U.S. Small Business Administration Quarterly Update - October 24, 2023
U.S. Small Business Administration
Office of Capital Access
7(a) Connect Quarterly Update
October 24, 2023
Housekeeping
2
3
Agenda
•
Opening remarks from Katie Frost, Acting Associate Administrator, Office of
Capital Access (OCA)
•
Hot Topics
•
Dianna Seaborn, Director, Office of Financial Assistance (OFA)
•
Ginger Allen, Chief, 7(a) Loan Policy Division, OFA
•
SBA’s Risk Mitigation Framework – OPSM & OFPO
•
Introduction to SOP 50 10 7.1 - 7(a) Loan Origination Policy Team
SBA Office of Capital Access Acting Associate Administrator
Katie Frost
4
Office of Financial Assistance
Dianna Seaborn
Director
7(a) Loan Policy Division
7
Hot Topics
•
Update to SOP 50 10
•
SOP 50 10 7.1 provides clarifications based on feedback from the lending
community
•
Effective date is November 15, 2023
•
Download SOP 50 10 7.1
here
•
Information Notice will be published
•
OFA will update SOP 50 10 training
on SBA’s
Training on Demand
page
•
Existing 50 10 7 training will be removed
•
New updated training will be published with downloadable slide decks
•
Updated Form 1919
is at OMB for final approval – targeted publication date is
mid-December
Hot Topics #2
•
FY 2024 7(a) Fees:
Information Notice 5000-848801
for 7(a) Fees
Effective October 1, 2023 for Fiscal Year 2024
•
Training and deck
available on SBA’s Training on Demand page
•
Sunset of the Community Advantage Pilot Program
has been
extended to October 31
st
, 2023
•
FRN 2023-22185
Community Advantage Pilot Program published October 5th
•
Information Notice
5000-850230
Sunset of the Community Advantage
Program published October 11th
•
Please join the 504 Loan Policy Team for a training on 504 Loan
Program Updates
on Thurs. Oct. 26
th
at 2:00 Eastern -
Login link
8
9
Save the Date – Upcoming Updates
7(a) Connect Quarterly Update – 3:00 p.m. Eastern
•
Quarterly call for 7(a) Lenders and SBA staff
•
Login links:
Jan. 9, 2024
;
April 9, 2024
;
July 9, 2024
;
Oct. 8, 2024
504 Connect Quarterly Update –
3:00 p.m. Eastern
•
Quarterly call for CDCs, Third Party
Lenders and SBA staff
•
Login link:
Dec. 12, 2023
504 Loan Program Updates
•
Thurs.
Oct. 26, 2023
at 2:00 Eastern
Subscribe/Unsubscribe to SBA OFA Policy News
Subscribe to OFA 7(a) Policy Newsletter
Unsubscribe from OFA 7(a) Policy Newsletter
Subscribe to OFA 7(a) Community Advantage Policy Newsletter
Unsubscribe from OFA 7(a) Community Advantage Policy Newsletter
Subscribe to OFA 504 Policy Newsletter
Unsubscribe from OFA 504 Policy Newsletter
If you are already subscribed, you do
NOT
need to re-subscribe!
If the above hyperlinks don’t open a new email, you may complete the process manually by either
scanning a Quick Response (QR) code or:
1.
Send an email to
OFANotifications@sba.gov
2.
Use one of the below subject lines exactly as it appears below:
REQUEST TO SUBSCRIBE: OFA 7(a) Policy
REQUEST TO SUBSCRIBE: OFA 504 Policy
REQUEST TO SUBSCRIBE: OFA 7(a) Community Advantage Policy
REQUEST TO UNSUBSCRIBE: OFA 7(a) Policy
REQUEST TO UNSUBSCRIBE: OFA 504 Policy
REQUEST TO UNSUBSCRIBE: OFA 7(a) Community Advantage Policy
The email will be read by computer software – the email subject line must use the specific text above, and
should not include any additional language, either in the subject line or body of the email
10
SBA OFA Quick Response (QR) Codes for Subscriber Lists
To sign up for SBA OFA’s subscriber lists using a QR code:
•
Scan the QR code with your cell phone camera
•
Select the popup link or email address
•
Your phone will auto-populate an email
•
Click send (no text needed in body of email)
11
Subscribe to SBA OFA News
7(a) Policy
12
Subscribe to SBA OFA News
504 Policy
13
14
Training On Demand
SBA’s
Training On Demand
webpage is now organized by topic for ease of use.
Scan the code below to learn more about SBA policy!
Training on Demand – How to Download a Video’s Slide Deck
1.
Navigate to the Training on demand webpage
HERE
2.
Select a video from the list as pictured below
15
Click on “Show more” in the Video Description Box
3.
When your video selection loads, scroll down or click on “Show more” in the video
description box
4.
Click on the link to download the slide deck
16
SBA box.com
5.
View the deck or download it from the box.com platform
17
7(a) Connect Call
E-TRAN Updates
October 2023
ETRAN Implementation
of SOP Updates
ETRAN Updates Effective as of August 1, 2023
7
a
T
e
r
m
s
a
n
d
C
o
n
d
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t
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o
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s
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Generate T&C from within ETRAN
5
0
4
T
e
r
m
s
a
n
d
C
o
n
d
i
t
i
o
n
s
•
Generate T&C from ETRAN
S
B
S
S
S
c
o
r
e
•
Increased threshold to $500k
A
f
f
i
l
i
a
t
i
o
n
R
u
l
e
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Updates to ETRAN Affiliation table
P
I
M
S
a
n
d
C
A
S
B
L
C
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Enhanced PIMS table for tracking of CA SBLC
5
0
4
J
o
b
C
r
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a
t
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t
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n
t
i
o
n
R
e
q
u
i
r
e
m
e
n
t
s
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Effective Date of May 12, 2023
S
T
A
R
C
o
m
p
l
i
a
n
c
e
C
o
d
e
s
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Process flow impacts
•
API and 3
rd
Party vendor updates
H
a
z
a
r
d
I
n
s
u
r
a
n
c
e
R
e
q
u
i
r
e
m
e
n
t
•
Removed validation for Hazard Insurance for loans $500k and
below
F
r
a
n
c
h
i
s
e
•
Franchise questions are now optional
•
Franchise validations removed
C
r
e
d
i
t
E
l
s
e
w
h
e
r
e
•
Added options to align with SOP
20
New: Validation 4363
21
NEW: Validation Error 4363
•
Introduced August 1, 2023 to flag individuals/entities with potential
compliance issues on existing SBA loans
•
This error checks for
hold codes
on other SBA loans such as PPP and
Covid EIDL
•
This validation must be resolved to proceed with the application
•
Check for this Error:
Validate
your loan within ETRAN
before
you submit
your application to SBA for Approval/Funding
•
Log into CAFS
•
Select ETRAN Origination
•
Search for your App Number
•
Click on the blue button labeled
Validate
22
NEW: Validation Error 4363 – Processing Tips
•
When
7a Lenders and CDCs
are requesting a resolution please use the following format in the email
subject line:
•
New Email Inbox
:
4363resolution@sba.gov
•
Subject
Line
: Error 4363 – Application XXX (
enter your app number
)
•
Body of Email
: If known, please include the loan number and the Loan Program (COVID EIDL, PPP,
etc.) for the existing SBA loan that you believe may be causing the validation error. If loan number for
the existing loan is unknown, please provide the last 4 digits of the Tax Id that is causing the error.
Important Notes
:
•
SBA is generally prohibited from sharing details about compliance issues on existing SBA loans directly with SBA
Lenders due to privacy concerns and legal obligations.
To address these concerns and to enable SBA to provide
additional details about most compliance issues and steps to resolve them, SBA Lenders should submit a
Borrower’s Consent to Verify Information and 3
rd
Party Authorization (
SBA Form 2518
), signed by the
borrower, with the request for resolution
.
Even with a signed Borrower Authorization, there will be instances
where SBA is unable to share details about the compliance issue on the existing loan.
•
Reviewing compliance issues on existing loans can be a time-consuming process that may involve SBA obtaining
additional documentation from the borrower.
•
Compliance issues cannot always be resolved by paying off the loan.
•
In many cases, the compliance issue will not be able to be resolved.
23
Validation 2087
24
Validation Error 2087
25
•
This is
not
a new Validation Error
•
This error checks for prior defaulted SBA loans
•
The defaulted loan must be cured by the borrower before the
application can proceed
•
Lenders and CDCs can contact the appropriate processing center for
details on which loans are defaulted:
•
7(a) Loans:
7aquestions@sba.gov
•
504 Loans:
504questions@sba.gov
Validation Error 2087 – Processing Tips
•
Validate
your loan within ETRAN
before
you submit your
application to SBA for Approval/Funding
•
Log into CAFS
•
Select ETRAN Origination
•
Search for your App Number
•
Click on the blue button labeled
Validate
•
When
7a Lenders and CDCs
are requesting info on defaulted loan,
please use the following format in the email subject line:
•
Subject Line: Error 2087 – Application XXX (
enter your app number
)
Important Note
:
•
Even after a Borrower has cured the defaulted loan, it can take
several weeks
before
the appropriate information is reflected in the system to clear the error.
26
NEW: Compliance PreCheck
Compliance PreCheck Highlights
•
Go-live date of August 18, 2023
•
Applicable for any 7a and 504 loan
•
Lenders should only use this feature for potential SBA loans
•
Smaller data-set sent for Compliance PreCheck
•
Similar in concept to SBSS pre-scoring lenders perform for potential SBA loan
•
Business and Principals
•
Purpose is to alert lenders of Compliance Check codes that will be issued
at time of submission
•
There is no clearing of codes at pre-check
•
Informational only
28
Compliance PreCheck Highlights
.
•
How to use:
•
Log into CAFS
•
Select ETRAN Origination
•
Search for your App Number
•
Click on the blue button labeled
PreCheck Compliance
•
Reminder: There is NO CLEARING OF CODES at Pre Check
29
High-Level Compliance Pre Check Process
Lender
System
Legend
30
New Fraud Risk Framework
STAR and Do Not Pay Implementation
Compliance Reviews
SBA is changing their business model for all 7a and 504 loan
guaranty products as part of the new SOP release:
•
Treasury Do Not Pay (DNP)
•
SBA History of Compliance
•
Lexis
Nexis evaluation of Business and Principals
•
Business Credit Score
This business process is like PPP round 3.
32
High-Level Compliance Code Process
Lender
System
Legend
33
Steps to Review Compliance Check Codes
Checking for Codes within ETRAN
If your file is showing a a status of
Withdrawn the following are steps to view
compliance code checks
that
were issued
1)
Log into ETRAN > Origination and pull
up your Application
2)
Click on the menu labeled
Application
Info
on the left-hand side
3)
Scroll to the bottom of the page to
view
Compliance Codes
4)
Click on the hyperlinked
Details
within
the
Star Comment
s column to view
additional details
BEFORE you proceed any further…
•
Carefully review the application data in
ETRAN
•
If there are typos in any of the Tax ID’s,
the Borrower Name or any
Principal/Guarantor,
resubmit a new
application with corrected data
(copy the
app within ETRAN)
•
SBA cannot clear alerts for applications
with inaccurate data
If the data was input accurately, Lenders
and CDCs can request for SBA to clear the
compliance code.
34
Requesting Clearance of Compliance Code(s) from SBA
If the data was input accurately, Lenders and CDC’s can request clearing
of Compliance Codes from SBA.
Each code has a different set of instructions and/or documents
1)
Upload supporting documentation via the
Documents
blue bubble and
select
Compliance Support Documents
.
2)
AFTER
documents have been uploaded, send an email to appropriate
processing center to request clearance:
•
7(a) Loans:
7aComplianceCheck@sba.gov
•
504 Loans:
504questions@sba.gov
•
Subject
line: Compliance Code Resolution – Application XXX
(enter app number)
35
Common Compliance Check Codes & Docs to Resolve
36
Common Compliance Check Codes & Docs to Resolve
,
37
Common Compliance Check Codes & Docs to Resolve
.
38
Common Compliance Check Codes and Docs to Resolve
.
39
818
817
819
7(a) Terms and Conditions
7(a) Terms & Conditions Implemented in ETRAN Origination
•
7a Terms and Conditions is available within
ETRAN
•
Data Entry Guide found in 2 areas within
CAFS:
•
CAFS Landing Page
•
ETRAN > Origination > FAQ
•
Refer to Data Entry Guide for questions
41
7(a) Terms & Conditions Implemented in ETRAN Origination
,
42
Reminders & Tips
The document button and generation are only available for Lenders from within
ETRAN Origination
for loans with
the following statuses:
•
Application In Process (IP)
•
Awaiting Documents (AD)
•
Funded (FD)
A loan with a status of In Review Reviewer 1 (R1)
cannot
be edited, nor can a T&C be generated.
Post-Approval Changes / Loan Modifications:
•
Any changes made to
ETRAN Servicing
will
not
be reflected in the T&C.
•
Changes or corrections needed post-approval will follow the normal loan modification process.
43
Cheat Sheets
Contact Email Summary
Origination Loan Statuses Summary
Email Contact Summary
Compliance Code & Validation Errors
45
Origination Loan Statuses Summary
46
Q&A
SOP 50 10 7.1
Lender and Development Company Loan Programs
7(a) and 504 Loan Origination Policy
Effective Nov. 15, 2023
48
Section A.
Core Requirements for all 7(a) and 504 Loans
Significant Updates
49
Chapter 1: Primary Applicant Eligibility Requirements Certified by Applicant and
Validated by SBA’s Risk Mitigation Framework
•
SBA will make the final determination as to the eligibility of the Applicant for all
eligibility requirements stated in Section A, Chapter 1, using SBA’s
Risk
Mitigation Framework
•
Applicant is an operating business located in the United States, is organized for profit, is
small in accordance with SBA’s size standards, and is not one of the types of ineligible
businesses listed at 13 CFR
§
120.110
•
Lenders may conduct a
pre-check
in E-Tran before submitting a loan application
to determine whether SBA’s Risk Mitigation Framework will flag any eligibility
issues for the Applicant
•
Lenders must not submit an application that they know is not eligible, regardless
of the Applicant’s certification
50
Chapter 1: Small Under SBA Size Requirements
EPC and OC:
•
Clarified that for loans structured with an EPC and OC, only the OC is examined for
size and affiliation
•
In accordance with
13 CFR § 120.151
, the amount of any loan received by an EPC
applies to the loan limit of both the EPC and the OC
Affiliation based on ownership:
•
When spouses and minor children jointly own a business, their ownership interests
must be combined when determining the amount of ownership interest,
but
…
•
Ownership interests are
not
combined when spouses and minor children have
individual ownership interests in different businesses
51
Chapter 2: Credit Not Available Elsewhere, Special Transaction
Structures, & Other Primary Applicant Eligibility Requirements
•
Credit not available elsewhere:
•
Clarified SBA’s requirements for documenting credit not available elsewhere. There is no
requirement for written justification in the SBA Lender’s credit memo beyond simply indicating
one or more reasons from a list of acceptable factors
•
If you select “other”, you must list the reason
•
Lender responsibility:
New Paragraph C. in Chapter 2, relocated two types of ineligible
businesses that were formerly located in Chapter 1 but that will now be the responsibility of the
Lender:
•
Businesses in which a Lender or any of its Associates owns an equity interest, directly or
indirectly
•
Small Business Lending Company (SBLC) may not make a loan to an Applicant that has
received financing (or a commitment for financing) from a Small Business Investment
Company (SBIC) that is an Associate of the SBLC. 13 CFR §
120.476
52
53
Chapter 3: Occupancy and Leasing Requirements
•
Added clarifying text: Amount of rentable property that can be leased,
based on the total project:
•
Occupancy and leasing requirements only apply when loan proceeds
are used to purchase or improve real estate, or when debt secured by
real estate is financed with loan proceeds
•
“Rentable Property” is the total square footage of all buildings or
facilities used for business operations (
13 CFR § 120.10
),
including
common areas. Excludes stairways, elevators, and mechanical areas
•
Added borrower responsibilities when leasing space
•
Minimum lease term; assignment of lease & landlord’s waiver “should” be
obtained; ground lease terms
54
Chapter 4: Ethics, Fees, and Agents
Service and Packaging Fees:
•
Lender may charge an applicant reasonable fees (customary for similar Lenders in the geographic
area where the loan is being made) for packaging and other services
•
Lender must advise the Applicant in writing that the Applicant is not required to obtain or pay for
unwanted services
•
Lender may charge a flat fee up to $2,500
•
Fees must be reported to SBA in E-Tran (via Form 159 if greater than $2,500)
•
Technology service fees:
•
Lenders may charge fees associated with technology services (whether developed internally
or purchased from a third party) on a pro-rata basis for software or technology used in
connection with preparing SBA loan documents, underwriting, or closing the SBA-
guaranteed loan
•
These fees
may not
be charged as an out-of-pocket expense (i.e., they are considered service
and packaging fees)
Chapter 5: Other Core Requirements
Guaranties:
•
Formerly Paragraph A.4, “Reducing Ownership Interest”: This paragraph has been
deleted because it was causing confusion regarding partial changes of ownership
•
Even though this paragraph has been deleted, SBA intends:
•
For an SBA loan for a complete change of ownership: Seller is not required to provide a
guaranty because they no longer have ownership in the business
•
For a 7(a) loan for partial change of ownership: Percentage of ownership is measured post-
sale
Verification of Financial Information:
•
This section has been rewritten for clarity and flow
•
7(a) loans $500,000 or less: “Do what you do” but
prior to first disbursement
, Lender
must obtain
either
tax transcripts
or
business tax returns to verify Applicant’s size
55
Chapter 5: Substitution of Personal and/or Corporate Guaranty Liability
Substitution of personal and/or corporate guaranty liability is permitted
•
Third-party individuals or entities may assume the liability of a guaranty for
individuals and/or entities that would otherwise be required to make a personal
or corporate guaranty for an SBA loan
•
Substitute guarantor must have a similar or greater value
•
Personal/corporate guaranty liability agreement or transfer agreement must be
submitted to the Lender as part of the complete loan package
•
If a substitute guarantor will be used, the Lender must identify in the E-Tran
terms and conditions both the substituted guarantor and the individual or
corporate entity being substituted
56
Chapter 5: Insurance
Flood Insurance:
•
If the Lender is taking the business real estate as collateral,
and if
it is
in a special flood hazard area,
and if
the loan proceeds are being used
to refinance, acquire, install, improve, construct, or renovate real estate
and/or machinery and equipment,
then
the loan recipient must obtain
flood insurance on the collateral and its contents
•
Private flood insurance will be accepted
•
However, it must meet the same requirements as the standard NFIP policy
57
Chapter 5: Special-Purpose Credit Programs
•
SBA’s lending programs qualify as “Special-Purpose Credit Programs” under the
Equal Credit Opportunity Act (ECOA)
•
Applicant’s marital status, sources of personal income, alimony, child support,
and spouse’s financial resources can be obtained and considered in determining
program eligibility
•
SBA and/or the Lender has the right to obtain the signature of an Applicant’s
spouse (whether an owner of the business or not) or other person on an
application or credit instrument if it is required by Federal or State law
58
Section B.
7(a) Loan Program
Specific Requirements
Significant Updates
59
7(a) Loan Maturities
For all 7(a) loan delivery methods:
•
Mixed purpose loans:
•
When loan proceeds are used for multiple purposes (land and
building, working capital, machinery & equipment, or the refinancing
of any of these purposes), the maturity may be a blended maturity
or,
if 51% or more of the use of proceeds are for real estate, the maximum
maturity may be up to 25 years
60
7(a) Loan Maturities (Continued)
For all 7(a) loan delivery methods:
•
Equipment, fixtures, or furniture loans should not exceed 10 years
•
The term may be up to 15 years if the IRS asset class useful life supports the
term
•
IRS Publication 946
•
Loans for leasehold improvements (except for leasehold interests in land)
may not exceed 10 years
•
Plus an additional period reasonably necessary to complete the leasehold
improvements, but in no case more than 12 months
61
Changes of Ownership for 7(a) Delivery Methods
That Allow These Transactions
Complete change of ownership:
Maximum loan maturity is 10 years;
however, the maturity may be up to 25 years
when
the purchase price
includes the commercial real estate where the Applicant business operates
and
when the value of the commercial real estate is 51% or more of the
purchase price
Complete partner buyout
and
partial changes of ownership:
These
transactions are, by their nature, transactions based on the redemption or
sale of stock for equity in the business; therefore, the loan maturity is limited
to a maximum of 10 years
Partial change of ownership:
The seller may stay on as an owner, officer,
director, stockholder, Key Employee, or employee of the business
62
Changes of Ownership
For 7(a) Delivery Methods That Allow These Transactions (#2)
•
Seller earnouts
are prohibited; however,
buyer rebates
based on business
performance are allowed because this is a benefit to the Borrower
•
If the Borrower receives funds based on the rebate, it should first be applied to
pay down the 7(a) loan to a point that will not trigger a subsidy recoupment fee
•
Any remaining funds may be used for business purposes
•
Business valuation:
The maximum 7(a) loan uses of proceeds for any
change of ownership is capped at the business valuation amount
•
When the business valuation is lower than the sales agreement, the shortfall
may be financed with a non-guaranteed loan if it is subordinate to the 7(a) loan
63
Debt Refinance for Standard 7(a), 7(a) Small, & SBA Express
•
Currency:
The debt to be refinanced must be, and must have been,
current for at least the last 12 months or for the life of the loan, whichever
is less
•
Delegated Authority:
•
In accordance with 13 CFR §
120.452
, a Lender may not use PLP delegated
authority to reduce the Lender’s credit exposure to the Applicant
•
Standard 7(a) and 7(a) Small loans that reduce a Lender’s credit exposure to
the Applicant must be processed under non-delegated authority (also applies
to all other delivery methods that use PLP delegated authority)
•
However
… SBA Express Lenders
may
process loans that reduce the SBA
Express Lender’s credit exposure to the Applicant under SBA Express authority
64
Debt Refinance for Standard 7(a), 7(a) Small, & SBA Express
(Cont.)
Refinancing same
i
nstitution or another Lender’s SBA-guaranteed
d
ebt u
sing either
delegated or non-delegated authority:
•
7(a) loan:
•
The new loan must meet the 10 percent improvement to installment payment amount
requirements
•
Any applicable subsidy recoupment fees must be included in the 10% improvement calculation
•
504 loan:
•
The new loan must meet the 10 percent improvement to installment payment amount
requirements
•
Lender must include justification in credit memo
•
Applicable 504 prepayment penalties will apply
•
May not solely refinance the Third Party Lender’s loan
•
Calculation of 10% improvement includes subsidy recoupment fees and prepayment penalties
•
Remember:
•
Lenders may not use PLP authority to reduce the Lender’s credit exposure to the Applicant
•
Debt must meet currency requirement
65
66
Refinancing Same Institution Non-SBA Guaranteed Debt
A Lender may refinance its own non-SBA guaranteed loan to the Applicant if:
•
The new loan meets the SBA 10 percent improvement to
installment payment
amount requirement
•
Remember:
•
Lenders may not use PLP authority to refinance the Lender’s non-guaranteed debt
•
Debt must meet currency requirement
•
Prepayment penalties must be included in 10% improvement calculation
67
7(a) Maximum Loan Amount
For 7(a) Small and SBA Express:
•
7(a) Small loans:
Maximum loan amount of $500,000
per project
•
Includes other 7(a) loans made within 90 days
•
SBA Express:
The maximum aggregate loan amount is $500,000 (gross)
•
This includes all outstanding SBA Express and 7(a) pilot program loans
68
Equity Requirements
Standard 7(a) Only
-
For complete changes of ownership:
•
SBA requires an equity injection of at least 10% of the total project costs
(all costs required to complete the change of ownership, regardless of the
source of funds):
•
Seller debt may be considered as part of the equity injection if:
•
The seller’s loan does not include a balloon payment
and
,
•
For the first 24 months of the 7(a) loan, either:
•
It is on full standby; or
•
It is on partial standby (interest payments only being made)
and
the Applicant’s
historical business cash flow supports the ability to make the payments,
and
at least
a quarter of the SBA-required equity injection is from a source other than the seller
Equity Requirements (Continued)
Standard 7(a) Only
- Changes of ownership between existing
owners (complete partner buyout)
or
partial changes of ownership:
•
If the 7(a) loan will finance more than 90% of the change of ownership, the
business balance sheets for the most recent completed FY and current
quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to
the change in ownership
•
When required, cash contribution can be
either:
•
An amount sufficient to reflect a debt-to-worth ratio of no greater than 9 to 1 on the pro
forma balance sheet
or
…
•
In the amount of at least 10% of the purchase price of the business, as reflected in the
purchase and sale agreement,
whichever is less
69
Underwriting 7(a) Small Loans
Applicant
receives an acceptable
SBSS Score:
•
Non-Delegated Authority:
•
Lenders must submit the application via E-Tran
•
Once SBA issues the SBA loan number, the Lender may close and disburse the
loan in accordance with the procedures in the SOP
•
Delegated Authority (PLP):
•
Once SBA issues the SBA loan number, Lender may close and disburse the
loan in accordance with the procedures in the SOP
70
Underwriting 7(a) Small Loans (#2)
Applicant
does not
receive an acceptable SBSS Score:
•
Non-Delegated Authority:
•
Lenders may submit the application via E-Tran for processing
•
The Lender’s credit memo must contain a cash flow analysis that
demonstrates the Applicant’s ability to repay the loan through the cashflow
of the business
•
The cashflow analysis must include all business debt payments including the
new 7(a) loan
•
Once SBA issues the SBA loan number, the Lender may close and disburse the
loan in accordance with the procedures in the SOP
71
Underwriting 7(a) Small Loans (#3)
Applicant
does not
receive an acceptable SBSS Score, three options
using delegated authority:
•
Lenders with PLP authority may override an unacceptable SBSS Score by:
•
Option 1:
Completing a cashflow analysis that demonstrates the reasonable
reassurance of repayment
•
Lenders must document the cashflow analysis in the loan file
•
The cashflow analysis must include all business debt payments including the new 7(a)
loan
•
SBA will not deny the Lender request for loan guaranty based solely upon the Lender’s
decision to use its PLP authority to underwrite the cashflow of the business
•
Option 2:
Use the Lender’s business credit scoring model that has been reviewed by
SBA
•
Lenders with SBA Express authority may approve the loan as an SBA
Express loan
72
73
Collateral
For All 7(a) Loan Delivery Methods:
•
Lender preference:
•
13 CFR § 120.411
prohibits Lenders from taking any action in connection with an SBA-
guaranteed loan that establishes a preference in favor of the Lender
•
Prohibits the Lender from having a 7(a) loan in a piggyback structure
For 7(a) Small Loans & SBA Express:
•
Loans over $50,000:
•
Collateral policies are “Do what you do”
except
that SBA does not require a Lender to place a
lien on non-business assets such as personal homes even if it is the Lender’s policy to do so
for its similarly-sized, non-SBA guaranteed commercial loans
•
A loan request is not to be declined solely on the basis of inadequate collateral
•
SBA does not permit its guaranty to be used as a substitute for available collateral
Appraisal Requirements: Commercial Real Estate
For Standard 7(a) only:
•
For all Standard 7(a) loans secured by commercial real property, Lenders must obtain an
appraisal by a State licensed or certified appraiser
For 7(a) Small Loans & SBA Express:
•
Lender must obtain an appraisal:
•
If a loan finances a transaction involving parties with a close relationship (examples:
transactions between existing owners or family members),
or
•
If SBA concludes that an appraisal is necessary to appropriately evaluate
creditworthiness,
or
•
If the Lender requires an appraisal for its similarly-sized, non-SBA guaranteed loans
•
Must be dated within 12 months of the application
•
If an appraisal is not required, all Lenders must obtain an appropriate evaluation that is
consistent with safe and sound banking practices
•
Evaluations are not required to be performed by State licensed or certified appraisers but
should be consistent with federal banking regulations
74
Submission of Application for Guaranty
•
Lenders must list in E-Tran all Beneficial Owners of at least 20 percent of the
Applicant and at least 51 percent of the total Beneficial Owners of the Applicant
•
A Beneficial Owner is a Person who owns a concern directly or indirectly through
another entity (Beneficial Owner is a defined term in SOP 50 10)
•
A Person is any individual, corporation, partnership, association, unit of
government, or legal entity, however organized (Person is defined in
13 CFR
120.10
)
•
Lenders must submit the required information from SBA Form 1919 into E-Tran,
but the Lenders are not required to upload the form itself into E-Tran
•
Lenders must retain the signed SBA Form 1919 in the loan file
75
E-Tran Terms and Conditions
Through Disbursement for all 7(a) Loans
•
Signatures:
SBA does not require signatures on the terms and conditions
•
Secondary Market:
Added the required Note terms for loans that will be sold on the
secondary market
•
Licenses:
•
Lender must obtain evidence of all licenses required to operate the business within no more
than 90 days after final disbursement of the loan
•
Loan may not be sold into the secondary market until all required licenses are obtained
•
Construction Loan Provisions:
•
If the construction component of the 7(a) loan is $500,000 or less: “Do what you do”
•
If the construction component of the 7(a) loan is more than $500,000:
•
I
n accordance with regulation 13 CFR §
120.200
SBA has granted a blanket waiver of the
requirement for a payment and performance bond under certain circumstances (i.e., use of
a third party construction monitoring service or internal construction management
department)
76
Questions
?
The U.S. Small Business Administration Office of Capital Access presents its 7(a) Connect Quarterly Update for October 24, 2023. Highlights include hot topics, updates on SOP 50.10, and upcoming training sessions and program updates for small business lenders and SBA staff. Stay informed on important changes affecting small business financing.
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Presentation Transcript
U.S. Small Business Administration Office of Capital Access 7(a) Connect Quarterly Update October 24, 2023
Agenda Opening remarks from Katie Frost, Acting Associate Administrator, Office of Capital Access (OCA) Hot Topics Dianna Seaborn, Director, Office of Financial Assistance (OFA) Ginger Allen, Chief, 7(a) Loan Policy Division, OFA SBA s Risk Mitigation Framework OPSM & OFPO Introduction to SOP 50 10 7.1 - 7(a) Loan Origination Policy Team 3
SBA Office of Capital Access Acting Associate Administrator Katie Frost 4
Office of Financial Assistance Dianna Seaborn Director
Hot Topics Update to SOP 50 10 SOP 50 10 7.1 provides clarifications based on feedback from the lending community Effective date is November 15, 2023 Download SOP 50 10 7.1 here Information Notice will be published OFA will update SOP 50 10 trainingon SBA s Training on Demand page Existing 50 10 7 training will be removed New updated training will be published with downloadable slide decks Updated Form 1919 is at OMB for final approval targeted publication date is mid-December 7
Hot Topics #2 FY 2024 7(a) Fees: Information Notice 5000-848801 for 7(a) Fees Effective October 1, 2023 for Fiscal Year 2024 Training and deck available on SBA s Training on Demand page Sunset of the Community Advantage Pilot Program has been extended to October 31st, 2023 FRN 2023-22185 Community Advantage Pilot Program published October 5th Information Notice 5000-850230 Sunset of the Community Advantage Program published October 11th Please join the 504 Loan Policy Team for a training on 504 Loan Program Updates on Thurs. Oct. 26th at 2:00 Eastern - Login link 8
Save the Date Upcoming Updates 7(a) Connect Quarterly Update 3:00 p.m. Eastern Quarterly call for 7(a) Lenders and SBA staff Login links: Jan. 9, 2024; April 9, 2024; July 9, 2024; Oct. 8, 2024 504 Connect Quarterly Update 3:00 p.m. Eastern Quarterly call for CDCs, Third Party Lenders and SBA staff Login link: Dec. 12, 2023 504 Loan Program Updates Thurs. Oct. 26, 2023 at 2:00 Eastern 9
Subscribe/Unsubscribe to SBA OFA Policy News Subscribe to OFA 7(a) Policy Newsletter Subscribe to OFA 7(a) Community Advantage Policy NewsletterUnsubscribe from OFA 7(a) Community Advantage Policy Newsletter Subscribe to OFA 504 Policy NewsletterUnsubscribe from OFA 504 Policy Newsletter Unsubscribe from OFA 7(a) Policy Newsletter If you are already subscribed, you do NOT need to re-subscribe! If the above hyperlinks don t open a new email, you may complete the process manually by either scanning a Quick Response (QR) code or: 1. Send an email to OFANotifications@sba.gov 2. Use one of the below subject lines exactly as it appears below: REQUEST TO SUBSCRIBE: OFA 7(a) Policy REQUEST TO SUBSCRIBE: OFA 504 Policy REQUEST TO SUBSCRIBE: OFA 7(a) Community Advantage Policy REQUEST TO UNSUBSCRIBE: OFA 7(a) Policy REQUEST TO UNSUBSCRIBE: OFA 504 Policy REQUEST TO UNSUBSCRIBE: OFA 7(a) Community Advantage Policy The email will be read by computer software the email subject line must use the specific text above, and should not include any additional language, either in the subject line or body of the email 10
SBA OFA Quick Response (QR) Codes for Subscriber Lists To sign up for SBA OFA s subscriber lists using a QR code: Scan the QR code with your cell phone camera Select the popup link or email address Your phone will auto-populate an email Click send (no text needed in body of email) 11
Subscribe to SBA OFA News 7(a) Policy 12
Subscribe to SBA OFA News 504 Policy 13
Training On Demand SBA s Training On Demand webpage is now organized by topic for ease of use. Scan the code below to learn more about SBA policy! 14
Training on Demand How to Download a Videos Slide Deck 1. 2. Navigate to the Training on demand webpage HERE Select a video from the list as pictured below 15
Click on Show more in the Video Description Box 3. When your video selection loads, scroll down or click on Show more in the video description box Click on the link to download the slide deck 4. 16
SBA box.com 5. View the deck or download it from the box.com platform 17
7(a) Connect Call E-TRAN Updates October 2023
ETRAN Implementation of SOP Updates
ETRAN Updates Effective as of August 1, 2023 7a Terms and Conditions Generate T&C from within ETRAN 504 Job Creation & Retention Requirements Effective Date of May 12, 2023 STAR Compliance Codes Process flow impacts API and 3rd Party vendor updates 504 Terms and Conditions Generate T&C from ETRAN Hazard Insurance Requirement SBSS Score Increased threshold to $500k Removed validation for Hazard Insurance for loans $500k and below Franchise Franchise questions are now optional Franchise validations removed Affiliation Rule Updates to ETRAN Affiliation table Credit Elsewhere Added options to align with SOP PIMS and CA SBLC Enhanced PIMS table for tracking of CA SBLC 20
NEW: Validation Error 4363 Introduced August 1, 2023 to flag individuals/entities with potential compliance issues on existing SBA loans This error checks for hold codes on other SBA loans such as PPP and Covid EIDL This validation must be resolved to proceed with the application Check for this Error: Validate your loan within ETRAN before you submit your application to SBA for Approval/Funding Log into CAFS Select ETRAN Origination Search for your App Number Click on the blue button labeled Validate 22
NEW: Validation Error 4363 Processing Tips When 7a Lenders and CDCs are requesting a resolution please use the following format in the email subject line: New Email Inbox: 4363resolution@sba.gov SubjectLine: Error 4363 Application XXX (enter your app number) Body of Email: If known, please include the loan number and the Loan Program (COVID EIDL, PPP, etc.) for the existing SBA loan that you believe may be causing the validation error. If loan number for the existing loan is unknown, please provide the last 4 digits of the Tax Id that is causing the error. Important Notes: SBA is generally prohibited from sharing details about compliance issues on existing SBA loans directly with SBA Lenders due to privacy concerns and legal obligations. To address these concerns and to enable SBA to provide additional details about most compliance issues and steps to resolve them, SBA Lenders should submit a Borrower s Consent to Verify Information and 3rdParty Authorization (SBA Form 2518), signed by the borrower, with the request for resolution. Even with a signed Borrower Authorization, there will be instances where SBA is unable to share details about the compliance issue on the existing loan. Reviewing compliance issues on existing loans can be a time-consuming process that may involve SBA obtaining additional documentation from the borrower. Compliance issues cannot always be resolved by paying off the loan. In many cases, the compliance issue will not be able to be resolved. 23
Validation Error 2087 This is not a new Validation Error This error checks for prior defaulted SBA loans The defaulted loan must be cured by the borrower before the application can proceed Lenders and CDCs can contact the appropriate processing center for details on which loans are defaulted: 7(a) Loans: 7aquestions@sba.gov 504 Loans: 504questions@sba.gov 25
Validation Error 2087 Processing Tips Validate your loan within ETRAN before you submit your application to SBA for Approval/Funding Log into CAFS Select ETRAN Origination Search for your App Number Click on the blue button labeled Validate When 7a Lenders and CDCs are requesting info on defaulted loan, please use the following format in the email subject line: Subject Line: Error 2087 Application XXX (enter your app number) Important Note: Even after a Borrower has cured the defaulted loan, it can take several weeks before the appropriate information is reflected in the system to clear the error. 26
Compliance PreCheck Highlights Go-live date of August 18, 2023 Applicable for any 7a and 504 loan Lenders should only use this feature for potential SBA loans Smaller data-set sent for Compliance PreCheck Similar in concept to SBSS pre-scoring lenders perform for potential SBA loan Business and Principals Purpose is to alert lenders of Compliance Check codes that will be issued at time of submission There is no clearing of codes at pre-check Informational only 28
Compliance PreCheck Highlights. How to use: Log into CAFS Select ETRAN Origination Search for your App Number Click on the blue button labeled PreCheck Compliance Reminder: There is NO CLEARING OF CODES at Pre Check 29
High-Level Compliance Pre Check Process Lender Clicks Pre Check Compliance (Optional) Loan File In Compliance Review Status Loan File Application In Process Status 4pm EST: Compliance Check 9am EST: Code Issued? No Yes Loan File Application In Process (Failed Pre Check) Status Lender formally submits loan when ready Legend Reminders Lender System Pre Check codes cannot be cleared, as they are informational only; Lender must copy/create a new application to formally submit loan. Loan will undergo a second compliance review upon formal submission. 30
New Fraud Risk Framework STAR and Do Not Pay Implementation
Compliance Reviews SBA is changing their business model for all 7a and 504 loan guaranty products as part of the new SOP release: Treasury Do Not Pay (DNP) SBA History of Compliance Lexis Nexis evaluation of Business and Principals Business Credit Score This business process is like PPP round 3. 32
High-Level Compliance Code Process Loan File In Compliance Review Status 4pm EST: Compliance Check Loan continues through normal processing Lender Submits Data Code Issued? No Yes Lenders work with Applicants and Centers to clear codes (e.g., collecting documentation) Loan File Withdrawn (Failed Compliance) Status 9am EST the following day: Lender/Vendor can check status Legend Lender System 33
Steps to Review Compliance Check Codes Checking for Codes within ETRAN If your file is showing a a status of Withdrawn the following are steps to view compliance code checks that were issued 1) Log into ETRAN > Origination and pull up your Application 2) Click on the menu labeled Application Info on the left-hand side 3) Scroll to the bottom of the page to view Compliance Codes BEFORE you proceed any further Carefully review the application data in ETRAN If there are typos in any of the Tax ID s, the Borrower Name or any Principal/Guarantor, resubmit a new application with corrected data (copy the app within ETRAN) SBA cannot clear alerts for applications with inaccurate data If the data was input accurately, Lenders and CDCs can request for SBA to clear the compliance code. 4) Click on the hyperlinked Details within the Star Comments column to view additional details 34
Requesting Clearance of Compliance Code(s) from SBA If the data was input accurately, Lenders and CDC s can request clearing of Compliance Codes from SBA. Each code has a different set of instructions and/or documents 1)Upload supporting documentation via the Documents blue bubble and select Compliance Support Documents. 2)AFTER documents have been uploaded, send an email to appropriate processing center to request clearance: 7(a) Loans: 7aComplianceCheck@sba.gov 504 Loans: 504questions@sba.gov Subject line: Compliance Code Resolution Application XXX (enter app number) 35
Common Compliance Check Codes and Docs to Resolve. 819 818 817 39
7(a) Terms & Conditions Implemented in ETRAN Origination 7a Terms and Conditions is available within ETRAN Data Entry Guide found in 2 areas within CAFS: CAFS Landing Page ETRAN > Origination > FAQ Refer to Data Entry Guide for questions 41
7(a) Terms & Conditions Implemented in ETRAN Origination, 42
Reminders & Tips The document button and generation are only available for Lenders from within ETRAN Origination for loans with the following statuses: Application In Process (IP) Awaiting Documents (AD) Funded (FD) A loan with a status of In Review Reviewer 1 (R1) cannot be edited, nor can a T&C be generated. Post-Approval Changes / Loan Modifications: Any changes made to ETRAN Servicing will not be reflected in the T&C. Changes or corrections needed post-approval will follow the normal loan modification process. 43
Cheat Sheets Contact Email Summary Origination Loan Statuses Summary
Email Contact Summary Compliance Code & Validation Errors 45
Origination Loan Statuses Summary Loan Status Status Definition / Tips In Compliance Review Loan is currently in compliance review Status applies to both Pre Check and regular compliance reviews No edits are permitted to Loan while in this status Application In Process Loan has not been formally submitted Loan is in process and has not been submitted for compliance review; OR Loan passed a Pre Check compliance review with no codes present. Application In Process (Failed Pre Check Compliance) Loan has not been formally submitted Pre Check compliance review was conducted with codes present. Codes cannot be cleared; Lender must copy/create a new application to formally submit loan Withdrawn (Lender) Loan was withdrawn by Lender Withdrawn (Failed Compliance) Loan was formally submitted and compliance review was conducted with codes present Codes must be cleared to move to next status Awaiting Documents Applies only to Non-Delegated Loan passed compliance review with no codes present; OR Codes were present, but have been cleared by Center Documents must be uploaded to formally submit In Review Reviewer 1 Applies only to Non-Delegated Loan was formally submitted Loan under review by associated processing center Funded Loan has been approved 46
SOP 50 10 7.1 Lender and Development Company Loan Programs 7(a) and 504 Loan Origination Policy Effective Nov. 15, 2023 48
Section A. Core Requirements for all 7(a) and 504 Loans Significant Updates 49
Chapter 1: Primary Applicant Eligibility Requirements Certified by Applicant and Validated by SBA s Risk Mitigation Framework SBA will make the final determination as to the eligibility of the Applicant for all eligibility requirements stated in Section A, Chapter 1, using SBA s Risk Mitigation Framework Applicant is an operating business located in the United States, is organized for profit, is small in accordance with SBA s size standards, and is not one of the types of ineligible businesses listed at 13 CFR 120.110 Lenders may conduct a pre-check in E-Tran before submitting a loan application to determine whether SBA s Risk Mitigation Framework will flag any eligibility issues for the Applicant Lenders must not submit an application that they know is not eligible, regardless of the Applicant s certification 50
