by Ethan Zallik, Director – Loan Originations & Processing
There has been ample discussion in the SBA space about the widespread changes implemented by the new SOP 50 10 7, effective August 1, 2023. Most people have heard of the “do what you do” concept, allowing for partial changes of ownership, updates to the equity injection source and verification, and more.
However, the new SOP 50 10 7 also includes a ton of lesser-known changes from the previous version that most lenders are not aware of.
This article lists 9 changes lenders should know about the latest SOP in addition to the more widely discussed changes.
The SBA has yet to release the much anticipated technical corrections update to SOP 50 10 7, so all of the highlighted changes below are subject to revision upon release of the technical corrections update.
1. Lenders to Verify Immigration Status of Businesses Owned by Non-US Citizens
The section referencing how to verify a non-US Citizens immigration status has been removed. SBA will not require the United States Citizenship and Immigration Services (USCIS) to verify immigration status prior to authorization and it will now be the lenders responsibility to verify the immigration status and document the loan file.
The updated section provides documentation that “serves as evidence of LPR status”, but there are cases where those with LPR card are on a conditional/temporary timeline. There are still some questions surrounding this (ex. Is this only needed for 51%+ owners or any guarantor?)
Further Reading: SOP 50 10 7 pages 19-21.
2. Rules Regarding EPC Assets Clarified
Additional language has been added to allow for an EPC to own more than one property, so long as all properties owned are leased to the OC(s). The EPC cannot own a property and lease to a separate third party as an investment property to generate passive income.
Further Reading: SOP 50 10 7 pages 25-28.
3. SBA Debt Refinance Rules Clarified
It is known that the debt refinance changes have reduced the eligibly requirements, however, the changes to refinance existing SBA loans specifically is a major change. The new language removes the historical gray area on SBA debt refinances.
Historically, all debt refinances needed to be on “unreasonable terms”. The SBA argued that all of their loans were reasonable which made it difficult to justify a refinance even with a large cash flow savings.
Moving forward, all SBA refinances are automatically eligible if existing SBA lender is unable to increase existing SBA loan or make a second loan AND new loan meets the 10% payment improvement requirement (assuming the existing SBA loan is current and putting SBA in a position to take over a non-performing loan).
Further Reading: SOP 50 10 7 pages 93-96.
4. Personal Real Estate Not Required for Supplemental Guarantors
Supplemental guarantors is a new term that has been added, defined as a “person or entity that a lender requires to provide a guaranty out of an abundance of caution that is not otherwise required by SBA loan program requirements to provide a guaranty”.
Personal real estate owned by supplemental guarantors does not need to be taken to further secure a loan if it is not fully collateralized on large 7a loans. The SBA confirmed that limited guarantors on a loan due to their interest in real estate that must be secured are not considered supplemental.
Further Reading: SOP 50 10 7 pages 71, 113, 119, 354 and Appendix 3, page 581.
5. Rules for Financial Verification Removed
The new SOP financial verification section has removed both the “sandwich” rule as well as verifying 2 years based on alternative size standard analysis. When verifying tax returns against IRS tax transcripts a lender must always verify last 3 years, or since inception of the business if shorter than three years.
In addition, loans $500,000 or less, the SBA is requiring the lender to follow the same processes and procedures that it uses to verify financial information for its similarly- sized, non-SBA guaranteed commercial loans (we explained that concept here), but at a minimum, the Lender must collect business tax returns or tax transcripts to confirm the Applicant filed taxes.
Further Reading: SOP 50 10 7 pages 72-75.
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6. Flood Insurance No Longer Required for All Properties
The main change to this requirement is that the SBA no longer requires flood insurance on real property or personal property located in a building not being acquired, installed, improved, constructed, or renovated with loan proceeds.
It should be noted that lenders still need to follow their policies for similarly sized non SBA loans, however, the SBA has removed the flood insurance requirement on all assets, only those used with loan proceeds.
A lender will not be required to provide justification for not requiring such flood insurance, which was required under SOP 50 10 6.
There was also a change to the flood insurance requirement for condominium or cooperative units. Historically, the lender was required to obtain proof of insurance from both the individual owner (walls-in) and from the condominium/cooperative organization (condo policy). Under SOP 50 10 7, lenders would only need to obtain proof from the unit owner for the inside of the unit.
Further Reading: SOP 50 10 7 pages 76-77.
7. Removal of Equity Injection Verification Requirement for Startups
The language has been updated to now only require equity injection from the borrower for changes of ownership. Historically, all startup businesses were also required to bring a minimum 10% equity to the transaction.
Further Reading: SOP 50 10 7 pages 110-112
8. Removal of Character Determination/Fingerprinting Process
The new SOP has removed the character determination section and no longer requires FBI Fingerprint Background Check and a Character Determination by SBA. This is now a pass/fail test that puts the onus on the lender to confirm no associate of the business is currently incarcerated, on probation, on parole, or is under indictment for a felony or any crime involving or relating to financial misconduct or a false statement.
This is a question on the Form 1919, however, this form will be updated by end of the year so we’ll need to be on the lookout for it is even being asked once the new form is issued. It is the lenders responsibility to still consider the applicants character when underwriting the deal and the lender must analyze each application in a commercially reasonable manner, consistent with prudent lending standards.
9. ETRAN Updates Will Impact Loan Number Processing
PLP loan numbers will no longer be instantaneous upon submission. There will be a delay between hitting submit and receipt as the SBA is updating ETRAN to perform an autonomous search on the parties and high-level eligibility check.
For GP loans, this will be completed near the end of the GP review process (once complete set of application documents provided to SBA) and as soon as the loan is submitted on PLP loans.
What's Next: Support for SBA Lenders
These 10 changes are among the many implemented by the new 2023 SOP, which will continue to shape the SBA landscape even more when technical corrections are released.
As the nation’s leading LSP, our mission is to equip our partners with the most accurate insights possible while providing the support to help them adapt with maximum efficiency.
Use the form below to ask our team of experts questions regarding how the SOP impacts your organization’s SBA loan underwriting, processing, and strategy.
For current clients, please reach out to the Eligibility Team here to schedule an evaluation of your current credit policy.
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