SBA SOP Changes: Did your credit memo get the memo?
Lenders, you’re familiar with the credit memo. You’ve filled it out a thousand times or more.
And you’ve undoubtedly reviewed the new SBA SOP 50 10 8.1 and the latest SBA SOP changes more than a few times by now.
But here’s the catch: your long-time familiarity with the credit memo might be causing you to overlook some of the updates you need to make.
In other words, it’s still called a Credit Memo, but it’s got a host of new SBA Lender requirements. Let’s take a look.
It’s Reorganized
To start with, bear in mind that it’s more than just the new SBA SOP 50 10 8.1; the Technical Policy Updates release on September 25th also affect the Credit Memo.
Several important SBA lender requirements were reorganized into Appendices 14 – 20. And the underwriting process must now include more than just the commercial credit analysis. Obviously, exactly what’s needed depends on the specific transaction, but pay attention to:
Eligibility: Business size, ownership, affiliation, citizenship, Credit Not Available Elsewhere, and other applicable eligibility requirements.
Repayment ability: Historical and interim financial performance, debt service coverage (including the global debt service coverage ratio (DSCR)), projections, and supporting assumptions.
Affiliate impact: How cash flow, obligations, and financial relationships with affiliated businesses affect the Borrower's overall repayment ability.
Change of Ownership: Transaction classification, applicable equity injection, business valuation, Quality of Earnings, and repayment requirements.
Loan structure: Sources and uses, seller financing, guarantors, collateral, and loan terms.
SBA-specific conclusions: Documentation of how the transaction meets applicable SBA requirements, including any exceptions or additional analysis.
LRM Takeaway: There’s no one-size-fits-all credit memo!
Explain and Document Repayment Ability
There are new credit analysis requirements based on loan program and transaction type, making it important to understand how these changes affect SBA compliance. Note the changes in Appendix 15, for instance, adding new requirements on Change of Ownership transactions. Just in one example, when projections are used to support repayment, your analysis must explain your assumptions and why the projections are reasonable.
Additional questions include global DSCR, as noted above, as well as the impact of any affiliated businesses on repayment ability (also noted above). Are affiliates contributing cash flow, relying on Borrower financial support, or carrying obligations that might affect repayment ability? Evaluate and document!
Note, too, that just obtaining a Quality of Earnings report (when required) isn’t enough. Its findings should be included in the debt service coverage analysis.
LRM Takeaway: As always, document more than just the numbers; document your reasoning. Anyone reading the credit memo should easily understand not just that the loan meets SBA’s credit standards, but also how the Lender reached that conclusion.
The good news: the commercial credit memo doesn’t stand alone
You probably don’t need to completely overhaul your existing credit memo.
Instead, create an SBA Credit Memo Addendum to address requirements not previously part of your commercial underwriting process.
What’s important is that you ensure the required analysis is thorough, documented, and aligned with the loan file.
LRM Takeaway: The addendum is helpful when Lenders originate different types of SBA loans and transaction structures. Because it’s a new part of the process, your underwriting team will have an additional reminder that the credit memo has changed in significant and important ways.
Checklists AND training!
As you know, we here at LRM are big fans of checklists.
But the requirements in the SBA SOP 50 10 8.1 – and the follow-on Technical Policy Updates – are, as the saying goes, non-trivial. From loan origination to underwriting to closing and servicing, everyone needs to understand these new requirements.
It’s more than just updating the checklist. Effective SBA lender training helps ensure everyone understands the SBA SOP changes and how they affect the work they do every day.
We’re the SBA geeks in your back pocket, SBA consultants who stay on top of the changes, and we’re here to help. Training? We offer SBA lender training. Review your updated checklist and processes? We are here for it. And more.
Give us a call at 877-576-0819, or drop us a line through our website here. We can help strengthen your SBA compliance and make the transition to the new SBA SOP 50 10 8.1 requirements straightforward and, hopefully, relatively painless.
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