GOT A POSSIBLE ISSUE? THINK IT THROUGH!
Credit Elsewhere. Is there an SBA issue debated more? All the talk – and the ensuing scrutiny – by Purchase Centers, OCRM, OIG and Congress resulted in changes detailed in SBA Policy Notice 5000-17057, effective April 3, 2018 for 7(a) and 504 loans. SBA has eliminated the Credit Elsewhere Test for those owning less than 20% of a business applicant. This is a change from the less than 10% ownership requirement as covered in SOP 50 10 5 (J). Specifically 13 CFR § 120.101 is clear about what the SBA and lenders must adhere to.
Does this make your job easier? It should. Performing the required analysis and providing the appropriate certifications in your underwriting and documentation in your file should take care of things. Yet it’s not necessarily so. Some gray areas surrounding this issue:
- SBA expects you to look at all 20% owners of the business, including their spouses and minor children.
- The applicant’s own personal financial statement form or information on SBA Form 413 needs to include assets of their spouse and minor children.
- Your analysis should include an explanation as to why financing isn’t available through commercial (non-federal) sources.
- Test each proposed loan and its structure against your institution’s regular commercial lending policy. If the loan doesn’t meet all requirements, you can certify that conventional credit is not available. (Some examples: Debt-to-Net Worth (DTNW) falls below your threshold; it’s a start-up business and so not eligible for conventional financing; guarantor credit is below your requirements.)
- If you’re taking a non-owner third-party guarantor, would you make the loan conventionally with the same non-owner guarantor? If you answer “Yes,” then the loan isn’t eligible for SBA funding.
- Document your conclusions in your credit memo and maintain any additional information in your file to support your decision, e.g., reference your current commercial loan policy including its effective date.
The Key: Think it through! Let’s say you have a borrower with $800,000 in cash wanting a $500,000 RE loan, you’ve got a Credit Available Elsewhere issue! Finally, if you’re in doubt and on the fence, send the loan to the LGPC through non-delegated authority and let SBA review your analysis and issue the final decision. Better to know now if you have an issue rather than later at repurchase!