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Lenders Take Note: Important SOP Revisions Anticipated to Take Effect June 15

Jun 2008

For more than a year now, the Small Business Administration (SBA) has been working on a major revision of its modernized Standard Operating Procedure (SOP) for lender and certified development company (CDC) loan programs, including the 504 program. The result of that work is expected to take effect this month.

June 15, 2008, is the anticipated effective date for SOP 50 10(5), which has been streamlined to 400 pages (previously 1,000 pages) in an effort to clarify loan processing polices and procedures. The provisions under the revised SOP will apply to all applications received by the SBA on or after the June 15, 2008, effective date.

The SOP was originally scheduled to take effect on May 1, 2008, but was postponed until June 15, 2008, following an extension request from the lending community in order to address certain technical concerns.

Recently, at the 2008 Annual Meeting of the National Association of Development Companies (NADCO), FFCFC staff had the opportunity to meet with key NADCO personnel and SBA officials to discuss and work through those technical concerns.

While the changes and agreed upon (in principal) revisions are too numerous to discuss here, one key area of particular interest to commercial lenders involves the proposed appraisal and collateral valuation changes. Some of the agreed upon revision points on appraisals and collateral valuation issues are noted below; however, because a draft of the new SOP with these potential revisions has not been made available for review, it is important for every lender to review the June 15, 2008, release before acting based on these discussion points.

Appraisal & Collateral Valuation Issues

Elimination of Income Valuation Approach

Status: It is our understanding that the SBA will require a single appraisal that conforms to the requirements of the bank regulators and the Appraisal Institute.

Financing Mixed Use Collateral

Status: CDCs will not be required to take a first lien position on FF&E in mixed use projects but must take at least a second lien position on these assets.

Elimination of Allowance for “Sales Comp Only” Appraisal for Projects Up to $1 million

Status: SBA and NADCO agreed to seek an appropriate ceiling up to which point, sales comp only appraisals may be allowed. This will be part of the entire appraisal rewrite to be in conformity with the requirements of the bank regulators and the Appraisal Institute.

Introduction of Liquidation Value

Status: Appraisals will not be required to present a liquidation value. Collateral adequacy will continue to be required as one of the factors that a CDC must consider when underwriting a 504 loan.

Requirement for Post Construction Appraisal

Status: The requirement for a post construction appraisal will be eliminated and the appropriate certifications that the project was completed in accordance with plans and specs will be required.

Appraisal Must be Requested by the CDC

Status: It was agreed that according to USPAP standards a reliance letter is not acceptable and the appraisal must be addressed to the intended user in order for that entity to legally be able to rely on the appraisal. It was therefore further agreed that the appraisal must be addressed to the SBA in addition to the third party lender. All parties also agreed to evaluate the concept of “other named financial institutions.”

Appraisals at Less Than 90% of Appraised Value

Status: It was agreed that if an appraisal comes in at less than 90% of estimated value, the debenture need not be reduced if other mitigating factors are introduced, such as alternative additional collateral.

Appraisal Floor

Status: The SBA requires a real estate appraisal if the estimated value of the project property is greater than $250,000. The SBA and NADCO agreed to see if statutory authority allowed for a higher floor. However, it appears that the statute caps the floor at $250,000.

Adequacy of Collateral

(1) The SBA's second lien position will be considered adequate when the applicant meets all of the following criteria:

• Strong, consistent cash flow that is sufficient to cover the debt;
• Demonstrated, proven management;
• The applicant business has been in operation for more than two years; and
• The proposed project is a logical extension of the applicant's current operations.

(2) If one or more of the above factors is not met, additional collateral and/or increased equity contributions may be required.

(3) No issue with this statement.

(4) If the project property, when liquidated, will not protect the interests of the government, the SBA will require additional collateral and/or greater equity injections.

(5) No issue with this statement.

Status: Agreed that statement (4) above would be removed from the SOP.

Borrowers and lenders can trust FFCFC to guide them through the new SOP and offer the best service and 504 loan expertise in Florida. For more information on this or the FFCFC 504 loan program, email us at info@ffcfc.com or call 888.320.5504.