The Small Business Administration’s recently implemented “Final Rule on Affiliation and Lending Criteria for the SBA Business Loan Programs” became effective May 11, 2023, and brings about several changes to the 7(a) and 504 Loan Programs. In this article, we will discuss just a few of the key points of the SBA Procedural Notice and help you understand a few of the ways this will impact Small 7(a) Lending.
Increase to Program Limit:
One significant change is the maximum loan amount for 7(a) Small loans has been raised to $500,000, an increase from the previous limit of $350,000. This change opens up new opportunities for small businesses to access higher loan amounts and fuel their growth while providing lenders with an avenue to be more efficient in their efforts to provide access to these lending programs.
The SBA Procedural Notice introduces revised underwriting standards for 7(a) loans with amounts less than or equal to $500,000. These standards emphasize the importance of the lender's credit analysis and documentation of the applicant's ability to repay the loan. Here are the main requirements for underwriting a small 7(a) loan:
- SBSS Screening is still the first step in underwriting the request. The minimum acceptable score remains a 155 at this time. The lender also continues to have the option to process any loan that falls below that threshold as a standard 7(a) loan or under the SBA Express program.
- The final rule changed the lending criteria from a list of 9 factors that had be analyzed and addressed in the credit memo to a simpler approach that mirror’s the already existing directions on the SBA Express program, which is a requirement to follow the prudent and generally acceptable procedures used in the Lender’s non-government guaranteed portfolio.
An interesting takeaway for this section is that not only does this give the lender the freedom to mirror their own non-SBA lending process, it allows them to mirror their approach in underwriting the loans. This makes it simpler for the lender to bring about improvements in efficiency and consistency. The notice also removes any reference to a credit memo or analysis of credit elsewhere, at least in the language specifically referencing “Underwriting Small 7(a) Loans”. This is not to say that the lender is no longer required to consider these, but it does mean that the credit memo itself is able to be a more concise document. With the publishing of the SOP 50 10 7, there will be more to discuss here in future posts.
While the Procedural Notice outlines equity requirements for various types of transactions above $500,000, it also clarifies that, for loans that fall in the Small 7(a) space, the decision of whether or not to require an equity injection and how any equity injection would be verified or documented is entirely up to the lender. The Lender will simply need to mirror the standard processes it uses in its similarly sized non-SBA lending.
The SBA's Procedural Notice implements the Final Rule on Affiliation and Lending Criteria, bringing important changes to the SBA Business Loan Programs. The increased maximum loan amount for 7(a) Small loans expands financing opportunities for small businesses and revisions in underwriting standards create opportunities for simpler credit processes and a more efficient program overall.
If you want to delve deeper into these changes or if you have any questions, we encourage you to reach out to us. Simply visit our SBA LSP Services page at https://www.lenderscooperative.com/sba-lsp-services/ and use the contact form at the bottom. We are here to provide further insights and assist you in navigating the evolving landscape of SBA Small 7(a) Lending.
Stay informed, embrace these changes, and let us support your journey towards success in accessing SBA loans for small businesses in your community.