The new SBA SOP 50 10 7 raised several questions surrounding the concept of applying to SBA loans the policies lenders would follow for “similarly-sized, non-SBA guaranteed commercial loans”.
The SBA has continued to expand what is referred to as the “do what you do” concept to give lenders more flexibility with structuring, underwriting, closing and disbursing their SBA 7a loan files. This language is not actually new, and was referenced 60 times in the previous SOP (50 10 6) and it is referenced 76 times throughout the new SOP (50 10 7). Below is the exact language in the SOP 50 10 7:
“Similarly-sized, non-SBA guaranteed commercial loans”: Throughout this SOP, SBA provides guidance for 7(a) Lenders to evaluate, process, close, and disburse their 7(a) loans using the same reasonable and prudent practices and procedures that the Lender uses for its similarly- sized, non-SBA guaranteed commercial loans. Despite this requirement, the Lender may make a 7(a) loan if the Lender cannot make the loan under its conventional loan policy based on any of the factors that would enable the Applicant to demonstrate the need for credit in accordance with Section A, Ch. 2, Para. A. Demonstrate the Need for Credit.
While the concept may not be new, the emphasis on lender-driven policies is an adjustment for many in the SBA space. This article explains and applies the “do what you do” concept to help lenders efficiently adapt to the SBA’s new standards required by the SOP 50 10 7.
Explaining the "Do What You Do..." Rule for SBA Lending
The SBA lending world refers to the above principal as the “do what you do” concept. In short, lenders are expected to follow the same acceptable and prudent policies and procedures for their SBA guaranteed loans that they follow for non-SBA guaranteed (conventional) loans of the same dollar amount. The exception being that the lender can only offer the SBA guaranteed loan if they are unable to offer a conventional loan due to their loan policy and in accordance with SBA’s long-standing requirement for the lender to demonstrate why the borrower cannot obtain conventional financing.
Adapting as an SBA Lender
There are ultimately three types of lenders we’ve received several questions from about this;
1) Small Business Lending Companies (SBLCs) who make 7a loans but do not have a conventional loan policy,
2) Lenders who have both an SBA loan policy and a conventional loan policy, and
3.) lenders who only have a conventional loan policy that does not specify certain items referenced in the SOP (ex. How to document equity injection).
Small Business Lending Companies (SBLCs)
For SBLC’s that only make 7a loans and do not have a conventional loan policy, when the SOP states that lenders are to follow their own policies and procedures on their similarly sized-non SBA loans, SBLCs must follow the written policies and procedures that were reviewed by SBA.
This guidance has actually been in place since 2014. Before the SBA allows for an SBLC to start making 7a loans, the SBA first reviews the internal policies and procedures of the lending institution. The SBA needed to make sure that the policies and procedures are acceptable to SBA before they were able to lend through the 7a program, and the SOP specifically requires SBLC’s to adhere to the policies and procedures that were already reviewed by SBA.
Lenders with Both SBA and Conventional Credit Policies
For lenders that have both an SBA loan policy and a conventional loan policy, the question is which policy should they follow?
The SOP 50 10 7 delegates much of the underwriting and collateral requirements for Small and Express loans to the lender’s processes and procedures for similarly sized, non-SBA guaranteed loans.
The key part of the requirement is the emphasis on what the lender does for its non-guaranteed loans. That means if, for example, a lender has a $250,000 Small 7a or Express loan, the lender should follow its policy for what’s required for a $250,000 conventional loan even if they have a separate SBA policy. While a 7(a) guaranteed loan must meet SBA guidelines for eligibility, size, forms, E-Tran data entry, closing, etc., it’s the conventional loan process a lender should follow.
Lenders with Conventional Credit Policies Only
For lenders who have a conventional loan policy but the policy does not specify certain items that SBA requires (ex. Source, use, and/or documentation for equity injection), the lender has a couple of choices.
First, the lender can follow their own policy and include what it says within the credit memo. If there is no requirement to verify the source or use of equity injection it can be as simple as the lender stating something like “the lender has no policy to verify equity injection for its similarly sized, non-SBA guaranteed loans, so it will not be verifying equity injection for this SBA guaranteed loan.”
Or, if a lender does verify equity injection for its similarly sized non-SBA guaranteed loans, it would continue to do so for its SBA guaranteed loans. It depends on what is within their policy. The best practice tip is for a lender to say in its credit memo what their conventional loan policy requires for equity injection (or any other type of topic not addressed in conventional loan policy) and how that will be handled for its 7(a) loan. Be transparent with the SBA. Most lending institutions do not have a written policy to verify the source of the equity injection other than making sure funds are brought to closing, so it’s important to know your policy.
Best Practices for SBA Lenders in 2023
So, the big question is: what should we do next? Below are some tips for immediate action lenders could take to be proactive in addressing the new SBA lending procedures:
1. Document, document, document.
While the SBA requires lenders to follow their internal policies of similarly sized-non SBA loans, it is unclear how this could impact a liquidation scenario. Lender justification, policy support and any other relevant documentation within the loan file is a MUST to ensure the guarantee will be intact.
Lenders may consider preparing a sort of credit memo addendum to address the conventional policy requirements for topics that have historically played a key part in keeping the SBA guaranty intact. Examples would be source and verification of equity injection, and collateral requirements. This could be attached to all credit memos so it is clear to the SBA that the lender has thoroughly considered all topics relative to underwriting, processing and closing its SBA guaranteed loans.
2. Review your internal policies.
Make sure you are following your internal policy for any items the SBA requires the lender to “do what you do”. SBA has the right to ask for a copy of your policy in a liquidation scenario to verify the loan was closed compliantly so it’s important to know what your institution requires.
3. Take a Conservative Approach
We have received many inquiries specific to topics that might not be within a lender’s conventional policy. It is not worth risking the SBA guarantee to assume, so don’t be afraid to send loans GP for SBA’s review and approval.
If there is any grey area topic or any concern on the loan, make the SBA review and provide approval. Windsor’s standard closing timelines for GP vs PLP loans are almost identical, so the processing method should not materially impact the closing timeline.
Ask Windsor: Guidance for SBA Lenders in 2023
Windsor is the leading lender service provider in the industry with billions of dollars of SBA closing experience. If you have any questions or would like a review of your internal policy please feel free to reach out using the form below.