SBA SOP 50 10 8.1 Was Updated – Did Your Checklists Catch Up?
We’ve all been aware that October 1st was the official effective date of SBA SOP 50 10 8.1.
You’ve undoubtedly been revising your processes and checklists and training (oh my!).
But did you catch the updates SBA released on September 25th, less than a week before that October 1st effective date?
SBA issued Technical Policy Updates that include several important changes and clarifications that you will need to include in your procedures, underwriting tools, and your checklists.
Here are several SBA SOP changes lenders should incorporate into their underwriting tools and checklists.
7(a) Small Is Back for Change of Ownership
The original version of SOP 50 10 8.1 prohibited 7(a) Small loans for change of ownership transactions.
The September 25th Technical Update removed that restriction, allowing both 7(a) Small and Express loans for change of ownership transactions (subject to Appendix 15. Its DSC and fully secured requirements still apply; the delivery method does not provide a reduced DSC standard).
LRM Takeaway: Make sure your eligibility checklist and underwriting processes no longer automatically exclude change of ownership transactions from 7(a) Small eligibility.
Asset Purchase: Change of Ownership or Start-Up?
Is the buyer continuing the seller’s business operations?
If so, purchasing all or substantially all of the seller’s business assets is considered a change of ownership.
If continuity of operations is not clearly defined and the buyer is not continuing the seller’s business operations, the lender may evaluate the transaction as a start-up and must apply all applicable start-up requirements for the delivery method used.
LRM Takeaway: Don’t classify the transaction based solely on the asset purchase. Evaluate whether the buyer will continue the seller’s business operations.
Calculating Business Purchase Price
When owner-occupied commercial real estate is included, Business Purchase Price (BPP) may differ from the same as the total purchase price.
Subtract the appraised value of the real estate from the purchase and sale agreement to determine BPP for Appendix 15 financial due diligence requirements.
And that may affect which financial due diligence requirements apply, including Quality of Earnings (QoE). The threshold is measured before buyer equity, seller debt, or other financing sources reduce the loan amount,
LRM Takeaway: Don’t just rely on the purchase agreement or the total project cost. Instead, document the Business Purchase Price calculation in the underwriting file.
Using Quality of Earnings In Credit Analysis
A QoE report is required for applicable Initial Acquisition and Business Expansion transactions with a Business Purchase Price of $3 million or more. The report must not be prepared by or for the seller.
When QOE is required, the lender must use its findings to calculate Debt Service Coverage (DSC). If the resulting DSC doesn’t support the business valuation and proposed debt structure, the loan amount must be reduced accordingly. Additional equity may be used to fund the adjustment.
LRM Takeaway: Don’t just obtain the QoE report. Use it. Your credit analysis should show how its findings were incorporated into cash flow and DSC.
SBA SOP Latest Version: Have Your Lending Tools Caught Up?
You prepared in advance for the new SOP 50 10 8.1.
Then SBA released the September 25th Technical Updates. Make sure the final requirements are reflected in your:
Change of ownership eligibility and delivery-method guidance
Business Purchase Price calculations
QoE and DSC procedures
Financial request lists
Credit memo templates
Underwriting and closing checklists
SBA Lender training materials
Do your team’s tools and training reflect the final requirements and support SBA compliance?
We can help! Our SBA lender service provider services help your team review procedures, update underwriting tools and address training needs. Give us a call at 877-576-0819, or drop us a line through our website here and make sure your SBA compliance remains intact.
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