SBA SOP Updates 50 10 5(i) Seminar

SBA SOP Update
Presented by
Alison Rind | Arnie Spevack
Mike Smith | Matt DiMeglio
1© 2017 Lerch, Early & Brewer, Chtd.
50 10 5(I) Lender and Development Company Loan Programs

Revisions to SOP 50 10 5(I)
• Streamline Procedures for Determining Size Eligibility Based on
Affiliation for Franchised Businesses
• Businesses Which Restrict Patronage
• Fee Relief- Veteran Owned Businesses
• Credit Elsewhere Requirements
• Collateral Determination
• Effective January 1, 2017
• Applies to Both 7(a) and 504 Lending
Lead Disclosure Requirements: Pitfalls For The Unwary RE Professional50 10 5(I) Lender and Development Company Loan Programs

Franchise Affiliation
• Revised Regulation 13 CFR 121.301(f)(5)
Affiliation based on franchise and license agreements. The
restraints imposed on a franchisee or licensee by its franchise or
license agreement generally will not be considered in determining
whether the franchisor or licensor is affiliated with an applicant
franchisee or licensee provided the applicant franchisee or licensee
has the right to profit from its efforts and bears the risk of loss
commensurate with ownership. SBA will only consider the franchise
or license agreements of the applicant concern.

What This Means
• Keys to the test unobstructed rights to profit
• No shift of risk of loss
• No longer need to review franchises of affiliates
• Lenders to follow instructions in E-Tran/SBA One to identify
specific franchise for the Applicant

SBA Review of Franchises
• SBA will no longer review franchise agreements
• Instead a universal SBA Addendum must be executed for each
franchise related SBA guaranteed loan
• If franchisor refuses to execute the Addendum- loan is not eligible
• No negotiations of the Addendum are allowed

Terms of Addendum
• Franchisor right of first refusal of partial interest may be exercised only if
the proposed transferee is not a current owner or family member
• Any consent to transfer of partial or full interest must not be unreasonably
withheld and transferor will not be liable for the acts of the transferee
• If franchisee owns the real estate where the franchise is located, franchisor
may not record any restrictive covenants, branding covenants or
environmental use restrictions
• Franchisor will not directly control (hire, fire or schedule) franchisee’s
employees

Addendum Only Addresses Affiliation
• If Addendum is signed, the SBA will not deem the franchisor and
franchisee affiliated
• SBA loan can only be made if Addendum is signed
• Applicant franchisee and franchise system must meet all other SBA
eligibility requirements
• Lender must not make any disbursement of loan proceeds without
obtaining executed franchise agreement and addendum and review
all other documents the franchisor requires to ensure compliance
with SBA Loan Program Requirements

Applicant Franchisors
• Any applicant franchisor must not exceed size standards
• Affiliates are included in this determination
• Applicants operating under franchise development agreements
are ineligible (not including master franchise agreements)
• These are deemed to be passive investments and inherently
speculative
• Agreements containing area development rights may be eligible
if the agreement complies with the above guidance

Franchise Registry
• SBA will no longer maintain an internal or external centralized
listing of franchise systems where the franchisee is not
considered affiliated with the franchisor for size determinations

Businesses Which Restrict Patronage
• Businesses restricting patronage for any reason other than
capacity are not eligible
• If franchise targets one gender, it must offer services to both genders
• Lender to document file with:
• Affidavit of Small Business Applicant that the business is open to both
genders
• Evidence that the facility is open to both genders (ie, separate bath/locker
rooms or membership demographics

Credit Elsewhere
• Acceptable factors to demonstrate credit is not available
elsewhere have been modified to incorporate changes made to
the Small Business Act (15 USC Section 636(a)(1))
• The following factors are not acceptable in determining credit not
available elsewhere
• Lender’s legal limit
• Lender’s liquidity dependent upon selling the guaranteed portion on the
secondary market
• Need to meet CRA requirements
• Refinance debt already on reasonable terms

Credit Elsewhere – Acceptable Factors
• Business need longer maturity than lender’s policy permits (ie, business
needs a loan that is not on demand)
• Requested loan amount exceeds the lender’s policy limit regarding a loan
it can make to one customer
• Collateral does not support lender’s policy requirements
• Lender’s policy normally does not allow loans to new businesses or
businesses in a particular industry
• Any other factors relating to credit, that, in the lender’s opinion cannot be
overcome without the guaranty (specify these reason)

Credit Elsewhere CONTINUED
• SBA is increasingly reviewing a lender’s analysis of the credit
elsewhere test. This increased scrutiny means that a lender must
elaborate in great detail its determination of credit not available
elsewhere
• Merely listing the criteria listed in the SOP is not sufficient
• A narrative specific to this particular borrower as well as the lender’s
particular program requirements must be addressed in the credit
memo

Other Revisions to SOP 50 10 5(I)
• Guarantee Fees
• Loans to Veterans and Spouses of Veterans
• No guarantee fee (so long as program is subsidy zero) for loans up
to $350,000.00

Other Revisions to SOP 50 10 5(I)
CONTINUED
• Collateral
• Requirements related to determination of adequacy of collateral
• Lender must review the impact of covenants and other restrictions
recorded against the collateral which may impact value and marketability
and document analysis in credit file
• Deed restrictions, covenants, easements, reversionary interests,
subordinations, leases and options and any other provisions that affect the
use of the property or benefit a third party
• Engineering controls that require installation of costly devices or structures
(ie, wells, barrier walls) prior to constructing or remodeling buildings or
otherwise improving property

Revised Procedures – SBA Forms 912
and 1081 and Fingerprint Cards (FD
258)
• Effective December 15, 2016
• Office of Personnel Security (OPS) within SBA’s Office of the Chief
Operating Officer (COO) is now responsible for processing
fingerprint checks for all SBA Forms 912 (Statement of Personal
History) and 1081 (Statement of Personal History for use by lenders)
for SBA loan programs
• Office of Inspector General (OIG) will no longer accept SBA Forms
912 and 1081 and Fingerprint Cards for processing

Businesses with an Associate of Poor
Character
• Requirements for who must complete the Form 912 has not
changed
• Types of offenses that require a background check have
changed
• Process streamlined for faster processing
• Incomplete packages submitted for processing will be returned
unprocessed

Character CONTINUED
• If Subject Individuals responds “No” to questions 1, 2 and 3 on
SBA Form 1919, then the loan can be processed with no SBA
Form 912 required
• If Subject Individuals responds “Yes” to Question 1 (presently
subject to an indictment, criminal information, arraignment or other
means by which formal criminal charges are brought) or in
response to Question 3, the individual is currently on probation
(including probation before judgment), then the Applicant is
ineligible

Character CONTINUED
• If Subject responds “Yes” to Question 2 or Question 3 (other
than active probation), then a character determination will be
required

Character CONTINUED
• Procedures for Determination
• Complete the Form 912
• Provide written explanation about the details of any “Yes” response to
include particulars as set forth in the SOP (details did not change)
• If Lender determines upon review of the court disposition of the case(s)
resulted in one or more multiple misdemeanor convictions whose
conditions were met more than 6 months prior to receipt of the SBA
application, then the Lender must retain the supporting documentation
in its file with the original Form 912 and may proceed with processing
the loan with no further 912 review

Character CONTINUED
• If Individual discloses any misdemeanor convictions within 6 months of
receipt of the Application, or if there are any misdemeanor convictions
for crimes against a minor (ie, child endangerment, abuse, possession
of child pornography), or if the 912 form discloses a felony conviction,
then a background check must be performed
• Fingerprint check (FD 258) must be used
• Name checks no longer used
• Lender may not disburse the loan until formal clearance from SBA is
received in writing

Character CONTINUED
• OPS will conduct the background check
• OPS will submit FD 258 to the FBI or the FBI’s Electronic Fingerprint Submission, if
available
• Lenders may obtain the FD 258 from its local SBA Field Office or on the FBI’s website
at www.fbi.gov
• For felony convictions, Lenders must submit the complete and detailed Form 912
package signed by the Individual within 90 calendars days prior to submission to SBA
• Delegated lenders – Submit directly to OPS (See SBA Notice 5000-1399 for
location)
• Non-delegated lenders – Submit to local SBA Field Office of LGPC for forwarding
to OPS

• FBI generally takes 30 days to process fingerprint check
• Upon receipt of determination from the FBI, OPS will refer the matter to
the SBA Director/Office of Financial Assistance (D/OFA) or designee to
make the character determination
• SBA Field Office or LGPC will notify lender of the Agency’s
determination
• Copy of clearance to be added to the lender’s loan file
• Reconsiderations should be submitted to D/OFA at SBA Headquarters
Character CONTINUED

• Factors that may contribute to favorable reconsideration are:
• Additional information provided by the applicant that satisfactorily explains the
circumstances of the prior offense
• Passage of time since offense where no additional offenses were committed and
the fact that the individual has led a responsible life and made a contribution to
the community.
Character CONTINUED

• SBA requires recertification of all users of its online Capital Access
Financial System (CAFS) on a bi-annual basis. CAFS is the online
system that includes lenders’ access to E-Tran Origination, E-Tran
Servicing, and SBA One.
• Last year SBA began requiring that SBA lenders designate “Authorizing
Officials” who would be responsible for approving the users of E-Tran
and SBA One and then recertifying them on a bi-annual basis.
Bi-Annual Recertification for SBA One
and E-Tran Access - Starts Jan. 11

• Beginning on January 11, 2017 and ending on February 11, 2017, the
Lender Authorizing Official will need to recertify the users at its lending
institution. If a user is not recertified, they will be denied access to SBA’s
CAFS systems. Information on the recertification process is available at
https://caweb.sba.gov/cls/help/CAFS%20AO%20Account%20Certification.p
df.
• The CAFS Website is https://caweb.sba.gov/cls/dsp_login.cfm.
• If you need assistance, please send an email to CLS@sba.gov.
Bi-Annual Recertification for SBA One
and E-Tran Access - Starts Jan. 11
CONTINUED

QUESTIONS?
50 10 5(I) Lender and Development Company Loan Programs

© 2017 Lerch, Early & Brewer, Chtd. 28
About the Presenters
Alison Rind (awrind@lerchearly.com) is chair of the Commercial Lending Practice Group at Lerch Early and is an SBA lending
attorney who represents commercial lenders in loan transactions and commercial matters, including participants in SBA and
government-guaranteed lending programs.
Michael Smith (mdsmith@lerchearly.com) is a commercial lending attorney at Lerch Early who primarily focuses on the
structuring, negotiation, documentation, due diligence and closing of commercial lending transactions.
Arnold Spevack (adspevack@lerchearly.com) is a commercial lending attorney at Lerch Early who represents businesses,
lenders and borrowers in financings, closings, negotiations, and in the courts.
Matthew DiMeglio (mgdimeglio@lerchearly.com) is a real estate and lending attorney at Lerch Early who helps national,
regional, and local banks, credit unions, and SBA lenders close loans.

SBA SOP Updates 50 10 5(i) Seminar

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