April 16, 2019
By Janet Annan and Joseph Bonin
Contributors, SBA Hot Topic Tuesday
Top Seven Risk Management Considerations from the Latest SBA SOP 50 10 5 (K) Updates
The SBA recently released its new SOP 50 10 5(K) policy, which becomes effective April 1, 2019. The new guidance and updated changes will apply to all applications received by SBA on or after that date. Participants must continue to use SOP 50 10 5(J) for all SBA 7(a) and 504 applications that were submitted through March 31, 2019.
Among the changes to this year’s SOP are updates to environmental and construction risk management policy that set forth new requirements that might impact how Lenders engage with due diligence consultants during the underwriting process. Here are the seven biggest takeaways:
1. The SBA has added provisions that if an Environmental Professional recommends proceeding directly from a Transaction Screen Assessment to a Phase II Environmental Site Assessment, agreed upon by the Lender, the Lender must seek a policy exception in advance from the SBA Environmental Committee on a case-by-case basis.
2. This was previously an option that is now stipulated in writing. This provision should be reserved and discussed with the client first after confirming that no valuable site or historical information can be obtained by a Phase I Environmental Site Assessment.
3. Lead Assessments on all daycare, child care, and/or facilities occupied by children must henceforth be performed following EPA/HUD guidelines. (Note: all buildings constructed in 1978 and prior that do not serve the above commercial businesses still apply, as this falls within the HUD lead assessment guidelines.)
4. This SOP change mandates that for the above facilities, all taps and possible sources of water be sampled for lead and all painted surfaces assessed for lead contamination. Depending on these results, the due diligence consultant can provide additional guidance and recommendations for further laboratory analysis to satisfy SBA requirements.
5. For construction components of SBA Loans greater than $350,000, the new SOP will continue to waive a performance and payment bond requirement in lieu of construction risk management services that also control the disbursement of the proceeds. However, the SBA has clarified this previous position by dictating the necessary engagement of a third-party firm, or an existing internal bank construction management department, to conduct these construction risk management services as long as that firm or department routinely manages construction for similarly-sized, non-SBA commercial loans in a reasonable and prudent manner, including funds control for all disbursements.
6. For some large lenders who have dedicated funds disbursement and construction risk management departments in-house, this is a great opportunity to consolidate construction oversight while staying SBA-compliant. Lenders who may not have these dedicated resources should engage with an experienced, knowledgeable risk management firm that has direct portfolio experience working with SBA loans and provides a suite of construction risk management services, including funds control and disbursement. Overall, these solutions can help guide project development objectives on budget and on schedule.
7. Additional SOP updates are provided to reflect recent changes in SBA regulations and loan program requirements including the Final Rule on Debt Refinancing in the 504 Loan Program, the addition of a 25-year Debenture in the 504 Loan Program, and revisions to guidance on credit elsewhere, minimum equity requirements for certain 7(a) loans, and the eligibility of marijuana-related and hemp-related businesses issued in SBA Policy Notice 5000-17057.
The SBA SOP is only a baseline set of guidelines to follow for due diligence and risk management. Each site can have unique risks and liabilities associated with it, and requires tailored due diligence solutions to meet specific business objectives. Lenders would best be served by engaging the expertise of environmental professionals who are familiar with SBA SOP standards and can also offer a range of due diligence assessments and solutions.
Janet Annan is the Technical Director of SBA Services at Partner Engineering and Science, Inc. She has over 13 years of experience in the environmental due diligence service industry, specifically providing technical expertise and senior review for ASTM, AAI, and SBA requirements on RSRAs, TSAs, ESAs, and Phase II ESAs. She is a technical expert on all aspects of environmental due diligence required for SBA loans. Ms. Annan has a BA in geology from the University of Kansas, and her certifications include AHERA Asbestos Inspector registrations in Kansas and Missouri, as well as Underground Storage Tank Operation.
Joey Bonin is a National Client Manager at Partner Engineering and Science, Inc. He brings over 18 years of experience fulfilling the construction risk management/bond alternative needs of lending institutions, owners, developers, hoteliers, and contractors throughout the United States, Canada, Mexico, and the Caribbean. Mr. Bonin has specific expertise in Payment & Performance Bonds, Bond Alternatives, Pre-construction Plan & Cost Reviews, Contractor Evaluations, Pay Application Reviews/Audits, Construction Funds Disbursements, and Project Status Reports. Mr. Bonin has additional experience managing all aspects of the construction due diligence process for a diverse array of client types, including financial institutions, commercial developers, commercial property owners, surety agents and contractors. Mr. Bonin has a BS in accounting and an MS in marketing from Louisiana State University.