Ah, all those thoughts for the new year … we resolve to work more efficiently, to save paperwork, and work smarter, not longer. The adages go on and on. Here’s a thought: Sometimes a short cut ends up to be the long way around. I received a question recently from Brian the BDO that pretty well sums things up.

Brian the BDO: Richard, as a sales guy, I’m always looking for ways to reduce paperwork for SBA borrowers. I heard recently that I didn’t have to require loan applicants to provide their personal financial statements on SBA Form 413. Is that right?”

Me. Brian, I’m glad you’re trying to make life easier for your borrowers. That’s your job, after all. But sometimes a shortcut can turn into a compliance burden when the loan gets audited. If you don’t use SBA Form 413 it can happen — unless you’re very, very careful.

Shortcut or lots of detours? Form 413 has a fascinating background. SOP 50 10 5 (K) says that lenders may use either the 413 “… or their own equivalent forms.” (Subpart B, Chapter 6, I., pg. 223) As we know, Subpart B relates to 7(a) loans. It’s pretty clear Form 413 isn’t required for them. Yet there’s no similar reference in Subpart C for CDCs.  Instead the SOP just states, “… CDC must obtain a personal financial statement from all individuals guaranteeing the loan …” It’s silent about Form 413. (Subpart C, Chapter 3, I., pg. 325)

However, in SBA Notice 5000-18009, announcing the current version of Form 413 in July 2018 SBA advised that “SBA Lenders … must begin to utilize the renewed version of SBA Form 413 7(a)/CDC immediately.” So here we have “504” lenders (CDCs) included in the reference to “SBA lenders” in the Notice. There is no provision for an “equivalent form.” And because SOP 50 10 5 K was issued after the Notice, the SOP’s provisions supersede previous notices.

Yep. This compliance business is tough. We know that there must be a personal financial statement in the application, whether for a 7(a) or a 504 loan. The SBA Notice includes CDCs as “SBA lenders.” Further, the SOP says an SBA lender may use its “equivalent form.” So it appears that if a 7(a) lender or a CDC uses either Form 413 or an equivalent form, it may be acceptable to SBA.

Phew! Got that out of the way! But wait! There’s more!! The current version of Form 413 states that it includes spousal assets and those of minor children. So if it is clear that the  equivalent form says the same thing, we’re off to a good start. But Check out page 3 of Form 413 where the signer certifies the information in the personal financial statement “… under penalty of criminal prosecution.” And toward the bottom we are warned that false statements are punishable “… by imprisonment of not more than thirty years…” and that treble damages may be imposed for lying. That’s a much bigger penalty for lying than having your nose grow! The “under penalty of prosecution” and thirty years in jail statements need to be in the equivalent form.

Finally, I’m sure you’ve noticed that Form 413 is six or seven pages long. Half of that is the “Statements Required by Law and Executive Orders.” Lenders don’t have to keep this part in their files. Instead, they must give it to the persons signing Form 413. Important: If you use an “equivalent form,” you’ll need some way of ensuring that the signers receive the “Statements Required by Law and Executive Orders.” And you’ll need to determine how to verify that the person got it when OCRM decides to audit your files.

Our recommendation. We recommend that if a lender – bank or CDC – uses “an equivalent form” they do so very cautiously. Make sure that the equivalent form states that it includes spousal assets and those of minor children. Include the statement that the principal is certifying under penalty of perjury that the information contained in the PFS is accurate. Give them the “Statements Required by Law and Executive Orders” and have the signers of the equivalent form certify that they received the statements.

Making life easy after all. Or you might just decide to have the guarantors sign SBA Form 413 and be done with it. Great to look for ways to save “busywork” by not requiring a form. Yet as Thoreau said, “It is not enough to be busy. The question is: What are we busy about?”

Happy New Year!

Richard Jeffrey
Senior Associate, 504/CDC Programs