Julie called me the other day. She handles a lot of construction loans many of them 7(a) guaranteed.

LENDER JULIE. Richard, I was looking up construction loans in 50 10 7.1 to see if SBA made any changes. As you know, 50 10 6 required contractors to post a Payment & Performance Bond if the project was financed by a 7a construction loan exceeding $350,000. That was on page 436 of SOP 50 10 6  but I cannot find the requirement in 50 10 7.1. I’m about to tell senior management to use our own construction risk management methods in the spirit of “Do What You Do.” But is that really one of those things left up to the lender?

ME. Some lenders, new to SBA lending, think that the SOP is the final word. To them I say, “There are more things in heaven and earth, Horatio, than are dreamt of in your SOP. Look at the CFR!” Then leaving them wondering, who gives a hoot about Horatio? 1

Julie is a well-rounded SBA lender so I knew she had bookmarked the Code of  Federal Regulations, in addition to 50 10 7.1.

I suggested that she take a look at the CFR, where Section 120.200 asks, “What bonding requirements exist during construction?” And right away it answers, “On 7(a) loans which finance construction, the Borrower must supply a 100 percent payment and performance bond and builder’s risk insurance, unless waived by SBA.”

LENDER JULIE. Ah, yes! There it is. So basically nothing has changed. Thanks so much, Richard!

ME. Whoa! Hold on!! Yes indeed, there’s a change. An important change. You know how 13 CFR §120.200 requires a P&P Bond on all 7(a) loans that finance construction unless waived by SBA? Well the new SOP notes that SBA has granted a blanket waiver of that requirement if the construction component is $500,000 or less, a change from the former threshold of $350,000 (SOP 50 10.7. 1 page 268). And the conditions under which that requirement can be waived now apply to loans with a construction component over $500,000, instead of the former threshold of $350,000.

LENDER JULIE. Richard, that relieves one huge expense for small businesses!

ME. Yep. Just remember to carefully document your file to avoid a repair or denial of the guaranty. Page 269 tells you how.

Richard Jeffrey, Senior Associate
Head Underwriter

1 In case you give a hoot: “There are more things in heaven and earth, Horatio, Than are dreamt of in our philosophy.” (Hamlet, Act 1 Scene 5)