October 4, 2013
As we all are aware now, SBA just recently released the newest version of the SOP 50 10 5 (F), effective January 1, 2014. Even though the new rules don’t become effective for another few months, now is the time to review, interpret, and commit it to memory. There is a lot to digest, so rather than providing a simple summary of the highlights, we’ve decided to outline one topic at a time. The “new” collateral requirements are an example of an approach that has dramatically changed, so it is a good one to start with.
Collateral and the FULLY SECURED Rule
Change is in the air. SBA has gotten very specific when it comes to underwriting criteria and specifically in how lenders should analyze and document collateral adequacy.
For loans of $25,000 or less
Lenders are not required to take collateral.
For loans over $25,000, up to and including $350,000
The lender must follow the collateral policies and procedures included in its credit policy for its non-‐ SBA guaranteed loans (for SBLC’s, their credit policy approved by SBA). But at a minimum the lender must obtain a lien on the applicant’s fixed assets to secure the loan. The lender may secure applicant’s trading assets (using a 10% current book value for the calculation) if it’s required by the lender’s credit policy.
For loans over $350,000
This is where the “fully secured” rules kick in. The lender must collateralize the loan to the maximum extent possible up to the loan amount. If fixed assets do not fully secure the loan, the lender must take available equity in the personal real estate of the principals as collateral.
Fully secured = taking all available collateral up to Net Book Value (adjusted) up to the loan amount. Net Book Value = Asset’s original price minus depreciation and amortization.
NEW M&E adjustment = 75% of net book value, or 80% of orderly liquidation appraisal minus any prior liens.
USED M&E adjustment = 50% of net book value, or 80% of orderly liquidation appraisal minus any prior liens.
R/E adjustment = 85% of the value (determined by SBA’s appraisal requirements).
If the loan is secured by the fixed assets and the valuation of fixed assets is greater than their depreciated value (net book value), an independent appraisal is required to support the higher valuation.
If the loan is not fully secured, the lender may include trading assets as necessary (using 10% of current book value for the calculation) and will be required to take available equity in the personal real estate of the principals. Liens on a personal residence or investment property may be limited to the amount of the collateral shortfall.
Liens on a personal residence or investment property may be limited to 150% of the equity in the collateral, rather than the loan amount, if there are tax implications associated with the lien amount in the particular state where the lien is filed.
SBA does not require a lender to collateralize a loan with a personal residence to meet the “fully secured” definition when the equity in the residence is less than 25% of the property’s fair market value.
When required collateral is owned by an individual and his or her spouse (if they together own 20% or more of the applicant business), the lender must consider taking as collateral available equity in personal real estate owned jointly. Real estate transferred by the applicant to the non-‐owning spouse within 6 months of the date of the application will not be exempt from consideration as available collateral.
These are interesting times. You will want to compare what is required now and what will be required as of January 1, 2014. For collateral, SBA only requires that the “fully secured” rule be met for the larger loans. Also, the liquidation (adjustment) values are being dictated per asset category (rather than allowing lenders to use their own liquidation values). The additional collateral required if the loan is not fully secured pertains only to personal real estate (which includes residences and investment property), not all the other personal assets of the principal owners.
We want to be your “go to” team for whatever needs you may have in the SBA lending world. We assist in consulting and outsourcing services. As it pertains to the new SOP changes, think of us as a resource to training and technical assistance.
To learn more about the all-‐inclusive SBA lending services of SBA Complete, go to www.sbacomplete.com or call us at 800-‐801-‐2378.