At JRB, one of our challenges as SBA consultants is explaining the Agency’s requirements in an intelligible manner. After I’ve explained a requirement and our client says, “Oh I see,” I have a tremendous sense of satisfaction. So the other day when a client objected to the requirement to get financial information from the spouse of an applicant, I looked forward to the challenge. The objection:
“Richard the spouse of the principal on the loan has no ownership of the borrower and isn’t a guarantor on the loan. Therefore, I don’t believe it would be relevant to request financials from her or from any business she might own for that matter.”
Where do I begin?
I sometimes find that the best way to answer questions of this sort is to inundate the questioner with as much information as possible. Of course, I risk giving “too much information” – but the question will be answered accurately and in full. TMI be darned. Here goes:
First, underwriters don’t ask for information that isn’t relevant. There is enough information required to prepare a loan request, so underwriters don’t ask for information just ’cause they feel like it.
SBA assumes that a spouse has access to the assets of their spouse. The Agency requires both spouses to disclose those assets and their value to demonstrate compliance with personal resources requirements and not necessarily to require one spouse to hypothecate assets owned solely by their spouse. Firms owned or controlled by married couples, parties to a civil union, parents, children, and siblings are presumed to be affiliated with each other if they conduct business with each other, though this presumption may be rebutted by showing a clear line of fracture between the individuals.
Although a personal guaranty isn’t required of each party to a spousal union, each spouse must personally guarantee the loan in full when the combined ownership interest of both spouses and minor children is 20% or more. (13 CFR § 121.103). Further, the personal financial statement must include the assets of the owner’s spouse and both spouses must complete Form 1919. None of that is required if the spouse and minor children own less than 20% of the business. And if the spouse owns none of the borrower, the guaranty of that spouse will be limited to that spouse’s interest in the collateral.
Finally, SBA considers that spouses are affiliated due to “identity of interest,” i.e., they have substantially identical business or economic interests (13 C.F.R. 124.3). “Affiliation by Identity of Interest goes beyond spouses and includes businesses owned by immediate family members (father, mother, husband, wife, son, daughter, brother, sister, grandfather, grandmother. grandson, granddaughter, father-in-law, and mother-in-law.” So if an underwriter asks, “What does your sister do?” It’s because the answer might be relevant to eligibility and not because the underwriter is looking for a date to Saturday night’s dance.
When it comes to this issue, it’s very definitely all in the family.
Senior Associate, CDC/504 Program