3. 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:
i. Take any side collateral or guaranty that would secure only its own interest in a loan;
ii. 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;
iii. Require a borrower to purchase certificates of deposit;
iv. Maintain a compensating balance not under the control of the borrower;
v. Take a side loan which would have the effect of ensuring a risk-free or limited-risk
investment on the participant’s share; or
vi. Have an SBA-guaranteed loan in a “piggyback” structure.
Effective Date: October 1, 2014 11
SOP 50 10 5(G)
(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):
i. The enabling authority of the lender requires the purchase as a condition for making the
loan.
ii. 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.
iii. 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.
iv. 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.
4. 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.
a) Conflicts of Interest
i. 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)
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
Effective Date: October 1, 2014 12
SOP 50 10 5(G)
i. 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))
ii. 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))
iii. 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))
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))
5. 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.
6. 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.
Effective Date: October 1, 2014 13
SOP 50 10 5(G)
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.
i. 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.).
ii. 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-your-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 related to Risk
Effective Date: October 1, 2014 14
SOP 50 10 5(G)
Rating), 13 CFR §120.1015 (Risk Rating System), and 75 FR 9257, March 1, 2010 75 FR 13145,
March 18, 2010, and 79 FR 24053, April 29, 2014 (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:
i. SBA FIRS ID Number(s);
ii. Account user’s name and title;
iii. Account user’s mailing address, telephone number and email address at the 7(a) lender;
iv. Requesting officer’s name and title; and
v. 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 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 §13 CFR §§120.1060.
C. Off-site monitoring and on-site reviews (13 CFR §13 CFR §§120.1025 and 120.1050 - 1060).
Effective Date: October 1, 2014 15
SOP 50 10 5(G)
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) To monitor lenders between on-site reviews or examinations. Additional information regarding
on-site reviews and examinations can be found in 13 CFR §13 CFR §§120.1050-1060 and SBA’s
SOP 51 00.
2. Additionally, in accordance with 13 CFR §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 §13 CFR
§§120.1070)
a) The fees may cover:
i. The cost of conducting on-site safety and soundness examinations of an SBA Supervised
Lender (SBLCs and NFRLs);
ii. The cost of conducting an on-site review of a 7(a) lender;
iii. 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
iv. 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.
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.
i. The invoice will state the charges, the date by which payment is due and the approved
payment method(s).
ii. 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 §13
CFR §§120.1070).
D. Supervision and enforcement
Effective Date: October 1, 2014 16
SOP 50 10 5(G)
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.)
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 §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) Failure to comply materially with any requirement imposed by Loan Program Requirements
including but not limited to, lender eligibility requirements and prudent lending requirements;
b) Repeated failure to properly report on loan disbursements and status; or
c) Less Than Acceptable examination/review assessment or repeated Less Than Acceptable Risk
Rating, the latter generally in conjunction with other grounds.
2. SBA will notify the lender of a proposed suspension or revocation in accordance with 13 CFR
§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 §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 to SBA’s satisfaction 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;
i. Packages demonstrate strong knowledge of SBA forms and procedures;
ii. 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 §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. A lender’s written request to participate must include a
regulatory good standing statement; a written statement that to the best of its knowledge, the lender
has satisfactory: i) financial condition (e.g., capital and liquidity); ii) small business credit
administration policies, procedures, and practices that it continues to adhere to in its operations; and
iii) small business servicing policies, procedures, and practices that it continues to adhere to in its
operations. When reviewing good standing, SBA will look to see that a lender does not have
significant deficiencies or weaknesses in these areas. “Significance” may be evidenced by the
number or seriousness of the deficiencies, as determined by SBA in its discretion. SBA will verify
Effective Date: October 1, 2014 17
SOP 50 10 5(G)
any good standing statement where possible with public (e.g., Cease and Desist Orders and Call
Reports) and/or non-public information from the lender’s primary and/or other regulators.
b) The local SBA District Director will consider whether the lender continues to meet the
requirements of 13 CFR §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 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:
i. 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).
ii. 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.
iii. 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.
iv. 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 email subject
line.
v. SBA Processing Procedure
Effective Date: October 1, 2014 18
SOP 50 10 5(G)
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.
vi. 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 57.
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:
i. Acquisition by another entity;
ii. Merge into another legal entity;
iii. A change of name;
iv. Substantial changes in management;
v. Substantial changes in how the lender handles SBA loans; or
vi. Takeover or closure of the lender by a regulatory agency.
Effective Date: October 1, 2014 19
SOP 50 10 5(G)
If a CLP Lender continues as the same Then . . .
legal entity that signed the CLP
agreement and. . .
(1) The CLP Lender changes its name. OCRM 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 OCRM 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. OCRM
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, 2014 20
SOP 50 10 5(G)
(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.
OCRM 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 §13 CFR
§§120.1400-1600.
B. Preferred Lenders Program (PLP) (13 CFR §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 to SBA’s satisfaction that it:
i. Has disbursed at least 5 SBA loans within the past 24 months;
ii. Can effectively process, close, service and liquidate SBA loans;
iii. Is in compliance with applicable SBA Loan Program Requirements (as defined in 13 CFR
§13 CFR §§120.10);
iv. 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, 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)
v. Has been current in filing SBA required 1502 reports and in remitting required guaranty,
servicing and review fees;
vi. Is in good standing with its state/FFIR. The lender’s written request to participate must
include a written statement that to the best of its knowledge, the lender has satisfactory: i)
Effective Date: October 1, 2014 21
SOP 50 10 5(G)
financial condition (e.g., capital and liquidity); ii) small business credit administration policies,
procedures, and practices that it continues to adhere to in its operations; and iii) small business
servicing policies, procedures, and practices that it continues to adhere to in its operations.
When reviewing good standing, SBA will look to see that a lender does not have significant
deficiencies or weaknesses in these areas. “Significance” may be evidenced by the number or
seriousness of the deficiencies, as determined by SBA in its discretion. SBA will verify any
good standing statement where possible with public (e.g., Cease and Desist Orders and Call
Reports) and/or non-public information from the lender’s primary and/or other regulators.
vii. Is not subject to any SBA enforcement actions; and
viii. Has not received a major substantive objection from its Lead SBA Field Office.
b) SBA, in its discretion, also will consider other risk related or program integrity information
(e.g., rapid growth, inadequate capital, formal supervisory actions outstanding filed by the lender’s
federal or state regulator, inadequate governance and management).
3. Process to obtain PLP status
A lender must submit its request for PLP status to its local SBA office with a copy to OCRM.
For multi-state lenders, the request will go to the District where the lender is headquartered.
a) The lender’s request should include:
i. Legal name and address of lender;
ii. Legal name of any holding company of lender;
iii. Name, title, address, phone number, e-mail address and fax number for contact person at
lender for nomination process;
iv. Lender’s Lead SBA Field Office (the SBA field office serving the area in which the
lender’s headquarters is located);
v. A copy of the lender’s SBA Form 750 and SBA Form 750B, if applicable;
vi. If lender is or ever was a CLP Lender, state how long the lender has been CLP;
vii. If lender was previously a PLP Lender, an explanation of why the lender left the Preferred
Lenders Program;
viii. A description of the lender’s history, organization, and management, including:
(a) When the lender was chartered; and
(b) Any recent mergers or acquisitions;
ix. Personnel who will:
(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;
x. Where and how PLP loans will be processed, closed, serviced and liquidated;
xi. A good standing statement (as described in paragraph 2.a)(6) above).
b) Field Office’s Nomination should include the field office’s opinion of:
i. The lender’s rapport with the field office; and
ii. The lender’s commitment to SBA lending.
c) The SBA field office sends the lender’s request and the field office’s recommendation to
OCRM.
Effective Date: October 1, 2014 22
SOP 50 10 5(G)
d) OCRM’s Role: OCRM 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. OCRM performs an analysis, makes a recommendation and sends it to the appropriate
SBA official who makes a decision and notifies OCRM. OCRM then informs the lender of SBA’s
decision.
e) Upon approval, OCRM notifies the lender and the SBA field office:
i. That the nomination is approved; and
ii. 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) OCRM 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 OCRM 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) OCRM sends the appropriate field offices copies of the approval letter. OCRM will enter the
effective term of the lender’s PLP status on the PIMS. This is an essential step for lenders
processing PLP loans.
h) If a lender is approved as a PLP Lender, it will automatically be approved as a CLP Lender.
OCRM 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, OCRM 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 OCRM and must show
how it has overcome the reasons for decline. OCRM will review the request, make a
recommendation and send it to the appropriate SBA official for a final Agency decision.
OCRM will notify the lender in writing of SBA’s final decision.
4. Process for Renewal of PLP Status (13 CFR §13 CFR §§120.451(e))
a) OCRM automatically starts the renewal process just prior to the expiration of a lender’s PLP
status. OCRM 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:
i. Whether they recommend renewal;
ii. If they do not recommend renewal, why not;
iii. Whether the lender can process, close, service and liquidate SBA loans;
iv. Changes in lender’s organization or management;
v. Any recurring denial of liability or repair situations with the lender;
vi. Reasons for any unfavorable loan volume or repurchase rate data;
Effective Date: October 1, 2014 23
SOP 50 10 5(G)
vii. Identification of any areas of concern; and
viii. An explanation of any discussions with the lenders that may impact the PLP decision.
b) OCRM contacts the lender to obtain a good standing statement.
c) OCRM gathers the information relevant to a lender’s renewal. OCRM performs an analysis,
makes a recommendation and sends it to the appropriate SBA official who makes a decision and
notifies OCRM. OCRM then informs the lender of SBA’s decision.
i. For renewal of its PLP status, the lender must demonstrate to SBA’s satisfaction that it:
(a) Can effectively process, close, service, and liquidate SBA loans;
(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 state/FFIR. The lender’s written request to participate must
include a written statement that to the best of its knowledge, the lender has satisfactory: i)
financial condition (e.g., capital and liquidity); ii) small business credit administration
policies, procedures, and practices that it continues to adhere to in its operations; and iii)
small business servicing policies, procedures, and practices that it continues to adhere to in
its operations. When reviewing good standing, SBA will look to see that a lender does not
have significant deficiencies or weaknesses in these areas. “Significance” may be evidenced
by the number or seriousness of the deficiencies, as determined by SBA in its discretion.
SBA will verify any good standing statement where possible with public (e.g., Cease and
Desist Orders and Call Reports) and/or non-public information from the lender’s primary
and/or other regulators.
(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.
ii. SBA, in its discretion, also will consider other risk-related or program integrity information
(e.g., rapid growth, inadequate capital, formal supervisory actions outstanding filed by the
lender’s federal or state regulator, inadequate governance and management.).
d) Notification of Renewal
OCRM notifies the lender and Lead SBA Field Office that:
i. The renewal is approved; and
ii. The term of the renewal.
OCRM sends the lender a new SBA Form 1347 signed by OCRM on behalf of the
appropriate SBA official. The lender must sign and return the SBA Form 1347 to OCRM
before the lender’s PLP renewal is effective.
e) CLP Status for PLP Lenders
OCRM renews the lender’s CLP status to match the term of the lender’s PLP renewal. OCRM
sends the lender a new SBA Form 1186 signed by OCRM on behalf of the appropriate SBA
official. The lender must sign and return the SBA Form 1186 to OCRM before the lender’s CLP
Effective Date: October 1, 2014 24
SOP 50 10 5(G)
renewal is effective. When the signed SBA Form 1186 is received, OCRM updates PIMS to
reflect the new expiration date.
f) If Renewal is Declined
OCRM 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 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 OCRM and must show how it has overcome the reason(s) for
decline. OCRM will review the request, make a recommendation and send it to the appropriate
SBA official for a final Agency decision. OCRM 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, OCRM may
extend a lender’s PLP status for a short, interim period as determined by the D/OCRM.
h) Non-Renewal and Shortened Renewals
If SBA determines in its discretion that a lender does not meet delegated authority criteria or
increased supervision may be necessary, SBA may not grant or renew delegated authority or may
only grant a shortened renewal period. See SOP 50 53 A, Chapter 3 on Increased Supervision.
i) 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 generally wait 5 months before requesting
reinstatement and follow paragraph B.III of this section.
5. PLP-Export Working Capital Program Authority
a) This program offers the opportunity for SBA 7(a) lenders with experience making EWCP loans
or who are participants in the Delegated Authority Lender Program of the Export-Import Bank to
apply for PLPstatus to underwrite EWCP loans. Lenders with PLP-EWCP status are delegated the
same level of authority to process, close, service, and liquidate EWCP loans as is granted to
approved 7(a) lenders with PLP authority.
b) Application requests include the following elements:
i. Legal name and address of lender;
ii. Address, city and state where lender’s EWCP underwriting will be performed;
iii. Name, title, telephone and fax numbers and e-mail address of the lending unit’s primary
contact for the EWCP program;
iv. A copy of the lender’s SBA Form 750EX;
v. Identification of the USEAC offices the lending unit works through on EWCP loans;
vi. 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;
Effective Date: October 1, 2014 25
SOP 50 10 5(G)
vii. Identification of personnel in charge of EWCP lending, their experience in export trade
finance for small concerns, and
viii. 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 and the lender’s unit’s capabilities as an
EWCP participant. OIT will forward its recommendation and the comments of the other offices to
OCRM for a final decision. The lender must demonstrate to SBA’s satisfaction that it:
i. Has a satisfactory history of providing trade finance to exporters (both the lender and the
lender’s loan officers);
ii. Has the ability to develop and analyze complete loan application packages;
iii. 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 and, if not
an Ex-Im Bank delegated lender, has booked no fewer than three (3) SBA EWCP loans during
the 24 months prior to application;
iv. Is in compliance with SBA Loan Program Requirements (as defined in 13 CFR §120.10);
v. 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).
vi. Is in good standing with its state/FFIR. The lender’s written request to participate must
include a written statement that to the best of its knowledge, the lender has satisfactory: i)
financial condition (e.g., capital and liquidity); ii) small business credit administration policies,
procedures, and practices that it continues to adhere to in its operations; and iii) small business
servicing policies, procedures, and practices that it continues to adhere to in its operations.
When reviewing good standing, SBA will look to see that a lender does not have significant
deficiencies or weaknesses in these areas. “Significance” may be evidenced by the number or
seriousness of the deficiencies, as determined by SBA in its discretion. SBA will verify any
good standing statement where possible with public (e.g., Cease and Desist Orders and Call
Reports) and/or non-public information from the lender’s primary and/or other regulators.
vii. Is not subject to any SBA enforcement actions; and
viii. Has been current in filing SBA required 1502 reports and remitting required guaranty,
servicing and review fees.
ix. SBA may also consider other risk-related or program integrity information (e.g., rapid
growth, inadequate capital, formal supervisory actions outstanding filed by the lender’s federal
or state regulator, inadequate governance and management).
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
Effective Date: October 1, 2014 26
SOP 50 10 5(G)
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
lender’s PLP authority. The succeeding PLP renewal of the lender will include a section on the
lender’s EWCP lending, with comment requests from OCRM 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.
i. 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.
ii. 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);
(c) Pollution Control program; and
(d) International Trade Loans not secured by a first lien position on the assets being
financed.
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.
iii. 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).
Effective Date: October 1, 2014 27
SOP 50 10 5(G)
i. Refinancing – See Subpart B, Chapter 2 of this SOP.
ii. 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.
i. 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 ensure the franchisor’s agreement meets the SBA’s requirement that
the franchisee’s opportunity for profit and risk of loss is commensurate with ownership. SBA
makes available a list of franchise agreements (the “Registry”) that have been approved by
the SBA Franchise Committee for size/affiliation and control issues. This information is
currently available to the public at no cost at www.franchiseregistry.com. (SBA also posts a
list of approved agreements by year on SBA’s website at www.sba.gov/for-lenders.) If the
franchisor’s agreement does not appear on the Registry, the lender may review the agreement
to ensure that it meets SBA’s requirements as set forth in Subpart B, Chapter 2 of this SOP,
or the lender has the option of submitting the franchise agreement to SBA for an affiliation
determination. In such case, the documentation must be sent to
DelegatedFranchiseReviews@sba.gov. SBA will notify the lender of its determination after
completing its review. If SBA determines that the parties are not affiliated based on the
agreement and any supplemental documentation, the lender may continue to process the
application under its delegated authority. With the exception of franchise affiliation as
discussed above, 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 accept as true the size information provided
by the applicant, unless credible evidence to the contrary is apparent.
ii. 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.
iii. The Authorization
Effective Date: October 1, 2014 28
SOP 50 10 5(G)
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.
iv. Closing Requirements
(a) SBA closing requirements are the same for PLP loans as for standard 7(a) loans. The
same SBA forms are required. 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).
v. Servicing and Liquidation Responsibilities
See SOP 50 57 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 OCRM in writing:
i. The lender is acquired by another lender;
ii. The lender is merged into another legal entity;
iii. The lender changes its name;
iv. The lender substantially changes the management of its SBA business;
v. The lender substantially changes how it handles SBA loans; or
vi. A regulatory agency takes over or closes the lender.
An SBA field office that discovers any of the above circumstances also must immediately
notify OCRM in writing.
c) Requests for New SBA Guaranty Agreements
The lender may obtain:
i. A new SBA Form 750 from the SBA field office; and
ii. New SBA Forms 1186 and 1347 from OCRM.
If a PLP Lender continues as the same Then . . .
legal entity that signed the SBA Forms
1347 (PLP) and 1186 (CLP) and. . .
Effective Date: October 1, 2014 29
SOP 50 10 5(G)
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. OCRM 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 OCRM 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.
(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.
OCRM 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.
Effective Date: October 1, 2014 30
SOP 50 10 5(G)
If a PLP Lender continues as the same Then . . .
legal entity that signed the SBA Forms
1347 (PLP) and 1186 (CLP) and. . .
(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. OCRM 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
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
Effective Date: October 1, 2014 31
SOP 50 10 5(G)
Lenders can find information about how to apply for SBA Express status on SBA’s website at
www.sba.gov/for lenders.
a) Existing SBA Lenders
i. An existing SBA lender must demonstrate to SBA’s satisfaction 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);
(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 state/FFIR. The lender’s written request to
participate must include a written statement that to the best of its knowledge, the lender has
satisfactory: i) financial condition (e.g., capital and liquidity); ii) small business credit
administration policies, procedures, and practices that it continues to adhere to in its
operations; and iii) small business servicing policies, procedures, and practices that it
continues to adhere to in its operations. When reviewing good standing, SBA will look to see
that a lender does not have significant deficiencies or weaknesses in these areas.
“Significance” may be evidenced by the number or seriousness of the deficiencies, as
determined by SBA in its discretion. SBA will verify any good standing statement where
possible with public (e.g., Cease and Desist Orders and Call Reports) and/or non-public
information from the lender’s primary and/or other regulators.
(f) Is not subject to any SBA enforcement actions; and
(g) Has not received a major substantive objection from its Lead SBA Field Office.
ii. SBA, in its discretion, also will consider other risk related or program integrity information
(e.g., rapid growth, inadequate capital, formal supervisory actions outstanding filed by the
lender’s federal or state regulator, inadequate governance and management).
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
to SBA’s satisfaction that it:
i. Is in good standing with its state/FFIR. The lender’s written request to participate must
include a written statement that to the best of its knowledge, the lender has satisfactory: i)
financial condition (e.g., capital and liquidity); ii) small business credit administration policies,
Effective Date: October 1, 2014 32
SOP 50 10 5(G)
procedures, and practices that it continues to adhere to in its operations; and iii) small business
servicing policies, procedures, and practices that it continues to adhere to in its operations.
When reviewing good standing, SBA will look to see that a lender does not have significant
deficiencies or weaknesses in these areas. “Significance” may be evidenced by the number or
seriousness of the deficiencies, as determined by SBA in its discretion. SBA will verify any
good standing statement where possible with public (e.g., Cease and Desist Orders and Call
Reports) and/or non-public information from the lender’s primary and/or other regulators.
ii. Has at least 20 commercial or business loans for $350,000 or less at their most recent fiscal
year end;
iii. 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
iv. Has no major substantive objections from the D/OCRM (e.g., relating to risk or program
integrity).
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 OCRM. 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 OCRM. When an SBA field office nominates a lender for PLP status, it also may
nominate the lender for SBA Express status.
d) OCRM gathers the information relevant to a lender’s participation request. OCRM performs an
analysis, makes a recommendation and sends it to the appropriate SBA official who makes a
decision and notifies OCRM. OCRM 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, OCRM notifies the lender of the
decision and sends the lender an SBA Express Supplemental Loan Guaranty Agreement to sign
and return. OCRM also sends the lender instructions for submitting SBA Express applications.
b) The lender must sign and return the agreement to OCRM 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
Effective Date: October 1, 2014 33
SOP 50 10 5(G)
If SBA declines a request for nomination for SBA Express status, OCRM 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 OCRM and must show how it has overcome the reason(s) for decline. OCRM will
review the request, make a recommendation and send it to the appropriate SBA official for a final
Agency decision. OCRM will notify the lender in writing of SBA’s final decision.
6. Renewals of SBA Express Status
a) OCRM will automatically start the renewal process a few months prior to the expiration of a
lender’s SBA Express status. OCRM contacts the lender to obtain a good standing statement (as
described in paragraph 2 above).
b) OCRM 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:
i. Whether they recommend renewal;
ii. If they do not recommend renewal, why not;
iii. Whether the lender can effectively process, close, service and liquidate SBA loans;
iv. Changes in lender’s organization or management;
v. Any recurring denial of liability or repair situations with the lender;
vi. Reasons for any unfavorable loan volume or repurchase rate data;
vii. Identification of any areas of concern; and
viii. An explanation of any discussions with the lenders that may impact the SBA Express
decision.
c) OCRM gathers the information relevant to a lender’s renewal. OCRM performs an analysis,
makes a recommendation and sends it to the appropriate SBA official who makes a decision and
notifies OCRM. OCRM 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:
i. The lender must demonstrate to SBA’s satisfaction 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);
(d) Has been current in filing SBA required 1502 reports and in remitting required guaranty,
servicing and review fees;
Effective Date: October 1, 2014 34
SOP 50 10 5(G)
(e) Is in good standing with its state/FFIR. The lender’s written request to participate must
include a written statement that to the best of its knowledge, the lender has satisfactory: i)
financial condition (e.g., capital and liquidity); ii) small business credit administration
policies, procedures, and practices that it continues to adhere to in its operations; and iii)
small business servicing policies, procedures, and practices that it continues to adhere to in
its operations. When reviewing good standing, SBA will look to see that a lender does not
have significant deficiencies or weaknesses in these areas. “Significance” may be evidenced
by the number or seriousness of the deficiencies, as determined by SBA in its discretion.
SBA will verify any good standing statement where possible with public (e.g., Cease and
Desist Orders and Call Reports) and/or non-public information from the lender’s primary
and/or other regulators.
(f) Is not subject to any SBA enforcement actions; and
(g) Has not received substantive objections from its Lead SBA Office.
ii. SBA, in its discretion, also will consider other risk related or program integrity information
(e.g., rapid growth, inadequate capital, formal supervisory actions outstanding filed by the
lender’s federal or state regulator, inadequate governance and management).
f) OCRM notifies the lender of SBA’s decision and, if the renewal is approved, OCRM 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 OCRM and
must show how it has overcome the reason(s) for denial. OCRM will review the request, make a
recommendation and send it to the appropriate SBA official for a final Agency decision. OCRM
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.
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.
i. Lenders may not use SBA Express for any pilot program unless SBA authorizes use of
SBA Express for the pilot.
ii. 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
Effective Date: October 1, 2014 35
SOP 50 10 5(G)
(d) CAPLines program.
iii. 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.
iv. 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 LGPC Director may waive this prohibition if the application was preliminary
or incomplete when previously submitted or it has changed materially since the previous
submission. . In addition, an application previously submitted under 7(a) Small Loan
procedures that did not receive an acceptable credit score may be submitted under SBA
Express. See Subpart B, Chapters 4 and 6 of this SOP.
d) SBA Express Lender’s Processing Responsibilities
i. 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 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 ensure the agreement meets
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 LGPC 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.
ii. 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
Effective Date: October 1, 2014 36
SOP 50 10 5(G)
credit analysis processes and procedures (which may include credit scoring), and these
procedures must 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. SBLCs are required to provide credit scoring model validation to SBA on
an annual basis. 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.
(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. While the credit
decision is left to the business judgment of the lender, early loan defaults will be reviewed by
SBA pursuant to SOP 50-57.
iii. 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.
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.
10. Suspension or revocation
See Paragraph III.E of this Chapter for further information on suspension and revocation.
D. 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
Effective Date: October 1, 2014 37
SOP 50 10 5(G)
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 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) Lenders must have a signed Export Express Supplemental Guaranty Agreement to make Export
Express loans.
b) The procedures for receiving Export Express authority are different based on the lender’s
existing authority:
i. 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 OCRM, at 7aDeleAuthNomination@sba.gov. OCRM 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 OCRM.
ii. 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 OCRM. OCRM 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. OCRM will send the
lender the Export Express Supplemental Guaranty Agreement and the lender will have 30 days
to executed and return the Agreement to OCRM.
c) To retain or renew Export Express authority, SBA Express lenders must:
i. Effectively process, make, close, service, and liquidate Export Express loans;
ii. Remain in substantial compliance with applicable SBA Loan Program Requirements;
iii. 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
iv. 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 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.
Effective Date: October 1, 2014 38
SOP 50 10 5(G)
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.
Effective Date: October 1, 2014 39
SOP 50 10 5(G)
CHAPTER 2: SMALL BUSINESS LENDING COMPANIES
I. A SMALL BUSINESS LENDING COMPANY (“SBLC”) IS: 13 CFR §120.460-120.490
A. Licensed and authorized by the Administrator to only make loans pursuant to section 7(a) of the
Small Business Act;
B. Regulated, supervised and examined solely by SBA;
C. Subject to additional SBA regulations specific to SBLCs regarding the formation, capitalization, and
enforcement actions;
D. Subject to all other 7(a) regulations specific to loan processing, servicing and liquidation; and
E. As required of all Lender Participants, SBLCs must analyze each application in a commercially
reasonable manner, consistent with prudent lending standards
F. SBLCs are required to:
1. Submit to the D/OCRM for review and approval a credit policy that demonstrates the SBLC’s
compliance with Title 13 of the CFR and SBA’s Standard Operating Procedures (SOPs) for
origination, servicing and liquidation of 7(a) loans.
2. Submit to the D/OCRM for review and approval annual validation, with supporting
documentation and methodologies demonstrating that any scoring model used by the SBLC is
predictive of loan performance.
3. Each SBLC’s board of directors must adopt and fully implement an internal control policy
which provides adequate direction to the institution for effective control over and accountability for
operations, programs, and resources. The board adopted internal control policy must, at a
minimum, comply with 13 CFR §120.460. For example:
a) The internal control policy implemented must ensure satisfactory monitoring and management
of the SBA loan portfolio, including but not limited to, providing for a periodic loan review
function to be performed at least annually by a person that is not directly or indirectly responsible
for loan making or by outside contractors.
b) It must include a list of monthly reports provided by the SBLC’s management for Board review
to support adequate Board oversight.
c) It must provide for internal controls for loan making, servicing and liquidation.
d) It must provide for a risk rating system to risk classify SBA loan assets satisfactory to SBA.
e) Internal control policies and procedures must include provisions to ensure compliance with
SBA’s Loan Program Requirements on eligibility.
f) SBLCs must provide documentation demonstrating that the internal control policies and
procedures are fully implemented and followed.
G. In accordance with Paragraphs A through F above, SBLCs must adhere to their internal
policies and procedures, including credit policies, as approved by SBA for originating, closing,
servicing, and when necessary liquidating SBA loans. When this SOP states that lenders are to
follow their own policies and procedures on their similarly-sized, non-SBA guaranteed loans,
SBLCs must follow the policies and procedures that have been reviewed and approved by SBA.
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.
Effective Date: October 1, 2014 40
SOP 50 10 5(G)
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.
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. 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.
Effective Date: October 1, 2014 41
SOP 50 10 5(G)
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.
F. SBA’s prior written consent is required for any proposed transaction or event that results in Control
by any entity or person(s) not previously approved by SBA. Control as defined in this paragraph means
the possession, direct or indirect, or the power to direct or cause the direction of the management or
policies of an SBLC, whether through the ownership of voting securities, by contract, or otherwise.
G. A new application in accordance with IID above must be submitted for SBA’s prior written consent
with respect to any change of ownership or control transaction as specified in 13 C.F.R. § 120.475.
Note: Lender participation in specific SBA programs such as PLP and SBA Express will be considered
separately.
Effective Date: October 1, 2014 42
SOP 50 10 5(G)
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.
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.
Effective Date: October 1, 2014 43
SOP 50 10 5(G)
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;
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:
i. 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
Effective Date: October 1, 2014 44
SOP 50 10 5(G)
ii. 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). The District Office receives the contract
request, reviews the contract, and sends its recommendation to the 504 Program Office in
Headquarters. The 504 Program Office reviews the contract and provides its recommendation to
the D/FA, who makes the final decision.
e) The professional services contract must:
i. Demonstrate that the CDC is not a shell for another entity as a result of the contract;
ii. Not diminish the responsibility of the Board of Directors for the operations of the CDC;
iii. 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;
iv. State that no contractor or associate of the contractor may be a voting or non-voting
member of the CDC’s Board of Director;
v. 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;
(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;
vi. 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;
vii. State the term of the contract and cannot be open-ended;
Effective Date: October 1, 2014 45
SOP 50 10 5(G)
viii. 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;
ix. 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:
i. That the contract is in compliance with 13 CFR §120.824 and 120.825 and SBA Loan
Program Requirements;
ii. Of understanding that the contract is subject to pre-approval and yearly review by SBA;
and
iii. 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. For example:
i. A CDC must have financial statements evidencing that it maintains adequate capital.
ii. A CDC should exhibit positive net cash flow trends.
iii. A CDC must maintain sufficient loan loss reserves, if required.
iv. A CDC must be solvent.
(a) A CDC must have assets in excess of liabilities.
(b) A CDC must be able to pay its debts when they become due.
v. A CDC must not have received a going concern opinion from its auditor.
vi. Other factors as determined by SBA.
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) Each CDC’s board of directors must adopt and fully implement an internal control policy which
provides adequate direction to the institution for effective control over and accountability for
operations, programs, and resources. The board adopted internal control policy must, at a
minimum, comply with 13 CFR §120.826(b). For example:
i. The internal control policy implemented must ensure satisfactory monitoring and
management of the SBA loan portfolio, including but not limited to, providing for a periodic
loan review function to be performed at least annually by a person that is not directly or
indirectly responsible for loan making or by outside contractors.
ii. It must include a list of monthly reports provided by the CDC’s management for Board
review to support adequate Board oversight.
iii. It must provide for internal controls for loan making, servicing and liquidation.
Effective Date: October 1, 2014 46
SOP 50 10 5(G)
iv. It must provide for a risk rating system to risk classify SBA loan assets satisfactory to SBA.
v. Internal control policies and procedures must include provisions to ensure compliance with
SBA’s Loan Program Requirements on eligibility.
vi. CDCs must provide documentation demonstrating that the internal control policies and
procedures are fully implemented and followed.
b) This includes timely 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.
c) 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.
d) 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.
e) 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
i. 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))
ii. 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))
Effective Date: October 1, 2014 47
SOP 50 10 5(G)
iii. 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:
i. A separately listed telephone number; and
ii. 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:
i. 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.
ii. General correspondence must be kept for 1 year. Case-specific correspondence should be
filed in the case file.
iii. 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.
Effective Date: October 1, 2014 48
SOP 50 10 5(G)
iv. 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 signed
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.
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
Effective Date: October 1, 2014 49
SOP 50 10 5(G)
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.
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. CDCs must also comply with all of the requirements prescribed
in 13 C.F.R. §§ 120.810 – 120.830. The applicant must demonstrate that it satisfies the CDC
certification and operational requirements in §§ 120.820, and 120.822 through 120.824. The
applicant also must include an operating budget, approved by the applicant’s Board of Directors,
which demonstrates the required financial ability (as described in § 120.825), and a plan to meet
CDC operational requirements in §§ 120.821, and 120.826 through 120.830. 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 or Electronic Fingerprint Submissions).
“Electronic Fingerprint Submission” means a digital reader and fingerprint scanning system
which either prints out a document with scanned fingerprints or submits digital fingerprint scans.
Electronic scanned fingerprint technology may be used where locally available through law
enforcement offices. If this technology is not available locally, paper and ink fingerprint cards may
be used.)(Electronic Fingerprint Submission as defined in Subpart B, Chapter 2 Paragraph III.);
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 or Electronic Fingerprint Submissions);
6. Certificate of Incorporation;
7. Articles of Incorporation;
8. By-Laws, which must include the regulatory requirements regarding Membership and the
Board of Directors;
Effective Date: October 1, 2014 50
SOP 50 10 5(G)
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 or Electronic Fingerprint Submissions 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 or Electronic Fingerprint Submission
have been forwarded to OIG; and
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.
Effective Date: October 1, 2014 51
SOP 50 10 5(G)
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):
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:
i. $100,000,000 or more
ii. $30,000,000 - $99,999,999
iii. $10,000,000 - $29,999,999
iv. $5,000,000 - $9,999,999
v. $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, 75 FR 13145, March 18, 2010,
and 79 FR 24053, April 29, 2014 (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. Submission of initial requests for a Portal user account
must be submitted to SBA’s OCRM, and must include the following information:
Effective Date: October 1, 2014 52
SOP 50 10 5(G)
i. Request must be made by a senior officer of the CDC with proper authority (Senior Vice
President or higher);
ii. 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;
iii. Request must be made using the CDC’s stationery;
iv. Request must include the user’s business card;
v. The stationery and business card should include the CDC’s name and address;
vi. 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.
vii. 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.
viii. 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.
a) For CDCs with $30 million or more in SBA dollars outstanding L/LMS details historical and
projected performance data:
i. For use in planning and conducting on-site reviews or examinations;
ii. To assist in prioritizing on-site reviews or examinations, and
iii. 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.
Effective Date: October 1, 2014 53
SOP 50 10 5(G)
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. (For further guidance on Lender Supervision and Enforcement,
see SOP 50 53.)
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 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:
i. Participate in the 504 program or any pilot or other program within the 504 program; or
ii. 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)) including all pending 504 loan applications and all rights associated with the
foregoing including any and all processing, closing, servicing and other fees associated with the
portfolio due and payable to the CDC going forward;
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:
i. Identifying the proposed action;
ii. Outlining the reasons for the action; and
iii. Stating the term and scope of the any suspension proposed.
b) For immediate suspension, the written notice will contain the:
i. Reasons for the action; and, if from a third party, the
Effective Date: October 1, 2014 54
SOP 50 10 5(G)
(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.
ii. 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:
i. 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
ii. 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.
f) SBA, in its discretion, may:
i. Seek additional information; or
ii. 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.
g) 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:
i. Quality and completeness of the CDC’s loan packages;
ii. CDC’s credit analysis abilities as well as knowledge of SBA’s policies and procedures;
iii. CDC’s capability and performance related to loan closing; and
iv. CDC’s servicing capability and performance (include comments from the appropriate
servicing center(s)).
Effective Date: October 1, 2014 55
SOP 50 10 5(G)
v. 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:
(c) Copies of the documents for the merger filed with the state;
(d) Any executed amendments to the Articles of Incorporation and By-Laws; and
(e) Revised list of the Members of the CDC and Board of Directors, along with the
corresponding Minutes of the meetings for the Members and Board Resolution reflecting the
approval of the changes.
h) 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. If the
Board of Director is no longer functioning, a responsible management official may
execute a Voluntary Withdrawal Agreement which includes a certification as to Board
status.
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:
i. Quality and completeness of loan packages;
ii. Credit analysis abilities as well as knowledge of SBA’s policies and procedures;
iii. Capability and performance related to loan closing; and
iv. 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.
Effective Date: October 1, 2014 56
SOP 50 10 5(G)
e) A CDC that has completed a voluntary decertification may not apply to re-certify the
CDC or apply for certification as a new CDC in the future.
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.
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:
i. An endorsement covering CDC committees and staff engaged in the closing process;
ii. Limits of at least $1,000,000/$1,000,000;
iii. A deductible not more than $10,000; and
iv. A declaration that SBA will receive at least 20 days prior notice of any lapse of coverage,
failure to renew, or cancellation.
v. The CDC must submit to SBA annually a certificate from its insurance carrier confirming
this coverage.
2. Application Process
a) Application by the CDC
i. 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, 2014 57
SOP 50 10 5(G)
ii. 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
i. 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.
ii. 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:
i. With limits of at least $1,000,000/$1,000,000; and
ii. 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.
iii. 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.
iv. 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 a 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
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:
i. A submission on the attorney’s letterhead addressing each of the conditions in the previous
paragraph;
ii. 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
Effective Date: October 1, 2014 58
SOP 50 10 5(G)
(c) Name of the attorney insured.
iii. 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
i. 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.
ii. 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.
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)
Effective Date: October 1, 2014 59
SOP 50 10 5(G)
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:
i. CDC staff experience;
ii. Number of 504 loans approved and size of portfolio;
iii. 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);
iv. Record of compliance with SBA Loan Program Requirements;
v. Priority CDC status; and
vi. 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:
i. 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.
ii. Evidence that the CDC is in compliance with 13CFR 120.840 & 120.841;
iii. 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);
iv. 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;
v. Verification that the CDC’s employees are either hired directly by the CDC or are under a
contract that has been approved by SBA;
Effective Date: October 1, 2014 60
SOP 50 10 5(G)
vi. A copy of the contract and the Board of Directors (BOD) resolution must be provided (if
applicable);
vii. Verification that the CDC is in compliance with 13 CFR §120.824, 120.825 and 120.826 ;
viii. 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;
ix. 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
x. Current list of the CDC’s Membership, Board of Directors, staff and any committees.
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 periods of up to two years.
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:
i. Is in compliance with its Loan Loss Reserve Fund (LLRF) requirements;
ii. Has established a PCLP processing goal of 50%; and
iii. Has a demonstrated ability to process, close, service and liquidate 504 and/or PCLP loans;
and
Effective Date: October 1, 2014 61
SOP 50 10 5(G)
iv. 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).
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.1 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.
1
For PCLP debentures issued while a PCLP CDC elected to participate in the Alternative Loan Loss Reserve Pilot Program (ALLR)
authorized under Section 508(c)(7) of the Small Business Investment Act of 1958, the PLCP CDC is required to reimburse SBA for 15
percent of any loss sustained by SBA as a result of a default in the payment of principal or interest on those PCLP debentures. The
statutory authority for the ALLR lapsed on July 31, 2011. As a result of the statutory lapse, PCLP CDCs that had elected to
participate in the ALLR are now required to maintain a Loan Loss Reserve Fund in an amount sufficient to meet the Standard Loan
Loss Reserve Requirement set forth in 13 C.F.R. § 120.847(b), which is one percent of the original principal amount of the PCLP
Debenture for the life of the loan.
Effective Date: October 1, 2014 62
SOP 50 10 5(G)
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 averse 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 a PCLP-CDC’s designation
A PCLP CDC requesting renewal of its PCLP CDC designation must submit the required
information and documentation to the CDC’s Lead SBA office. The required information and
documentation should be submitted at least 120 days prior to expiration of the CDC’s PCLP
status to ensure sufficient processing time. After receipt of the required information and
documentation, the CDC’s Lead SBA office will ask for comments from SBA’s processing,
servicing and liquidation centers, and will forward all of the information, documentation and
comments to OCRM for SBA’s review. SBA’s review will address all of the requirements
found at 13 CFR §120.846 and the items noted in paragraph 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
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
Effective Date: October 1, 2014 63
SOP 50 10 5(G)
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.
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
Effective Date: October 1, 2014 64
SOP 50 10 5(G)
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). A CDC may submit its LEA request in combination with its Annual Report or in
combination with an initial or renewal ALP application in order to avoid duplication.
i. 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).
ii. 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.
iii. 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 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.
iv. 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 or the
Electronic Fingerprint submission. 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.
Effective Date: October 1, 2014 65
SOP 50 10 5(G)
(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.
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:
i. Comments on whether the CDC is in compliance with SBA’s regulations and policies;
ii. Comments on whether the Lead SBA Office agrees that the areas requested meet the
definition of a Local Economic Area;
iii. 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;
iv. Comments on the CDC’s ability to manage an increase in loan servicing activity resulting
from the expansion; and
v. 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.
vi. 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.
C. Multi-State Expansion 13 CFR §120.835
Effective Date: October 1, 2014 66
SOP 50 10 5(G)
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. For states or territories not directly
connected to the 48 contiguous states, the following are deemed to be contiguous: Alaska and
Washington; Hawaii, Guam, American Samoa, and the Commonwealth of the Northern Marianas
Islands, and California; Puerto Rico and the U.S. Virgin Islands and Florida.
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
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:
i. The CDC’s portfolio performance passes 4 of the 5 the SBA established risk benchmarks.
ii. All statuses are current or in compliance;
iii. There are no loans listed under the “Loans 90 or More Days Past Due” category;
Effective Date: October 1, 2014 67
SOP 50 10 5(G)
iv. There are no loans listed under “Loans in Catch-Up That Missed At Least 3 Consecutive
Payments.”
v. 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.
vi. 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 and risk-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:
i. 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.
ii. The CDC’s compliance with SBA's regulations, policies, and performance benchmarks,
including the timely submission of all annual reports.
iii. Compliance of any new contracts with SBA regulations [13 CFR §120.824].
iv. Comments from other field offices that have dealings with the applicant, including
Servicing Centers.
v. 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
Effective Date: October 1, 2014 68
SOP 50 10 5(G)
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, 2014 69
SOP 50 10 5(G) Subpart B
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. For Export Working Capital Program
(EWCP) and International Trade (ITL) loans, an exception to policy may be approved by the Director,
International Trade Finance (D/ITF). For Export Express loans, an exception to policy may be approved by the
D/ITF with the concurrence of the Director, Office of Credit Risk Management (D/OCRM). The D/FA or
D/ITF 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 D/ITF, as applicable or an individual acting in that
capacity, who will make the final decision (with the concurrence of the D/OCRM for Export Express
loans). The decision must be documented in the appropriate Agency loan 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.
Effective Date: October 1, 2014 70
SOP 50 10 5(G) Subpart B
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
The Agency guarantees 7(a) Program Loans through various methods including:
1. Standard 7(a) Guaranty
a) “7(a)Small Loans” up to and including $350,000 (Formerly “SLA”)
b) Loans over $350,000 to $5,000,000
2. Certified Lenders Program (CLP)
a) “7(a) Small Loans” up to and including $350,000 (Formerly “SLA”)
b) Loans over $350,000 to $5,000,000
3. Preferred Lenders Program (PLP)
a) “7(a) small Loans” up to and including $350,000 (Formerly “SLA")
b) Loans over $350,000 to $5,000,000
4. SBA Express (delegated)
5. Export Express (delegated)
6. Community Advantage (Pilot Program)
a) Loans up to and including $250,000 (covered by a separate Community Advantage Participant
Guide)
II. USE OF LOAN PROCEEDS
SBA loan proceeds may be used to finance any of the following:
A. Permanent working capital;
B. Revolving working capital;
C. Furniture and fixtures;
D. Machinery and equipment;
E. Purchase of land and building including construction and renovations;
F. Business Acquisition; and
G. Refinancing of existing debt
Effective Date: October 1, 2014 71
SOP 50 10 5(G) Subpart B
III. 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/content/caip. This listing is updated several times a year.
3. Debt Refinancing and Change of Ownership 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:
i. Converting short-term debt (i.e., debt with a remaining term of 24 months or
less) to long-term debt;
ii. Converting interim debt (i.e., a bridge loan) to long-term debt;
iii. Converting line of credit or revolving credit debt to long-term debt;
iv. 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;
v. Bringing trade payables to a current status or buying out a factor; and
c) A change of ownership (e.g., acquisition, merger or consolidation) that is
essential to sustain the existence of the business is not subject to the limitation.
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.)
Effective Date: October 1, 2014 72
SOP 50 10 5(G) 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
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.
IV. 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, 2014 73
SOP 50 10 5(G) Subpart B
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.
An Eligibility Checklist is included in the lender application (SBA Form 1920 SX, Part
C) to identify eligibility issues.
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 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;
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, 2014 74
SOP 50 10 5(G) Subpart B
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;
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)
Effective Date: October 1, 2014 75
SOP 50 10 5(G) Subpart B
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 including any affiliates must meet the
following:
a) The maximum tangible net worth of the applicant and its affiliates 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 and its affiliates 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.
c) For applications processed under a lender’s delegated authority (PLP, SBA
Express, Export Express, ), 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
Effective Date: October 1, 2014 76
SOP 50 10 5(G) Subpart B
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 affiliation), jobber or similar
agreements. All such franchise, license, dealer, jobber or similar agreements
are referred to in this section as “franchise agreements” and the two parties to
any such agreement are referred to as “franchisor” and “franchisee.”
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; therefore, lender must consider all other size,
eligibility and underwriting requirements specific to a respective loan
applicant/application in accordance with this SOP.
Applicants who operate or propose to operate under franchise development
agreements (often referred to as Master Franchise Agreements) are ineligible as
such agreements 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.
Applicants who operate or propose to operate under an agreement containing
area development rights, which allow a specific franchisee to operate a number
of franchises within a specified geographic area, may be eligible if it complies
with the guidance in this section.
a) Affiliation can exist through:
i. Common ownership,
ii. Common management,
iii. Excessive restrictions upon the sale/transfer of the franchise interest, or
Effective Date: October 1, 2014 77
SOP 50 10 5(G) Subpart B
iv. Control by a franchisor either directly or through an affiliated entity or agent
such that the franchisee does not have the independent right to profit from its
efforts and bear the risk of loss commensurate with ownership. (13 CFR
§121.103 (i))
b) Review of Franchise Agreements and Related Documents
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 and such relationship (or product, service or trademark
covered by such relationship) is critical to the Small Business Applicant’s
business operation. In such case, the agreement governing the relationship
(or product, service or trademark), and any related documents must be
reviewed.
c) Review and determination must be conducted by:
i. SBA--for all loans processed through the LGPC, including CLP.
ii. Lender--for PLP, SBA Express, or any other delegated processing method,
except that delegated lenders also have the option of submitting franchise
agreement documentation to SBA for an affiliation determination. In such case,
the documentation must be sent to DelegatedFranchiseReviews@sba.gov. SBA
will notify the lender of its determination after completing its review. If SBA
determines that the parties are not affiliated based on the agreement and any
supplemental documentation, the lender may continue to process the application
under its delegated authority.
iii. In all cases, the franchise agreement, including any amendments and/or
addendums must be executed by all parties prior to first disbursement. If the
application is submitted to the LGPC for processing, the lender must also
submit a certification signed by the franchisor that it will provide the franchisee
with any approved SBA addendum which, upon execution by the franchisee,
will supplement the Franchise Documents and be binding on the franchisor. If
lender disburses the proceeds without obtaining the necessary executed
franchise documents, including any amendments and/or addendums, SBA may
deny liability on its guaranty.
d) Registry of approved franchise agreements
i. To facilitate the review of these agreements, SBA makes available a list of
franchise agreements (the “Registry”) that have been approved by the SBA
Franchise Committee for size/affiliation and control issues. This information is
currently available to the public at no cost at www.franchiseregistry.com. (SBA
also posts a list of approved agreements by year on SBA’s website at
www.sba.gov/for-lenders.) Lender must ensure that they have the correct date of
the agreement that the applicant/franchisee is operating under in order to access
the correct Registry documents. If lender is unable to determine the date from
the documents, it should contact the franchisor directly. SBA will accept the
executed Certification of Franchise Documents (available on the Registry
website) matching the correct year of the agreement as conclusive evidence that
Effective Date: October 1, 2014 78
SOP 50 10 5(G) Subpart B
the franchisee is not affiliated with the franchisor based upon the agreement.
(Affiliation may nevertheless exist based on other factors.)
ii. In order to rely on the Registry for its determination, the lender’s loan file
must include the following:
(a) Executed franchise agreement and any approved attachments and exhibits;
(b) Executed Addendum (if required);
(c) Executed Certification of Franchise Documents; and
(d) Compliance with any required eligibility notes.
e) Process if Not Listed on Registry or Lender is Not Using the Registry
If the franchise agreement is not listed on the Registry or the lender
chooses not to use the Registry, a review must be made of the agreement
and all related documents.
i. Franchise Findings
(a) Lenders should consult the SBA Franchise Findings List at
http://www.sba.gov/content/franchise-findings to see if there have been
any findings for a particular franchise agreement, which if still in the
agreement, would result in a determination of affiliation. The information
provided by the SBA Franchise Findings List should be used by Lenders
to ensure they are making informed affiliation determinations. Lenders
should consult the “fix available” category on the findings list to see if
there is a fix to remedy the specific issues noted on the findings list.
(b) If a franchise agreement has no negotiated fix available and the
noted findings remain in the agreement, then the agreement should be
determined to result in affiliation.
(c) Lenders may contact SBA counsel in the District Office or the
SBA Chief Franchise Counsel for specific questions regarding franchise
affiliation determinations.
(d) Franchisors may contact the SBA Chief Franchise Counsel at
franchiseappeals@sba.gov for questions regarding the franchise registry
approval process.
ii. Affiliation Issues to Consider if Reviewing a Franchise Agreement that is
Not Listed on the Registry or if the Lender is Not Using the Registry.
The following are examples of common situations that should be
examined to determine if affiliation exists.
(a) Control
Any of the following provisions are considered conclusive
evidence of control:
Effective Date: October 1, 2014 79
SOP 50 10 5(G) Subpart B
1. Including a transfer provision that requires a
franchisor’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
substitute;
2. Setting the Applicant’s net profit;
3. Requiring the payment of excessive franchise
continuing fees;
4. Directly controlling the applicant’s employees
including hiring or terminating.
a. Short term step-in agreements for 90-120 days
are acceptable, provided the period of control by
the franchisor does not exceed 365 days in the
aggregate over the term of the agreement;
b. In the temporary personnel industry, temporary
employees paid by the franchisor are acceptable
as long as the franchisee makes all employment
determinations.
5. Requiring that the billing activities, deposit receipts or
revenues for the applicant be handled by the franchisor
or a Third Party chosen by the franchisor (Exception:
automatic debits from a franchisee account are
acceptable);
6. Including an option to purchase the applicant’s personal
property upon expiration or breach of the agreement,
where the franchisor has the ability to control the price
at the time of purchase (Exception: right of first refusal
is allowed provided it is on commercially reasonable
terms);
7. Requiring the franchisee (or EPC owner, if applicable)
to sell the real property to the franchisor upon
expiration, breach or termination of the agreement.
(This type of provision may be found in the agreement
itself or recorded against the real estate as a purchase
option.) Exception: The franchisor may, however,
require a lease of the property upon termination for a
period up to the remaining term of the original
franchise agreement; or
8. Including a Right of First Refusal on a partial transfer
of ownership between existing owners of a franchise
entity or their close relatives.
Effective Date: October 1, 2014 80
SOP 50 10 5(G) Subpart B
(b) Insurance Industry
SBA’s Office of Hearings and Appeals has determined that, in
the insurance industry, it does not create affiliation for the
franchisor to own the Insurance Policies as well as receive the
payments on the policy.
(c) Fitness Industry
Fitness centers that target one gender are not ineligible if they permit both
men and women to join and/or use the facility. Lenders must document the
file with the following:
i. Affidavit signed by the Small Business Applicant
that both men and women are allowed to join and/or use
the facility; and
ii. Evidence that the facility is open to both men and
women, such as two single-sex bathrooms or locker
rooms, brochures/flyers stating that both men and
women are welcome, or actual membership
demographics.
(d) 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
Effective Date: October 1, 2014 81
SOP 50 10 5(G) Subpart B
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
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
Effective Date: October 1, 2014 82
SOP 50 10 5(G) Subpart B
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 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.
Effective Date: October 1, 2014 83
SOP 50 10 5(G) Subpart B
f) Questions on SBA’s Franchise Policy, Requests for Reconsideration and Appeals
i. Questions on SBA’s Franchise Policy should be directed to local field
counsel, center counsel, SBA Chief Franchise Counsel.
ii. Lenders that believe SBA’s franchise decision 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. For
purposes of franchise appeals, the D/FA or designee will be an ex officio
member of the SBA Franchise Committee. The Associate General Counsel for
Financial Law & Lender Oversight will retain the authority to overrule
decisions rendered by the SBA Franchise Committee.
iii. Franchisors that would like to appeal SBA’s decision not to place them on
the Registry may do so following the procedures set forth in subparagraph (2)
immediately above.
iv. Certain issues involving businesses that may be engaged in promoting
religion or that may have activities of a prurient nature may be referred to the
Associate General Counsel for Litigation for a decision.
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 has the ability to obtain some or all of the requested
loan funds on reasonable terms from non-Federal Federal sources without SBA
assistance. (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 the entire loan is not available from any of the following sources:
i. Non-Federal sources; or
ii. The resources of the applicant business.
If some or the entire 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 their loan 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:
Effective Date: October 1, 2014 84
SOP 50 10 5(G) Subpart B
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.
6. The lender must certify that credit is not otherwise available by signing the
Lender Official block on the appropriate application form.
7. 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.
8. SBA or the lender may require additional capitalization. (See Chapter 4 on
equity injection).
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))
i. SBA cannot guarantee a loan that provides funds to businesses primarily
engaged in lending or investment, or to an otherwise eligible business for the
Effective Date: October 1, 2014 85
SOP 50 10 5(G) Subpart B
purpose of financing investment not related or essential to the business. This
prohibits loans to:
(a) Banks;
(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.
ii. 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.
(e) A business engaged in providing the services of a financial advisor on a
fee basis is eligible provided they do not use funds to invest in their own
portfolio of investments.
c) Passive Businesses (13 CFR §120.110 (c))
i. 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.
ii. Businesses primarily engaged in subdividing real property into lots and
developing it for resale on its own account are not eligible.
iii. 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.
iv. 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
Effective Date: October 1, 2014 86
SOP 50 10 5(G) Subpart B
50% of the business’s revenue will be derived from transients who stay for 30
days or less at a time.
v. Residential facilities that are licensed as nursing homes or assisted living
facilities are eligible.
vi. 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.)
vii. 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. (See subparagraphs i and iii
above regarding ineligibility of developers and landlords.)
viii. 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))
i. Life insurance companies are not eligible.
ii. 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))
i. Businesses are not eligible if the business is:
Effective Date: October 1, 2014 87
SOP 50 10 5(G) Subpart B
(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.
ii. 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.
iii. 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.
iv. Businesses involved in international trade are subject to U.S. trade
restrictions.
v. 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))
i. Small businesses that obtain more than one-third of their annual gross
revenue for the prior year, including rental income, from legal gambling
activities are not eligible.
ii. Small businesses are eligible if they obtain one-third or less of their annual
gross revenue, 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.
(c) If the purpose of the business is gambling, such as a pari-mutual betting
racetrack or a gambling casino, it is not eligible, regardless of the percentage
of gross revenue derived from gambling.
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
Effective Date: October 1, 2014 88
SOP 50 10 5(G) 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))
i. Municipalities and other political subdivisions are not eligible.
ii. Special Requirements Applicable to Native American Businesses
iii. 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))
i. In evaluating the eligibility of a Small Business Applicant, if it appears that
the Small Business Applicant may be connected, associated or affiliated with a
religious organization or may have a religious component, the lender must
complete the Religious Eligibility Worksheet (SBA Form 1971), attached to this
SOP as Appendix 8. Any questions regarding this worksheet may be addressed
to local SBA Counsel or Center Counsel.
ii. A delegated lender must retain the worksheet and any information obtained
in connection with the lender’s religious eligibility decision in the loan file, and
must submit the worksheet and such information to SBA with any request for
guaranty purchase. SBA also may review the worksheet and such information
when conducting lender oversight activities.
iii. A non-delegated lender must submit the completed worksheet and any
information obtained in connection with that worksheet to the LGPC with the
application. Center Counsel will then review the matter. If Center Counsel
recommends that the Small Business Applicant be found ineligible for financial
assistance based on a religious aspect, the matter must be referred to the
Associate General Counsel for Litigation for a decision. If Center Counsel finds
the Small Business Applicant eligible for financial assistance, the LGPC will
notify the lender of that decision.
iv. A Small Business Applicant is not ineligible merely because it offers
religious books, music, ceremonial items and other religious articles for sale.
l) Cooperatives (13 CFR §120.110(l))
i. Consumer and marketing cooperatives are not eligible. For agricultural
marketing cooperatives, see (3) below.
Effective Date: October 1, 2014 89
SOP 50 10 5(G) Subpart B
ii. 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) It is small and each member of the cooperative is small.
iii. Agricultural Marketing Cooperatives. An agricultural cooperative acting
pursuant to the provisions of the Agricultural Marketing Act (12 USC 1141j) is
considered to be a producer cooperative and is eligible if it meets the
requirements for eligible producer cooperatives in (2) above.
iv. Worker Cooperatives. A worker cooperative, in which the employees of the
small business cooperatively own the company, is eligible if it meets all other
SBA eligibility requirements.
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))
i. The SBA cannot provide financial assistance to businesses with Associates
who are incarcerated, on probation, on parole, who are currently under
indictment for a felony or a crime of moral turpitude, or who are presently
subject to an indictment, criminal information, arraignment, or other means by
which formal criminal charges are brought in any jurisdiction...
ii. 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.
iii. An individual with a deferred prosecution is treated as if the individual is on
probation or parole. Such an applicant is not eligible.
iv. 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. Part of the character evaluation process involves
answering the applicable questions on SBA Form 1919, Borrower Information
Form.
v. Generally, loans submitted under any program including CAPLines, ITL,
Export Working Capital, Export Express, and SBA Express may be made only
if questions 1, 2, and 3 on SBA Form 1919 are all answered “no”.
(a) If a Subject Individual answers “yes” to question 1, then the Small
Business Applicant is not eligible.
Effective Date: October 1, 2014 90
SOP 50 10 5(G) Subpart B
(b) If a Subject Individual’s response to question 3 reveals that he/she is
currently on parole or probation, then the Small Business Applicant is
not eligible.
(c) If a Subject Individual answers “yes” to question 2 or 3, that individual
must complete SBA Form 912 Statement of Personal History within 90 days
of submission to accomplish 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.) 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
and that individual must complete, sign, date, and submit SBA Form 912 to
the Lender for processing.
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).
(b) City and state or the county and state where the offense(s)
occurred.
(c) The specific charge(s) [DUI, assault, forgery, 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. “Electronic
Fingerprint Submission” means fingerprints taken and reproduced in a
Effective Date: October 1, 2014 91
SOP 50 10 5(G) Subpart B
machine-readable format by a fingerprint capture system that complies
with the Federal Bureau of Investigation’s Electronic Biometric
Transmission Specifications. An Electronic Fingerprint Submission must
be compatible with the Federal Bureau of Investigation’s Automated
Fingerprint Identification System, or any successor system in place for
biometric identification. The Electronic Fingerprint Submission will
generally be a piece of paper produced by the fingerprint capture system,
which an individual may attach to SBA Form 912 to expedite character
check procedures. Where an Electronic Fingerprint Submission is not
locally available, paper and ink fingerprint cards may still be used. 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. A Fingerprint Card (FD 258) or the Electronic
Fingerprint Submission (as defined above) must be completed.
iv. Clearing an Application with a “Yes” response to questions 2 or 3, the
SBA Field Office (for non-delegated loans) or the delegated lender (for
loans processed under delegated authority) may process, submit and
disburse the loan only when the subject’s affirmative activity meets the
criteria set forth below:
(a) A single minor (misdemeanor) offense or arrest; OR
(b) 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
(c) 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.
v. If the subject’s affirmative activity meets the criteria above, delegated
lenders (for loans processed under their delegated authority)must usethe
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;
Effective Date: October 1, 2014 92
SOP 50 10 5(G) Subpart B
(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;
(vi) Lender must insert the SBA Servicing Center that will service
the loan after it is processed by the LGPC;
(vii) Include the lender’s address, telephone
number, and contact person;
(viii) Lender must check, sign, and date the
“Fingerprints waived” box and the “Clear For Processing” box;
(b) 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.
vi. A Delegated lender or SBA Field Office Cannot Clear Felony
Arrests or Convictions for Loan Processing.
vii. A non-delegated lender with a “yes” response or a delegated lender
unable to or choosing not to exercise its authority to clear a 912 with a
“yes” response must:
(a) Submit a cover letter with the lender’s contact information, a brief
description of the business and the complete 912 package to the local
SBA field office before loan processing can proceed. The lender must
submit copies to the field office and retain the originals in its loan file.
SBA recommends that the lender submit the 912 package as soon as
possible.
(b) 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.)
(c) When a 912 with a “yes” response is forwarded to the OIG/OSO, a
lender must:
(i) 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.
(d) If additional criminal activity is revealed, information pertaining to
the additional criminal activity will be provided to the D/FA or
Effective Date: October 1, 2014 93
SOP 50 10 5(G) Subpart B
designee who will notify the field office that an adverse condition
exists.
(e) OIG/OSO may 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) For all Form 912s submitted, SBA’s OIG/OSO will request a
“Name Check” (a/k/a background check) from the FBI.
1. 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.
2. If the information from the FBI Name Check is consistent
with the information provided on the 912, OIG/OSO will
notify the appropriate SBA Office (District Office for
non-delegated loans and SBA Servicing Center for
delegated loans) , and that SBA 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.
3. 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, and directed to immediately
cease further loan disbursements and seek immediate
repayment. If the loan has been disbursed, the Agency
will cancel its guaranty.
4. The lender may be responsible for any funds that are
uncollected in the event that the Name Check reveals
additional undisclosed offenses or fraud.
viii. 912 Decision Appeals.
(a) 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 led a responsible life and made a contribution to the
community.
Effective Date: October 1, 2014 94
SOP 50 10 5(G) Subpart B
(b) 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.
(d) 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 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))
i. 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.
ii. 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 to be prurient.
iii. If a delegated lender finds that the Small Business Applicant may have a
business aspect of a prurient sexual nature, the lender must document its
analysis and eligibility decision in the loan file, and must submit that
documentation to SBA with any request for guaranty purchase. SBA also may
review such documentation when conducting lender oversight activities.
iv. If a non-delegated lender finds that the Small Business Applicant may have
a business aspect of a prurient sexual nature, the lender must include an analysis
of the issue with its application to the LGPC. Center Counsel will then review
the matter. If Center Counsel recommends that the Small Business Applicant be
found ineligible for financial assistance, the matter must be referred to the
Associate General Counsel for Litigation for a decision. If Center Counsel finds
Effective Date: October 1, 2014 95
SOP 50 10 5(G) Subpart B
the Small Business Applicant eligible for financial assistance, the LGPC will
notify the lender of that decision.
q) Prior Loss to the Government (13 CFR §120.110 (q)) and Delinquent Federal
Debt (31 CFR 285.13)
i. 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.
ii. 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) above.)
iii. “Federal loan or Federally-assisted financing” includes any loan made
directly or guaranteed/insured by any Federal agency, any unreimbursed
advance payments under 8(a) or similar programs operated by any Federal
agency, and federally-backed student loans 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, any loss incurred by the Federal
Deposit Insurance Corporation (FDIC) when it sells a loan at a discount, or
any loan purchased, held or securitized by Fannie Mae or Freddie Mac.
iv. These rules apply to:
(a) The Small Business Applicant;
Effective Date: October 1, 2014 96
SOP 50 10 5(G) Subpart B
(b) Any business owned, operated or controlled by an Associate of the
Small Business Applicant that incurred the Delinquent Federal Debt or
caused the Prior Loss; and
(c) Any guarantor who has (or guaranteed) a Delinquent Federal Debt or a
caused Prior Loss (either directly or as a guarantor).
v. Delegated lenders are responsible for accessing their records in E-Tran to
determine if any of the individuals or businesses identified in paragraph iv
above experienced a Prior Loss.
vi. 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 iv above have outstanding Delinquent Federal
Debt.
(a) CAIVRS allows the lender to enter multiple tax id numbers (either SSN or
EIN) to search for an outstanding Delinquent Federal Debt in connection with
a loan application.
(b) Lenders may obtain instructions for accessing CAIVRS at
http://www.hud.gov/offices/hsg/sfh/sys/caivrs/caivrs_faq.cfm.
vii. 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.
viii. 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))
i. Speculative businesses are not eligible. This prohibits loans to a Small
Business Applicant for:
Effective Date: October 1, 2014 97
SOP 50 10 5(G) Subpart B
(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.
ii. 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
(e) Building homes for future sale (except under the Builders CAPLines
program).
Note: Construction of homes for future sale with no sales contract in
place (spec homes) is eligible under the Builder’s CAPLines program.
(13 CFR120.391)
iii.
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 1919 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:
Effective Date: October 1, 2014 98
SOP 50 10 5(G) Subpart B
i. Resident Alien Card; and
ii. 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:
i. A temporary stamp by USCIS on the individual’s passport that says
“Processed for I-551 – Temporary Evidence of Lawful Permanent
Residence;”
ii. USCIS Form I-327, “Re-entry Permit,” issued to LPRs in lieu of a visa,
which is valid for only 2 years;
iii. 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).
iv. 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.
i. They must have current/valid USCIS documentation permitting them to
reside in the U.S. legally; and
ii. 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 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.
Effective Date: October 1, 2014 99
SOP 50 10 5(G) Subpart B
c) All applicants self-certify that they are eligible under IRCA by signing SBA
Form 1919, which includes the “Statements Required by Law and Executive
Orders.” This includes a certification that IRCA does not apply to them or if
it does apply, more than five years have elapsed since they were granted
lawful temporary resident status pursuant to the 1986 legislation.
5. Documentation to evidence and verify an alien’s status.
a) At time of application, for any alien required to complete SBA Form 1919, the
following applies:
i. Aliens must provide their alien registration number on SBA Form 1919,
“Borrower Information Form” (for EWCP loans, aliens must provide their alien
registration number on EIB-SBA Form 84-1)
ii. Lenders must obtain a copy of the individual’s USCIS documentation and
maintain in the case file.
iii. 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.
iv. 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 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.
(d) The authorization statement must not be on SBA or lender stationery.
Effective Date: October 1, 2014 100
SOP 50 10 5(G) Subpart B
b) Lenders must receive verification of the status of each alien required to submit
USCIS documents prior to submission of the application to SBA or, for delegated
processing, prior to submission of the request for loan number. The lender must
document the findings in the loan file.
c) Verification of the status of an LPR is required if 6 months has elapsed since the
last verification with one exception: if the individual reported an offense on SBA
Form 912, then verification would be required even if 6 months had not elapsed, as
the offense may put their status at risk. For non-LPRs, verification is required with
each loan application, as their status can be revoked at any time.
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.
i. Management must have operated the business for at least 1 year prior to the
application date. (This requirement prevents financial assistance to “start-up”
businesses owned by aliens who do not have LPR status.)
ii. 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. with a
liquidation value equal to no less than the approved loan amount at the time of first
disbursement and, to the extent that the value of collateral declines during the life of
the loan, require the borrower to pledge additional collateral to ensure a sufficient
collateral coverage amount. If the Small Business Applicant owned by foreign
nationals, foreign entities or non-immigrant aliens residing in the U.S. does not have
sufficient collateral, the applicant is not eligible for 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.
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.
Effective Date: October 1, 2014 101
SOP 50 10 5(G) Subpart B
i. There may be several individuals or entities in a tenancy in common, but the
tenancy in common is considered 1 EPC.
ii. 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:
i. The lease must be in writing;
ii. The lease must be subordinated to the SBA’s mortgage, trust deed lien, or
security interest on the property;
iii. The lease must have a term, including options to renew exercisable solely by
the OC, at least equal to the term of the loan;
iv. 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;
v. 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
vi. 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.
vii. If in acquiring the property, the EPC becomes the beneficiary or owner of
the rights to an existing mineral lease on the property, the EPC must assign its
interest in the lease (together with its rights to all rental, mineral, royalty, bonus,
or similar lease payments that might accrue by virtue of the existing mineral (oil
and gas) lease) to the OC; and any such assignment must be subordinated to all
Deeds of Trust or Mortgages. In addition, the lender must take the following
actions as applicable:
(a) If subordination is not possible, the lender must provide documentation to
that effect.
(b) If the mineral lease has been terminated, the lender should attempt to have
it removed from the Title Policy.
Effective Date: October 1, 2014 102
SOP 50 10 5(G) Subpart B
(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 and/or for the purchase
of other assets, including intangible assets, for the Operating Company’s use.
f) Each holder of an ownership interest constituting at least 20% of either the EPC
or the OC must guarantee the loan (if the holder is a trust, then the Trustee shall
execute the guarantee on behalf of the trust). Each spouse owning 5% or more of the
EPC or the OC must personally guarantee the loan in full when the combined
ownership interest of both spouses in the EPC or OC is 20% or more.
3. Conditions that apply when the EPC is owned in whole or in part by a trust.
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.
i. If an Employee Stock Ownership Plan trust agreement prohibits it from
being a guarantor or co-borrower, then it cannot use the EPC form of
borrowing.
ii. Beneficiaries usually do not have any control over the actions of the trust
and, therefore, do not have to meet the guaranty requirements.
e) The Trustee shall certify in writing to SBA that:
i. The Trustee has authority to act;
ii. The trust has authority to borrow funds, pledge trust assets, and lease the
property to the OC;
iii. The Trustee has provided accurate, pertinent language from the trust
agreement confirming the above; and
iv. The Trustee has provided and will continue to provide SBA with a true and
complete list of all trustors and donors.
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.
i. If there is only one OC, use the OC’s NAICS code.
ii. 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.
Effective Date: October 1, 2014 103
SOP 50 10 5(G) Subpart B
iii. 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 (on delegated loans) and the LGPC (on
non-delegated loans) must consult with local SBA counsel for further guidance.
H. 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)
I. 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:
i. The applicant’s key personnel have clearly demonstrated export expertise
and substantial previous successful business experience, and
ii. 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
Effective Date: October 1, 2014 104
SOP 50 10 5(G) Subpart B
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.
Required documentation is itemized in Paragraph IV.J.5 of this Chapter.
J. 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
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. Indirect exports are
considered exports for purposes of determining eligibility. 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 to the lender from the Borrower’s domestic customer (typically
in the form of a letter, invoice, order or contract) that the goods or services are in fact
being exported. For all of the Borrower’s exports (including indirect exports), the
lender must determine if US companies are authorized to conduct business with the
country to which the goods or services will be shipped, 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 Schedule; 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
Effective Date: October 1, 2014 105
SOP 50 10 5(G) Subpart B
the fact that the loan will allow the Small Business Applicant to improve its
competitive position.
K. 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.
L. 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.
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
Effective Date: October 1, 2014 106
SOP 50 10 5(G) Subpart B
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,
and/or have inventory.
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:
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%
Effective Date: October 1, 2014 107
SOP 50 10 5(G) Subpart B
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;
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
Effective Date: October 1, 2014 108
SOP 50 10 5(G) Subpart B
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 be used to refinance debt in the personal name
of the owners, such as a Home Equity Line of Credit (HELOC) or credit card debt
that was used for business purposes. The borrower must certify that the amount
being refinanced was used exclusively for business purposes and provide appropriate
documentation, such as a copy of the note and/or current loan statement, to
demonstrate that the debt was, in fact, used for business purposes. For example, a
sole proprietor may demonstrate that the debt was used for business purposes by
providing a copy of the note and documentation that shows the debt is reflected on
the business balance sheet and/or the interest deduction is reported on the Schedule
“C” not the Schedule “A” of the proprietor’s tax return. If the interest deduction
reported on the Schedule C includes multiple debts, then the applicant must provide
a copy of the appropriate IRS Form 1098 related to the debt being refinanced. (For
documentation requirements concerning the refinancing of credit card debt, see
paragraph 5.h) below.)
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 over collateralized 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; and
i.Refinancing institutional loans within 6 months of the change of ownership
may not be processed under delegated authority.
ii.To be eligible for refinancing, any seller financed note must have been in
place for 24 months following the change of ownership, and must have been
current for the past 24 months. The refinancing request must meet the
requirements set forth in paragraphs 4 and 5 below.
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
Effective Date: October 1, 2014 109
SOP 50 10 5(G) Subpart B
included in the cash flow 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.
i. 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 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.
ii. 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 for the prior 36 months, or
the life of the loan whichever is less. In addition, the lender must explain in
writing any late payments and late charges that have occurred during the last 36
Effective Date: October 1, 2014 110
SOP 50 10 5(G) Subpart B
months. (Late payments are defined as any payment made beyond 29 days of the
due date.) 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)):
i. 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
ii. 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:
i. Borrower or Lender must provide evidence from the lender holding the
existing SBA-guaranteed loan that verifies 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. Lender must retain this
evidence in the loan file.
b) Procedure to refinance a same institution SBA-guaranteed loan:
i. 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.
ii. These applications may not be processed PLP, they must be processed in the
LGPC.
8. Using a 7(a) loan to Refinance an Existing SBA 504 loan.
A 7(a) loan may be used to refinance an existing 504 loan if it meets the requirements
of paragraphs 3, 4 and 5 above and either:
a) Both the Third Party Loan and the 504 loan are being refinanced; or
b) The Third Party Loan has been paid in full and the 504 loan needs to be
refinanced as part of a larger transaction to provide funding for expansion of or
renovations to the Project Property. In either case, the lender must document its loan
file as to the justification to refinance the existing SBA-guaranteed 504 loan. Any
applicable 504 prepayment penalties will apply.
Refinance of an existing 504 loan may not be processed under delegated authority.
9. Refinancing under SBA Express
Effective Date: October 1, 2014 111
SOP 50 10 5(G) Subpart B
a) A lender may refinance an existing non-SBA guaranteed loan or borrower debt
from another lender if:
i. 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
ii. 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:
i. Items a)(1) and a)(2) above are met;
ii. The debt to be refinanced is, and has been, current for at least the last 36
months. (SBA Form 1920 includes the related lender certification.) Current
means that a required payment has not remained unpaid for more than 29
days. A loan that has matured and not been paid within 29 days of the
maturity date is not current and is not eligible for refinancing; and
iii. 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 that refinancing
comprises only business related debt (SBA Form 1919, Borrower’s Information
Form, includes such a certification).
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.
10. Refinancing Under Export Express
a) A lender may refinance debt under Export Express if it follows the guidelines set
forth in paragraph 9 above for SBA Express; and
b) The applicant provides documentation that the new loan or line of credit will help
to develop a market or support sales outside of the United States.
c) Existing SBA guaranteed loans may not be refinanced under Export Express.
11. Refinancing Under CAPLines
a) No proceeds from a Seasonal, Contract or Builder’s CAPLine may be used to
refinance any existing debt.
b) Proceeds from a Working Capital CAPLine may refinance existing short-term
revolving debt as long as the conditions of paragraphs 3, 4 and 5 above are met
and:
i. The short-term revolving debt must be terminated after it is paid off with the
CAPLine;
ii. The refinancing does not put SBA in a position to sustain a loss which the
existing lender is presently facing;
iii. Depending on whether the CAPLine will be disbursed based on a borrowing
base certificate or not, the borrower has either a borrowing base or collateral
Effective Date: October 1, 2014 112
SOP 50 10 5(G) Subpart B
sufficient to support the Working Capital CAPLine plus any other short-term
debt that is not being refinanced;
iv. The refinancing is specifically identified in the Use of Proceeds section of the
Authorization; and
v. If the application includes the refinancing 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.
vi. If the application includes the refinancing of same-institution, SBA-
guaranteed short-term revolving debt, in addition to the requirements of i
through v above, the lender’s exposure to the applicant will not be reduced.
c) Additional documentation required:
i. A copy of the note(s) and an explanation of the terms and conditions of any
debt(s) being refinanced;
ii. A copy of the transcript of account; and
iii. A Borrowing Base Certificate with Aging of Receivables and List of
Inventory, as necessary.
d) If the short-term revolving debt to be refinanced was not revolving in accordance
with the terms of the note, the debt is not eligible to be refinanced under
CAPLines.
12. 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).
13. 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.
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, or Export 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.
14. Other conditions that apply to debt refinancing
Effective Date: October 1, 2014 113
SOP 50 10 5(G) Subpart B
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:
i. An itemization of all debts being repaid by loan proceeds when the individual
creditor is to be paid $10,000 or more; and/or
ii. 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.
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 may also include exterior space
(except parking areas) that is actively used in Borrower’s business operations.
Examples of exterior space that is actively used in Borrower’s business operations
include: outdoor storage yards for general contractors, trucking companies, and
moving and storage companies; or boat slips and docks for marinas.
Effective Date: October 1, 2014 114
SOP 50 10 5(G) Subpart B
3. Lender must document in its loan file the basis for determining that the exterior
space is actively used in Borrower’s business operations.
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-boarding 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(s) (and any individual co-applicant as permitted
under this paragraph H) , may use loan proceeds for a change of ownership, whether
the change of ownership is accomplished through a stock purchase (including a stock
redemption) or an asset purchase, only under the circumstances described in this
paragraph H. (An asset purchase will be deemed a change of ownership and must
comply with all of the requirements of this paragraph if the Small Business
Applicant(s) is purchasing all or substantially all of the assets of the Seller’s business
or is otherwise continuing the operations of the Seller’s business.):
a) The change of ownership will promote the sound development and/or preserve
the existence of a small business;
b) Change of Ownership Between Existing Owners: A change of ownership
between existing owners may be financed under the following circumstances:
i. An existing owner(s) of the small business is purchasing the ownership
interest of another owner(s), resulting in 100% ownership of the business by the
purchasing owner(s); or
ii. The small business is redeeming the ownership interest of an owner(s),
resulting in 100% ownership of the small business by the remaining owner(s);
and
c) Change of Ownership Resulting in a New Owner: A change of ownership
resulting in a new owner may be financed under the following circumstances:
i. A small business is purchasing 100% of the ownership interest in another
business;
ii. An individual(s) who is not an existing owner is purchasing 100% of the
ownership interest in a small business; or
iii. A small business is acquiring another small business through an asset
purchase.
2. The seller may not remain as an officer, director, stockholder or key employee
of the business. (13 CFR §120.130) (If a short transitional period is needed, the
Effective Date: October 1, 2014 115
SOP 50 10 5(G) Subpart B
small business may contract with the seller as a consultant for a period not to exceed
12 months including any extensions.)
3. An SBA-guaranteed loan cannot be made solely to an individual. The small
business must be either the Borrower or a Co-borrower as follows:
a) In a change of ownership under section H.1.b)i. or H.1.c)ii. above, the small
business and the individual owner(s) must be co-borrowers. In addition, the Note
must be executed, jointly and severally, by both the individual(s) who acquires the
ownership interest(s) and the small business whose ownership interest is being
acquired. If the small business denies liability for the debt based on an alleged
failure of consideration under applicable state law, SBA may deny liability on its
guaranty.
b) In a change of ownership under section H.1.b)ii. above, the small business must
be the Borrower and the remaining owner(s) may be Co-borrower(s) or Guarantor(s).
In a change of ownership under section H.1.c)i. or c)iii. above, the acquiring entity
may be the Borrower or the acquiring entity and the small business being acquired
may be Co-borrowers.
4. The lender must meet the requirements for IRS verification identified in Chapter
5, Paragraph III.C of this Subpart.
5. If the Borrower will be acquiring the small business’s real estate in a separate
transaction with a non-SBA guaranteed loan, the SBA loan must receive 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.
6. The following changes of ownership are not eligible:
a) A non-owner who is purchasing less than 100% of the ownership interests in the
business; or
b) An existing owner who is purchasing the ownership of another existing owner
that will not result in 100% ownership of the business 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:
i. A current 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.)
ii. A site visit of the business being acquired. The lender must document in its
loan file the date of the site visit as well as comments.
Effective Date: October 1, 2014 116
SOP 50 10 5(G) Subpart B
iii. A real estate appraisal for commercial real estate that meets SBA’s
requirements. (See Chapter 4 of this Subpart for SBA’s appraisal requirements.)
iv. An analysis as to how the change of ownership will promote the sound
development and/or preserve the existence of the business. 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.
i. 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%.
ii. If the purchase price of the business includes intangible assets of $500,000
or less, b)(i) immediately above does not apply.
iii. 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.
iv. 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.
v. 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.
vi. 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.
I. Eligible Use of Proceeds for SBA Express
SBA Express loan proceeds must be used exclusively for business-related purposes
subject to 13 CFR §120.120 and 120.130.
J. Eligible Use of Proceeds for Export Express
Effective Date: October 1, 2014 117
SOP 50 10 5(G) Subpart B
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 (as a normal course of
business, the borrower may use portions of the line of credit for domestic purposes,
as long as no less than 70% of the line of credit will be used for export purposes).
Lender must maintain documentation in the loan file that at least 70% of the first full
disbursement (100% of approved loan amount) was used 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. Indirect Exports are considered exports for purposes of determining the eligible
use of proceeds. 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 to the lender from the
Borrower’s domestic customer (typically in the form of a letter, invoice, order or
contract) that the goods or services are in fact being exported.
3. Loan proceeds may not be used to:
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.
4. When an Export Express loan finances specific export transactions (including
indirect exports), the lender must determine if US companies are authorized to
conduct business with the country to which the goods or services will be shipped.
Lenders must check Ex-Im Bank’s Country Limitation Schedule, 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 Schedule.
Effective Date: October 1, 2014 118
SOP 50 10 5(G) Subpart B
5. Documentation required: SBA requires the lender to obtain information from
the borrower pertaining to the use of proceeds and its projected impact on the
borrower’s export sales and retain that documentation in its loan file. The specific
documentation includes the following:
a) The applicant must answer affirmatively on question 8 of SBA Form 1919 and
provide an estimate of annual export sales; and
b) The applicant must provide documentation regarding the following items (this
may be in the form of a general business plan, an attachment to the loan application
or on a lender-developed questionnaire):
i. A brief description of the business’ product or service which will be
exported;
ii. An explanation of how the loan proceeds will enable the business to enter a
new export market or expand in an existing export market;
iii. The countries to which the business will export; and
iv. An estimate of the borrower’s export sales for the 12 month period
following the date of the loan application.
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 to the lender
from the Borrower’s domestic customer (typically in the form of a letter, invoice,
order or contract) that the goods or services are in fact being exported. 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
Effective Date: October 1, 2014 119
SOP 50 10 5(G) Subpart B
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
Proceeds of an IT loan may be used for the following eligible purposes only. Proceeds of
an IT loan may not be used for any other purpose, including a change of ownership.
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.)
Effective Date: October 1, 2014 120
SOP 50 10 5(G) Subpart B
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.
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, 2014 121
SOP 50 10 5(G) Subpart B
CHAPTER 3: LOAN TERMS AND CONDITIONS
I. MAXIMUM LOAN AMOUNTS
The maximum loan amount allowed under SBA’s loan program varies by delivery
method 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/CLP/PLP $5,000,000
7(a) Small Loans $350,000
SBA Express Loans (including lines of $350,000 (gross) (including any outstanding SBA Express, Community
credit) Express, Patriot Express and Export Express)
Export Express $500,000 (gross)
CAPLines $5,000,000
International Trade Loans (IT) and $5,000,000
Export Working Capital Loans
(EWCP)
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
(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
Effective Date: October 1, 2014 122
SOP 50 10 5(G) Subpart B
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 with a single payment, 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 a single contract with multiple payments, the loan amount is the amount
projected by the borrower necessary to cover 20% over the greatest cash deficit
projected for the subject contract. This permits the line to revolve within the term of
the contract.
d) 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
(excluding profit).
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.
c) The final sale of the property must be an arm’s length transaction with legal
transfer to an unaffiliated third party.
Effective Date: October 1, 2014 123
SOP 50 10 5(G) Subpart B
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, and Export 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, increases:
a) May be requested:
i. if made under SBA Express and Export Express, 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 and Export Express loans);
ii. if made under CAPLines, at any time during the life of the loan, but must be
within 10 years of the date of loan approval (except Builder’s CAPLines which
must be within 5 years of the date of loan approval) and be in compliance with
Chapter 3, Paragraph III.E. of this Subpart (maximum maturities on CAPLines);
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
and, Export Express and Patriot Express); and
Effective Date: October 1, 2014 124
SOP 50 10 5(G) Subpart B
c) Must include an analysis of appropriate credit and risk factors consistent with the
procedures the lender uses for its similarly sized non-SBA guaranteed commercial
loans if the increase is above 33% of the original loan amount.
4. PLP, SBA Express and Export 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)/CLP/PLP Loans—See $3,750,000 85% for loans of $150,000 or less. 75%
Note 1 for loans over $150,000
SBA Express Loans $3,750,000--See Note 2 50%
Export Express $3,750,000--See Note 2 and Note 4 90% for loans of $350,000 or less. 75%
for loans over $350,000 up to
$500,000.
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%
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.
Effective Date: October 1, 2014 125
SOP 50 10 5(G) Subpart B
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
$3,750,000 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%.
C. Maximum Guaranty Percentage for Multiple 7a and 504 Loans
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.
Effective Date: October 1, 2014 126
SOP 50 10 5(G) Subpart B
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 57.
III. LOAN MATURITIES (13 CFR §120.212)
The loan term must be the shortest appropriate term based on the use of proceeds and the
borrower's ability to repay. 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)
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),
Effective Date: October 1, 2014 127
SOP 50 10 5(G) Subpart B
Program/Use of Proceeds Maximum Maturity Additional Considerations
See Note 1 below
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 and Export Term loans--same as 7(a). SBA Express LOCs may consist of a
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
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)
Effective Date: October 1, 2014 128
SOP 50 10 5(G) Subpart B
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. (Note: Lender should include in their file
support for maturities that exceed the standard for an asset class but in no event may
the maturity exceed the stated maximums.) 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 and Export Express Maximum Maturities and the use of Non-Financial
Default Provisions
1. SBA Express and Export 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.
2. Non-financial default provisions are allowed under SBA Express and Export
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
Effective Date: October 1, 2014 129
SOP 50 10 5(G) Subpart B
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 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
Effective Date: October 1, 2014 130
SOP 50 10 5(G) Subpart B
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
www.sba.gov/for-lenders. 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 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 and Export Express.
5. For loans with a variable interest rate, the following terms must be defined:
a) Base Rate:
i. 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.
ii. 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
Effective Date: October 1, 2014 131
SOP 50 10 5(G) Subpart B
quarterly in the Federal Register. Base Rates will be rounded to two digits with
.004 being rounded down and .005 being rounded up.
iii. For SBA 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. After approval and prior to final disbursement, lender must notify the LGPC of
any changes to the Note terms related to the interest rate. After final disbursement,
lender must notify the appropriate Commercial Loan Servicing Center of any
changes to the Note terms related to the interest rate.
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
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)
Effective Date: October 1, 2014 132
SOP 50 10 5(G) Subpart B
Product Interest Rate – The Limitations
published maximum
allowable fixed rate or if
variable:
SBA Express and Export Express - Cannot exceed Prime + 4.5% See Paragraphs G and H.2
More than $50,000 (All maturities) 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 (up to and
including $50,000 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.
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. However, the
maximum spread over the base cannot exceed SBA’s stated maximum.
2. Post-Approval Changes to the Interest Rate
Effective Date: October 1, 2014 133
SOP 50 10 5(G) Subpart B
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 LGPC 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 SOP 50 57.
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.
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.
Effective Date: October 1, 2014 134
SOP 50 10 5(G) Subpart B
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
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 re-amortized 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
Effective Date: October 1, 2014 135
SOP 50 10 5(G) Subpart B
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 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.
Effective Date: October 1, 2014 136
SOP 50 10 5(G) Subpart B
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);
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.
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 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
Effective Date: October 1, 2014 137
SOP 50 10 5(G) Subpart B
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.
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. The SBA
earns the short term guaranty fee when the SBA loan number is issued. The
guaranty fee is not refundable except as provided for in paragraph H.1 below.
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. 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 required to use
Effective Date: October 1, 2014 138
SOP 50 10 5(G) Subpart B
www.pay.gov (see paragraph C below). If the fee is not received within 10 business
days after the processing center issues the loan number, SBA cancels the guaranty.
d) Short Term SBA Express and Export Express Loans: For SBA Express and
Export 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. 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
required to use www.pay.gov (see paragraph C below). If the fee is not received
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
Lenders must submit the guaranty fee electronically either by using their existing
SBA-approved bulk ACH method or through www.pay.gov. When using
www.pay.gov, select “form type 1544” and select “guaranty.” The loan must have
been approved and an SBA loan number issued in order to use www.pay.gov.
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 Due
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 SBA has not received the full guaranty fee by the due date, on the 91st day
after loan approval SBA may issue a “Notice of Overdue Guaranty Fee.” If
SBA 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.”
Effective Date: October 1, 2014 139
SOP 50 10 5(G) Subpart B
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 57, Chapter 4):
1. SBA Loan Number and the SBA Loan Name;
2. The required guaranty fee must be paid electronically (see paragraph C above)
within 30 days from the date of reinstatement or the guaranty will be cancelled.
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 paid
electronically (see paragraph C above) within 30 days from the date the increase was
approved or the total loan guaranty will be cancelled.
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 be paid electronically (see paragraph C above) within 30 days from the date the
lender agrees to the extension or the total loan guaranty will be cancelled. The
lender may charge the additional fee to the borrower after the lender has notified
SBA that the maturity has been extended and has paid the additional guaranty fee.
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.
Effective Date: October 1, 2014 140
SOP 50 10 5(G) Subpart B
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 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.
i. 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.
ii. 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.
Effective Date: October 1, 2014 141
SOP 50 10 5(G) Subpart B
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.
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
Effective Date: October 1, 2014 142
SOP 50 10 5(G) Subpart B
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
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
Effective Date: October 1, 2014 143
SOP 50 10 5(G) Subpart B
Trade (OIT). This report will track information on each EWCP loan by Lender,
including but not limited to the following:
i. Whether the Lender is submitting 1502 Reports on EWCP loans as required;
ii. When annual invoices are to be sent; and
iii. 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. (Note: The lender and its Associates, however, are prohibited from charging
the Small Business Applicant a broker, referral or similar fee. See Paragraph VII
below for further discussion of prohibited fees.) The fees must be reasonable and
customary for the services actually performed and must be consistent with those fees
charged on the lender’s similarly-sized, non-SBA guaranteed commercial loans. In
addition, fees for packaging and other services may be based on a percentage of the
loan amount. With regard to fees for packaging or other services charged based on a
percentage of the loan amount, in no event may the fee exceed 3% on loans of
$50,000 or less, and for loans over $50,000, 2% on the first $1,000,000 and an
additional ¼% on amounts over $1,000,000, with a maximum fee of $30,000. A
standard fee charged to all Small Business Applicants is not acceptable.
2. Lenders may be reimbursed by the Small Business Applicant for the direct costs
(including reasonable overhead) of legal services performed by lender’s in-house
counsel in connection with an SBA-guaranteed loan, but in no event may the lender
be reimbursed for an amount that would exceed the cost of outside counsel. In
accordance with 13 CFR §120.222(e), charges for legal services (regardless of who
provides the service) must be on an hourly basis and must be for requested services
actually performed. In addition, as with fees charged for other services provided by
the lender to the Small Business Applicant, such charges must be reasonable and
customary for the services performed. These fees may be reviewed at any time and
lender must refund any fee considered unreasonable by SBA.
Effective Date: October 1, 2014 144
SOP 50 10 5(G) Subpart B
3. 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.
4. 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.
5. 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. 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
Effective Date: October 1, 2014 145
SOP 50 10 5(G) Subpart B
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.
2. 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.
Effective Date: October 1, 2014 146
SOP 50 10 5(G) Subpart B
2. This fee may be paid by the seller or the assumptor. Lenders should review
SBA’s SOP 50 57, 7 (a) Loan Servicing and Liquidation, for procedures to process
an assumption request.
H. SBA Express and Export Express Fee Policy
1. The SBA guaranty and on-going servicing fees are the same for SBA Express
and-, Export Express as for standard 7(a) loans. The policy regarding packaging
fees is the same as for standard 7(a) loans as set forth in paragraph B.1 above. In
addition, the lender may charge the same fees for SBA Express and Export 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 and are reasonable and
customary for the services performed. Examples include application fees and
reasonable transaction fees such as cash advance fees, late fees, returned check
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.
Such fees must comply with Paragraph C above.
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 and Export 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.
Effective Date: October 1, 2014 147
SOP 50 10 5(G) Subpart B
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,
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 individual who is a qualified source as defined in Chapter 4, Paragraph II.C.
of this Subpart and employed by the lender to conduct an independent business
valuation in connection with an SBA loan
d) An environmental professional employed by the lender to conduct an
environmental assessment of the collateral in connection with an SBA loan;
e) Any attorney in connection with the SBA loan closing; and
f) 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.
Effective Date: October 1, 2014 148
SOP 50 10 5(G) Subpart B
5. If the total compensation exceeds $2,500, the compensation must be itemized.
6. Lenders must submit SBA Form 159(7a) to Fiscal Transfer Agent (“FTA”) 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 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 FTA 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.
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.
c) For all other Agents paid by either a Small Business Applicant or a lender, a
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).
Effective Date: October 1, 2014 149
SOP 50 10 5(G) Subpart B
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 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
Effective Date: October 1, 2014 150
SOP 50 10 5(G) Subpart B
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-
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 complies with paragraph VI.B.1 above; 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; comply with paragraph VI.B.1 above; 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).
Effective Date: October 1, 2014 151
SOP 50 10 5(G) Subpart B
1. Individuals and entities suspended, debarred, revoked or otherwise excluded
under the SBA or Government-wide debarment regulations are not permitted to
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 are responsible for consulting the System for Award
Management’s (SAM)/Excluded Parties List System (EPLS) or any successor
system to determine if an Agent has been debarred, suspended or otherwise excluded
by SBA or another federal agency. (www.sam.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. Lenders are
responsible for reviewing SBA’s webpage list of Agents that have been subject to an
enforcement action or have been otherwise excluded from the privilege of
conducting business with SBA and must refrain from doing business with any Agent
appearing on the list during the time that an Agent is suspended or revoked from
SBA programs. See http://www.sba.gov/about-sba-services/18351.
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
Effective Date: October 1, 2014 152
SOP 50 10 5(G) Subpart B
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. If an LSP is authorized to access E-Tran on behalf of a
lender, the lender is responsible for all entries and certifications made on its behalf
into the E-Tran system.
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 comply with paragraph VI.B.1 above and cannot be contingent 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.
Effective Date: October 1, 2014 153
SOP 50 10 5(G) Subpart B
CHAPTER 4: CREDIT STANDARDS, COLLATERAL AND ENVIRONMENTAL
POLICIES
I. CREDITWORTHINESS/CREDIT UNDERWRITING
A. Credit Standards (13 CFR §120.150)
Credit underwriting requirements are separated into three categories. The first is for
“7(a) Small Loans” which consists of any loan of $350,000 or less (except SBA
Express and Export Express). The second is for any loan over $350,000 processed
using Standard, CLP, or PLP procedures (and for 7(a) Small Loans that do not receive
an acceptable credit score). The third is for any loan that is processed using SBA
Express or Export Express.
Lenders must analyze each application in a commercially reasonable manner,
consistent with prudent lending standards. 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 or
outside sources of cash.
1. 7(a) Small Loans up to and including $350,000:
a) Screening for Credit Score
All applications (except SBA Express and Export Express) will begin with a
screening for a credit score. The lender will enter certain information into E-
Tran and a credit score will be issued. (The specific information is described
in Chapter 6, of this Subpart.) If the applicant receives an acceptable credit
score, the application may be submitted via E-Tran. If the applicant does not
receive an acceptable credit score, non-delegated lenders may submit a
Standard 7(a) loan application to the LGPC (following the procedures for
loans over $350,000 as outlined in paragraph 2. below) while delegated
lenders may process using their delegated authority (following the procedures
for loans over $350,000 as outlined in paragraph 2. below), or, if the lender is
an SBA Express or Export Express lender, as an Express application via E-
Tran.
The credit score is calculated based on a combination of consumer credit
bureau data, business bureau data, borrower financials, and application data.
(The credit score is not to be confused with the Small Business Predictive
Score (SBPS) used by SBA’s Office of Credit Risk Management.) The
minimum credit score is based on the lower end of the risk profile of the
current SBA portfolio and may be adjusted up or down from time to time.
SBA will post on its website the minimum credit score for applications at
www.sba.gov/for-lenders.
b) Credit Analysis:
Effective Date: October 1, 2014 154
SOP 50 10 5(G) Subpart B
The Applicant (including the Operating Company) must be creditworthy and
loans must be so sound as to reasonably assure repayment. An acceptable credit
score satisfies the requirement to consider the following:
i. The credit history of the applicant (and the Operating Company if
applicable), its Associates, and guarantors, including historical performance
as well as the potential for long term success (character and reputation will
be determined through the appropriate questions on SBA Form 1919 and, if
required, SBA Form 912);
ii. The strength of the business;
iii. Past earnings, projected cash flow, and future prospects; and
iv. The applicant’s ability to repay the loan with earnings from the business.
c) The Lender’s credit memorandum will also be used to demonstrate reasonable
assurance of repayment and must include the following:
i. A brief description of the history of the business;
ii. A brief description of the management team of the company. Consider the
length of time in business under current management and, if applicable, the
depth of management experience in this industry or a related industry;
iii. Owner/Guarantor analysis, including obtaining personal financial
statements, consistent with lender’s similarly-sized non-SBA guaranteed
commercial loans;
iv. Confirmation of Lender’s collection of business tax returns and verification
and reconciliation of the applicant’s financial data against income tax data
(received in response to IRS Form 4506-T, Request for Transcript of Tax
Return) prior to submitting the application to SBA. (PLP lenders must do
this prior to first disbursement;
v. Lender must determine if the equity and the pro-forma debt-to-worth are
acceptable based on its policies and procedures for its similarly-sized, non-
SBA guaranteed commercial loans. If the lender requires an equity injection
and, as part of its policies and procedures for its similarly-sized, non-SBA
guaranteed commercial loans verifies the equity injection, it must do so for
SBA loans;
vi. A list of collateral and its estimated value, if secured; and
vii. The effect any affiliates may have on the ultimate repayment ability of the
applicant.
2. For Standard 7(a) loans greater than $350,000 and up to and including
$5,000,000:
Lenders credit memorandum and analysis must demonstrate the Small Business
Applicant’s ability to repay the loan from the cash flow of the business by
documenting the
following:
a) A description of and history of the business;
Effective Date: October 1, 2014 155
SOP 50 10 5(G) Subpart B
b) Lender’s credit analysis must consider the nature of the business, length of time
in business under current management and, if applicable, the depth of management
experience in the industry or a related industry. Such analysis should include a brief
description of the business’s management team.
c) A financial analysis of repayment ability based on historical financial statements
if an existing business (including balance sheet with debt schedule and income
statement) and/or tax returns and detailed projections, including the supporting
assumptions. Include:
i. Analysis of historical cash flow for existing businesses, that demonstrates
total debt service coverage after the SBA loan;
ii. Calculation of operating cash flow (OCF) defined as earnings before
interest, taxes, depreciation and amortization (EBITDA);
iii. Analysis must document additions and subtractions to cash flow such as the
following:
(a) Unfunded capital expenditures;
(b) Non-recurring income;
(c) Expenses and distributions;
(d) Distributions for S-Corp taxes;
(e) Rent payments;
(f) Owner’s Draw; and/or
(g) Global cash flow analysis that includes assessment of impact on cash flow
to/from any affiliate business.
d) Debt service (DS) is defined as the future required principal and interest
payments on all business debt inclusive of new SBA loan proceeds. The small
business applicant’s debt service coverage ratio (OCF/DS) must be equal to or
greater than 1.15 on a historical and/or projected cash flow basis:
e) For projected cash flows, the Lender should provide the calculation of debt
service coverage using the definitions above, and provide analysis of the
assumptions supporting the projected cash flow, such as:
i. reason for reduced expense structure;
ii. reason for revenue growth, i.e.
iii. new product lines,
iv. sales channels, and
v. production facilities, and
vi. industry analysis.
f) Spread of pro-forma Business Balance Sheet (current business balance sheet
adjusted for all changes in assets and liabilities as a result of the loan, other debt, any
required equity injection and use of loan proceeds);
g) Ratio calculations (based on the pro-forma Balance Sheet and historical and
projected Income Statements) for the following financial ratio benchmarks: Current
Ratio, Debt/Tangible Net Worth, Debt Service Coverage, and any other ratios the
Effective Date: October 1, 2014 156
SOP 50 10 5(G) Subpart B
lender considers significant for the business/industry (e.g., inventory turnover,
receivables turnover, and payables turnover, etc.);
h) Analysis of working capital adequacy to support projected sales growth over the
next 12 months;
i) Collateral adequacy assessment (using market or net book value as defined in
Section II. of this Chapter to offset risk of default;
j) Explanation of and justification for the refinancing of any debts as part of the
loan request, particularly Same Institution Debt (SID), in accordance with the
written analysis required in Chapter 2, Paragraph IV.E.5 of this Subpart. SID
requires a transcript of the account for the prior 36 months or the life of the loan,
whichever is less.
k) Analysis of credit, including lender’s rationale for recommending approval.
Include discussion and analysis of any:
i. Competition
ii. Seller financing;
iii. Stand-by agreements;
iv. 90+day delinquencies;
v. Trade disputes and/or;
vi. Federal, State or local citations which would preclude the small business
applicant from normal business operations.
l) For a change of ownership, discussion/analysis of the 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.);
m) Discussion of any liens, judgments or bankruptcy filings; and
n) Discussion of 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).
B. SBA Express and Export Express Credit Standards
1. SBA has authorized SBA Express and Export 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 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 or Export
Express. SBA Express and Export Express Lenders may use a business credit
Effective Date: October 1, 2014 157
SOP 50 10 5(G) Subpart B
scoring model (not just consumer credit scores) to assess character, reputation, and
credit history of the applicant and/or repayment ability if they do so for their
similarly-sized non-SBA guaranteed commercial loans. If used, the business credit
scoring results must be documented in each loan file and available for SBA review.
Lenders must not make an SBA Express or Export 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
2. The credit decision on SBA Express and Export 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 and Export Express loans. 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 57.
C. EWCP Credit Standards
1. 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.
2. The lender’s analysis must include the following:
a) 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;
b) A description of the history and nature of the business;
c) A description of and comments on the business plan, including the financial
condition of the business;
d) 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;
e) A financial analysis of the applicant’s current balance sheet;
f) A financial analysis of repayment ability based on the applicant’s cash cycle;
g) A ratio analysis of the financial statements, including comments on any trends
and a comparison with industry averages;
h) 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;
i) If the applicant intends to seek advances on “open account, uninsured foreign
receivables,” an analysis on the suitability of these foreign receivables; and
Effective Date: October 1, 2014 158
SOP 50 10 5(G) Subpart B
j) A discussion of lender’s credit experience with the applicant and a review of
business and personal credit reports.
D. SBA Review of Lender’s Credit Analysis
1. 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.
2. For all applications processed through the LGPC, 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.
3. SBA has authorized PLP, SBA Express, and Export Express, lenders to make
credit decisions without SBA review prior to loan approval. The PLP, SBA Express,
and Export 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 lender oversight activities.
E. EquityRequirement for loans in excess of $350,000
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:
i. Cash that is NOT borrowed.
ii. 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.
iii. Assets other than Cash
Effective Date: October 1, 2014 159
SOP 50 10 5(G) Subpart B
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.
iv. Standby debt
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:
i. Value or cost of education; and
ii. 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:
i. 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;
ii. 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
iii. 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.
Effective Date: October 1, 2014 160
SOP 50 10 5(G) Subpart B
II. COLLATERAL
A. General Requirements
With respect to collateral taken, lenders must use commercially reasonable and
prudent practices to identify collateral items, which conform to procedures at least as
thorough as those used for their similarly-sized non-SBA guaranteed commercial
loans. Decisions regarding what collateral must be taken to secure a loan are based on
the circumstances of the individual loan, including size, and in all cases must meet the
minimum requirements set forth in this section.
1. Adequacy of Collateral
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. However, SBA does not permit
its guaranty to be used as a substitute for available collateral.
For all 7(a) loans, Lenders must consider both what to take as collateral and how
to value that collateral.
a) When loan proceeds from any 7(a) loan will be used to refinance existing debt,
the loan must be secured with at least the same security and lien priority as the debt
that is being refinanced.
b) SBA considers a loan as “fully-secured” if the lender has taken security interests
in all available fixed assets with a combined “net book value” as adjusted below up
to the loan amount. For 7(a) loans, the term “fixed assets” means real estate,
including land and structures, machinery and equipment owned by the business or an
EPC. “Net book value” is defined as an asset's original price minus depreciation and
amortization.
i. New machinery and equipment may be valued at 75% of price minus any
prior liens for the calculation of “fully-secured.”
ii. Used or existing machinery and equipment may be valued at 50% of Net
Book Value or 80% with an Orderly Liquidation Appraisal minus any prior
liens for the calculation of “fully-secured.”
iii. Real estate can be valued at 85% of the market value for the calculation of
“fully-secured” and the value must be determined in accordance with the
requirements set forth in Paragraph C below.
iv. If there is a collateral shortfall (not fully-secured) on the SBA-guaranteed
loan, the lender may include trading assets as necessary (using 10% of current
book value for the calculation) and will be required to take available equity in
the personal real estate of the principals. Liens on a personal residence or
investment property may be limited to the amount of the collateral shortfall;
v. Liens on a personal residence or investment property may be limited to
150% of the equity in the collateral, if there are tax implications associated with
the lien amount in the particular state where the lien is filed.
Effective Date: October 1, 2014 161
SOP 50 10 5(G) Subpart B
vi. For loans that are more than $250,000 and collateralized by commercial real
estate, lenders must comply with the appraisal requirements set forth in
Paragraph II.C 1 below.
vii. SBA does not require a lender to collateralize a loan with a personal real
estate to meet the “fully secured” definition when the equity in the real estate is
less than 25% of the property’s fair market value.
c) When loan proceeds from any 7(a) loan will be used to purchase assets, a first
security interest in those assets must be obtained (except for 7(a) loans of $25,000 or
less, see paragraph 2.a) below).
2. For 7(a) loans up to and including $350,000 (excluding SBA Express and
Export Express).
a) For loans of $25,000 or less, the lender is not required to take collateral (personal
guarantees must still be obtained in accordance with paragraph B. below); and
b) For loans over $25,000, up to and including $350,000, the lender must follow the
collateral policies and procedures (what to take and how to value it) that it has
established and implemented for its similarly-sized non-SBA-guaranteed
commercial loans, but at a minimum the lender must take a first lien on assets
financed with loan proceeds, and a lien on all of the applicant’s fixed assets to secure
the loan. Lender may secure applicant’s trading assets if it does so for similarly sized
non-SBA guaranteed commercial loans. Lender may also take personally owned
investment and residential real estate as collateral, and may limit the liens on that
collateral in accordance with the provisions in paragraph 3.a) below.
3. For 7(a) loans over $350,000.
a) For loans in excess of $350,000, SBA requires that the lender collateralize the
loan to the maximum extent possible up to the loan amount. If business fixed assets
do not “fully secure” the loan in accordance with Paragraph 1. above, the lender may
include trading assets (using 10% of current book value for the calculation), and
must take available equity in the personal real estate (residential and investment) of
the principals as collateral. Lender is not required to collateralize a loan with a
personal real estate to meet the “fully secured” definition when the real estate equity
is less than 25% of the fair market value.
b) Assets owned by the Small Business Applicant and Spouse
i. When an individual alone or together with his or her spouse owns 20% or
more of the Small Business Applicant, the lender must consider taking as
collateral a lien on personal real estate (investment or residential) that is owned
individually by the applicant owner, or jointly owned by the individual and his
or her spouse.
Effective Date: October 1, 2014 162
SOP 50 10 5(G) Subpart B
ii. Real estate transferred by the applicant to the non-owning spouse within 6
months of the date of the application will not be exempt from consideration as
available collateral.
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 or
equivalent lender’s form) 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 (or equivalent lender’s form) (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 fixed assets, available equity in
personal real estate must be pledged to secure the guaranty, up to the collateral
shortfall above.
c) Guaranty of Spouse:
i. 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
ii. 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 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
Effective Date: October 1, 2014 163
SOP 50 10 5(G) Subpart B
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) For all loans greater than $250,000, secured by commercial real property,
federally regulated lenders must obtain an appraisal by a state licensed or certified
appraiser and otherwise follow their primary regulator’s FIRREA requirements for
real estate appraisals. Appraisals must be in compliance with USPAP. Additionally,
SBA requires that completed appraisals be dated within 12 months of the application
for guaranty, and that federally-regulated lenders comply with the provisions set
forth in paragraphs 3 and 4 below with regard to other fixed assets and the additional
appraisal requirements for changes of ownership. No Exemption is granted under
the Interagency Apraisal and Evaluation Guidelines dated December 2, 2010
for Transactions Insured or Guaranteed by a US Government Agency.
(www.fdic.gov/news/news/financial/2010/fil10082a.pdf The SBA or the lender
may require an appraisal of real estate property by a State licensed or certified
appraiser in connection with a loan for $250,000 or less, if such appraisal is
necessary for appropriate evaluation of creditworthiness
b) All NFRLs and SBLCs must follow the appraisal requirements below if the
SBA-guaranteed loan is greater than $250,000 AND is collateralized by
commercial real property:
c) The appraiser must be:
Effective Date: October 1, 2014 164
SOP 50 10 5(G) Subpart B
i. 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
ii. 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.
d) 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 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.
e) The appraisal must be prepared in compliance with USPAP and use one of the
following options:
i. a self–contained appraisal report; or
ii. a summary appraisal report.
f) 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.
g) 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.
h) 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.
i) 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
Effective Date: October 1, 2014 165
SOP 50 10 5(G) Subpart B
(including intangible assets). When the collateral is a special purpose property, the
appraiser must be experienced in the particular industry.
j) 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.
k) 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.
i. 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.
ii. 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.
iii. 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 appraisal 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
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.
Effective Date: October 1, 2014 166
SOP 50 10 5(G) Subpart B
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 (including any 7(a), 504, seller, or other
financing) 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 accredited by one of the following
recognized organizations:
i. Accredited Senior Appraiser (ASA) accredited through the American
Society of Appraisers;
ii. Certified Business Appraiser (CBA) accredited through the Institute of
Business Appraisers;
iii. Accredited in Business Valuation (ABV) accredited through the
American Institute of Certified Public Accountants;
iv. Certified Valuation Analyst (CVA) accredited through the National
Association of Certified Valuation Analysts; and
Effective Date: October 1, 2014 167
SOP 50 10 5(G) Subpart B
v. 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:
i. The loan proceeds will be used to purchase a special use property;
ii. The appraisal is performed by an appraiser experienced in the particular
industry and who is a “qualified source” as identified in paragraph 5.c)
above and
iii. 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, 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.
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:
Effective Date: October 1, 2014 168
SOP 50 10 5(G) Subpart B
i. 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).
ii. 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 equity in personal real
estate owned by 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:
i. 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.
ii. 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
i. Applicants must be able to provide the lender with a first lien position on the
contract(s) and the proceeds of the contract(s) financed with the line, by
assignment to the participating lender and proper UCC filing. As discussed in
Chapter 7, Paragraph IV.H.2 of this Subpart, however, there may be exceptions
to when an assignment is required.
ii. 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
Effective Date: October 1, 2014 169
SOP 50 10 5(G) Subpart B
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. 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 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/ITF.
G. 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
Effective Date: October 1, 2014 170
SOP 50 10 5(G) Subpart B
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.
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
Effective Date: October 1, 2014 171
SOP 50 10 5(G) Subpart B
Lender must submit the Environmental Investigation Report to the SBA Center
processing the application, except on PLP, 7(a) Small Loans SBA Express and
Export Express loans. Lenders processing PLP, 7(a) Small Loans, SBA Express
and Export Express loans do not have to submit Environmental Investigation Reports
to the SBA Center but they must keep a copy of any Environmental Investigation
Report in the loan file. All lenders must comply with and meet the requirements of
the Environmental Policies and Procedures as set forth in this SOP. For example, 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. (A Reliance Letter is required even if the Environmental Investigation Report is
addressed to the lender.) Any request for an exception to Agency Environmental
Policies and Procedures must be directed to the Environmental Committee, regardless
of the method of processing used for the loan.
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)i. and ii.
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 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:
i. If the loan amount is up to and including $150,000, the
Environmental Investigation may begin with an Environmental
Questionnaire.
ii. 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.
Effective Date: October 1, 2014 172
SOP 50 10 5(G) Subpart B
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.
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.
Effective Date: October 1, 2014 173
SOP 50 10 5(G) Subpart B
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:
i. Whether the Contamination quantities exceed the reportable or
actionable levels;
ii. Whether Remediation is necessary;
iii. 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
iv. 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.
E. 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
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.
F. 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;
Effective Date: October 1, 2014 174
SOP 50 10 5(G) Subpart B
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:
i. cannot be modified;
ii. must be executed by the Borrower and (if applicable) Operating
Company;
iii. must have a copy of the Environmental Investigation Report attached
to it; and
iv. must be properly recorded in the memorandum format in Exhibit C
to Appendix 6.
All lenders (except when submitting requests through PLP, 7(a) Small
Loans, SBA Express and Export 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.
Effective Date: October 1, 2014 175
SOP 50 10 5(G) Subpart B
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
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:
i. Another Person with sufficient resources is performing Remediation
pursuant to a Remediation action plan that has been approved by the
appropriate Governmental Entity; or
Effective Date: October 1, 2014 176
SOP 50 10 5(G) Subpart B
ii. 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
iii. 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 loans processed under PLP, 7(a) Small Loans, SBA Express
and Export Express.
For loans processed under PLP, 7(a) Small Loans, SBA Express and Export 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.
G. 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
Effective Date: October 1, 2014 177
SOP 50 10 5(G) Subpart B
present significant clean-up costs if contaminated (for specific requirements
pertaining to gasoline stations, please refer to Appendix 5).
H. 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.
I. 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, 2014 178
SOP 50 10 5(G) Subpart B
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 SOP supersedes the Boilerplate.
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 and Export Express lenders may
use the Boilerplate or the abbreviated version created for those programs. “7(a)
Small Loans” approved by PLP Lenders under their PLP authority may use the
alternative Authorization created for what was formerly “SLA” or the Boilerplate.
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 “7(a) Small
Loans” (loans approved under a lender’s PLP authority only), SBA Express and Export
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, non-PLP 7(a) Small Loans,
and CAPLines SBA drafts and signs the Authorization
Standard EWCP SBA drafts and signs the Authorization
CLPLender drafts, SBA finalizes and signs
PLP (including PLP-7(a) Small Loans and PLP-CAPLines),
PLP-EWCP, SBA ExpressExport Express Lender drafts and signs on SBA’s behalf
D. Processing center counsel must review and approve any Authorization that proposes
to deviate from the Boilerplate language with the following exception. PLP lenders,
Effective Date: October 1, 2014 179
SOP 50 10 5(G) Subpart B
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, 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. If the
business is located in a state that requires additional coverage such as wind, hail,
earthquake or other, on the hazard insurance, the borrower must provide a separate
policy.
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 and Export 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.
Effective Date: October 1, 2014 180
SOP 50 10 5(G) Subpart B
3. The policy must include Protection and Indemnity, Breach of Warranty, and
Pollution coverage.
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 086-0-32 or FEMA Form 81-93). Lenders have the
option of using either form until May 30, 2015, at which time only FEMA Form
086-0-32 may be used. 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. For loans processed under standard 7(a) over $350,000, lenders may follow
their internal policy for similarly sized non-SBA guaranteed commercial loans,
except:
If the loan is not fully secured, life insurance is required for the principals of
sole proprietorships, single member LLCs, or for businesses otherwise
dependent on one owner’s active participation, consistent with the size and term
Effective Date: October 1, 2014 181
SOP 50 10 5(G) Subpart B
of the loan. The amount and type of collateral available to repay the loan may
be factored into the determination of the appropriate amount of life insurance.
If lender determines that the principal is uninsurable, lender must obtain written
documentation from a licensed insurer of the same.
2. For loans processed under “7(a) Small Loans”, SBA Express and Export
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 submission of the application to the LGPC for non-delegated loans, and prior
to first disbursement for loans processed under a lender’s delegated authority, 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 Company if the
Borrower is an EPC, for the last 3 years (unless Borrower or Operating Company is
a start-up business). For non-delegated loans up to and including $350,000, the
lender is required to confirm in its credit memo, collection of business tax returns,
and verification and reconciliation of the applicant’s financial data against income
tax data received in response to IRS Form 4506-T (Request for Transcript of Tax
Return) prior to submitting the application to SBA; If the business has been
operating for less than 3 years, lender must obtain the information for all years in
operation.
Effective Date: October 1, 2014 182
SOP 50 10 5(G) Subpart B
b) 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.
c) Lender must compare the tax data received from the IRS with the financial data
or tax returns submitted with the loan application.
d) Borrower must resolve any significant differences to the satisfaction of lender
and the LPGC or appropriate SBA CLSC. Failure to resolve differences may result
in cancellation of the loan.
e) For a change of ownership, lender must verify financial information provided by
the seller of the business in the same manner as above.
f) If lender processing a loan under delegated authority does not receive a response
from the IRS or the copy of the tax transcript within 10 business days, the lender:
i. May proceed to close and disburse the loan;
ii. 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;
iii. Must document its file with a dated copy of the second submission; and
iv. 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 $2.00 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:
http://www.irs.gov/Individuals/Income-Verification-Express-Service
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
Effective Date: October 1, 2014 183
SOP 50 10 5(G) Subpart B
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 and Export 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 and Export 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 that is used for similar non SBA guaranteed loans. 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.
C. For further discussion of standby agreements, see Chapter 4, Paragraph I.E.2.a) 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
Effective Date: October 1, 2014 184
SOP 50 10 5(G) Subpart B
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 existing or new improvements on a leasehold interest
in land, the underlying ground lease must include, at a minimum, detailed clauses
addressing the following:
1. Tenant's right to encumber leasehold estate;
2. No modification or cancellation of lease without lender's or assignee's approval;
3. Lender's or assignee's right to:
a) Acquire the leasehold at foreclosure sale or by assignment and right to reassign
the leasehold estate (along with right to exercise any options) by lender or
successors; lessor may not unreasonably withhold, condition or delay the
reassignment;
b) Sublease;
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 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.
c) The Authorization boilerplate automatically inserts the NEHRP provision when
any of the use of proceeds options selected includes construction financing,
including leasehold improvements. If the leasehold improvements made with loan
proceeds will become permanently affixed to any structure on the leased premises,
then they must comply with the NEHRP. If the improvements are only temporary,
they do not need to comply with the NEHRP. Accordingly, if the borrower can
Effective Date: October 1, 2014 185
SOP 50 10 5(G) Subpart B
demonstrate that the leasehold improvements will be temporary, lender may request
modification of the Authorization to remove the NEHRP provision in accordance
with Paragraph X of this Chapter.
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;
i. Only a corporate surety approved by the Treasury Department using an
American Institute of Architect's form or comparable coverage may issue these
bonds.
ii. 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:
i. An acceptable contractor at a specified price; and
ii. 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;
d) Obtain a completed SBA Form 601, Applicant's Agreement of Compliance; and
e) Obtain lien waivers or releases from all material men, 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
Effective Date: October 1, 2014 186
SOP 50 10 5(G) Subpart B
that all lien waivers and releases from all material men, 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.
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
CAPLiness. A “clean up” period may be included in the Authorization at the lender’s
option
X. MODIFYING THE AUTHORIZATION
A. For 7(a), CLP, 7(a) Small Loan (non-PLP) and CAPLines (non-PLP), 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
Effective Date: October 1, 2014 187
SOP 50 10 5(G) Subpart B
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 7(a) Small Loans PLP and PLP-CAPLines), PLP-EWCP, SBA
Express and Export Express loans, the lender is responsible for modifying the
authorization under its delegated authority and must document its file with a written
explanation that includes justification for the change and any supporting
documentation.
Effective Date: October 1, 2014 188
SOP 50 10 5(G) Subpart B
CHAPTER 6: SUBMISSION OF APPLICATION FOR GUARANTY
There are several different ways to process 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 each process. The different
methods are:
• Standard 7(a) Guaranty
o Loans up to and including $350,000 (7(a) Small Loans)
o Loans over $350,000 to $5,000,000
• Certified Lender Program
o Loans up to and including $350,000 (7(a) Small Loans)
o Loans over $350,000 to $5,000,000
• Preferred Lender Program (delegated)
o Loans up to and including $350,000 (7(a) Small Loans)
o Loans over $350,000 to $5,000,000
• SBA Express (delegated)
• Export Express (delegated)
• Community Advantage
o Loans up to and including $250,000
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:
The contents of the Lender’s application for guaranty vary depending on the size of the
loan and the method of processing chosen by the Lender.
A. Standard 7(a), CLP, PLP
Program forms can be found at www.sba.gov/for-lenders.
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
1. In compliance with the requirements stated in Chapter 4, 7(a), SBA Express,
and Export Express Application packages must include the forms and information
the lender requires in order to make an informed eligibility and credit decision. Any
application obtained by the lender from the applicant must be certified by the
applicant as true and complete. The following SBA documentation is required:
Effective Date: October 1, 2014 189
SOP 50 10 5(G) Subpart B
a) Applicants must complete and sign SBA Form 1919, “Borrower
Information Form.” SBA Form 1919 must be signed by the following:
i. For a sole proprietorship, the sole proprietor;
ii. For a partnership, all general partners, and all limited partners owning 20%
or more of the equity of the firm, or any partner that is involved in
management of the applicant business;
iii. For a corporation, all owners of 20% or more of the corporation and each
officer and director;
iv. For limited liability companies (LLCs), all members owning 20% or more
of the company and each officer, director, and managing member;
v. Any person hired by the business to manage day-to-day operations.
b) 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 concerning floodplains and wetlands
management, lead based paint, earthquake hazards, the Right to Financial
Privacy Act, among others are included in SBA Form 1919
c) Lender must complete and sign SBA Form 1920.
d) Additional Forms may be necessary. See 2.e below.
2. All standard 7(a) loan applications over $350,000 must include the following:
a) Lender must complete and submit SBA Form 1920
b) As part of the Lender’s request for Guaranty, the Applicant is required to
complete and sign SBA Form 1919, Application for Loan. Application packages
must include all forms and information the lender is required to obtain based on
loan size and delivery method in accordance with Chapter 4 Credit Standards.
c) SBA Form 1919 must be signed by the following:
i. For a sole proprietorship, the sole proprietor;
ii. For a partnership, all general partners and all limited partners owning 20%
or more of the equity of the firm or any partner who is involved in
management of the applicant business;
iii. For a corporation, all owners of 20% or more of the corporation and each
officer and director;
iv. For limited liability companies (LLCs), all members owning 20% or more
of the company and each officer, director, and managing member;
v. Any person hired by the business to manage day-to-day operations.
d) The Form 1919 includes the certifications and requirements previously set
forth in SBA Forms 601, 912 and 1261. 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
e) Additional Forms that may be necessary:
i. 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
Effective Date: October 1, 2014 190
SOP 50 10 5(G) Subpart B
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 guaranteed loan, the lender must complete the Form
159(7(a)). See Chapter 3, Paragraphs VIII-IX of this Subpart for further
guidance on the disclosure of fees.
ii. 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.
iii. 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.
f) 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.
g) Business financial statements and/or tax returns dated within 180 days prior to
submission to SBA, consisting of:
i. Year End Balance Sheet for the last three years, including detailed debt
schedule,
ii. Year End Profit & Loss Statements for the last three years,
iii. Reconciliation of Net Worth,
iv. Interim Balance Sheet,
v. Interim Profit & Loss Statements,
h) Affiliate/Subsidiary financial statement requirements same as above, and
i) Copy of Lease, if applicable
j) Detailed listing of machinery and equipment to be purchased with loan proceeds
and cost quotes
k) Detailed listing of collateral
l) Provide the following if real estate is to be purchased with loan proceeds:
m) Appraisal;
n) Lender’s environmental questionnaire;
o) Cost breakdown; and
p) Copy of purchase agreement.
q) Provide the following if purchasing an existing business with loan proceeds:
i. Copy of buy-sell agreement
Effective Date: October 1, 2014 191
SOP 50 10 5(G) Subpart B
ii. Copy of business valuation that meets the requirements of Chapter 4 of this
Subpart;
iii. Pro forma balance sheet for the business being purchased as of the date of
transfer;
iv. 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
v. Interim statements no older than 180 days from date of submission to SBA.
vi. 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;
(b) How the lender determined the business purchase price was reasonable;
and
(c) How the lender verified business revenue.
r) 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.
s) 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.
t) IRS Form 4506-T, Request for Transcript of Tax Return – See Chapter 5,
Paragraph III. of this Subpart. Identify the date IRS Form 4506-T was sent to IRS.
For non-delegated lenders verification of IRS Form 4506-T is required prior to
submission of application. ;
u) Documentation of USCIS status verification -- Per Chapter 2, Paragraph III.E. of
this Subpart, lenders must receive verification of the status of each alien required to
submit USCIS documents prior to submission of the application to SBA. Lenders
may submit a copy of the verification received from USCIS or SBA-SLPC or lender
may document in its credit memorandum that verification has been obtained.
v) SBA Form 1846, Statement Regarding Lobbying, must be signed and dated by
lender.
w) Authorization – latest version of the wizard program available at
http://www.sba.gov/aboutsba/sbaprograms/elending/authorizations/bank_Auth_Nati
onal_7a.html
3. 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:
i. 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;
Effective Date: October 1, 2014 192
SOP 50 10 5(G) Subpart B
ii. Copy of SBA Form 1920 ; and
4. EWCP
a) 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.
b) 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.
B. CAPLines
All CAPLines, including those processed non-delegated use SBA Application Forms
1919 and 1920. Forms can be found at www.sba.gov/for-lenders .
1. There are 4 subprograms under the CAPLines program. All require:
a) The Standard 7(a) application referenced above in I.A.2.
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.)
c) In addition to the documents identified above as required for a Standard 7(a)
application, for the following subprograms lender must:
2. Seasonal CAPLine:
a) Document the seasonal nature of the business; and
b) Obtain from applicant a month-to-month cash flow projection for the upcoming
12 months.
3. Contract CAPLine:
Obtain from applicant
i. 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;
ii. 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
iii. A copy of the contract(s) being financed by the Contract CAPLine.
4. Builders CAPLine:
i. Obtain month-to-month cash flow for all work to be performed by applicant;
Effective Date: October 1, 2014 193
SOP 50 10 5(G) Subpart B
ii. 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.
iii. 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.
Effective Date: October 1, 2014 194
SOP 50 10 5(G) Subpart B
II. WHERE TO SUBMIT APPLICATION FOR GUARANTY
All Lenders with an executed 750 Agreement are eligible to submit Applications for guaranty to
SBA using Standard processing procedures. Lenders with supplemental agreements such as
CLP, PLP, CA, and SBA Express can submit Applications based on what the agreement covers.
Regardless of the dollar amount or the processing procedure by which the Lender seeks to have
their request processed every request for guaranty must be made using E-Tran or electronically
as noted below.
A. Standard 7(a), CLP, and CAPLines (non-delegated) applications must be sent via E-
Tran or to the 7(a) Loan Guaranty Processing Center (“LGPC”) electronically.
1. Email: 7aloanprogram@sba.gov if attachments are less than 9 megabytes in
size.
2. Website: http://www.sba.gov/aboutsba/sbaprograms/elending/lgpc/index.html
click on “Submit 7(a) Document Here” or “sendthisfile.com”.
B. 7(a) Small Loans $350,000 and Under
Applications must be submitted using E-Tran (SBA’s electronic origination program) or e-mail.
For those loans that are submitted by non-PLP lenders or that are ineligible to be processed under
a PLP 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.
All applications for a loan guaranty for any small loan $350,000 or less processed through
Standard, CLP, or PLP (excluding SBA or Export Express) will begin with a screening for
a credit score. The lender will enter certain information into E-Tran (the specific information is
described below) and a credit score will be issued. If the small business applicant receives an
acceptable credit score, the application may be submitted under 7(a) small loan via E-Tran using
the steps below. If the applicant does not receive an acceptable credit score, non-delegated
lenders may submit a Standard 7(a) loan application to the LGPC (following the procedures for
loans over $350,000), while delegated lenders may process using their delegated authority
(following the procedures for loans over $350,000), or, if the lender is an SBA or Export Express
lender, as an Express application via E-Tran for a 50% guaranty. See Chapter 4, Paragraph I.A.
of this Subpart for more information.) Using E-Tran to Request a Guaranty:
1. To screen the application for a credit score:
The Lender will enter a minimal set of fields into E-Tran Loan Origination. At this
point, the lender will not be required to complete the entire set of E-Tran screens, but
the lender may choose to submit the entire set of E-Tran loan origination data if it is
easier to keep the data set intact while processing via a third-party software product.
The fields required to generate a credit score are as follows (it should be noted that
these data fields are part of the screens used for the E-Tran loan origination process
Effective Date: October 1, 2014 195
SOP 50 10 5(G) Subpart B
and part of the specification for loan origination software packages, which will make
it easier to move forward with the loan application if the credit score is acceptable):
business_legal_name
business_address>
business_city
business_state
business_zip
business_phone
fed_tax_id
DUNs number (if available)
For all owners of 20% or more equity in the applicant small business, the
following must be provided and will be included in the credit score.
first_name
last_name
SSN
city
state
zip
a) If the small business applicant receives an acceptable credit score, follow these
specific steps for submitting all “7(a) Small Loans” applications:
i. E-tran has been modified to include a choice for 7(a) small loan. After
selecting 7(a) Small Loan() the lender will complete the E-tran screens up to the
point of “Eligibility.”
ii. E-tran will then ask the following questions: For non-PLP lenders, “Is
lender a PLP lender?” For PLP lenders, “Is this loan eligible to be processed
under the PLP lender’s delegated authority? If you answer “yes,” you are also
certifying that the SBA Form 1920, has been completed, signed, dated, and filed
in the loan file.”
(a) If the lender is a PLP lender and 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 lender is not a PLP lender or the loan is not eligible to be submitted
under the PLP lender’s delegated authority, the lender checks “No” and 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:
i. Form 1919 and any other SBA forms required by Form 1919 in
response to “yes” answers on the form [for example, Form 912 (Statement
of Personal History)];
ii. Form 1920,
Effective Date: October 1, 2014 196
SOP 50 10 5(G) Subpart B
iii. Lender’s Credit Memorandum; and
iv. Documents required based on the conditions of the loan (e.g., appraisal
if real estate, purchase and sale agreement if change of ownership).
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.
b) If the small business loan application does not receive an acceptable credit score,
the lender may cancel the application that failed to receive an adequate credit score
and resubmit their request to LGPC, as a full standard 7(a) loan (following the
procedures for loans over $350,000while delegated lenders may process using their
delegated authority (following the procedures for loans over $350,000, or, if the
lender is an SBA or Export Express lender, as an Express application via E-Tran for
a 50% guaranty. .
C. For loans over $350,000 screening for a credit score is not required.
D. For SBA Express or Export Express, there is no requirement to screen for a credit
score.
E. PLP (including PLP-7(a) Small Loans and PLP-CAPLines), PLP-EWCP, SBA
Express and Export 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.
F. Standard EWCP
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, International Trade Finance (D/ITF) or designee.
Effective Date: October 1, 2014 197
SOP 50 10 5(G) Subpart B
G. Reconsideration of Declined Standard 7(a), CLP, 7(a) Small Loans (non-delegated)
and CAPLines (non-delegated) 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.
Effective Date: October 1, 2014 198
SOP 50 10 5(G) Subpart B
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. If lender makes the change using E-Tran servicing, a separate
notification to the appropriate SBA center is not necessary. PLP lenders are required
to notify SBA of these actions by making the changes in E-Tran servicing.
C. For SBA loans that have not been closed or fully disbursed:
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.
D. For SBA loans that have been fully disbursed:
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.
Effective Date: October 1, 2014 199
SOP 50 10 5(G) 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 57.)
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 57.)
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, 2014 200
SOP 50 10 5(G) Subpart B
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:
Lenders using the SBA Note are required to insert the repayment terms from the
authorization into the Note without modification.
Lenders using their own Note form, however, are required to comply with SBA
repayment terms but are not required to use the specific language set forth 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:
Lender must ensure that any necessary state-specific provisions that relate
to the Borrower’s state of residence at the time the loan is made 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
i. 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;
ii. 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;
iii. 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;
iv. 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);
Effective Date: October 1, 2014 201
SOP 50 10 5(G) Subpart B
v. 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
vi. Upon termination of the account, the remaining funds must be returned to
the borrower within 15 business days.
d) CAPLines
i. Interest only payments for any period exceeding the borrower’s cash cycle,
seasonal cycle, contract final payment date, or project completion date are not
permitted.
ii. 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 7(a) Small Loans, SBA Express and Export Express, and
paragraph 2 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 all 7(a) loans, 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 (except for SBA Express where a demand feature is permitted with specific
written conditions). 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 assert against SBA any local or
state law to deny any obligation, defeat any claim of SBA, or preempt federal law.”
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 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
Effective Date: October 1, 2014 202
SOP 50 10 5(G) Subpart B
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.”
3. 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) Settlement Sheet, SBA Form 1050;
b) Fee Disclosure and Compensation Agreement, SBA Form 159(7a);
c) Agreement of Compliance, SBA Form 601;
d) Equal Employment Opportunity Poster, SBA Form 722;
e) Tax Return Verification, IRS Form 4506-T.
4. 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 SBA Express, Export Express, and 7(a) Small Loans , lender and
borrower must use and 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:
i. The recipient of each disbursement;
ii. The date and amount of each disbursement; and
iii. 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.
d) The following documentation is acceptable to verify disbursement in accordance
with the Authorization:
i. Joint payee checks;
ii. Copies of receipts, invoices or other supporting documentation marked paid
by the seller or vendor; or
iii. 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.
5. 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.
Effective Date: October 1, 2014 203
SOP 50 10 5(G) Subpart B
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.
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 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;
Effective Date: October 1, 2014 204
SOP 50 10 5(G) Subpart B
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,
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. 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 7(a) Small Loans
1. For SBA Express, Export Express, and 7(a) Small 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
Effective Date: October 1, 2014 205
SOP 50 10 5(G) Subpart B
licenses, and cash/equity injections. In addition, fo7(a) Small Loans over $250,000
that are collateralized by commercial real estate, the lender must comply with the
appraisal policy set forth in Chapter 4, Paragraph II.C. of this Subpart.
3. Before disbursing an SBA Express, Export Express or Small Loan, the lender
must:
a) Use IRS tax transcripts to verify financial information used to support the loan
credit analysis. For 7(a) Small Loans, the lender is required to confirm in its credit
memo, collection of business tax returns and verification and reconciliation of the
applicant’s financial data against income tax data (received in response to IRS Form
4506-T, Request for Transcript of Tax Return) prior to submitting the application to
SBA. Obtain evidence of no un-remedied 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.
b) Obtain required hazard insurance on all assets taken as collateral, as set forth in
Chapter 5, Paragraph II of this Subpart.
c) 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.
d) 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 "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.
e) 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.
f) 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.
g) 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.
h) Require appropriate environmental reviews and compliance. For loans under
SBA Express, Export Express, and 7(a) Small Loans, lenders must follow the
environmental requirements in Chapter 4 of this Subpart. For loans under SBA
Express, Export Express and 7(a) Small Loans, 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.
Effective Date: October 1, 2014 206
SOP 50 10 5(G) Subpart B
4. The lender should not send any closing documentation to SBA after closing an
SBA Express, Export Express or 7(a) Small Loan but should retain all documents in
the loan file.
5. Access to Funds: SBA Express, Export Express, and 7(a) Small Loan 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 7(a) Small Loans. 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 SBA may require the borrower to mitigate the currency risk
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.
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%. The SBA Approving Official may approve a maximum
advance rate up to 90% when the lender submits written justification that meets one
of the following conditions:
Effective Date: October 1, 2014 207
SOP 50 10 5(G) Subpart B
a) The receivables are from financially sound corporations or multinational
companies located in countries with minimal political risk;
b) The receivables are from highly-rated government entities in countries with
minimal political risk; or
c) The exporter can provide favorable ledger experience with specific accounts over
a significant period of time (e.g., three years).
If the lender is a PLP-EWCP lender, the lender may advance up to 90 % and must
document its loan file with the analysis and justification to allow the higher advance
rate.
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:
i. 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);
ii. Irrevocable letter(s) of credit (SBA or the PLP-EWCP lender may require
for some or all of the borrower’s export-related accounts);
iii. 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.);
iv. Open account insured through non-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.);
v. Cash payment received prior to shipment;
vi. Open account uninsured, with SBA’s prior written consent; and
vii. 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, forward option, or
similar mechanism) as a condition of such approval. When advancing against a
Effective Date: October 1, 2014 208
SOP 50 10 5(G) Subpart B
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:
i. 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.
ii. 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
(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.
iii. 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
Effective Date: October 1, 2014 209
SOP 50 10 5(G) Subpart B
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;
(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;
(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;
(l) An account receivable due from an affiliated company; and
(m) 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.
iv. 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.
v. 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
i. Export-related inventory taken as collateral must be located within the
United States, until shipped to the foreign buyer.
ii. 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).
iii. Export-related inventory may include raw materials, work-in-process, and
finished goods.
Effective Date: October 1, 2014 210
SOP 50 10 5(G) Subpart B
iv. 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:
i. Inventory that is not subject to a valid, perfected, and enforceable first
priority lien in favor of the lender;
ii. Inventory located at an address that has not been disclosed to the lender in
writing;
iii. Inventory that is not located in the United States, unless being shipped to the
foreign buyer;
iv. Inventory that is placed by the borrower on consignment or held by the
borrower on consignment;
v. Inventory that is demonstration inventory;
vi. Inventory that consists of proprietary software (i.e., software designed solely
for the borrower’s internal use and not intended for resale);
vii. Inventory that is damaged, obsolete, returned, defective, recalled or unfit for
further processing;
viii. 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
ix. 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:
i. 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.
Effective Date: October 1, 2014 211
SOP 50 10 5(G) Subpart B
ii. 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:
i. 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.
ii. 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:
i. Both the Prime and the Subcontractor have favorable credit ratings based on
an acceptable rating agency (e.g., Builders Industry Credit Association
“BICA”);
Effective Date: October 1, 2014 212
SOP 50 10 5(G) Subpart B
ii. There is a successful track record between the Prime contractor and the
Subcontractor (borrower);
iii. There is a successful track record between the Prime contractor and the
contracting authority;
iv. The Contract CAPLine amount is less than $300,000;
v. The term of the contract is 12 months or less;
vi. 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
vii. 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:
i. The lender’s perfected UCC security interest in the contract proceeds will be
subordinate to the cost reimbursement claim of the Surety; and
ii. 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:
i. The PO is issued to the borrower under a Master Agreement; and
ii. 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
Effective Date: October 1, 2014 213
SOP 50 10 5(G) Subpart B
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 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, material men, 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, or 1:1 collateral ratio.
i. 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
Effective Date: October 1, 2014 214
SOP 50 10 5(G) Subpart B
collateral ratio. If business assets do not fully secure the line, the lender
must take available personal equity in personal real estate of the
principals as collateral to ensure there is a 1:1 collateral ratio;
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 85% 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 consistent with borrowers operating cash
cycle.
(g) Lenders must report the initial disbursement on SBA Form
1050 in accordance with paragraph C.4. above.
ii. 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, 2014 215
SOP 50 10 5(G) Subpart B
(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.)
(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.
Effective Date: October 1, 2014 216
SOP 50 10 5(G) Subpart B
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 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.4. 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 or the foreign accounts receivable are insured by the
Export-Import Bank or a major private insurer. 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;
Effective Date: October 1, 2014 217
SOP 50 10 5(G) Subpart B
(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:
(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
Effective Date: October 1, 2014 218
SOP 50 10 5(G) Subpart B
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
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. The
customer is a prime contractor performing on a Federal
government contract, or the accounts are insured through credit
insurance (common for foreign accounts receivable). If the
account meets one of those five 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 five 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, the
customer is a prime contractor performing on a Federal
government contract, or the accounts are insured through credit
insurance (common for foreign accounts receivable). If the account
meets one of those five 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 five 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 borrowing
Effective Date: October 1, 2014 219
SOP 50 10 5(G) Subpart B
base certificate is used or not, is determined by the banking relationship the lender
has with the borrower.
i. 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.
ii. If the lender does not have the borrower’s deposit accounts, then the lender
must utilize some form of controlled account as follows:
(a) 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
(b) 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. However, if maturity
coincides with the scheduled annual review of the line, including an annual review
conducted by lender coincidental with the maturity of the line, lender may advance
on the line up to maturity in conjunction with the lender's annual review in
accordance with lender's policies and procedures on its similarly-sized non-SBA
guaranteed commercial lines of credit. No advances can be made after maturity.
When a balance exists on a CAPLine at maturity, the lender should consider the
following:
i. Enforce final collection;
ii. Renew the line without SBA’s guaranty;
iii. Renew the line, requesting SBA’s guaranty (new application required if
maturity has reached 10 years);
iv. 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
v. Commence liquidation of supporting collateral.
Effective Date: October 1, 2014 220
SOP 50 10 5(G) Subpart B
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 SBA Resource.” 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 50-57.
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 50-57 provides additional information and can be accessed at
http://www.sba.gov/sites/default/files/SOP_50_57-
7(a)_Loan_Servicing_and_Liquidation_FINAL.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 of the SBA
requirements for securitization can be found at 13 CFR §120.420 through 13 CFR
§120.428.
Effective Date: October 1, 2014 221
SOP 50 10 5(G) Subpart B
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 transmitting loan account updates 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: diskette, e-mail, and FTA’s web site interface.
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. 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.
Effective Date: October 1, 2014 222
SOP 50 10 5(G) Subpart B
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.
4. Diskette
FTA may receive the Form 1502 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
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 cannot 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:
i.Fully Undisbursed (status 9) - leave blank.
ii.Current – report the due date of the next scheduled payment;
iii.Past Due – report the due date of the first missed scheduled payment;
iv.Deferred (status 4) – report the date the borrower is scheduled to resume
making payments;
v.In Liquidation (status 5) - leave blank;
vi.Paid-in-Full (status 6) - leave blank;
vii.Reserved (status 7) - leave blank;
viii.Purchased by SBA (status 8) - leave blank;
ix.Purchased by Lender from Secondary Market; or
Effective Date: October 1, 2014 223
SOP 50 10 5(G) Subpart B
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:
i. 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;
ii. 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;
iii. 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;
iv. 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;
v. 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;
vi. 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;
vii. 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. Purchased by SBA - if the guaranteed portion
Effective Date: October 1, 2014 224
SOP 50 10 5(G) Subpart B
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;
viii. 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
ix. 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. Do not restore any balance to the Undisbursed
Amount once loan disbursements have begun.]
x. 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. (For revolving loans refer to instruction (d) viii above.) If fully
disbursed, leave blank.
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 undisbursed for month ending 3/31/YY = $80,000.00
f) Interest Rate:
i. 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%
Effective Date: October 1, 2014 225
SOP 50 10 5(G) Subpart B
Secondary market rate = Prime + 1.50%
Prime = 6.75%
Rate reported = 8.25%
ii. 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%
iii. No Payment Received - if no interest payment was received, leave blank.
g) Guaranteed Portion Interest:
i. 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
ii. 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
iii. No Payment Received - if no interest payment was received, leave blank.
h) Guaranteed Portion Principal:
i. 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
ii. Unsold Loans - same as for sold loans.
Example: Principal payment on total loan
= $200.00 x 80% guaranty = $160.00
Effective Date: October 1, 2014 226
SOP 50 10 5(G) Subpart B
iii. 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.
i.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
ii. Total to FTA = $893.33 Unsold Loans (subject to SBA
ongoing guaranty fee) - SBA’s ongoing guaranty fee is remitted every
month.
(a) For term loans, SBA's ongoing guaranty fee calculation is:
i. [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
$80,000.00 x .005 ÷ 360 x 30 days = $33.33
Total to FTA = $33.33
ii. 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
iii.No Payment Received - if no payment was received, compute the fee based
on the product of a monthly on-going fee factor times the last reported
Guaranteed Portion Closing Balance. This on-going fee factor is either one-
twelfth of the annual service fee, or a daily fee factor times the number of
days in a reporting month.
iv.Interest Period From: The date from which the reported interest started or
accrued from. Leave blank if no interest payment is reported.
j) 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
Effective Date: October 1, 2014 227
SOP 50 10 5(G) Subpart B
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.
k) # 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)
l) 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.
m) Guaranteed Portion Closing Balance: The balance remaining after applying the
borrower's most recent principal payment multiplied by the guaranty percentage.
i. Sold Loans - the guaranteed principal balance outstanding after the
application of the reported guaranteed portion principal payment.
ii. 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)
iii. No Payment Received - if no payment was received from the borrower,
indicate the guaranteed principal balance as of the last payment received.
n) Remittance Penalty: Penalty amount if the lender does not forward secondary
market payments according to the terms in SBA Form 1086.
o) Total (Total to FTA column): The sum of each of the dollar values in the Total to
FTA column.
p) Total (Penalty column): The sum of each of the dollar values in the Remittance
Penalty column.
Effective Date: October 1, 2014 228
SOP 50 10 5(G) Subpart B
q) 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.
r) 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.
Effective Date: October 1, 2014 229
SOP 50 10 5(G) 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 appropriate
Agency loan 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.
3. A ratio analysis of the financial statements including comments on any trends
and a comparison with industry averages.
Effective Date: October 1, 2014 230
SOP 50 10 5(G) Subpart C
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. Credit reports are only required for the small business concern applying
for the loan and its owners and affiliates who are guarantors. Credit reports are not
required on non-guarantor affiliates.
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, official
Effective Date: October 1, 2014 231
SOP 50 10 5(G) Subpart C
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
Structure Limited or Special Limited or Special
Effective Date: October 1, 2014 232
SOP 50 10 5(G) Subpart C
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 of intent/term sheet or commitment letter included in the
application package outlining the terms and conditions of the Interim and/or 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. Unless otherwise approved in writing by D/OFPO or their designee, the Third
Party Lender may obtain additional collateral or other security for the Third Party
Loan in addition to its lien on the Project Property (“Additional Collateral”) only if
in the event of liquidation:
a) The Third Party Lender liquidates or otherwise exhausts all reasonable avenues
of collection with respect to the Additional Collateral no later than the disposition of
the Project Property, and
The Third Party Lender applies any proceeds received as a result of the Additional
Collateral to the balance outstanding on the Third Party Loan prior to the application
of proceeds from the disposition of the Project Property to the Third Party Loan.
6. Interest Rate Swap Contracts
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
Effective Date: October 1, 2014 233
SOP 50 10 5(G) Subpart C
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:
i. 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.
ii. 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.
iii. Swap contracts may be used on new or existing Third Party Loans.
iv. The swap contract does not have to last for the entire length of the Third
Party Loan.
v. SBA does not have a standard form for an interest rate swap contract.
vi. 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.
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:
Effective Date: October 1, 2014 234
SOP 50 10 5(G) Subpart C
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 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. 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:
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;
Effective Date: October 1, 2014 235
SOP 50 10 5(G) Subpart C
l) Hospitals, surgery centers, urgent care centers and other health or medical
facilities;
m) Hotels, motels, and other lodging facilities;
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:
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.
D. Financing Involving Industrial Development Bonds or Industrial Revenue Bonds
SBA may participate in Projects financed in part, directly or indirectly, by obligations
exempt from state or local taxes (for example, real estate tax exemptions). However, in
accordance with OMB Circular A-129, “Policies for Federal Credit Programs and Non-
Tax Receivables” (January 2013), SBA may not participate in projects financed in part,
directly or indirectly, by Federal tax-exempt obligations. For Projects that do not involve
Federal tax-exempt obligations, industrial development bonds or industrial revenue bonds
Effective Date: October 1, 2014 236
SOP 50 10 5(G) Subpart C
(IDBs/IRBs) may be a source of funding for Projects under the following conditions:
1. When the bond proceeds are used to fund the Third Party Loan:
a) If the bond issuer requires that it hold title to the Project Property, the TPL’s and
SBA’s respective liens must be properly recorded before any transfer of the title to
the Project Property to the bond issuer;
b) If the bond issuer takes title to the Project Property and leases the Project
Property to the borrower, the bond issuer must assign the lease to the Third Party
Lender and all payments under the lease must be paid to the Third Party Lender and
serve as the payments under the loan;
c) If 1.a) and b) are met, then the Third Party Loan may remain in a senior lien
position.
d) If the bond issuer does not require that it hold title to the Project Property but
takes a lien on the Project Property, the Third Party Lender may still be in a senior
lien position, but SBA’s lien position must not be subordinate to the bond issuer’s
lien.
2. When the bond proceeds are used to fund the Borrower’s Contribution:
a) If the bond issuer requires that it hold title to the Project Property, the TPL’s and
SBA’s respective liens must be properly recorded before any transfer of the title to
the Project Property to the bond issuer;
b) SBA’s lien position must not be subordinate to the bond issuer’s lien; and
c) The borrower may not pay the loan made from the proceeds of the tax-exempt
obligation at a faster rate than the 504 loan unless it is approved by the D/FA or
designee;
3. In no case may a default in payment of the tax-exempt obligation result in a tax
lien on the property; and
4. In transactions where the bond issuer takes collateral other than the Project
Property, SBA may, in its discretion, agree to take a subordinate lien position on that
collateral.
The structure of these transactions may vary from state to state and other conditions
may apply. CDCs and the SLPC should consult with District Counsel and OGC for
additional guidance.
Effective Date: October 1, 2014 237
SOP 50 10 5(G) 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.
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, 2014 238
SOP 50 10 5(G) Subpart C
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.
B. The Applicant Must Be Small Under SBA Size Requirements Applicable to 504
Financial Assistance (13 CFR §121.301(b))
Effective Date: October 1, 2014 239
SOP 50 10 5(G) Subpart C
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 affiliation), jobber or similar
agreements. All such franchise, license, dealer, jobber or similar agreements
are referred to in this section as “franchise agreements” and the two parties to
any such agreement are referred to as “franchisor” and “franchisee.”
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; therefore, CDC must consider all other size, eligibility
Effective Date: October 1, 2014 240
SOP 50 10 5(G) Subpart C
and underwriting requirements specific to a respective loan
applicant/application in accordance with this SOP.
Applicants who operate or propose to operate under franchise development
agreements (often referred to as Master Franchise Agreements) are ineligible as
such agreements 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.
Applicants who operate or propose to operate under an agreement containing
area development rights, which allow a specific franchisee to operate a number
of franchises within a specified geographic area, may be eligible if it complies
with the guidance in this section.
a) Affiliation can exist through:
i. Common ownership;
ii. Common management;
iii. Excessive restrictions upon the sale/transfer of the franchise interest; or
iv. Control by a franchisor either directly or through an affiliated entity or agent
such that the franchisee does not have right to profit from its efforts and bear the
risk of loss commensurate with ownership. (13 CFR §121.103 (i))
b) Review of Franchise Agreements and Related Documents
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 and such relationship (or product, service or trademark
covered by such relationship) is critical to the Small Business Applicant’s
business operation. In such case, the agreement governing the relationship
(or product, service or trademark), and any related documents, must be
reviewed.
c) Review and determination must be conducted by:
i. SBA-- for all loans processed through the SLPC; and
ii. CDC --for all PCLP loans.
iii. In all cases, the franchise agreement, including any amendments and/or
addendums, must be executed by all parties prior to submitting the closing
package to SBA for debenture funding
d) Registry of approved franchise agreements
i. To facilitate the review of these agreements, SBA makes available a list of
franchise agreements (the “Registry”) that have been approved by the SBA
Franchise Committee for size/affiliation and control issues. This information is
currently available to the public at no cost at www.franchiseregistry.com. (SBA
Effective Date: October 1, 2014 241
SOP 50 10 5(G) Subpart C
also posts a list of approved agreements by year on SBA’s website at
www.sba.gov/for-lenders.) CDCs must ensure that they have the correct date of
the agreement that the applicant/franchisee is operating under in order to access
the correct Registry documents. If CDC is unable to determine the date from the
documents, it should contact the franchisor directly. SBA will accept the
executed Certification of Franchise Documents (available on the Registry
website) matching the correct year of the agreement as conclusive evidence that
the franchisee is not affiliated with the franchisor based upon the agreement.
(Affiliation may nevertheless exist based on other factors.)
ii. In order to rely on the Registry for its determination, the CDC’s loan file
must include the following:
(a) Executed franchise agreement and any approved attachments and exhibits;
(b) Executed Addendum (if required);
(c) Executed Certification of Franchise Documents; and
(d) Compliance with any required eligibility notes.
e) Process if Not Listed on Registry or CDC is Not Using the Registry
If the Agreement is not listed on the Registry or the CDC chooses not to use the
Registry, a review must be made of the Agreement and all related
documents.
i. Franchise Findings
(a) CDCs should consult the SBA Franchise Findings List at
http://www.sba.gov/content/franchise-findings to see if there have been any
findings for a particular Franchise agreement, which if still in the Agreement,
would result in a determination of affiliation. The information provided by
the SBA Franchise Findings List should be used by CDCs to ensure they are
making informed affiliation determinations. CDCs should consult the “fix
available” category on the List to see if there is a fix to remedy the specific
issues noted there.
(b) If an agreement has no negotiated fix available and the noted findings
remain in the agreement, then the agreement should be determined to result in
affiliation.
(c) CDCs may contact SBA counsel in the District Office or the SBA Chief
Franchise Counsel for specific questions regarding franchise affiliation
determinations.
(d) Franchisors may contact the SBA Chief Franchise Counsel at
franchiseappeals@sba.gov for questions regarding the franchise registry
approval process.
ii. Affiliation Issues To Consider If Reviewing A Franchise Agreement That Is
Not Listed On The Registry Or If The Lender Is Not Using The Registry. `
Effective Date: October 1, 2014 242
SOP 50 10 5(G) Subpart C
The following are examples of common situations that should be
examined to determine if affiliation exists:
(a) Control
Any of the following provisions are considered conclusive evidence
of control:
i. Including a transfer provision that requires a franchisor’s
consent unless it expressly states “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 substitute;
ii. Setting the Applicant’s net profit;
iii. Requiring the payment of excessive franchise continuing
fees;
iv. Directly controlling the applicant’s employees including
hiring or terminating, except
v. Short term step-in agreements for 90-120 days are
acceptable, provided the period of control by the franchisor
does not exceed 365 days in the aggregate over the term of
the agreement;
vi. In the temporary personnel industry, temporary
employees paid by the franchisor are acceptable as long as
the franchisee makes all employment determinations.
vii. Requiring that the billing activities, deposit receipts or
revenues for the applicant be handled by the franchisor or a
Third Party chosen by the franchisor (Exception: automatic
debits from a franchisee account are acceptable);
viii. Including an option to purchase the applicant’s personal
property upon expiration or breach of the agreement, where
the franchisor has the ability to control the price at the time
of purchase (Exception: right of first refusal is allowed
provided it is on commercially reasonable terms);
ix. Requiring the franchisee (or EPC owner, if applicable) to
sell the real property to the franchisor upon expiration,
breach or termination of the agreement. (This type of
provision may be found in the agreement itself or recorded
against the real estate as a purchase option.) Exception: The
franchisor may require a lease of the property upon
termination for a period up to the remaining term of the
original franchise agreement; or
x. Including a Right of First Refusal on a partial transfer of
ownership between existing owners of a franchise entity or
their close relatives.
Effective Date: October 1, 2014 243
SOP 50 10 5(G) Subpart C
(b) Insurance Industry
SBA’s Office of Hearings and Appeals has determined that, in the Insurance
industry, it does not create affiliation for the franchisor to own the Insurance
Policies as well as receive the payments on the policy.
(c) Fitness Industry
Fitness centers that target one gender are not ineligible if they permit both
men and women to join and/or use the facility. Lenders must document the
file with the following:
i. Affidavit signed by the Small Business Applicant that both men and
women are allowed to join and/or use the facility; and
ii. Evidence that the facility is open to both men and women, such as two
single-sex bathrooms or locker rooms, brochures/flyers stating that both
men and women are welcome, or actual membership demographics.
(d) 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 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
Effective Date: October 1, 2014 244
SOP 50 10 5(G) Subpart C
(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:
(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:
Effective Date: October 1, 2014 245
SOP 50 10 5(G) Subpart C
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 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
i. Questions on SBA’s Franchise Policy should be directed to local field
counsel, center counsel, or SBA Chief Franchise Counsel.
ii. CDCs that believe SBA’s franchise affiliation decision 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
Effective Date: October 1, 2014 246
SOP 50 10 5(G) Subpart C
Oversight. For purposes of franchise appeals, the D/FA or designee will be an
ex officio member of the SBA Franchise Committee. The Associate General
Counsel for Financial Law & Lender Oversight will retain the authority to
overrule decision rendered by the SBA Franchise Committee.
iii. Franchisors that would like to appeal SBA’s decision not to place them on
the Registry may do so following the procedures set forth in subparagraph (2)
immediately above.
iv. Certain issues involving businesses that may be engaged in promoting
religion or that may have activities of a prurient nature may be referred to the
Associate General Counsel for Litigation for a decision.
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 has 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 the entire loan is not available from the resources of the applicant
business. If some or the entire loan applied for is otherwise available on reasonable
terms, 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 their loan 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:
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.)
Effective Date: October 1, 2014 247
SOP 50 10 5(G) Subpart C
6. The CDC must certify that credit is not otherwise available by signing the CDC
Official block on the appropriate application form.
7. 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.
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
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))
i. 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.
ii. 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.
Effective Date: October 1, 2014 248
SOP 50 10 5(G) Subpart C
(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.
(e) A business engaged in providing the services of a financial advisor on a
fee basis is eligible provided they do not use funds to invest in their own
portfolio of investments.
c) Passive Businesses (13 CFR §120.110(c))
i. 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.
ii. Businesses primarily engaged in subdividing real property into lots and
developing it for resale on its own account are not eligible.
iii. 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.
iv. 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.
v. Residential facilities that are licensed as nursing homes or assisted living
facilities are eligible.
vi. 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.)
vii. 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. (See subparagraphs i and iii
above regarding the ineligibility of business owned by developers and landlords.
viii. An ineligible passive business cannot obtain an SBA loan for any purpose,
including the purchase or construction of a building for its own use.
Effective Date: October 1, 2014 249
SOP 50 10 5(G) Subpart C
d) Life Insurance Companies (13 CFR §120.110(d))
i. Life insurance companies are not eligible.
ii. 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 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))
i. 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.
ii. 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.
iii. 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.
Effective Date: October 1, 2014 250
SOP 50 10 5(G) Subpart C
iv. Businesses involved in international trade are subject to U.S. trade
restrictions.
v. 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))
i. Small businesses that obtain more than one-third of their annual gross
revenue for the prior year, including rental income, from legal gambling
activities are not eligible.
ii. Small businesses are eligible if they obtain one-third or less of their annual
gross revenue, 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.
iii. 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 revenue 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))
i. Municipalities and other political subdivisions are not eligible.
ii. 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
Effective Date: October 1, 2014 251
SOP 50 10 5(G) Subpart C
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))
i. In evaluating the eligibility of a Small Business Applicant, if it appears that
the Small Business Applicant may be connected, associated or affiliated with a
religious organization or may have a religious component, the CDC must
complete the Religious Eligibility Worksheet (SBA Form 1971), attached to this
SOP as Appendix 8. Any questions regarding this worksheet should be
addressed to local SBA Counsel.
ii. A PCLP CDC must retain the worksheet and any information obtained in
connection with the CDC’s religious eligibility decision in the loan file. SBA
may review the worksheet and such information when conducting lender
oversight activities.
iii. A non-PCLP CDC must submit the completed worksheet and any
information obtained in connection with that worksheet to the SLPC with the
application. The SLPC will forward the matter to appropriate local SBA
Counsel who will then review the matter. If local SBA Counsel recommends
that the Small Business Applicant be found ineligible for financial assistance
based on a religious aspect, the matter must be referred to the Associate General
Counsel for Litigation for a decision. If local SBA Counsel finds the Small
Business Applicant eligible for financial assistance, the SLPC will notify the
CDC of that decision.
iv. A Small Business Applicant is not ineligible merely because it offers
religious books, music, ceremonial items and other religious articles for sale.
l) Cooperatives (13 CFR §120.110(l))
i. Consumer and marketing cooperatives are not eligible. For agricultural
marketing cooperatives, see (3) below.
ii. 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) It is small and each member of the cooperative is small.
iii. Agricultural Marketing Cooperatives. An agricultural cooperative acting
pursuant to the provisions of the Agricultural Marketing Act (12 USC 1141j) is
considered to be a producer cooperative and is eligible if it meets the
requirements for eligible producer cooperatives in (2) above.
Effective Date: October 1, 2014 252
SOP 50 10 5(G) Subpart C
iv. Worker Cooperatives. A worker cooperative, in which the employees of the
small business cooperatively own the company, is eligible if it meets all other
SBA eligibility requirements.
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))
i. SBA cannot provide financial assistance to businesses with Associates who
are incarcerated, on probation, on parole, who have been indicted for a felony or
a crime of moral turpitude, or who are presently subject to an indictment,
criminal information, arraignment, or other means by which formal criminal
charges are brought in any jurisdiction.
ii. 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.
iii. An individual with a deferred prosecution is treated as if the individual is on
probation or parole. Such an applicant is not eligible.
iv. 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 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.
(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’s response to question 9 reveals that
he or she is currently on parole or probation, then the Small
Business Applicant is not eligible.
(d) 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
Effective Date: October 1, 2014 253
SOP 50 10 5(G) Subpart C
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
or an Electronic Fingerprint Submission.
“Electronic Fingerprint Submission” means fingerprints taken
and reproduced in a machine-readable format by a fingerprint
capture system that complies with the Federal Bureau of
Investigation’s Electronic Biometric Transmission
Specifications. An Electronic Fingerprint Submission must be
compatible with the Federal Bureau of Investigation’s
Automated Fingerprint Identification System, or any successor
system in place for biometric identification. The Electronic
Fingerprint Submission will generally be a piece of paper
produced by the fingerprint capture system, which an individual
may attach to SBA Form 912 to expedite character check
procedures. Where an Electronic Fingerprint Submission is not
locally available, paper and ink fingerprint cards may still be
used.
(e) 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, 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, 2014 254
SOP 50 10 5(G) Subpart C
(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) or an Electronic Fingerprint
Submission must be completed. Where an Electronic Fingerprint
Submission is not locally available, paper and ink fingerprint cards may
still be used. 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.)
(f) 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 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 CDC to process and
Effective Date: October 1, 2014 255
SOP 50 10 5(G) Subpart C
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 or an Electronic Fingerprint Submission, 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 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.
(g) 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
Effective Date: October 1, 2014 256
SOP 50 10 5(G) Subpart C
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.
(h) 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.
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.
(i) 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.
(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 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
Effective Date: October 1, 2014 257
SOP 50 10 5(G) Subpart C
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))
i. 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.
ii. 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, to be prurient.
iii. If a PCLP CDC finds that the Small Business Applicant may have a
business aspect of a prurient sexual nature, the PCLP CDC must document its
analysis and eligibility decision in the loan file. SBA may review such
documentation when conducting lender oversight activities.
iv. If a non-PCLP CDC finds that the Small Business Applicant may have a
business aspect of a prurient sexual nature, the CDC must include an analysis of
the issue with its application to the SLPC. The SLPC will forward the matter to
the appropriate local SBA Counsel who will then review the matter. If local
SBA Counsel recommends that the Small Business Applicant be found
ineligible for financial assistance, the matter must be referred to the Associate
General Counsel for Litigation for a decision. If local SBA Counsel finds the
Small Business Applicant eligible for financial assistance, the SLPC will notify
the lender of that decision.
q) Prior Loss to the Government (13 CFR §120.110(q)) and Delinquent Federal
Debt (31 CFR 285.13)
i. 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.
ii. 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.
Effective Date: October 1, 2014 258
SOP 50 10 5(G) Subpart C
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.)
iii. “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, any loss incurred by the Federal Deposit
Insurance Corporation (FDIC) when it sells a loan at a discount, or any loan
purchased, held or securitized by Fannie Mae or Freddie Mac.
iv. These rules apply to:
(a) The Small Business Applicant;
(b) Any business owned, operated or controlled by an Associate of the Small
Business Applicant that incurred the Delinquent Federal Debt or caused the
Prior Loss;
(c) Any Associate of the Small Business Applicant who has (or guaranteed) a
Delinquent Federal Debt or cause a Prior loss (either directly or as a
guarantor); and
(d) Any guarantor who has (or guaranteed) a Delinquent Federal Debt or
caused a Prior Loss (either directly or as a guarantor).
v. CDCs are responsible for checking the Credit Alert Verification Reporting
System (CAIVRS) to determine if any of the individuals or businesses identified
in paragraph iv immediately above has a Delinquent Federal Debt which would
result in the Small Business Applicant being ineligible for SBA financial
assistance. In addition, SBA and CDCs may take additional due diligence
efforts to determine whether there has been prior loss to the government.
(a) CAIVRS allows the CDC to enter multiple tax id numbers (either SSN or
EIN) to search for an outstanding Delinquent Federal Debt 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.
Effective Date: October 1, 2014 259
SOP 50 10 5(G) Subpart C
vi. 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.
vii. 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.
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))
i. 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.
ii. 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
iii. 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
Effective Date: October 1, 2014 260
SOP 50 10 5(G) Subpart C
(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
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:
i. Resident Alien Card; and
ii. 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:
i. A temporary stamp by USCIS on the individual’s passport that says
“Processed for I-551 – Temporary Evidence of Lawful Permanent Residence;”
ii. USCIS Form I-327, “Re-entry Permit,” issued to LPRs in lieu of a visa,
which is valid for only 2 years;
iii. 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).
Effective Date: October 1, 2014 261
SOP 50 10 5(G) Subpart C
iv. 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.
i. They must have current/valid USCIS documentation permitting them to
reside in the U.S. legally; and
ii. 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 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 1244, which includes the “Statements Required by Law and Executive
Orders.” This includes a certification that IRCA does not apply to them or if it does
apply, more than five years have elapsed since they were granted lawful temporary
resident status pursuant to the 1986 legislation.
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
Effective Date: October 1, 2014 262
SOP 50 10 5(G) Subpart C
authorization from the alien is attached to and submitted with the 845 on that alien
providing name, address and date of birth.
i. 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 CDC] because I am applying
for a U.S. Small Business Administration loan.
ii. 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.
iii. 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.
iv. 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.
Effective Date: October 1, 2014 263
SOP 50 10 5(G) Subpart C
i. Management must have operated the business for at least 1 year prior to the
application date. (This requirement prevents financial assistance to “start-up”
businesses owned by aliens who do not have LPR status.)
ii. 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. with a
liquidation value equal to no less than the approved loan amount at the time of first
disbursement and, to the extent that the value of collateral declines during the life of
the loan, require the borrower to pledge additional collateral to ensure a sufficient
collateral coverage amount CDCs will determine liquidation value in compliance
with SOP 50 55 and in coordination with the appropriate commercial loan servicing
center. 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.
i. There may be several individuals or entities in a tenancy in common, but the
tenancy in common is considered 1 EPC.
ii. 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:
i. The lease must be in writing;
Effective Date: October 1, 2014 264
SOP 50 10 5(G) Subpart C
ii. The lease must be subordinated to the SBA’s mortgage, trust deed lien, or
security interest on the property;
iii. The lease must have a term, including options to renew exercisable solely by
the OC, at least equal to the term of the loan;
iv. 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 CDC to exercise
the tenant’s rights upon default;
v. 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
vi. 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.
vii. 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 guarantee the loan (if the holder is a trust, then the Trustee shall
execute the guarantee on behalf of any trust) . Each spouse owning 5% or more of
the EPC or the OC must personally guarantee the loan in full when the combined
ownership interest of both spouses in the EPC or the OC is 20% or more.
3. Conditions that apply when the EPC is owned in whole or in part by a trust.
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, 2014 265
SOP 50 10 5(G) Subpart C
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.
i. If an Employee Stock Ownership Plan trust agreement prohibits it from
being a guarantor or co-borrower, then it cannot use the EPC form of
borrowing.
ii. Beneficiaries usually do not have any control over the actions of the trust
and, therefore, do not have to meet the guaranty requirements.
e) The Trustee shall certify in writing to SBA that:
i. The Trustee has authority to act;
ii. The trust has authority to borrow funds, pledge trust assets, and lease the
property to the OC;
iii. The Trustee has provided accurate, pertinent language from the trust
agreement confirming the above; and
iv. The Trustee has provided and will continue to provide SBA with a true and
complete list of all trustors and donors.
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.
i. If there is only one OC, use the OC’s NAICS code.
ii. 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.
iii. 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
Effective Date: October 1, 2014 266
SOP 50 10 5(G) 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
i. At least 1 job for every $65,000 of project debenture ($100,000 for Small
Manufacturers).
ii. Job Opportunity is defined in Chapter 1 of this Subpart.
iii. 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.
iv. 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.
v. 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:
i. Energy 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);
(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
Effective Date: October 1, 2014 267
SOP 50 10 5(G) Subpart C
(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. For additional information on LEED Certification, see
http://usgbc.org/leed/certification.
ii. Additional guidance to determine if the Project meets one of the energy
public policy goals:
(a) In order for an applicant’s Project to be eligible under the Energy Public
Policy Goal described in b)(1)(c) above, the Project must generate more than a
de minimus amount (SBA interprets “more than a de minimus amount” to
mean at least 10%) of the energy used by the applicant at the Project facility.
In additional, all improvements or equipment required to generate the
renewable energy or renewable fuels must be included in the 504 Project
costs.
(b) In order for an applicant’s 504 loan project to be eligible under the 10%
energy reduction goal, the following applies:
i. If the Project involves the construction or acquisition of a facility (the
“new facility”), the new facility must replace an existing facility. The
energy consumption at the existing facility must be compared with the
new facility to determine if the Project satisfies the 10% energy reduction
goal. The new facility must be located in the same local area (e.g. the
same city, town, county, zip code, metropolitan statistical area or as
otherwise deemed appropriate by SBA), and the applicant must be able to
demonstrate that the new facility will use 10% less energy than the
existing facility. In addition, the energy consumption between the two
facilities must be compared for energy consumption on a square footage
basis.
ii. If the Project involves the retrofit of an applicant’s existing facility, the
retrofit must reduce energy consumption of that facility by at least 10%,
regardless of the energy usage of any other facilities that the applicant may
operate.
(c) The applicant must document the Project’s compliance with either
paragraph (2)(a) or (b) above through either an energy audit, engineering
report, or other professional evaluation, as deemed appropriate by SBA that is
based on the annual energy usage at the facility or facilities (measured in
actual energy usage, e.g. kilowatt hours, therms, or gallons, as applicable, not
in dollar costs), and that, at a minimum, includes the following:
i.a description of the facility or facilities;
ii.the current energy usage;
iii.the projected energy usage, which must be based on all
modifications and retrofits to building(s), and all
Effective Date: October 1, 2014 268
SOP 50 10 5(G) Subpart C
installations of, and replacements and retrofits to,
equipment; and
iv.the qualifications of the party performing the energy
audit, engineering report, or other professional
evaluation, each of which must be performed by an
independent third party (by an entity other than the
applicant, the interim lender, the Third Party Lender, or
any of their respective affiliates).
iii. 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.
iv. 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.
v. 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.
(c) Loans to Small Manufacturers (See Chapter 7 - Debenture Pricing &
Funding for definition) are excluded from this average.
vi. 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.
Effective Date: October 1, 2014 269
SOP 50 10 5(G) Subpart C
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
i. 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;
ii. Building and Building Improvements -- Integral costs for improvements to
the building such as facade expenditures, heating, electrical, plumbing and
roofing costs;
iii. Machinery and Equipment –
(a) All costs associated with the purchase, transportation, dismantling or
installation of machinery and equipment;
(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;
iv. 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));
v. 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.
vi. Expenditures for any of the costs listed in subparagraphs i through v above
incurred by the Borrower (with its own funds or from a Short Term Debt) prior
to the date of application that are directly attributable to the Project, provided
such expenditures (net of Borrower’s contribution) are reimbursed by the
Interim Lender;
vii. Short Term Debt (“Bridge Financing”) the purpose of which was to provide
financing until longer term financing could be obtained for any of the costs
listed in subparagraphs i through iv or in subparagraph vi above that are directly
Effective Date: October 1, 2014 270
SOP 50 10 5(G) Subpart C
attributable to the Project, provided that the financing is for a term of 3 years or
less;
viii. Interim financing – Repayment of interim financing including points, fees
and interest; and
ix. 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.
x. “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
(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.
Effective Date: October 1, 2014 271
SOP 50 10 5(G) Subpart C
i. 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,
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.
ii. 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.
Effective Date: October 1, 2014 272
SOP 50 10 5(G) Subpart C
iii. 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” and either: (i) both the
Third Party Loan and the 504 loan are being refinanced; or (ii) the
Third Party Loan has been paid in full and the 504 loan needs to be
refinanced as part of a larger transaction to provide funding for
expansion or renovations to the Project Property. In either case, the
CDC and Third Party Lender must document its loan file as to the
justification to refinance the existing SBA-guaranteed 504 loan. Any
applicable 504 prepayment penalties will apply. A Third Party Loan
may not be refinanced with an SBA guaranteed loan. (13 CFR
§120.920(b))
(c) Applications to refinance 504 loans with 7(a) loans may not be
processed under delegated authority but must be processed through the
LGPC.
(d) 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 secondary market
investor will not agree to modified terms.
iv. 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.
Effective Date: October 1, 2014 273
SOP 50 10 5(G) Subpart C
(c) The total debt being refinanced may consist of one or more loans.
v. 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.
vi. 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.
vii. The financing under section 504 will provide better terms or rate of interest
than the existing indebtedness on the date of refinancing.
Effective Date: October 1, 2014 274
SOP 50 10 5(G) Subpart C
“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.
viii. 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)
ix. 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:
i. Settlement agent’s fees;
ii. Overnight delivery, postage and messenger services;
iii. Certifications required by SBA (such as earthquake, flood, IRS, Certificate
of Occupancy, and certificate of completion); and
iv. 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
Effective Date: October 1, 2014 275
SOP 50 10 5(G) Subpart C
a) Leasing policies specific to 504 loans
i. 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.
ii. The CDC must not subsidize the project by charging an amount less than
enough to pay the CDC’s costs for the project.
iii. 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
i. 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.
ii. “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 may also include
exterior space (except parking areas) that is actively used in Borrower’s
business operations. Examples of exterior space that is actively used in
Borrower’s business operations include: outdoor storage yards for general
contractors, trucking companies, and moving and storage companies; or boat
slips and docks for marinas.
iii. CDC must document in its loan file the basis for determining that the
exterior space is actively used in Borrower’s business operations. Residential
Space as Part of the Business
c) 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-boarding facility
Effective Date: October 1, 2014 276
SOP 50 10 5(G) Subpart C
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.
d) 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.
7. Eligibility of Projects that Result in a Change of Ownership
a) Projects that result in a change of ownership are eligible under the following
circumstances:
i. i. The 504 Project finances only the costs associated with eligible long-term
fixed assets; the change in ownership and the acquisition of any other assets
such as receivables or goodwill is not an eligible use of 504 loan proceeds and
must be financed by other means which may include a 7(a) loan;
ii. ii. The application documents that jobs will be retained because of the
change of ownership. There must be reasonable assurance that the jobs would
be lost without the change of ownership. This can be in the form of a statement
from the seller to that effect or other certification acceptable to the SLCP.
b) The 504 loan proceeds must not be used to purchase stock or any other
ownership interest in a business; and
c) All other 504 Loan Program Requirements must be met.
8. 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 Party Lender
must submit a detailed explanation of why the new small business borrower will
succeed at that same location.
Effective Date: October 1, 2014 277
SOP 50 10 5(G) Subpart C
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. Mixed-Use Collateral
D. Mixed Use Collateral
Effective Date: October 1, 2014 278
SOP 50 10 5(G) 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. Each 504 loan must be
guaranteed by at least one individual or entity. 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:
i. 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.
ii. 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 requirements even if
that person has changed his or her ownership interest to less than 20%.
Effective Date: October 1, 2014 279
SOP 50 10 5(G) Subpart C
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:
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 SBA as the client or an intended user of the appraisal, as
those terms are defined in the Uniform Standards of Professional Appraisal Practice
Effective Date: October 1, 2014 280
SOP 50 10 5(G) Subpart C
(USPAP). The CDC may also be identified as the client or an intended user. It is
acceptable to SBA if the appraisal identifies the Third Party Lender as the client and
SBA as an intended user. 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;
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 appraisal 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.
Effective Date: October 1, 2014 281
SOP 50 10 5(G) Subpart C
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 must submit the Environmental Investigation Report to the SBA Center
processing the application except on PCLP loans. CDCs processing PCLP loans do
not have to submit Environmental Investigation Reports to the SBA Center but they
must keep a copy of any Environmental Investigation Report it the loan file. All
CDCs must comply with and meet the requirements of the Environmental Policies
and Procedures set forth in this SOP. For example, 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. (A Reliance Letter is required
even if the Environmental Investigation Report is addressed to the CDC.) Note,
however, that CDCs processing PCLP loans do not have to submit the results of
Environmental Investigation Reports to SBA, notwithstanding instructions to do so
elsewhere in this Section III. Any request for an exception to Agency Environmental
Policies and Procedures must be directed to the Environmental Committee (see
paragraph J), no matter how the underlying loan is being processed.
E. The Steps of an Environmental Investigation
Effective Date: October 1, 2014 282
SOP 50 10 5(G) 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)i. and ii.
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:
i. If the loan amount is up to and including $150,000, the
Environmental Investigation may begin with an Environmental
Questionnaire.
ii. 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, 2014 283
SOP 50 10 5(G) Subpart C
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:
i. Whether the Contamination quantities exceed the reportable or
actionable levels;
ii. Whether Remediation is necessary;
iii. 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
iv. 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”.
Effective Date: October 1, 2014 284
SOP 50 10 5(G) 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, 2014 285
SOP 50 10 5(G) Subpart C
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:
i. Cannot be modified;
ii. Must be executed by the Borrower and (if applicable) Operating
Company;
iii. Must have a copy of the Environmental Investigation Report
attached to it; and
iv. 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
Effective Date: October 1, 2014 286
SOP 50 10 5(G) 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:
i. Another Person with sufficient resources is performing Remediation
pursuant to a Remediation action plan that has been approved by the
appropriate Governmental Entity; or
ii. 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
iii. 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, 2014 287
SOP 50 10 5(G) Subpart C
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
Effective Date: October 1, 2014 288
SOP 50 10 5(G) 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, 2014 289
SOP 50 10 5(G) Subpart C
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_LOAN_
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
1. Regular loans: within 6 business days.
Effective Date: October 1, 2014 290
SOP 50 10 5(G) Subpart C
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:
i. Eligibility checklist (Exhibit 2);
ii. SBA Forms 912 (Exhibit 3);
iii. Franchise documentation (Exhibit 13);
iv. Key costs documents (Exhibit 14);
v. Collateral appraisals (Exhibit 15);
vi. Environmental documentation (Exhibit 16);
vii. Participating Lender Letter (Exhibit 18);
viii. USCIS Verification (Exhibit 18); and
ix. Copies of debt and lien instruments and a transcript of account or equivalent
(Exhibit 21).
x. There is a certification on Form 1244 “The undersigned certifies that all
information in this application and the exhibits whether submitted
contemporaneously with this application or at a later date, is true and complete
to the best of his/her knowledge and is submitted to SBA so that SBA can
decide whether to approve this application.” Therefore wet signatures from the
borrower are not required on the following exhibits: Exhibit 4, “Personal
Financial Statement,” Exhibit 6 “A balance and income statement as well as
federal income tax returns for the previous three years for SBC (or three years,
if the alternative 7(a) size standard is used, Exhibit 7 “A balance sheet and
income statement dated 120 days of the application together with an aging of
the accounts receivable and accounts payable listed,” and Exhibit 12: “The
names of affiliated (through ownership or management control) or subsidiary
businesses as well as the last three fiscal year-end financial statements and/or
federal income tax returns for the last three years (or two years, if the alternative
7(a) size standard is being used.) The signature on the Certification will serve
as the signature for Exhibits 4, 6, 7 and 12.
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.
Effective Date: October 1, 2014 291
SOP 50 10 5(G) Subpart C
4. All CDCs are required to provide a copy of the full or partially executed
purchase/sale agreements with 504 applications.
5. 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:
i. Be an ALP;
ii. Be Premier Certified Lenders Program (PCLP): or
iii. Have submitted at least 10 loans in the last 12 months, and have passed
benchmark measures using the most recent loans processed; and
iv. 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.
6. Monitoring
SBA will monitor CDC’s continued eligibility to use ASM by reviewing 1 loan out
of 10 loan applications based upon the following:
i. Each CDC will have at least 1 loan reviewed during a 12 month period.
ii. No CDC will have more than 12 loans reviewed during a 12 month period.
iii. SLPC will send CDC a written notice for review, and CDC will have 3
business days to submit the entire file to the SLPC.
iv. 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.
v. 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.
Effective Date: October 1, 2014 292
SOP 50 10 5(G) 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 SOP supersedes the Boilerplate.
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.
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
Effective Date: October 1, 2014 293
SOP 50 10 5(G) Subpart C
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. If the business
is located in a state that requires additional coverage such as wind, hail, earthquake
or other, on the hazard insurance or in a separate policy, borrower must provide.
b) Real Estate:
i. Coverage must be in the amount of the full replacement cost.
ii. If full replacement cost insurance is not available, coverage must be for the
maximum insurable value.
iii. 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:
i. Coverage must be in the amount of full replacement cost.
ii. If full replacement cost insurance is not available, coverage must be for
maximum insurable value.
iii. 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.
b) The policy must contain a Mortgagee clause providing that the interest of
CDC/SBA will not be invalidated by any:
i. Act, omission, or negligence of the mortgagor, owner, master, agent or crew
of the insured vessel;
Effective Date: October 1, 2014 294
SOP 50 10 5(G) Subpart C
ii. Failure to comply with any warranty or condition out of mortgagee’s
control; or
iii. Change in title, ownership or management of the vessel.
c) The policy must include Protection and Indemnity, Breach of Warranty, and
Pollution coverage.
d) The policy or endorsements must provide for at least 10 days prior written notice
to CDC/SBA of policy cancellation.
3. Flood Insurance
a) SBA flood insurance requirements are based on the Standard Flood Hazard
Determination (FEMA Form 086-0-32 or FEMA Form 81-93). CDCs have the
option of using either form until May 30, 2015, at which time only FEMA Form
086-0-32 may be used.). 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:
i. Uses prudent lending standards to determine that flood insurance is not
economically feasible or not available; and
ii. 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.
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
Effective Date: October 1, 2014 295
SOP 50 10 5(G) Subpart C
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:
a) Verification of Financial Information—
i. 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.
Effective Date: October 1, 2014 296
SOP 50 10 5(G) Subpart C
ii. If the business has been operating between zero and 2 years, CDC must
obtain the information for all years in operation.
iii. 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.
iv. CDC must compare the tax data received from the IRS with the financial
data or tax returns submitted with the loan application.
v. 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.
vi. For a change of ownership, CDC must verify financial information provided
by the seller of the business in the same manner as above.
vii. 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 $2.00 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, 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/Income-Verification-Express-Service
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
Effective Date: October 1, 2014 297
SOP 50 10 5(G) Subpart C
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
i. A term including renewal options that equals or exceeds the term of the
loan; and
ii. 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.
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:
i. 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;
Effective Date: October 1, 2014 298
SOP 50 10 5(G) Subpart C
ii. Sublease;
iii. Hazard insurance proceeds resulting from damage to
improvements;
iv. 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
i. The NEHRP provisions may be found in the American Society of Civil
Engineers (ASCE) Standard 7 and the International Building Code.
ii. 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 authorization boilerplate automatically inserts the NEHRP provision when
any of the use of proceeds options selected includes construction financing,
including leasehold improvements. If the leasehold improvements made with loan
proceeds will become permanently affixed to any structure on the leased premises,
then they must comply with the NEHRP. If the improvements are only temporary,
they do not need to comply with the NEHRP. Accordingly, if the borrower can
demonstrate that the leasehold improvements will be temporary, CDC may request
modification of the authorization to remove the NEHRP provision in accordance
with Paragraph II of this Chapter. 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.
b) Inspections must be made by a qualified engineer, appraiser, or other party
satisfactory to SBA prior to all progress disbursements.
Effective Date: October 1, 2014 299
SOP 50 10 5(G) Subpart C
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.)
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.
Effective Date: October 1, 2014 300
SOP 50 10 5(G) Subpart C
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, 2014 301
SOP 50 10 5(G) Subpart C
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). 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 13 items and the Checklist; or
b) For expedited closing packages, the first 8 items and 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.
Effective Date: October 1, 2014 302
SOP 50 10 5(G) Subpart C
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.
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
Effective Date: October 1, 2014 303
SOP 50 10 5(G) Subpart C
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 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:
1. Issue an annual 504 debenture closing schedule with District Office deadlines
for receiving closing packages. SBA Counsel responsible for debenture closing in
Effective Date: October 1, 2014 304
SOP 50 10 5(G) Subpart C
each District Office must make available an annual schedule of the deadlines for
receipt of both regular and expedited closing packages for each monthly debenture
sale to the public and to CDCs who regularly submit closing packages to the district.
2. Review closing packages. SBA Counsel must use the standard Checklist to
review the 8 documents submitted for an expedited closing and 13 documents
submitted for a regular closing. If SBA Counsel has concerns that SBA may be at
material risk if the debenture is sold, then SBA Counsel must contact the CDC and
identify what information is reasonably necessary to address that concern. If the
CDC is unable to provide the information or otherwise alleviate the concern, then the
debenture will not be submitted for sale. In addition, SBA Counsel must verify that
the information the CDC entered onto the Debenture, Note, and Servicing Agent
Agreement forms is accurate and complete.
a) Notify CDCs of deficiencies. SBA Counsel may reject late packages or
packages that do not meet the standards for debenture sale. If the SBA Counsel
determines that changes are needed in the closing documents of packages approved
for sale, SBA Counsel must notify the CDC of such changes before the deadline
upon which the CDC must mail the documents to CSA for the debenture sale. If
SBA Counsel rejects a package, SBA Counsel must notify the CDC that SBA will
not include the package in the scheduled sale and advise the CDC in writing of what
the CDC needs to correct for the package to meet the standards for sale. The CDC
may resubmit the package for a future sale with the required changes.
b) Issue an SBA Counsel closing opinion. Once SBA Counsel is satisfied with the
loan closing package (including that the CDC has made all necessary changes to the
closing documents as identified by SBA Counsel), SBA Counsel must issue an
opinion pursuant to 13 C.F.R. §120.960(c) stating that the debenture may be closed,
SBA may execute its guarantee, and the debenture may be sold. The SBA Counsel’s
Opinions should be sent to the SLPC.
c) Notify the CDC and the CSA which loans SBA has approved for debenture
funding. SBA Counsel must notify the CDC and the CSA in writing as to which
debentures the District Office approves for funding in that month’s sale.
3. 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.
4. 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:
Effective Date: October 1, 2014 305
SOP 50 10 5(G) Subpart C
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
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.
Effective Date: October 1, 2014 306
SOP 50 10 5(G) Subpart C
CHAPTER 7: DEBENTURE PRICING & FUNDING
I. PRICING A 504 DEBENTURE 13 CFR §120.931
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:
i. Regular 504 loans; and
ii. 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:
i. 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);
ii. Each Project that reduces the Borrower’s energy consumption by at least
10%; or
iii. 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 provided that SBA
determines that each Project meets prudent lending standards. 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
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%
Effective Date: October 1, 2014 307
SOP 50 10 5(G) Subpart C
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.
7 Underwriter’s Fee To determine the exact amount of the underwriter’s fee,
multiply the 20-year Gross Debenture by .004.
Effective Date: October 1, 2014 308
SOP 50 10 5(G) Subpart C
(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 proceeds by the amount of the unused
contingency fund, and the Debenture amount is recalculated. 13 CFR §120.930(c)
Effective Date: October 1, 2014 309
SOP 50 10 5(G) Subpart 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:
i. Converting short-term debt (i.e., debt with a remaining term of 24 months or
less) to long-term debt;
ii. Converting interim debt (i.e., a bridge loan) to long-term debt;
iii. Converting line of credit or revolving credit debt to long-term debt;
Effective Date: October 1, 2014 310
SOP 50 10 5(G) Subpart C
iv. 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;
v. Bringing trade payables to a current status or buying out a factor; and
vi. A change of ownership (e.g., acquisition, merger or consolidation) that is
essential to sustain the existence of the business is not subject to the limitation.
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, 2014 311
SOP 50 10 5(G) Subpart C
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)
Effective Date: October 1, 2014 312
SOP 50 10 5(G) 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
fee) One-time fee
Fee is adjusted annually by
cohort year (based on date the
(2) Annual Fee -- (Ongoing fee) individual loan was approved)
and is charged on the unpaid
principal balance of the loan.
Funding Fee -- 13 CFR 0.25% of the net Debenture Charged to cover the costs
§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, 2014 313
SOP 50 10 5(G) Subpart C
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) An individual who is a qualified source as defined in Subpart B, Chapter
4, Paragraph II.C.5 of this SOP and employed by the lender to conduct an
independent business valuation in connection with an SBA loan;
e) Any attorney in connection with the SBA loan closing; and
f) A real estate agent who is receiving a commission for the sale of real
estate in connection with the SBA loan.
Effective Date: October 1, 2014 314
SOP 50 10 5(G) Subpart C
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
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.
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
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
Effective Date: October 1, 2014 315
SOP 50 10 5(G) Subpart C
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 complies with Subpart B, Chapter 3, Paragraph VI.B.1 of
this SOP; 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 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. Individuals and entities suspended, debarred, revoked or otherwise excluded
under the SBA or Government-wide debarment regulations are not permitted to
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 are responsible for consulting the System for Awards
Management’s (SAM)/Excluded Parties List System (EPLS) or any successor
system to determine if an Agent has been debarred, suspended or otherwise excluded
by SBA or another federal agency. (www.sam.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. CDCs are
responsible for reviewing SBA’s webpage list of Agents that have been subject to an
enforcement action or have been otherwise excluded from the privilege of
conducting business with SBA and must refrain from doing business with any Agent
Effective Date: October 1, 2014 316
SOP 50 10 5(G) Subpart C
appearing on the list during the time that an Agent is suspended or revoked from
SBA programs. See http://www.sba.gov/about-sba-services/18351.
B. Illegal Activity of an Agent Must Be Reported
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, 2014 317
SOP 50 10 5(G) Subpart C
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 50-55 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 50-55, Chapter 15 contains information on prepayment or purchase
of a development company loan or debenture.
2. Wells Fargo Bank Corporate Trust Services is the current central servicing
agent (CSA) for closed SBA 504 loans.
Effective Date: October 1, 2014 318
SOP 50 10 5(G) Subpart C
3. 13 CFR §120.940 addresses prepayment of the 504 loan or debenture.
Effective Date: October 1, 2014 319
SOP 50 10 5(G) Appendix 1
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:2
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).3
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).
2
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.
3
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.
Effective Date: October 1, 2014 320
SOP 50 10 5(G) 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)4
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.)
4
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, 2014 321
SOP 50 10 5(G) Appendix 1
These restrictions would not apply if the foreign controlled enterprises operated through a
domestic subsidiary.
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.
Effective Date: October 1, 2014 322
SOP 50 10 5(G) 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, 2014 323
SOP 50 10 5(G) Appendix 2
“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;
Effective Date: October 1, 2014 324
SOP 50 10 5(G) 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 Contamination5 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.
5
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, 2014 325
SOP 50 10 5(G) Appendix 2
“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 E1527-13.
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
Effective Date: October 1, 2014 326
SOP 50 10 5(G) 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 § 312.266 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
6
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, 2014 327
SOP 50 10 5(G) Appendix 2
no further investigation is warranted; or (b) 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. A Transaction Screen may be considered if it was
completed up to one year prior to submission.
Effective Date: October 1, 2014 328
SOP 50 10 5(G) 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 E1527-13). 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, 2014 329
SOP 50 10 5(G) Appendix 3
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
Effective Date: October 1, 2014 330
SOP 50 10 5(G) 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, 2014 331
SOP 50 10 5(G) Appendix 4
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/eos/www/naics/.
Effective Date: October 1, 2014 332
SOP 50 10 5(G) 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, 2014 333
SOP 50 10 5(G) Appendix 5
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, 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, and Export 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 and Export 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.
Effective Date: October 1, 2014 334
SOP 50 10 5(G) 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."
Effective Date: October 1, 2014 335
SOP 50 10 5(G) Appendix 6
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.
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 E1527-13 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
Effective Date: October 1, 2014 336
SOP 50 10 5(G) Appendix 6
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).
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.
Effective Date: October 1, 2014 337
SOP 50 10 5(G) Appendix 6
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.
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
Effective Date: October 1, 2014 338
SOP 50 10 5(G) Appendix 6
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
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.
Effective Date: October 1, 2014 339
SOP 50 10 5(G) Appendix 6
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.
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
Effective Date: October 1, 2014 340
SOP 50 10 5(G) Appendix 6
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
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
Effective Date: October 1, 2014 341
SOP 50 10 5(G) Appendix 6
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
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
Effective Date: October 1, 2014 342
SOP 50 10 5(G) Appendix 6
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
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
Effective Date: October 1, 2014 343
SOP 50 10 5(G) Appendix 6
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.
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
Effective Date: October 1, 2014 344
SOP 50 10 5(G) Appendix 6
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
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
Effective Date: October 1, 2014 345
SOP 50 10 5(G) Appendix 6
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.
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
Effective Date: October 1, 2014 346
SOP 50 10 5(G) Appendix 6
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.
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.]
Effective Date: October 1, 2014 347
SOP 50 10 5(G) Appendix 6
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: _________________________________________
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: ________________________________________
Effective Date: October 1, 2014 348
SOP 50 10 5(G) Appendix 6
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: ________________________________________
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, 2014 349
SOP 50 10 5(G) Appendix 6
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]
Effective Date: October 1, 2014 350
SOP 50 10 5(G) 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, 2014 351
SOP 50 10 5(G) Appendix 6
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]
Effective Date: October 1, 2014 352
SOP 50 10 5(G) 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, 2014 353
SOP 50 10 5(G) Appendix 6
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
Effective Date: October 1, 2014 354
SOP 50 10 5(G) Appendix 7
APPENDIX 7 – CAPLINES PROGRAM DOCUMENTS
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: _____________
Effective Date: October 1, 2014 355
SOP 50 10 5(G) Appendix 7
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, 2014 356
SOP 50 10 5(G) Appendix 7
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
Effective Date: October 1, 2014 357
SOP 50 10 5(G) 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, 2014 358
SOP 50 10 5(G) Appendix 7
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
Effective Date: October 1, 2014 359
SOP 50 10 5(G) 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: January 1, 2014 360
SOP 50 10 5(G) Appendix 7
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
Effective Date: January 1, 2014 361
SOP 50 10 5(G) Appendix 8
RELIGIOUS ELIGIBILTY WORKSHEET
(SBA Form 1971)
I. NAME OF LOAN APPLICANT:
II. TYPE OF LOAN REQUESTED:
III. AMOUNT OF LOAN REQUESTED:
IV. USE OF PROCEEDS:
V. RELIGIOUS COMPONENT OF BUSINESS
A. Is the business or its activities connected, associated or affiliated
with a religious organization in any way?
Yes No
If yes, explain nature and extent of relationship:
B. Nature of the religious component (please check all that are applicable).
Sale of religious books, music, artifacts, gifts, and
other religious items.
Religious instruction, counseling or indoctrination
with regard to any items sold (including those listed above).
Religious instruction, indoctrination or counseling
whether to adults or children (includes use of religious
material at day care facilities).
Religious broadcasting (includes religious music,
religious programming including instruction,
indoctrination, counseling, and religious services).
Publication of newspaper, journal or other religious
Effective Date: January 1, 2014 362
SOP 50 10 5(G) Appendix 8
publication.
Creation or development of religious materials
(including writings, music, artifacts, computer software,
religious art and so forth).
Sale or distribution of religious publications.
Prayer, meditation, religious worship, religious
service or proceeding.
Provision of Reading room or other space to
conduct lectures, readings, prayer, worship, meditation or
other activities related to religion.
Other:
Comments or explanation:
C. Describe the quantity or extent of the religious component or
activities with regard to the entire business. In this regard,
examine both the actual religious activities (particularly those that
involve teaching, instructing, counseling or indoctrinating) and
whether the religious component pervades or permeates the entire
business.
VI. LENDER/CDC SIGNATURE
_________________________________ _______________
Name and Title of Lending/CDC Official Date
VII. DETERMINATION
Eligible
Recommended Not Eligible
Comment or Explanation:
___________ ____________________
Center/District Counsel Date
SBA FORM 1971 (10/2013)
Effective Date: January 1, 2014 363