Updated Guidance on Underwriting 7(a) Loans during the COVID-19 Pandemic and Miscellaneous Related Matters
Summary
SBA Procedural Notice 5000-20071, effective December 16, 2020, to all SBA employees and 7(a) Lenders, extending through March 31, 2021 the COVID-19 underwriting guidance first issued in SBA Procedural Notice 5000-20042 on August 7, 2020. It lists the factors a lender should consider in its credit memorandum, including the cash-flow effect of any PPP, EIDL or other stimulus loan, an 18-month contingency plan, pandemic restrictions and costs, customer and supplier concentration, collateral, change-of-ownership loans under Notice 5000-20057, and loans with 50% or more of proceeds as working capital. It reminds SBA Express lenders that the $1,000,000 maximum under Section 1102(c) of the CARES Act reverts to $350,000 on January 1, 2021, and gives closing guidance on IRS Form 4506-C transcripts, valuations, appraisals and electronic signatures.
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SBA Procedural Notice
TO: All SBA Employees and 7(a) Lenders CONTROL NO.: 5000-20071
SUBJECT: Updated Guidance on Underwriting EFFECTIVE: December 16, 2020
7(a) Loans during the COVID-19 Pandemic and
Miscellaneous Related Matters
On August 7, 2020, SBA issued SBA Procedural Notice 5000-20042 providing guidance on the
additional credit analysis that a 7(a) Lender should conduct and include in its credit
memorandum during the COVID-19 emergency in order to demonstrate that the 7(a) Lender has
performed prudent underwriting and provided an adequate financial analysis of the Applicant’s
ability to repay the loan. Given the continuing adverse economic effects of the COVID-19
emergency, the purpose of this Notice is to extend this underwriting guidance through March 31,
2021 as described and updated below. The guidance for certain miscellaneous matters related to
7(a) loans during the COVID-19 emergency discussed in SBA Procedural Notice 5000-20042
also is extended through March 31, 2021.
A. Updated Underwriting Criteria for New 7(a) Loans Made During the COVID-19
Emergency:
Lenders must analyze each application in a commercially reasonable manner, consistent with
prudent lending standards, and further provides that the cash flow of the applicant is the primary
source of repayment, not any expected recovery from the liquidation of collateral. SOP 50 10 6,
Part 1, Section A, Ch. 1 provides that the Lender’s failure to underwrite, service, and liquidate
SBA Loans in a commercially reasonable and prudent manner may result in the suspension or
revocation of the authority of a Lender to conduct 7(a) program activities in accordance with the
regulations under 13 CFR 120.1400-1600. The SOP also states that if the Lender’s financial
analysis demonstrates that the applicant lacks reasonable assurance of repayment in a timely
manner from the cash flow of the business, the loan request must be declined, regardless of the
collateral available or outside sources of repayment. SBA recognizes that prudent underwriting
during the COVID-19 emergency includes taking into consideration the current and future
effects the emergency has on business operations, cash flow and the repayment ability of 7(a)
applicants.
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The Lender’s financial analysis of the applicant and credit memorandum must comply with the
core requirements in Part 2, Section A of SOP 50 10 6, and must also comply with the detailed
guidance provided for each delivery method in the applicable chapter of Part 2, Section B. In
addition, as a best practice during the COVID-19 emergency and with respect to applications
received after the date of this Notice, SBA recommends that the Lender continue to consider the
factors listed below to demonstrate that the Lender has performed prudent underwriting and
provided an adequate financial analysis of the Applicant’s ability to repay the loan. For 7(a)
loans processed on a non-delegated basis, the Loan Guaranty Processing Center (LGPC) may
request additional information to facilitate the proper loan decision if sufficient information is
not provided when the application is submitted. These additional factors include, but are not
limited to:
1) Does the applicant have any other loan(s), such as a Paycheck Protection Program
(PPP) loan, Economic Injury Disaster Loan (EIDL), or other stimulus financing,
that have repayment or contingent repayment requirements that could impact cash
flow? If yes:
a. What is the loan’s status (current, on deferment, past due, or, for PPP
loans, forgiveness application in process etc.)?
b. Include in the cashflow analysis the impact of any PPP loan (i) during
and after any payment deferment period, and (ii) considering whether
the loan is fully, partially, or not forgiven.
c. Include in the cashflow analysis the impact of any EIDL or other
stimulus financing, during and after any payment deferment period.
d. What will the lien position be on the new 7(a) loan?
2) Based on the sector and industry in which the applicant operates, how is the
industry and the business impacted by the COVID-19 emergency? Have the
applicant’s business revenue and staffing levels been impacted, and has the
applicant provided a plan to return to normal operations? Does the business have
a contingency plan for revenues and operations for a minimum of the next 18
months (i.e. changes in products and/or service)?
3) How have any restrictions such as “stay-at-home orders”, social distancing, travel,
traffic flow, and trade limitations impacted the applicant’s cost projections,
clientele or access to supplies, inventory and/or equipment?
4) What are the other impacts to the business’ operational cost(s) such as providing
protective gear, cleaning materials and essential costs to ensure the safety of
customers and employees?
5) Is the historical financial information reliable based on current market conditions?
Consider using month to month financial proforma with break-even analysis
based on current market conditions (i.e. unemployment rates, decreased
household disposable income).
6) How concentrated or diversified is the customer base? How reliant is the applicant
on sales to or receivables from customers in those concentrations?
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SBA Form 1353.3 (4-93) MS Word Edition; previous editions obsolete
Must be accompanied by SBA Form 58
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7) How concentrated or diversified is the applicant’s vendor/supplier pool, and
which, if any, vendors/suppliers have decreased ability to support the business?
8) Discussion of the impact current market conditions have on collateral adequacy.
9) For Change of Ownership loans, given current market conditions, does the
applicant have adequate industry experience to operate the business? (see
Business Valuation below). Does the seller have any other loan(s) (PPP, EIDL, or
other stimulus financing, etc.) that have repayment or contingent repayment
requirements that could impact cash flow? If yes, the Lender must address the
issues in 1. (a)-(d) above and follow any requirements applicable to the other loan
program(s), as well as the additional procedural requirements provided in SBA
Procedural Notice 5000-20057, Paycheck Protection Program Loans and Changes
of Ownership, effective October 2, 2020.
10) For any loans where 50% or more of the loan proceeds will be used for working
capital, the Lender should specifically address in its credit memorandum why this
level of working capital is necessary and appropriate for the subject business in
light of the COVID-19 emergency.
B. SBA Express COVID-19 Reminders:
As described in SBA Information Notice 5000-20025, Temporary Increase to SBA Express
Maximum Loan Amount and Permanent Changes to Fee Relief for SBA Express Loans to
Veteran-Owned Small Businesses in the CARES Act, effective May 7, 2020, the SBA Express
maximum loan amount was increased to $1,000,000 through December 31, 2020 by Section
1102(c) of the Coronavirus Aid, Relief, and Economic Security Act. The maximum SBA
Express loan amount will revert back to $350,000 effective January 1, 2021.
SOP 50 10 6, Part 2, Section B, Chapter 2, Paragraph C. provides that to the maximum extent
practicable, SBA Express Lenders may use their own forms, internal credit memoranda, notes,
collateral documents, and servicing and liquidation documentation. In using their documents and
procedures, Lenders must continue to follow their established and proven internal procedures
used for their similarly-sized, non-SBA guaranteed commercial loans. Therefore, in making an
SBA Express Loan up to $1,000,000, SBA expects the Lender to follow the same established and
proven internal procedures that it uses for its similarly-sized, non-SBA guaranteed loans up to
$1,000,000. The SBA Office of Credit Risk Management may at any time review the Lender’s
commercial loan policy for compliance.
SBA Express Lenders are also reminded that SOP 50 10 6, Part 1, Ch. 1, Para. E.3.m.ii. provides
that Lenders may not use their delegated authority to submit such an application under any
Lender’s SBA Express authority for a period of 12 months from the date of withdrawal, screen-
out, or decline of the application. There are no exceptions to this prohibition for SBA Express
loans over $350,000.
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Must be accompanied by SBA Form 58
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C. Guidance Regarding Obtaining Required Documents to Close and Disburse 7(a) Loans:
SBA is aware that, due to the COVID-19 emergency, some 7(a) Lenders are currently
experiencing delays in obtaining certain documents required for loan closings and disbursement
such as IRS transcripts, appraisals, and valuations. SBA is providing the following guidance
regarding these items:
1) IRS 4506-T/4506-C Tax Verification: On April 8, 2020, SBA issued
Procedural Notice 5000-20016, Changes to 4506-T Tax Transcript
Verification Procedures during the COVID-19 Emergency. That Notice
provided certain temporary procedures for tax verification that remain
effective until further notice. On December 11, 2020, SBA issued Information
Notice 5000-20068 informing SBA employees and Lenders that the IRS
issued a new IRS Form 4506 for use by authorized IRS Income Verification
Express Service (IVES) participants. The new form is the IRS Form 4506-C,
IVES Request for Transcript of Tax Return.
2) Verification of USCIS Status: As set forth in SOP 50 10 6, Part 2, Section A
Ch. 3, Para. C, 7(a) 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 7(a) Lender must document the findings in the
loan file. If the 7(a) Lender is unable to obtain the required verification, the
application cannot be submitted to SBA, or for delegated processing, the
Lender cannot submit a request for a loan number.
3) Business Valuations: Valuations performed on businesses that have been
negatively impacted by COVID-19 restrictions put in place for health and
safety concerns of the public and employees may not have taken into
consideration the impact of the COVID-19 emergency, which can result in an
inaccurate or inflated valuation. All 7(a) Lenders should review the business
valuation to ensure that it addresses the economic impact of the COVID-19
emergency, including such factors as whether the business provides essential
or non-essential services, has been subject to closures or occupancy
restrictions, and has incurred any additional debt as a result of the COVID-19
emergency. If the valuation does not satisfactorily address the impact of the
COVID-19 emergency, the 7(a) Lender should consider requesting an updated
business valuation.
4) Appraisals: All 7(a) Lenders must continue to follow the appraisal
requirements for the delivery method under which the application will be
processed in the applicable chapter of SOP 50 10 6, Part 2, Section B. 7(a)
Lenders should consult with appraisers and other persons performing real
estate inspections about acceptable alternative arrangements that comply with
the SOP requirements if the appraiser or inspector cannot access the interior of
a property due to concerns related to the COVID-19 emergency.
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SBA Form 1353.3 (4-93) MS Word Edition; previous editions obsolete
Must be accompanied by SBA Form 58
Federal Recycling Program Printed on Recycled Paper
5) Electronic Closing Capability: In the event, an in-person loan closing is not a
viable option, the 7(a) Lender may use electronic signatures on SBA forms
and other documents requiring signatures in connection with a 7(a) loan,
provided that the Lender complies with the standards outlined in SOP 50 10
6, Appendix 10. Additionally, where electronic signatures are not feasible,
7(a) Lenders may use the procedures outlined in SBA Procedural Notice
5000-20061, Extension of Previous Guidance on Acceptable Signatures for
Applications and Loan Documents in the 7(a) and 504 Business Programs.
The above guidance is not intended to be a complete listing of criteria for underwriting in these
unprecedented times. All 7(a) Lenders must continue to follow prudent lending practices and
adhere to all parameters set by their primary regulator or, for Small Business Lending
Companies and Community Advantage Pilot Program Lenders, by SBA.
Questions
Questions concerning this Notice may be directed to the Lender Relations Specialist in the local
SBA Field Office. Local SBA Field Offices can be found at https://www.sba.gov/tools/local-
assistance/districtoffices.
William M. Manger
Associate Administrator
Office of Capital Access
PAGE 5 of 5 EXPIRES: 12-1-21
SBA Form 1353.3 (4-93) MS Word Edition; previous editions obsolete
Must be accompanied by SBA Form 58
Federal Recycling Program Printed on Recycled Paper
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