Second Extension of Notice Providing Guidance on Underwriting 7(a) Loans during the COVID-19 Pandemic and Miscellaneous Related Matters
Procedural Notice Synopsis
The SBA issued SBA Procedural Notice 5000-808534 on April 14th, 2021 which serves as a great reminder that we as lenders must continue to practice prudent lending in our evaluation of new SBA loan requests. This procedural notice includes:
- Updated underwriting criteria for new 7(a) loans made during the COVID-19 emergency
- An update on SBA Express
- Guidance regarding obtaining required documents to close and disburse 7(a) loans
An increase in the guaranty to 90%, no borrower fees and a subsidy are all great steps in keeping small business intact and afloat. The secondary market has been at record levels as we have seen 22% premiums this month. History tells us some lenders will take additional risks given the CARES act support and we at Windsor want to caution this kind of decisioning.
Lenders must analyze each application in a commercially reasonable manner, consistent with prudent lending standards. They must demonstrate that the cash flow of the applicant is the primary source of repayment and not any expected recovery from the liquidation of collateral.
Below we analyze the updated underwriting criteria that is detailed by the SBA. In the lenders credit memo, consideration must include the following:
- PPP and EIDL loan repayment information considering whether the loan is fully, partially or not forgiven.
- Description of the industry and how it has been impacted by COVID-19. Specifically address whether or not the business revenue and staffing levels have been impacted. Also, detail out what their plan is in returning to normal.
- A second draw PPP Loan requires evidence of a 25% reduction in gross receipts and a description of how the company going to return to a “normal” level of revenue.
- Describe how the COVID restrictions impacted the business regarding social distancing, costs and access to supplies, inventory or equipment.
- Consider a month-to-month financial proforma with break-even analysis.
- Address concentrations and the financial impact.
- Collateral adequacy and information on if the real estate or business valuations have changed in the last 18 months. We should not use dated information.
- In business acquisitions or change of ownership, industry experience is more important today than ever before as we are in a new norm.
- Working capital use of funds must be clearly defined and based upon the borrower’s true operating cycle.
For those of you that remember the recession of 2008-2009, we needed to demonstrate an uptick in the operating company’s performance before we could entertain a new or refi loan request at that time. Now, during the COVID-19 emergency, the due diligence, credit underwriting and subsequent decisioning must be well thought out and on target.