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September 6, 2023

Navigating SBA’s SOP 50 10 7 Construction Loan Changes

By AJ Nosek, Joseph Bonin and Kyle Gustafson

Navigating SBA’s SOP 50 10 7 Construction Loan Changes: Funds Control, Bonds, and Best Practices

Navigating the complexities of handling construction loans in light of the SBA’s recent SOP changes can be challenging. You’re not alone in facing this situation. At Partner, we understand your concerns and are here to provide guidance and solutions. Our commitment lies in helping you navigate the evolving SBA lending landscape, with a focus on ensuring that both your immediate challenges and your long-term portfolio are protected throughout the 7(a) lifecycle. We firmly believe that guiding our clients toward prudent lending solutions is not just our business; it’s our mission.

The Changing Landscape: SOP 50 10 7

The recent changes introduced by SBA SOP 50 10 7 have brought about significant transformations, particularly in the context of construction loans. These changes involve the removal of Construction Loan Provisions from the 7(a) section of the SOP, which reverts guidance to regulatory reference 13 CFR 120.200 (Code of Federal Regulations). This code requires all 7(a) construction loans to supply a 100% payment and performance (P&P) bond and builder’s risk insurance, unless waived by SBA. Whereas the prior SOP 50 10 6 offered a blanket waiver for using Funds Control and Construction Progress Monitoring in lieu of a P&P bond, under the new SOP such waivers would now likely be on a loan-by-loan basis, which could add significant delays. The new SOP is ambiguous as to how SBA would make determinations regarding bond waivers.

Potential SBA Policy Catch 22

It is our opinion that the SBA had it right in the SOP 50 10 6, and it is likely that some lenders may want to fall back to its Construction Loan Provisions guidance. However, if a lender were to strictly follow SOP 50 10 6, they may face challenges in the event of a construction-related default if the Office of Inspector General (OIG) enforces SOP 50 10 7. This presents an inherent risk to lenders trying to follow best practices in these murky construction waters. Properly documenting your loan file and credit memorandum, along with providing a waiver for Funds Control and Construction Progress Monitoring (Monitoring), will be essential for prudent lending.

The Industry Standard: Funds Control with Monitoring

Funds Control with Monitoring, the industry-standard alternative to bonding requirements, is the preferred option in the SBA construction space for construction risk management. It is a lower-cost, proactive, and borrower-friendly solution when bonding is either unattainable or cost-prohibitive.

However, the recent removal of the Construction Loan Provisions, particularly the blanket waiver allowing for Funds Control with Monitoring as a bond alternative, has raised concerns about best practices in small business construction lending. While both risk management solutions (P&P Bonds and Funds Control) have their respective advantages, we firmly believe that Funds Control with Monitoring is a superior risk mitigation tool, offering several advantages over P&P Bonds, which include:

  1. Proactive Approach: Funds Control takes a proactive stance, ensuring that projects progress on schedule and within budget, whereas P&P Bonds are reactive, only coming into play after contractor default.
  2. Cost-Effective: Funds Control is substantially more cost-effective than P&P Bonds. It eliminates the high bond premiums, making it an attractive option for borrowers who are sensitive to project costs.
  3. Monthly Oversight: Funds Control creates a monthly process to verify, assess, and fund contractors of all sizes, enhancing transparency and control.
  1. Bonding Capacity: General Contractors (GCs) are not always bondable at the level that the SBA specifies. Particularly, on less sophisticated small tenant improvements and basic ground-up projects.
A Cost Comparison

Here’s a practical cost comparison between P&P Bonds and Funds Control:

Partner ESI - Cost Comparison of Funds Control with Monitoring to P&P Bond

* Estimated 3-5% of the loan amount. Range in costs is for the upper loan amount.
** Typically, 1% or less of loan amount and depends on the complexity, scope, location and number of draws. Cost if for the upper loan amount.

It’s important to keep in mind that the cost of the P&P Bond does not include the cost of a Document and Cost Review or Construction Progress Monitoring, which are typically also required when a bond is in place, making the total for a bond even greater.

What To Do Now

Per the new SOP, if lenders want to continue to use Funds Control as their proactive bond alternative, a waiver must be granted by the SBA via non-delegated authority.

To obtain a bond waiver to utilize Funds Control and Monitoring as its alternative, lenders should reference the following guidance we’ve received, which ideally, needs to be done prior to PLP approval:

“We’ve recently been informed that if the lender is requesting a waiver of the statutory 100% payment and performance bond and builder’s risk insurance applicable to 7(a) loans financing construction, that it may send a list of loans on which it is requesting the waiver to Dianna Seaborn at [email protected] stating that the lender is requesting a waiver of the regulatory requirement at 13 CFR 120.200 for a 100% payment and performance payment bond and builder’s risk insurance. The lender must provide her with a list of the loans for which they are requesting the waiver. Dianna will respond with an email stating that, for those specific loans, SBA has granted a waiver which the lender should keep in the loan file. We’ve also been instructed that this waiver should be obtained prior to PLP approval.”

Let Us Support You

Partner is dedicated to supporting our SBA community during these times of uncertainty and is ready to provide guidance, answer your questions, and facilitate your Funds Control journey. Our goal is to help clients skillfully balance construction risks while ensuring sustainable SBA lending in a challenging construction market and in accordance with the new SOP.

Our team will be present at many SBA conferences this year, eager to engage in more detailed discussions with you and your team. In addition, we will be hosting a webinar on Wednesday, October 11, 2023 titled SBA SOP 50 10 7: What’s New & Essential that will review SOP changes, including construction loans, current bond waiver protocols, etc.

We value your partnership, so should you have any questions or require immediate assistance, please feel free to reach out to us at any time.

Together, we can navigate these changes and emerge stronger in the face of new challenges.

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