SOP 50 10 5(F) Collateral Requirement Changes

October 15, 2013
SBA recently released a revised version of the SOP 50 10 5 (F), effective January 1, 2014 in which the "new" collateral requirements have dramatically changed. Even though the new rules don't become effective for a couple of months, now is the time to review, interpret, and plan for the changes.

Collateral and the FULLY SECURED Rule
When it comes to underwriting criteria and, more specifically, how lenders analyze and document collateral adequacy, the SBA has gotten very specific.

For Loans of $25,000 or Less

For Loans over $25,000
Up To and Including $350,000

For Loans over $350,000

Lenders are not required to take collateral.

The lender must follow the collateral policies and procedures in its credit policy for non-SBA guaranteed loans (for SBLC's, their credit policy approved by SBA).

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.

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 = 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.
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Continued from Loans over $350,000

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).

Secured vs. Not Fully Secured

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-