SBA Releases New SOP 50 10 5(k)

© 2019 Lerch, Early & Brewer
Presented by:
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SBA Releases New SOP
50 10 5(K)
Alison Rind | Arnie Spevack
Michael Smith | Lance Kodish
Attorneys at Lerch, Early & Brewer

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Introduction

Agents Barred from SBA Participation
• SBA website no longer maintained for barred Agents
• SBA Lenders and CDCs must continue to consult the
System for Award Management Excluded Parties List
– 7(a) Subpart A, Chapter 1, paragraph II.E.1 (page 13)
– 504 Subpart A, Chapter 3, paragraph II.B.2 (page 52)
– 504 Subpart C, Chapter 8, paragraph V.A.2 (page 365)
3

GS-13 Applications
• Lenders and CDCs must now submit a Statement of No Objection to
a specific e-mail address (SNOMemos@sba.gov) and receive written
clearance from SBA prior to submitting the application to the
appropriate processing center (for non-delegated loans) or prior to
processing the loan/application under the SBA Lender’s delegated
authority (delegated loans). Non-PCLP CDCs must submit a copy of
the SBA’s written clearance to the SLPC with the application.
– 7(a) Subpart A, Chapter 1, paragraph II.E.3 (page 15)
4

SBA Loan and Lender Monitoring System
• Updated SBA’s Loan and Lender Monitoring System to
include Lender portfolios with gross outstanding SBA
dollars of $350 million or more as a new peer group for
purposes of measuring loan performance.
– 7(a) Subpart A, Chapter 1, paragraph III.A.3 (page 18)
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Restrictions on PLP Processing
• 1) Loans to cooperatives may not be submitted using PLP or SBA Express authority;
• 2) Once submitted to LGPC, an application withdrawn by the Lender, screened-out,
or declined by LGPC may not be approved by any Lender under its PLP or SBA
Express authority. E-Tran will not permit the submission of such an application
under any Lender’s PLP or SBA Express authority for a period of 12 months from the
date of the withdrawal, screen-out, or decline of the application. Lender must not
knowingly submit an application for the same project under its PLP authority that
was submitted through LGPC by a difference Lender.
– 7(a) Subpart A, Chapter 1, paragraph IV.C.11 (page 28)
– Express Subpart A, Chapter 1, paragraph IV.D.8 (page 35)
6

SBA Express Lender Authority Where Credit Score Not Acceptable for 7(a)
Small Loan Application
• SBA Express Lender may withdraw the application prior
to submission through E-Tran or SBA One and process the
loan through SBA Express
– Express Subpart A, Chapter 1, paragraph IV.D.8 (pages 35-36)
7

SBA Express Lender Program Loan Term
• SBA will generally grant Lenders Export Express loan authority for a
term that coincides with the Lender’s SBA Express term, unless the
D/OCRM determines a shorter term is appropriate. Clarification that
maximum term for all Export Express Lenders is 2 years.
• 7(a) Lenders who have not participated with SBA previously, the
term may be less than 2 years at the discretion of the D/OCRM.
– Express Subpart A, Chapter 1, paragraph IV.E.2 (page 38)
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Certified Development Companies
Clarifying language-Professional Services Contracts:
• All professional services contracts for functions related to marketing, packaging, closing, servicing, liquidating, or human
resources (e.g., for paying wages and taxes and providing retirement and health benefits to the CDC’s staff) must be pre-
approved by the D/FA prior to engaging the services of the contractor. (See SOP Page 49)
• Contracts for management services are only permitted for CDCs affiliated with state and local economic development
organizations.
• CDCs may contract for accounting, legal services, information technology, and independent loan review services without
SBA approval, except for legal services in connection with loan liquidation or litigation.
• CDC may not obtain independent loan review services from another CDC.
• For all contracts that require prior approval (except for contracts involving legal services in connection with loan liquidation
or litigation) 504 Program Branch reviews the contracts and provides its recommendation to the D/FA, who makes the final
decision.
• Contracts involving legal services in connection with loan liquidation or litigation, the Fresno or Little Rock Commercial
Loan Servicing Center (CLSC) will review and approve the contracts.
• Clarifying language with regard to professional services contract must not include any contractual services provided by the
Executive Director of a CDC or evidence any actual or apparent conflict of interest or self-dealing on the part of any of the
CDC’s officers, management, and staff, including any members of the Board or any Loan Committee (SOP Page 50)
– 504 Subpart A, Chapter 3, paragraph II.A.8 (pages 49-50)
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Certified Development Companies CONTINUED
Changes in Internal Control Policy
• CDC’s Board of Directors must establish 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.
• Revision to provide that 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 a
minimum of every 2 years by a person who is not directly or indirectly responsible
for loan making or by outside contractors. OCRM, in its discretion, may require an
off-cycle Independent Loan Review.
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• A CDC must now retain a copy of any SBA character determination in the
CDC loan file for the life of the loan.
• After closing, the CDC must now forward to SBA all original loan
documents as required by SBA Form 2286 and Subpart C, Chapter 6,
Paragraph III.A.12.
• CDCs are required to retain scanned copies of documents when hard copy
records are not required. If hard copies are required, then the CDC must
retain them.
11

• The SOP now requires CDCs to obtain prior written
approval from the Office of Financial Assistance, and
possibly a new application for CDC Certification, for any
proposed changes in the CDC legal structure.
– 504 Subpart A, Chapter 3, paragraph II.C.1 (page 58)
12

Changes in CDC Governing Documents New language includes
requirement that changes in a CDC’s bylaws or Articles of
Incorporation must be reported to the D/OCRM no later than
30 days after the change takes place. All documents are subject
to SBA review and must comply with all Loan Program
Requirements.
– 504 Subpart A, Chapter 3, paragraph II.C.2 (pages 58-59)
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• Loan Committee members not serving on a CDC’s Board of Directors
who answered “yes” to certain questions on SBA Form 1081 must
submit a fingerprint card (FD-258), Electronic Fingerprint
Submission, each signed and dated within 90 days of submission to
the SBA, or evidence of federal clearance from the individual’s
current employer. Loan Committee members who answer “no” to
such questions are not required to provide fingerprint submission
but the CDC is required to retain the signed 1081 in the file.
– 504 Subpart A, Chapter 3, paragraph III.A.1 (page 60)
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• Designated Attorneys are now required to submit their
compliance documentation to the 504 Program Branch
on or before the expiration of the renewal of their
current policy (malpractice)(instead of July 1).
– 504 Subpart A, Chapter 3, paragraph V.A.6 (page 74)
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• The SOP added a number of additional required
deliverables (corporate governing documents, good
standing certificates, listing of designated attorneys,
board members, loan committee members, etc.) when
applying for Local Economic Expansion Area or becoming
a multi-state CDC.
– 504 Subpart A, Chapter 3, paragraph VI.B.4 and VI.C.1 (page 82)
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Eligibility Requirements - Franchises
• Added and clarified language and procedures. For
example, lenders need to “ensure all of Applicants
agreements that meet the FTC definition of a franchise
are on the directory” vs. “ensure all of Applicants brands
are on the directory.”
– 7(a) Subpart B, Chapter 2, paragraph II.D.8 (page 96)
– 504 Subpart C, Chapter 2, paragraph II.D.8 (page 277)
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Eligibility Requirements - Franchises - Multiple Agreements
• All of the Applicants agreements must be on the directory (whether
they meet the FTC definition of franchise or not). Then, the lender
determines which agreements are critical to the business (> 50% of
revenue). Lender only needs to get the addendum if the franchise is
critical to the Applicants business. If a brand is determined to be
ineligible, the loan cannot be processed regardless if it meets the
FTC definition of a franchise or is critical to a business.
– 7(a) Subpart B, Chapter 2, paragraph II.D.8 (pages 96-7)
– 504 Subpart C, Chapter 2, paragraph II.D.8 (page 279-280)
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Eligibility Requirements - Franchises - Adding Brands
• When requesting to add a brand, if a franchisor does not
request it (i.e., lender makes the request), the name and
email address of the franchisor must be included.
19

Eligibility Requirements - Franchises - Annual Certifications
• Annual Certifications are only needed for franchises that
either do not need an addendum or use a negotiated
addendum (Form 2464). The certification is provided by
the franchisor annually to the SBA but lenders do not
need to obtain the Form 2464 or provide it to the SBA.
20

Eligibility Requirements - Franchises - Lender Determination
• Reminder (not new)—If a brand is not listed, a lender for a
delegated loan may make the determination that the brand
does not meet the FTC definition of a franchise, but this
determination will be reviewed at time of repurchases or
other lender oversight activities and lenders bear the risk of
an incorrect determination.
21

Eligibility Requirements - Franchises - File Documentation
• Language was added to the SOP that provides that the
documentation regarding brand eligibility will be review
in lender oversight activities.
22

Eligibility Requirements - Franchises - Negotiated Addendums
• Lenders must obtain any negotiated addendum directly
from the franchisor. And while the lender should review
the FDD, the lender does not need to keep a copy of the
FDD in its file.
23

Eligibility Requirements - Franchises - Management Agreements
• Added language that in addition to reviewing the
management agreements to see if it creates affiliation, but
also if it results in a passive business. This will be reviewed at
repurchase or during lender oversight activities. Also added
that if the management company is affiliated with the
franchisor, the loan is ineligible.
24

Eligibility Requirements - Franchises - Appeals
• Added that the franchise committee will refer businesses that
appear to cater to one gender to the Associate General
Counsel for Litigation for a final Agency decision and there is
no right to appeal to the Franchise Committee.
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Credit Elsewhere
• Added “non-state or non-governmental sources” to the
list of sources where credit is available elsewhere (used
to say just “non-federal”).
– 7(a) Subpart B, Chapter 2, paragraph II.E.1 (page 102)
– 504 Subpart C, Chapter 2, paragraph II.D.1-2 (page 285-286)
– 7(a) Subpart B, Chapter 4, paragraph I.C.1-2 (pages 180, 184)
– 7(a) Subpart B, Chapter 4, paragraph I.C.4 (page 187)
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Credit Elsewhere CONTINUED
• Credit elsewhere requirements must be included in the
credit memorandum and if not, the loan may be denied
(if non-delegated) or liability denied (delegated).
– 7(a) Subpart B, Chapter 2, paragraph II.E.1 (page 103)
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• Updated the SOP to incorporate Policy Notice 5000-17057-
increased the percentage test on credit elsewhere to owners
of 20% or more of the Applicant (used to be 10%), but still
includes the owner, spouse and Applicant’s minor children.
– 7(a) Subpart B, Chapter 2, paragraph II.E.1-2 (pages 102-103)
– 504 Subpart C, Chapter 2, paragraph II.D.1-2 (page 286)
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• Clarifying language included regarding needing a longer
maturity “to reasonably assure the ability of the loan
applicant to repay the debt from the actual or projected
cash flow of the business”
– 7(a) Subpart B, Chapter 2, paragraph II.E 2 (page 103)
29

• Added an example as to when a lender policy does not
allow loans to new business “(e.g., a business that has
been in operation for a period of not more than 2 years)”
– 7(a) Subpart B, Chapter 2, paragraph II.E 2 (page 103)
30

• Clarified that lenders cannot solely rely on lender
liquidity or exceeding the legal lender limits. A lender
may not rely at all on CRA maintenance or improvement
or improving a lender lien position.
– 7(a) Subpart B, Chapter 2, paragraph II.E 2 (page 103-104)
31

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Ineligible Business - Marijuana Related Businesses
Ineligible Business - Marijuana Related Businesses
• New section concerning the eligibility of marijuana-
related businesses is added. Whether a business is
eligible is determined by the nature of the business’s
specific operations (businesses that exclusively grow,
produce, distribute or sell products made from hemp are
eligible).

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Marijuana Related Businesses
• Ineligible:
– “Direct Marijuana Businesses” Businesses that grow,
produce, process, distribute or sell marijuana or marijuana
products such as edibles or derivatives. This applies to
recreational and medical use even if the business is legal under
local or state law where the applicant business is or will be
located.

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Marijuana Related Businesses CONTINUED
• “Indirect Marijuana Business” A business that derives any of its
gross revenue from the previous year (or if a start-up, projects to
derive any of its gross revenue for the next year) from sales to Direct
Marijuana Businesses of products or services that could reasonably
be determined to aid in the use, growth, or development of
marijuana (examples include businesses that sell or install grow
lights or that advise or counsel Direct Marijuana Businesses on the
specific legal, financial or regulatory aspect associated with
establishing, promoting or operating the Direct Marijuana Business;
however, a plumber that fixes a sink for a Direct Marijuana Business
is OK).

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Marijuana Related Businesses CONTINUED
– 7(a) Subpart B, Chapter 2, paragraph III.A.8 (page 107-108)
– 504 Subpart C, Chapter 2, paragraph III.A.8 (pages 290-291)

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Ineligible Business - Religious Promotion
• Streamlines/standardizes the process for submitting SBA Form 1971 (Religious
Eligibility Worksheet) for delegated and non-delegated loan applications
(previously, the process for submitting this worksheet and receiving a
determination on religious promotion varied depending on whether the loan
application was delegated or non-delegated). Note, for non-delegated loan
applications, the lender is still required to submit a copy of SBA’s approval to the
LGPC with the final application.
– 7(a) Subpart B, Chapter 2, paragraph III.A.11 (page 107-108)
– 504- Subpart C, Chapter 2, paragraph III.A.11 (292)

Ineligible Business - Residential Facilities
• Language describing whether residential facilities are
ineligible used to provide that “residential facilities that are
licensed as nursing homes or assisted living facilities are
eligible” now provides that “residential facilities that do not
provide healthcare and/or medical services are not eligible.”
– 7(a) Subpart B, Chapter 2, paragraph III.A.3.g (page 105)
– 504- Subpart C, Chapter 2, paragraph III.A.2.g (page 288)
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Ineligible Business - Associate of Poor Character
• Besides moving around and rewording already established
criteria, the following criteria was added or modified:
• Disclosure under the 912 includes conditions regarding
registration as a sex offender registry and court
documentation that sentencing and other conditions have
been met.
– 7(a) Subpart B, Chapter 2, paragraph III.A.13 (page 111)
– 504 Subpart B, Chapter 2, paragraph III.A.13 (page 293)
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Associate of Poor Character CONTINUED
• With respect to providing court documentation, new
language provides that if court documentation is not
available, subject individual must submit a written statement
from the court indicating documents are not available and
verification that there are no outstanding warrants, unpaid
fines or other conditions of the court that have not been met.
39

Associate of Poor Character - 912 Appeals
• Any appeal must be made within 6 months of the SBA
decision with new procedures for appeal added.
40

Ineligible Businesses –
Businesses Providing Prurient Sexual Material
• Process change- if a lender determines that the business has an aspect of
a prurient sexual nature, prior to either submitting the application (non-
delegated) or submitting the application for a loan number (delegated),
the lender must document and submit its analysis to the Associate
General Counsel of Litigation (now same process for all lenders). Lenders
must maintain documentation and SBA approval in the loan file for
guaranty purchase or lender oversight.
41

42
Eligible Use of Proceeds - Refinance of Debt
• Revised to demonstrate that applications submitted to
the LGPC for non-delegated processing must include
copies of all supporting documentation for debt to be
refinanced.
• Subpart B, Chapter 2, paragraph V.E.5 and Chapter 6, paragraph I.C.16
(pages 133 and 225)

Eligible Use of Proceeds - Refinance of Debt
• Increased the timeframe for refinancing institutional debt
(non-seller) from 6 months to 12 months if the lender
wants to process under delegated authority (if less than
12 months, must go for non-delegated processing).
– Subpart B, Chapter 2, paragraph V.E.3 (page 132)
43

Eligible Use of Proceeds - Change of Ownership
• In ESOP and cooperatives, financing may include
transaction costs but not the costs associated with
creating the ESOP or cooperative.
– Subpart B, Chapter 2, paragraph V.H.1 (page 140)
44

• Allows a small business to obtain a loan for the sole
purpose of lending the funds to the ESOP to acquire a
controlling interest. Any seller remaining after the sale
must be a guarantor of the loan
45

• Only transfers of less than 100% of interests in ESOPS and
“cooperatives” (new) are allowed.
46

47
Eligible Use of Proceeds - Land Purchase
• Clarification-“Purchase of land as part of an eligible
project. Purchase , construction or renovations to
buildings” (broke it out in two parts and added that the
land had to be a part of the eligible project).
– Subpart B, Chapter 1, paragraph II.E (page 89)
– Subpart B, Chapter 2, paragraph V.A.1 (page 128)
– Subpart B, Chapter 2, paragraph V.A.1 (page 128) (farm enterprises)

48
Eligible Use of Proceeds - Export Express
• Revised guidance regarding eligible uses of proceeds for Export
Express loans financing standby letters of credit, the performance of
service contracts from buyers located outside of the U.S. and
obtaining transaction-specific financing associated with completing
export orders. In addition to checking EX-IM Bank’s Country
Limitation Schedule, Lenders must now also check the sanctions lists
maintained by the Department of Treasury OFAC office.
– Subpart B, Chapter 2, paragraph V.J.3 (page 143)

49
Ineligible Uses - Leasing to Businesses Conducting Illegal Activity
• Clarifies that during the life of a loan, a Borrower or an Operating Company
may not lease space to any business that the Borrower or Operating
Company knows is engaged in any activity that is illegal under Federal, state
or local law or any activity that can reasonably be determined to support or
facilitate any such activity (formerly, this was an objective standard as
opposed to a knowledge based/reasonability standard). Additionally, now if
a Borrower or an Operating Company discovers it is leasing space in violation
of this provision, it must notify SBA Counsel as soon as the Lender becomes
aware of the lease and advise of the actions the Lender intends to take.
– 7(a) Subpart B, Chapter 2, paragraph V.F.1 (page 138)
– 504 Subpart C, Chapter 2, paragraph IV.J (page 321)

50
Maximum Loan Term
• Clarification- The maximum maturity for leasehold improvement
loans is 10 years plus an additional period reasonably necessary
to complete leasehold improvements not to exceed 12 months
(used to be the maximum maturity for leasehold improvement
loans was 10 years unless there was significant construction or
build-out)
– 7(a) Subpart B, Chapter 3, paragraph III (page 148)

51
Maximum Allowable Fixed Rate
• The maximum allowable fixed rate is now based upon the Prime
Rate in effect on the first business day of the month, plus an
allowable spread over the Prime Rate, as set forth in the most
recent Federal Register Notice. The listing of the current
maximum allowable fixed rate will be found on the SBA’s Capital
Access Financial System homepage (no longer based on LIBOR
swap rate.
– 7(a) Subpart B, Chapter 3, paragraph IV.A.2 (page 152)

52
Maximum Allowable Express Loan Rates
• Interest Rates for Fixed SBA Express and Export Express
cannot exceed the maximum allowable fixed interest rate
published by the SBA in the Federal Register.
• For variable Rate Loans, the SOP clarified that the interest
rate can be up to 4.5% over the Prime Rate on $50,000-
$350,000 Loans ($500,000 for Export Express); and up 6.5%
over the Prime Rate for Loans $50,000 or less.
– 7(a) Subpart B, Chapter 3, paragraph IV.F.1-2 (page 159)

53
Fees
• Updated to reflect/comport with the revised SBA Form 159, in
particular to show that multiple services performed by the
same Agent may be reported on one form. Lenders must now
submit SBA Form 159 within two SBA 1502 reporting cycles
(used to be at the same time as the Lender’s 1502 report for
the applicable month).
– 7(a)- Subpart B, Chapter 3, paragraph VIII.B.1 and VIII.B.6 (pages 170-171)
– 504- Subpart C, Chapter 8, paragraph III.B.1 and B.6

54
Equity Injection - Change of Ownership
• Incorporated SBA Policy Notice 5000-17017- With change of
ownership between existing owners, 10% equity injection is not
required if: (i) the remaining owner has been actively involved in the
business for at least 24 months prior to change of ownership (lender
must obtain a borrower certificate to this effect and noted in the
credit memo); and (ii) balance sheet reflects debt to worth ratio of
no > 9:1 prior to the change of ownership (otherwise, 10% equity is
required).
– 7(a)- Subpart B, Chapter 4, paragraph I.C.1-2 (pages 181, 185)

55
EWCP Collateral Requirements – Assignment of Contract Proceeds
• EWCP loans must be secured by no less than a first security interest in all
collateral associated with the transactions financed.
• At least the export inventory and receivables, assignment of credit
insurance, letters of credit proceeds, and contract proceeds as applicable.
Collateral must be located in the United States, its territories or
possessions.
• Assignment of contract proceeds may be required by LGPC for non-
delegated loans and PLP-EWCP Lender under delegated authority.
– 7(a)- Subpart B, Chapter 4, paragraph II.E.1 (pages 196-197)

56
Business Valuations
• Removed Accredited Valuation Analysis as a “qualified
source” or method for performing a business valuation
because that designation no longer exists.
– Subpart B, Chapter 4, paragraph IV.E.2 (pages 203-204)

57
Environmental Reports
• Adds guidance that if an Environmental Professional
recommends proceeding directly from the Transaction Screen
to a Phase II (bypassing Phase I), and the Lender agrees, the
Lender must seek (in advance) an exception to policy from
the SBA Environmental Committee, which may be granted on
a case-by-case basis.
– 7(a) Subpart B, Chapter 4, paragraph V.E.4 (page 207):
– 504 Subpart C, Chapter 3, paragraph III.E.4

58
Environmental Reports CONTINUED
• Adds guidance for specific additional environmental
assessments that must be performed for child-occupied
facilities, drycleaners and gas stations.
– For child-occupied facilities, must undergo a lead risk
assessment and testing for lead in drinking water and all
taps/fountains in conformance with EPA and HUD
regulations with results submitted to the SBA.
– For on-site drycleaners (whether currently in operation or
operated historically at that site), a Phase I followed by a
Phase II is required.

59
Environmental Reports CONTINUED
• For gas stations, lenders must obtain an Environmental Site
Assessment with a Phase I ESA and a Phase II if recommended by
the Environmental Professional, a determination whether the gas
station is in compliance with all regulatory requirements pertaining
to tank and equipment testing and additional follow-up testing if the
property is contaminated (see Appendix 5 of SOP for additional
details).
– 7(a) -Subpart B, Chapter 4, paragraph V.H.1-3 (pages 211-212)
– 504 -Subpart C, Chapter 3, paragraph III.H.1-3 (pages 334-335)

60
Submission of Application
• 100% of the ownership must be disclosed on the Form
1919 and in E-Tran in order to submit a loan application
(Form 1244 for 504 loans).
– -7(a) -Subpart B, Chapter 6 paragraph I (page 201)
– 504 -Subpart C, Chapter 4. Paragraph I (page 327)

61
Payment/Performance Bond Waiver
New Requirements for Blanket Waiver of Payment/Performance Bonds
• Lender has retained the services of a third-party construction management firm.
• Lender must ensure that the third party provides commercially reasonable and prudent monitoring
including funds control for all disbursements.
• Lender must have an existing internal construction management department that routinely manages
construction for its similarly-sized, non-SBA guaranteed commercial loans.
• Lender must ensure that all monitoring services provided by its construction management department
are commercially reasonably and prudent and include funds control for all disbursements.
• Lender must document in its file that the construction was completed in conformance with the plans
and specifications and that all lien waivers and releases from all materialmen, contractors, and
subcontractors involved in the construction have been obtained. If any mechanics’ or other liens are
filed or take priority over the Lender’s lien on the collateral, the Lender may be subject to a repair or a
denial of the guaranty.
– 7(a) -Subpart B, Chapter 5 paragraph II.B.3 (page 216)

62
Verification of Financial Information
• For all loans, a Lender/CDC is required to document in its file
confirmation of 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 first
disbursement.
– 7(a) -Subpart B, Chapter 5 paragraph IV.D.1 (page 218)
– 504 -Subpart C, Chapter 5. paragraph I.E.4 (page 344)

63
Verification of Financial Information
• If the IRS advises that it has no record on the Applicant for Tax Verification, no record of year
1 and/or year 3, or the Lender is unable to reconcile the IRS information to the Applicant’s
financial information, the Loan must be cancelled or closing must be postponed until the
issue is resolved. Non-delegated Lenders must report the issue to the LGPC. If a Lender
processing the loan under its delegated authority has disbursed the loan and is unable to
reconcile the IRS information, the guaranty may be subject to repair or denial.
• For 504 loans, if the CDC cannot reconcile the IRS information or if the IRS has no record on
the Applicant in year 1 and/or year 3, the CDC must report the issue to the appropriate SBA
CLSC and either the loan must be cancelled or closing postponed until the issue is resolved.
– 7(a) -Subpart B, Chapter 5 paragraph IV.D.4 (page 219)
– 504 -Subpart C, Chapter 5. paragraph I.E.4 (pages 344-345)

64
Borrowing Base Certificates
• SOP now requires Borrowers to submit a Borrowing Base
Certificate on at least on a monthly basis, or as frequently as
a the Lender customarily requires from its borrowers on a
similarly-sized, non-SBA guaranteed loan if more often than
monthly.
– 7(a) -Subpart B, Chapter 7 paragraph IV.J.2 (page 240)

65
Foreign Accounts Receivable for Working Capital CAPLines
• SOP now requires lenders to check the Department of
Treasury Office of Foreign Assets Control sanctions list in
addition to the Ex-Im Bank’s Country Limitation Schedule
to determine if the transaction would be prohibited.
– 7(a) -Subpart B, Chapter 7 paragraph IV.J.4 (page 240-243)

66
Semi-Annual Monitoring Requirements-CAPLines
• SOP no longer requires semi-annual monitoring
requirement. Monthly, quarterly and annual monitoring
requirements remain.
– 7(a) -Subpart B, Chapter 7 paragraph IV.K.4 (page 253)

67
Post Closing Changes - Ownership
• For non-delegated loans, lenders need SBA approval for a change of
ownership prior to final disbursement. For delegated loans, lenders
must obtain written consent of the SBA for any change in ownership
before a loan is fully disbursed. The LGPC will approve in E-Tran
after it verifies that the changes comply with loan limits and CAIVRS
verification. No unilateral approval by a CDC for changes in
ownership for 12 months after final disbursement.
– -7(a) -Subpart B, Chapter 7 paragraph I.B.1 (page 228)
– -504 -Subpart C, Chapter 9. Paragraph IV.A.1 (page 366)

68
Post Closing Changes - EWCP Loans
• Changes to be submitted to the USEAC unless the change
is within the lender’s delegated PLP-EWCP authority
– -7(a) -Subpart B, Chapter 7 paragraph I.C (page 229)

69
EWCP with Master Notes
• Added the ability for a EWCP loan to have a sub-limit (as
well as a sub-note) provided the sub-limit conforms to
the requirements of the sub-note contained in this
section.
– -7(a) -Subpart B, Chapter 7 paragraph IV.B.d.ii (page 232)

70
Closing- Documentation on Equity Injection
• For Express, Export Express and 7(a) Small Loans, if the
lender requires equity injection for similarly sized non-
SBA loans, then they must require the same for these
loans.
– (a) -Subpart B, Chapter 7 paragraph IV.C.2 (page 234)

71
Closing - Leasing - Borrower Certification
• Prior to first disbursement, the Lender must require the
Borrower and Operating Company to certify that real estate
pledged as collateral will not be leased to or occupied by a
business engaged in any illegal activity under federal, state or
local law (again, the standard applied is “Borrower’s or
Operating Company’s knowledge”).
– 7(a) Subpart B, Chapter 7, paragraph IV.G.2 (page 236)

72
Post Disbursement Changes
• Lenders may not unilaterally approve adjustments to change
in ownership including percentages for 12 months after a
final disbursement on any loan (mechanism for approval
detailed)
• CDC must request a modification to the Authorization for any
adjustments in ownership prior to funding
– 7(a) Subpart B, Chapter 8, paragraph I (page 255)
– 504 Subpart C, Chapter 9, paragraph IV.A (page 366)
– 504 Subpart C, Chapter 5.II.A (page 348)

73
Construction Escrows/Escrow Closing
504 Interim Loan – Construction Escrow In Connection With Interim Financing
• Requirements concerning construction escrow accounts have been moved from Chapter 6,
paragraph IV to Subpart C IV.B.2. page 267
Escrow Closing (No Interim Financing) – NEW PROVISION
• When a Project is to acquire an existing facility that the Borrower will immediately occupy,
SBA may allow an Escrow Closing instead of requiring Interim Financing.
• Not effective until SBA approves forms.
– 504 Subpart C, Chapter IV.B.2 (pages 267-268)
– 504 Subpart C, Chapter IV.C..1 (pages 269-270)

74
Escrow Closing
Escrow Closing -- Requirements for Escrow Account:
• SBA counsel must approve the Escrow Agreement, which will be signed by the CDC, SBA, the Borrower and the
Escrow Agent. The Escrow Agent must be approved by the CDC and SBA counsel, and the Escrow Agent must follow
the escrow instructions provided by the CDC and SBA counsel. The CDC counsel, Title Company or other party
approved by SBA counsel may act as the Escrow Agent and hold the Escrow Account.
• The Borrower must deposit an additional 10% of the Total Project Costs into the Escrow Account. This deposit must
be in cash or an irrevocable Letter of Credit. The CDC must provide SBA counsel with evidence of the Borrower’s
deposit at the time of closing of the 504 Loan.
• The net Debenture sale proceeds must be wired directly into the Escrow Account.
• The funds in the Escrow Account may not be distributed and the Escrow Account may not be dissolved until the
CDC and CDC counsel provide a certification to SBA that:
– A post-Debenture funding updated title commitment has been issued and reviewed showing the title and lien positions
required by the Authorization for Debenture Guarantee (SBA 504 Loan);
– As a result of the review, the CDC and CDC counsel have determined that upon release of the funds in the Escrow Account at
the scheduled Project Property real estate closing and subsequent recordation, title to the Project Property will transfer to the
Borrower, all collateral documents will be properly filed, and all lien positions will be properly perfected;
– 504 Subpart C, Chapter IV.C.1 (pages 269-270)

75
Escrow Closing CONTINUED
Escrow Closing -- Requirements for Escrow Account (continued):
– iii. CDC counsel will ensure that all title and lien positions required by the Authorization are properly recorded
and that a final title policy is issued; and
– iv. The CDC has determined that since the date of the CDC Certification submitted to SBA at the 504 Loan
closing, there has been no unremedied substantial adverse change in the financial condition of the Borrower
or Operating Company. After receipt of the foregoing certification, SBA counsel will determine if all of the
requirements for dissolution of the Escrow Account have been met, and if so, will provide the Escrow Agent
and the CDC with written approval for the distribution of the funds in the Escrow Account.
• All of the requirements for dissolution of the Escrow Account must be met to SBA counsel’s satisfaction no later
than 5 months from the date of the Debenture sale. If not, SBA counsel will direct the Escrow Agent and the CDC to
use the funds in the Escrow Account to pre-pay the Debenture in full. Any leftover funds in the Escrow Account
after the Debenture is pre-paid in full will be returned to the Borrower.
• CDC counsel must provide SBA with a post-Project Property real estate closing legal opinion stating that:
– All title and lien positions required by the Authorization have been properly recorded; and
– A final title policy reflecting the same has been delivered to SBA.

76
Escrow Closing CONTINUED
Escrow Closing -- Borrower must agree in the Escrow Agreement that:
• The required Borrower’s deposit will be used to make up the difference between the amount of the
net Debenture sale proceeds and the amount required to pre-pay the Debenture in full. This
difference includes the following:
– Debenture sale costs paid from the gross Debenture sale proceeds such as the CDC processing fee, CSA
fee, CDC attorney’s fees/closing costs, SBA Guarantee Fee, Funding Fee and Underwriter’s Fee; and
– The costs of pre-paying the Debenture including the prepayment premium and 6 months’ worth of
interest on the original Debenture amount.
• If all of the requirements for dissolution of the Escrow Account are not met to SBA counsel’s
satisfaction within 5 months of the date of the Debenture sale, the Debenture shall be pre-paid using
the funds in the Escrow Account.
• The Borrower must make all regularly scheduled 504 Loan payments after the Debenture sale.

77
Collateral Involving National Register of Historic Places
• SOP requires CDCs to consult with local SBA counsel on
all loans that impact National Register of Historic Places
regardless of the method of loan submission.
– 504 Subpart C, Chapter 2, paragraph III.D (page 308)

78
Economic Development Objectives – Job Requirements or Community
Development/Public Policy Goals
504 Project must achieve at least one of the Economic Development Objectives (which
include):
• Job Creation or Retention At least 1 Job Opportunity must be created or retained
per every $75,000 of project debenture ($120,000 for Small Manufacturers).
• Prior requirement was $65,000 of project debenture and $100,000 for Small
Manufacturers.
• CDC’s portfolio must maintain a job opportunity average of one Job Opportunity
created or retained for every: i. $75,000 guaranteed by SBA; or ii. $85,000
guaranteed by SBA for Projects located in Special Geographic Areas (Alaska, Hawaii,
State- designated enterprise zones, empowerment zones, enterprise communities,
Opportunity Zones, and labor surplus areas).
– 504 Subpart C, Chapter 2, paragraph IV.A.1 (pages 309-310)

79
Permissible Debt Refinance with Expansion for 504 Loans
• SOP incorporates the May 7, 2018 Final Rule on Debt Refinancing, which
includes:
• Clarification that any refinanced debt may include modifications that extend
the maturity date provided there were no payment deferments and no
additional proceeds advanced except for closing costs
• Limited or special purpose properties must comply with the contribution
requirements set forth in the SOP
• Added “business credit lines” as well as credit card debt
• Specific business expanse documentation guidelines added
– 504 Subpart C, Chapter 2, paragraph IV.E (pages 314-315)

80
Leasing - 504 Loans
• Clarified that the borrower must be occupying the
required amount of Project property and operate from
the project property before closing although language
regarding circumstances that may justify allowing a
period of time to comply for pre-existing leases (< 1 yr).
– 504 Subpart C, Chapter 2, paragraph IV.J.2 (pages 320-321)

81
Submission of Authorization/Disbursement of Debt Refinance without
Expansion Loan
• The SOP now requires CDCs to electronically submit to SBA
through E-Tran a copy of the executed Authorization.
• The SOP now requires CDCs to disburse all Debt Refinances
without Expansion loan proceeds within 9 months from the
date of approval.
– 504 Subpart C, Chapter 5, paragraph I.A.2 (page 340)
– 504 Subpart C, Chapter 5, paragraph I.B.1 (page 340)

82
25-Year Debenture/Insurance
• The SOP incorporates the 25-year debenture into various provisions of the SOP (Interest
Rate, Maturity, Calculation of Debenture, Fees, Etc.)
• The SOP now requires that CDCs ensure that all insurance requirements are listed in the
Authorization.
• The SOP removed the provision allowing a CDC to proceed to close and disburse a loan if it
has not received a response from the IRS verifying the financial information prior to first
disbursement of loan proceeds. The effect of this is that CDC’s must reconcile the
Applicant’s financial data against income tax data received in response to IRS Form 4506-T
prior to submitting the closing documents to SBA counsel.
– 504 Subpart C, Chapter 7, paragraph I.B.2, .1.B., I.C., Chapter 8, paragraph I (page 341, page 356, page 357
and page 360)
– 504 Subpart C, Chapter 5, paragraph I.D-D-1 (page 341)
– 504 Subpart C., Chapter 5, paragraph I.E.4 (page 344)

83
Unilateral Actions/Changes for 504 Loans/Guidance to Counsel
• The SOP no longer allows the CDCs to use their unilateral authority to submit a 327
action using the 504 E-TRAN system to extend the Post-Debenture maturity.
• The SOP added guidance that PCLP CDCs may modify and extend the loan authorization
unilaterally and must notify SLPC of any change in loan amount. However, PCLP CDCs
must obtain prior written consent from the SLPC for any adjustment to or change in the
ownership of a Borrower, including a change in percentage of ownership.
• The SOP added guidance regarding the requirements of CDC Counsel when submitting
504 Loan Closing Packages to the SBA using the form Opinion of CDC Counsel.
– 504 Subpart C, Chapter 5, paragraph II.B. (page 348)
– 504 Subpart C, Chapter 5, paragraph I.C (page 348)
– 504 Subpart C, Chapter 6, Paragraph I.B (Page 349)

84
CDC Closing Certification Requirements – Use of Proceeds/Sources of Funds
CDC must certify that Project costs were paid in full and that the Project proceeds were used in accordance with the
requirements of the Authorization, and that each party to the Project contributed the required amount to the costs. Sufficient
evidence of the use of proceeds and the contributions by each party is:
• Purchase of land and or building: a Settlement Statement, or its equivalent, showing the amounts paid and whether paid
by the Borrower or from the Third Party Lender or Interim Lender’s loan proceeds.
• For construction or renovations,
– Copy of construction contract and all change orders;
– Evidence of each progress payment and final payment of project reflecting cumulative costs and source of payment;
– If a construction escrow account is used as set forth in this SOP, copies of paid invoices and a copy of cancelled check made payable to
the Borrower and the designated contractor; and
– Copy of Mechanic’s Lien Releases, if applicable.
• For debt refinancing, a copy of the transcript of account and settlement statement.
• For all other costs, a settlement statement or copies of the paid invoices and cancelled checks or evidence of wire transfers.
• No funds should be paid directly to the Borrower unless the CDC obtains evidence of the Borrower’s payments (cancelled
checks and paid invoices).
– 504 Subpart C, Chapter 6, paragraph III.A (pages 350-351)

85
CDC Closing Certification Requirements –No Unremedied Substantial
Financial Change
• CDC must issue a written opinion based upon financial statements current within
120 calendar days from the date of loan closing that to the best of its knowledge
there has been no unremedied substantial adverse change in the Applicant’s (or
Operating Company's) ability to repay the 504 loan since its submission of the loan
application to SBA. CDC opinion must be made within 14 business days prior to its
submission of its opinion to SLPC (prior requirement was within 14 business days of
loan closing) and supported by financial statements that are dated no earlier than
120 calendar days from the date of closing.
– 504 Subpart C, Chapter 6, paragraph III.A.6 (pages 351)

86
CDC Closing Certification Requirements –Timing of Request to SLPC to Grant
Access to Authorization to SBA Counsel
• Clarification that access to each Authorization and all modifications be granted by
the SLPC Center to the SBA Counsel for closing in time to meet the Lead SBA Office’s
deadline for submission of loan closing packages. CDCs must not request access to
the Authorization and modifications unless the debenture is ready for closing and
sale during the month following the request. If access has not been granted to SBA
Counsel by its loan closing package submission deadline, SBA Counsel may hold
over the package for the next month’s debenture sale.
– 504 Subpart C, Chapter 6, paragraph III.A.7 (pages 351-352)

87
CDC Closing Certification Requirements –Electronic Submission of Closing
Packages
• CDC Closing Certification Requirements –(SOP Page 352)
• Revised requirement that all CDC’s must electronically submit
closing packages by the deadline established by SBA Counsel.
SBA Counsel may hold late packages over for the next
month’s debenture sale.
– 504 Subpart C, Chapter 6, paragraph III.A.8 (page 352)

88
Complete File Reviews
• No longer a requirement for Quality Assurances of 504 Closings.
• 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. The number and frequency of CFRs are at the
discretion of SBA Counsel, but no less than one package per 10 closing packages submitted by each CDC will be
reviewed.
• SBA Counsel will notify the CDC when a loan has been selected for a CFR, and the CDC must promptly submit to
SBA Counsel the applicable items on SBA Form 2303 for that loan. SBA Counsel will prepare a written report
documenting the CFR and its results, and send a copy of that report to: 1. The CDC; 2. The CDC’s 504 closing
attorney that closed the loan; 3. The SBA Counsel that reviewed and opined upon the loan closing package; and 4.
The CLSC loan file.
• If the CFR reveals closing deficiencies that could result in a loss to SBA, the CDC and/or its closing attorney must
promptly correct the deficiencies, if possible. SBA may take other action, including an action against the CDC closing
attorney. In the event of a loss, SBA may pursue an action against the CDC
• Revised requirement that all CDC’s must electronically submit closing packages by the deadline established by SBA
Counsel. SBA Counsel may hold late packages over for the next month’s debenture sale.
– 504 Subpart C, Chapter 6, paragraph III.C. (page 353-354)

89
Gross Debenture Dollar Limitations for Eligible Energy Public Policy Projects
• Revised requirements for Gross Debenture for Eligible Energy Public Policy Projects (may not be used for Projects
involving new businesses) are limited to $5,500,000.
• If Project involves:
– Construction or acquisition of a facility (the “new facility”), new facility must replace an existing facility. Energy
consumption at the existing facility must be compared with the new facility to determine if the Project satisfies
the 10% energy reduction goal. Applicant must be able to demonstrate that the new facility will use 10% less
energy than the existing facility.
– Retrofit of an Applicant’s existing facility, the retrofit must reduce the energy consumption of that facility by at
least 10%, regardless of the energy usage of any other facilities that the Applicant may operate; OR
• Each Project for plant, equipment and process upgrades of Eligible Energy Public Policy Project must generate more
than 15% of the energy used by the Applicant at the Project facility. All improvements or equipment required to
generate the renewable energy or renewable fuels must be included in the 504 Project costs.
• Applicant must document the Eligible Energy Public Policy Project’s compliance through either an energy audit,
engineering report, or other professional evaluation that is based on the annual energy usage at the facility or
facilities.
– 504 Subpart C, Chapter 7, paragraph I.A. (page 355-356)

90
Appendices
• Appendix 7 (Page 415): Removed pages 6 and 7 because SBA Form
AB-4 is obsolete (this relates to Application Questions for Working
Capital Caplines)
• Appendices 8-11 (Pages 415-416): Removed Appendices providing
Forms 1971 (Religious Eligibility Worksheet), 2462 (Addendum to
Franchise Agreement and Instructions) and 2464 (Annual Franchisor
Certification and Instructions) because these three forms are
available on SBA’s website. Now, the former Appendix 11 has been
renumbered as Appendix 8.

Disclaimer: This content is for your information only and is
not intended to constitute legal advice. Please consult your
attorney before acting on any information contained here.
91
Thank you!

92
About the Presenters
Arnold D. Spevack
Principal
Lerch, Early & Brewer
T 301-657-0749
adspevack@lerchearly.com
Lance M. Kodish
Attorney
T 301-657-0152
lmkodish@lerchearly.com
Alison W. Rind
Principal
T 301-657-0750
awrind@lerchearly.com
Michael D. Smith
Principal
T 301-657-0166
mdsmith@lerchearly.com

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