With an apology to Stephen Sondheim’s “Send in the Clowns,” which certainly dates me, SBA has published a Proposed Rule to amend various regulations applicable to 7(a) and 504  Loans. As proposed, these will be serious changes.

If adopted, the biggest changes will be to affiliation, but there is also a major change to the factors SBA considers in determining an applicant’s creditworthiness. Effectively, the 5 C’s of Credit will be reduced to 3: Credit Score; Cash flow; Collateral. No compromised standards here. SBA isn’t encouraging loans to ne’er-do-wells and other rogues. Rather, the Agency notes that lenders use the terms “character” and “credit history” interchangeably and so SBA will do the same.

Under the proposed amendments, SBA will be able to use business credit scoring models including SBA’s Small Business Scoring Service (SBSS), for non-delegated 7(a) loans. But the Agency will still have to ensure that the Project meets eligibility requirements, uses of proceeds, and credit not available elsewhere.

SBA Lenders: Policies and Procedures Heads Up. There are several areas in the proposed regulations where the Agency will be looking at SBA lenders and CDCs to have rigorous policies and procedures in place. For example, they would be required to underwrite SBA loans in the same manner as they underwrite similarly sized, non-SBA-guaranteed commercial loans where they bear all risk of loss in the case of loan default.

The Proposed Rule would also eliminate the requirement for hazard insurance on loans under $150,000. Instead, lenders and CDCs would be required to follow their established Hazard Insurance Policies and Procedures that they’ve implemented for similarly sized, non-SBA-guaranteed commercial loans.

If you don’t have such credit policies and procedures, SBA will require you to submit your credit policies, including credit scoring models, for SBA’s review.

Comment period for the Proposed Rule ends this year on December 27. In all likelihood, the new regs will be effective soon after. It’s high time to review your Policies and Procedures. At JRB we provide assistance in developing SBA-compliant policies to expedite the review.

Richard Jeffrey
Senior Associate, 504 Program
Head Underwriter