You know how we’ve always said that SBA won’t call a 7(a) Note in the event of a technical default? Well, check out page 77 of SOP 50 57 3. There’s a  provision you should highlight. Essentially it says that a violation of 13 C.F.R. §120.131, could result in SBA taking action including accelerating the Note and demanding payment in full.

What’s more, SBA’s review of any future SBA loan application from not just the Borrower or Operating Company, but also from any Associate, “… will take into consideration any prior failure to comply with SBA Loan Program Requirements, including occupancy requirements, in connection with an outstanding SBA Loan.”

Associate? Read: officer, director, owner of more than 20% of the equity, or key employee of the small business.

SBA hasn’t hired “lease police” to run through your SBA portfolio with their yard sticks, measuring whether your OC meets SBA’s occupancy requirements. Yet during servicing of your loan it might become evident that contrary to the provisions in the OC’s lease, the OC no longer occupies the requisite amount of space. That would of course be a “technical default.” And it must be remedied. Among the penalties to consider, SBA could take the ultimate action: accelerating the Note and demanding payment in full.

Is this something new? Nope. There was nothing in previous SOPs limiting SBA’s remedies. SBA has always had the right to accelerate the Note and make demand  for payment in full. Yet, enforcement is a departure from SBA’s prior treatment of a non-payment, technical default. Historically SBA has declined to repurchase a 7(a) loan guaranty based solely on a technical default.

Now, SBA has chosen to put penalties for technical violations right in plain sight, smack- dab in the SOP with no fanfare or notice.

The Upshot: It’s a useful eligibility tool. This provision gives lenders and SBA one more tool to evaluate applicants not just for failure to pay a prior loan, but for performance and adherence to SBA eligibility requirements on their existing loans. Should SBA choose, lenders may act more quickly in taking servicing action against a Borrower even if a payment default hasn’t yet occurred, for example a borrower who rented more of its commercial property than allowed. Not only that, but any Associate may be prohibited from additional SBA loans in the future, at least as long as an existing SBA loan is in technical default.

And now we can all learn to say, “V-A-L-I-D-A-T-I-O-N   E-R-R-O-R  4-3-6-3.”
Richard Jeffrey, Senior Associate
Head Underwriter