SBA has decided that in light of issues raised during the meetings held across the country with lenders and CDCs, they will extend the effective date -- which was to have been May 1 -- by 45 days, to June 15.

Since January 29, 1999, the SBA has updated its Standard Operating Procedures (SOP) via various policy notices. Over the past several months, the SBA staff took on a massive project, attempting to incorporate over 7 years of policy notices into an updated version of the SOP, while simultaneously reducing the volume.

The modernized SOP 50-10 (5) replaces the last version and incorporates policy notices in effect through December 31, 2007. In an effort to maintain the currency of the SOP, updates are anticipated on a semi-annual basis. The hope is to eliminate sporadic policy notices. SOP 50-10 (5) is effective for loan applications received beginning June 15, 2008. The new SOP is 380 pages vs. 849 pages of the previous version.

Commercial Real Estate:

The following applies to 7(a) and 504

Appraisals may either be “complete” which details three methods of valuation (cost, income and comparable sales of similar property) or “limited” which does not use all three methods.
SBA, however, requires that at a minimum both the “cost” and “comparable sales” valuations are part of the appraisal and are the parts that are used to determine the fair market value of the property.

If the appraisal also includes an “income” valuation, this valuation is not to be used either separately or as part of any averaging of the values when identifying the real estate value to support an SBA-guaranteed loan. SBA requires a “bricks and mortar” valuation on the commercial real estate. An income valuation describes the use of the property as an investment, landlord/tenant property.

The following applies to 504 only

In order for the appraiser to identify the scope of work appropriately, the appraisal report must be requested by and prepared for the CDC. The cost may be passed on to the borrower.
Source of Equity Injection:

· Cash that is borrowed – counts only if the repayment comes from other personal loan sources other than the cash flow of the business. (The salary of the business owner does not qualify)

· Employee Stock Ownership Plans (ESOPs) and 401(k) Accounts: When an ESOP or 401(k) owns 20 percent or more of a Small Business Applicant, SBA will not require the Plan or Account to guarantee the loan if the following conditions apply:

1. The beneficiary(ies) of a 401(k) must provide his or her full unconditional personal guaranty regardless of the individual ownership interest in the applicant concern. This guaranty must be a secured guaranty if required by SBA’s existing collateral policies.
2. The members of the ESOP are not required to personally guarantee the debt.
3. The borrower cannot be an eligible passive company (EPC). (13 CRF 120.111(a)(6)) (SBA regulations require all 20 percent or more owners of an EPC to guarantee the loan and the regulation does not provide for an exception.)

Stay tuned for additional revisions and effective date updates.

The information above has been provided by Barbara Arena,CIT Small Business Lending Corporation, 781-294-2244 barbara.arena@cit.com www.cit.com