2014: New Year, New SOP for SBA Lending

The Latest on U.S. SBA Lending in the New Year

Are you an SBA lender under the agency’s 7(a) or 504/CDC programs? Or an environmental professional who supports these programs? Then you should be aware that effective January 1, 2014, a new version of the SBA’s SOP 50 10 5 guidelines took effect. Version (F) supersedes the current version (E). All loan documentation must now reference 50 10 5(F). Below is EDR Insight’s capsule summary of all things related to SBA lending, including the latest metrics on 7(a) and CDC lending volume, information on the new SOP, the agency’s response to adopting ASTM’s new E 1527 Phase I ESA standard and the latest tips on how to avoid screen outs by the SBA’s Environmental Committee.

SBA Records 3rd Highest Lending Volume in FY13

For many lenders—and the consultants who serve them, lending under SBA-guaranteed programs has been a bright spot during the past few years of market recovery. Many community banks, in particular, would not lend on commercial real estate without the government backing that the SBA 7(a) or CDC programs provide. The latest numbers tell the story:

– FY 13 (ending on Sept. 30) was the agency’s third-highest year ever for combined lending under the 7(a) and 504 programs (supporting more than 54,000 loans).

– 7(a) lending increased 5 percent in FY13.

-The latest data through December 31st shows that for the first quarter of FY14, beginning October 1st, 7(a) loan volume was down 3 percent from the same period in 2012. This is largely due to the 17-day federal shutdown in October.

– CDC lending is down by a more significant 30 percent in the first quarter of the new FY (see accompanying graph).

Despite the Y-on-Y declines for the latest quarter, the latest stats reflect signs of improvement over comparative figures released at the end of November.

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Large institutions that continue to dominate SBA lending include: Wells Fargo, Key Corp., Regions Financial, Huntington Bancshares, M&T Bank, JP Morgan Chase, Citizens Financial Group, Citigroup, Bank of America, TD Bank, US Bank, PNC Bank and SunTrust Bank.

New Year, New SOP 50 10 5

Back in September, the SBA released its new SOP 50 10 5(f) with an effective date of January 1, 2014. The new SOP for the 7(a) and CDC programs contains a number of significant changes. The chair of the SBA’s Environmental Committee, Eric Adams, noted in a recent call of the Environmental Bankers Association’s Risk Management Committee that “The changes were all on the credit side. Nothing changes with the SBA’s environmental policies.”

The SBA On the New ASTM E 1527 Standard

On November 6, 2013, ASTM published a new version of the E 1527 Phase I environmental site assessment standard. A number of federal agencies, including Freddie Mac, have already adopted it. The new SOP does not update the reference from E 1527-05 to E 1527-13, and the reason has to do with timing. The requisite approvals for any changes to the SBA SOP take several months, so the new standard, noted Adams, would have needed to be in effect in late spring 2013 to have been part of the latest SOP. Now that the U.S. Environmental Protection Agency has recognized E 1527-13 as compliant with the federal All Appropriate Inquiries rule for the purposes of CERCLA liability protection (see December 30 final rule), the next version of the SOP will reflect the E 1527-13 standard. In the interim, however, the SBA is currently accepting environmental investigations performed under both standards and is in the process of communicating to the lender community that

“We are accepting adherence to both standards [-05 or -13] at this time. The reliance letter does refer to the -05 standard so environmental professionals are asking if the letter can be altered if they use -13. The answer is yes, and that revision will not result in a screen out.”

In terms of the revisions to -13, the word from SBA is that the environmental committee does not expect the changes to impact their process. Reviews will be done “the same as usual. On the new CREC definition, note that this is the type of REC that will trigger the Section G analysis requirement mitigation factors under the SOP.”

How to Avoid Screen-Outs by SBA’s Environmental Reviewers

With permission from the SBA’s Environmental Committee, EDR Insight is circulating a tip sheet the agency developed. The purpose of the tip sheet is to help lenders (and their environmental professionals) avoid having their environmental reports screened out, delaying the loan approval process. Based on an analysis of the environmental reports coming through the SBA, the most common screen outs are due to the following:
– Reliance letter date does not match the date on the Phase I ESA report.

– The certificate of liability insurance does not provide evidence of coverage in effect during the applicable time frame.

– The report lacks documentation to support a No Further Action decision.

– Telling SBA only past use of property and current, but not detailing the current/past use of adjoining properties.

– Overlooking required information on compliance status on loans involving gas stations.

– If the loan involves a dry cleaner that is more than five years old, the SBA expects to see a Phase II ESA performed by a Professional Engineer or Professional Geologist with at least three years experience.

– If the loan involves a special use facility (e.g., day care center, nursery school, etc.), and the date of construction is pre-1980, then an assessment for lead based paint and testing for lead in drinking water is required even if the state does not require it.
On the topic of Transaction Screens, the SBA is considering doing away with the SOP’s carve-out for TSA because “we’re seeing firms using it to bypass Phase I ESA and go right to a Phase II ESA.” A final decision has not yet been made.

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It is important for any lenders participating in the 7(a) or CDC programs to make sure their loan documentation contains references to the new version of SOP 50 10 5(f)—not its predecessor 50 10 5(e).

Lenders and environmental professionals involved in SBA lending should also carefully review the tip sheet to ensure they are doing all they can to avoid any costly delays if loan applications are screened out.

For more information on the SBA’s environmental policy, including the latest flow chart and list of high-risk NAICS codes, visit EDR’s SBA page.