UPDATED: May 19, 2023 for SBA’s Delayed Implementation of Removal of SBA Authorization. Windsor Advantage will continue updating this article with the latest changes as they are announced.
In early May the SBA released two procedural notices (SBA Procedural Notices 5000-846607 and 5000-846991) in anticipation of the latest SBA SOP 50 10 7.
- The SOP updates, released May 10, 2023, will go into effect on August 1, 2023.
- SBA Procedural Notice 5000-846607 went into effect on May 12, 2023.
- On May 19th, the SBA announced that Procedural Notice 5000-846991 would not be effective May 12, as previously stated. The Removal of the SBA Loan Authorization will instead be effective August 1, 2023.
Windsor Advantage believes the rule changes will allow for a tremendous expansion of the SBA 7a program, however, there will be more responsibility put on the lender.
Our team is currently reviewing and digesting the SBA Procedural Notices 5000-846607 and 5000-846991 as well as the newly released notice on the issuance of SOP 50 10 7. This article covers key takeaways lenders should know now. Our team’s analysis with additional guidance and strategic next steps for lenders is forthcoming, subscribe to the Windsor Advantage Newsletter for first access:
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7 Key Changes in the SBA Procedural Notices 5000-846607 and 5000-846991
1. SBA Authorization Removed
2. 7(a) Small Loan Maximum Dollar Amount Increased to $500,000
3. New 7(a) Small Loan and Express Loan Underwriting Requirements
4. New Equity Injection Requirements and Verification
5. New Eligible Change of Ownerships
6. New Eligible Equity Towards Change of Ownerships
7. Implemented Rule for Determining Affiliation
Change 1: Removal of the SBA Authorization (SBA Procedural Notice 5000-846991)
The SBA will no longer issue Authorizations on approved 504 and 7(a) loans. This was originally announced to be effective on May 12, 2023. However, the SBA has delayed this change for the 7(a) Program only until August 1, 2023. The SBA cites the need for system updates as the impetus for the delay.
This delay also comes in the wake of congressional hearings investigating the potential consequences of removing the authorization. The SBA has announced that an additional notice may be forthcoming soon with more guidance for lenders between now and August 1st.
- RISK – There is no central document that all parties (e.g. Lender, LSP, Closing Counsel, SBA, etc.) can rely on to verify approved terms and conditions of a loan.
- OPPORTUNITY – This may streamline communication with the SBA post-approval since there will not be an extensive document that requires modification. The Procedural Notice does specifically identify a few post-approval changes that will still require SBA approval. Our next analysis will discuss this in more detail.
Change 2: 7(a) Small Loan Maximum Dollar Amount Increased to $500,000 (SBA Procedural Notice 5000-846607)
The SBA has increased the maximum dollar amount for 7(a) Small Loans from $350,000 to $500,000.
- RISK – This change could prompt an increased default rate on larger 7(a) Small Loans if a Lender chooses to reduce their internal underwriting standards for loans $350,000 – $500,000.
- OPPORTUNITY – Lenders can now fund loans between $350,000 – $500,000 faster and with less required documentation by leveraging the streamlined underwriting and closing processes of the 7(a) Small Loans Program. Read more context on the push for small loans and our recommended best practices on scaling small loan production.
Change 3: New 7(a) Small Loan and Express Loan Underwriting Requirements
Underwriting requirements and credit decisions for 7(a) Small Loans and Express Loans are now left to the business judgment of the Lender.
- RISK – Potential for more denials on 7(a) Small Loans processed through the Loan Guaranty Processing Center since there are no clear underwriting requirements. Lenders may choose to review and potentially update their internal credit policies to prepare.
- OPPORTUNITY – With a strong and updated credit policy in place, lenders may make significant progress in streamlining the underwriting and approval process for 7(a) Small Loans and Express loans.
Change 4: New Equity Injection Requirements and Verification
Equity injection requirements and verification must now be consistent with Lender’s similarly-sized non-SBA guaranteed commercial loans.
- RISK – It is unclear if a guaranty can be repaired or denied if the SBA does not agree with the Lender’s equity requirement and/or method of verification.
- OPPORTUNITY – Equity verification under previous SBA equity injection requirements was the most time-consuming and documentation-heavy part of an SBA loan closing so this may simplify and streamline the closing process.
Change 5: New Eligible Change of Ownerships
Partial changes of ownership are now eligible for financing through the SBA 7(a) loan program.
- RISK – Windsor Advantage does not currently see any significant risks to lenders with this rule change.
- OPPORTUNITY – Lenders may significantly increase units and total dollar amount of loans funded with the new eligible use of proceed.
Change 6: Updated Eligible Equity Towards Change of Ownerships
The SBA Procedural Notices introduced a new level of flexibility with seller notes being used as equity injection. Additionally, a higher percentage of equity can now be contributed toward seller notes.
- RISK – Borrowers could have less ‘skin in the game’ on loan structures, potentially spurring an increase of seller note balloon payments that could be detrimental to a business.
- OPPORTUNITY – Lenders may have additional flexibility with structuring deals for changes of ownership. There is also a newfound ability to provide loans to new business owners that might not have the current liquidity to previously qualify through the program.
Change 7: Implemented Rule for Determining Affiliation
Affiliation is now based solely on ownership as the concept of affiliation caused by control has been removed.
- RISK – Since the concept of affiliation caused by control has been removed, the SBA will no longer publish the Franchise Directory. This puts the onus on the Lender to review franchise agreements for anything that could impact eligibility.
- OPPORTUNITY – Lenders could provide loans to small businesses that may have been ineligible for not meeting the size standard when considering affiliates under previous affiliation rules. Read more about the Final Rule Affiliation and Lending Criteria in our previous article.
As we analyze the potential impacts of these changes and prepare guidance on next steps for lenders, we will continue to update our clients directly with relevant resources in addition to the insights distributed through the Windsor Advantage Newsletter.
Our goal is to equip your department with the most up-to-date insights possible as you continue shaping an effective SBA strategy. Should you have any questions about the changes implemented by these notices and the impending SOP, please schedule a call with a member of the team using the form below: