About now, you’re celebrating changes to the 504 program over the past year. Feels like touchdowns and two-point conversions. For starters, the SOP no longer requires an Independent Loan Review every year. Now, loan reviews are required only every two years (SOP 50 10 5 (K) Chapter 3, Subpart A., II., B. 3., a. i.  pg. 52) This will save CDCs some real money.

And on June 28 of this year, SLPC emailed the 504 industry, advising that “The standard liquidation rate that can be used for Commercial Real Property has been updated to 85% from the old 75%. Going forward, a lot of borrowers could get by with less life insurance, or even no life insurance assignment at all.

Two-Year Loan Reviews: On-Field Review: Watch out! Here come the guys in the black and white striped shirts. Unless you’ve changed your CDC’s internal policy, you might be guilty of SBA’s equivalent of celebrating in the end zone. And although the folks from OCRM don’t wear those striped shirts, you might get SBA’s equivalent of a touch-down overrule.

Good Idea. Better Yet, Great Idea. Read the SOP carefully. What it says on page 52:

“The (CDC’s) 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.”

What’s in Your Policy? The SOP says a CDC’s internal policy must provide for a loan review a minimum of every two years. What’s in your policy? If it requires an annual loan review – and it might, as a holdover from the old days – you must have an annual review regardless of the updated SOP requirement. How to get out of it?  Your Board of Directors must approve an internal policy change. Not a huge deal. Make sure it’s an Agenda item for your next Board meeting.

Same Thing for the 85% CRE Liquidation Rate. It’s interesting that the SOP doesn’t mention a standard liquidation rate for 504 loans. Not anywhere. I presume that’s why the SLPC issued the change in an email, since there is no regulation or procedural designation of a standard liquidation rate. What the SOP says: (Chapter 3: Subpart B, Chapter 4, II. G, 7, b. pg. 200)

“The amount and type of collateral available to repay the loan may be factored into the determination of the appropriate amount of life insurance.”

SBA provided guidance that, when factoring in the amount of collateral, a factor of 75% was the max. Now it’s 85%. We can be flexible.

What’s in Your Loan Policy? Chances are, your loan policy sets your standard liquidation rate at 75%. So here come the guys in the black and white striped shirts blowing their whistles. And probably another big-time penalty. If your loan policy says 75%, that’s the factor you must use until your Board of Directors changes your internal policy. And if you authorized loans after June 28, 2019 and you used 85% without changing your policy then: Well I don’t have to tell you. Better get another policy change on your Board Agenda!

Loan touchdowns without penalty. That’s the score.

Richard Jeffrey
Senior Associate, CDC/504 Programs