I have found that people leaving one lender for another bring along practices from their prior employer – good, bad, and unnecessary. Sometimes checking that old baggage at the door is necessary. Time to unlearn and relearn:
Shelly was new to her CDC, coming in with seven years of SBA loan underwriting experience. Her new CDC Exec wanted to expedite the underwriting process and engaged me to work with Shelly and the underwriting team to see if improvements could be made. Shelly expected her transition to be a smooth one, but she knew that different lenders do things differently and she was eager to learn the “new ropes.” This was my first management consult with her:
ME. Shelly, your credit skills are excellent and I really enjoy working with you. But your previous CDC must have had some “overlays” on SBA requirements resulting in your asking borrowers for more information than required.
SHELLY. I’ve always thought that SBA asks for a lot, so I’m surprised to learn that I’ve been asking for even more than required. Tell me more.
ME. For example, there is no requirement that the term of a franchise agreement equal the term of the loan. That just isn’t an SBA rule. The term of the lease must equal the loan term, but the borrower doesn’t need a 25-year term on the franchise agreement to get a 25-year SBA loan.
Here’s another one: SBA requires only the most recently filed federal income tax return from personal guarantors. Asking for three years is an old SBA requirement. One year will do. As for affiliates, we need only the last two years of federal taxes filed unless you’re following the Industry Size Standard which also isn’t necessary.
SHELLY. I’m surprised. When did all that change?
ME. Well for sure the current requirements are in SOP 50 10 6 beginning on page 490. And Ventures has a handy-dandy index of the required exhibits and their file order in the Eligibility section under “1244 Exhibits.”
When I first came to JRB, we had a client who thought SBA required that every affiliate guaranty the loan. As you know, that’s just not true. Julia, our portfolio manager, can tell you what a nightmare that caused her.
Here’s an example from another underwriter: He is telling our bank participants that a business must have a DSC of 1.15, and that the principal must have a FICO score of 640. As you know, SBA doesn’t have a minimum FICO score requirement. And if the DSC is less than 1.15, it doesn’t mean we decline the loan. It means we require projections supported by reasonable assumptions.
SHELLY. Hmm. Yes, it sounds like I have some old lessons to unlearn, old habits to break and new ones to learn. Any suggestions?
ME. As I said, Shelly, your credit skills are good. But for a while, just make sure what you’re requiring is indeed on those pages in the SOP. (SOP 50 10 6 Part 2, Section C. Chapter 1. F. 2.)
And as always, if you have any questions, give me a call. At JRB, we want all our clients to be exceptional SBA lenders.
Senior Associate, CDC/504 Program