We published an eBulletin in December ‘22 titled “Send in the Regs …” with apologies to Stephen Sondheim’s “Send in the Clowns.” In it we recapped SBA’s proposed amendments to 7(a) and 504 regulations, advised lenders to review their Policies and Procedures and again quoted Sondheim, “… Well, maybe next year.” Well, next year is certainly here. And so are the new regs.
We all know that as published in the Federal Register* on April 10, there are many changes to regulations for SBA’s 7(a) and 504 programs. All are effective May 11. At JRB, we’re reviewing our clients’ credit policies to ensure that they will be compliant with the changes. A brief recap:
- SBA’s current regulations don’t permit 7(a) loan proceeds to be used for partial changes of ownership. The new regulations amend those restrictions, so that 7(a) Loans may be used to buy part or all of a co-owner(s)’s interest in the business or part or all the business itself.
- The nine factors a lender must consider in a lending decision will be reduced to three.
- Hazard insurance will no longer be required for loans under $500,000, although such insurance might be required out of prudence.
But the biggest change is in the section regarding affiliation.**
When the changes to SBA’s affiliation regulation were first proposed, SBA stated its belief that the revisions would increase access to credit while decreasing time spent reviewing an application for eligibility: “Specifically, SBA is removing the provisions on affiliation arising from management and control, franchise or license agreements, and identity of interest and to streamline affiliation determinations based on ownership.” **
The key determining factor is ownership rather than control, a much easier metric to explain and to identify. And yes, the new affiliation rules are much more straightforward than the current ones. For example, under the new regulations, a business owned by the brother-in-law of a business owner isn’t relevant to affiliation. So, we can say goodbye to that business, and to any business owned by the sisters, brothers and cousins and aunts.
As a further consequence of the change, SBA will no longer publish the Franchise Directory. Lenders will still be required to examine franchised businesses for affiliation based on ownership. But the issue of a franchise agreement rendering a franchisee ineligible is gone.
It’s important to note that the regulations in effect on the date an application is made to SBA govern the loan’s eligibility and underwriting. Take, for example, an application received by SBA on May 10: a business controlled by an applicant’s brother-in-law is determined to be an affiliate and the affiliation rules apply. But if the application is received on May 11, the old affiliation rules don’t apply.
May 11 is very near. If your loan application may have an issue with affiliation, it might be advisable to wait until May 11 to submit it to SBA. For “No,” there’s no going back and changing the date of the application to avoid the old requirements. You’re stuck with the date the application was made to SBA.
The upshot: If you don’t want today’s rules, then don’t apply today. Apply after May 11. Or if you have already submitted, withdraw your application and wait the required six months to resubmit.
The eagerly awaited changes have the potential to reduce underwriting time. We shall have to wait until after May 11 to assess their impact.
* Affiliation and Lending Criteria for the SBA Business Lending Programs Federal Register 4/10/2023.
** “The amendments to affiliation standards will also apply to the Microloan Program, Intermediary Lending Pilot Program, Surety Bond Guarantee Program, and the Disaster Loan programs (except for the COVID Economic Injury Disaster Loan (EIDL) Disaster Loan Program.” Federal Register 4/10/2023.