In a welcomed update, the Small Business Administration (SBA) released their new Standard Operating Procedure (SOP) 50 10 7.1 on October 24, 2023, which becomes effective November 15, 2023. This SOP reintroduces the Construction Loan Provisions for 7(a) loans, which were notably absent in SOP 50 10 7. Most of the provisions that were present in SOP 50 10 6 have been added back in, albeit with some important modifications as presented below.
Blanket Waivers: Upon the release of the SOP 50 10 7, it became clear that, when construction loan guidance is not provided by the SBA, that 7(a) construction loans had to comply with 13 CFR 120.200. This regulation mandates that every 7(a) construction loan, regardless of loan amount, must have a 100% Payment and Performance (P&P) Bond and Builder’s Risk Insurance, unless waived by the SBA.
The updated SOP now offers two blanket waivers for lenders to forego the need for a P&P bond. One waiver applies to loans with a construction component of $500,000 or less, and the other covers construction loans greater than $500,000. [Note: the loan amount threshold has increased from $350,000 to $500,000.] These waivers not only remove the requirement for a P&P bond, but also the previous requirements for contractors to carry Builder’s Risk and Worker’s Compensation Insurance. While maintaining these insurances are generally strongly advisable, they are now potentially optional. If your institution traditionally requires Builder’s Risk and Worker’s Compensation Insurances as part of your prudent lending practices, be sure to continue to require them in order to secure your SBA guaranty.
For 7(a) construction loans of $500,000 or less, these requirements are waived if the lender follows the same risk management policies, procedures, and processes as it does for construction loans of a similar size that are not guaranteed by the SBA.
For 7(a) construction loans exceeding $500,000, the requirements follow the same standards as SOP 50 10 6. As long as “commercially reasonable and prudent monitoring” and “funds control for all disbursements” are in place, either through a third-party construction management firm or the lender’s internal construction management department, provided it routinely manages construction for commercial loans of a similar size that are not guaranteed by the SBA.
Language Reorganization: Additionally, the Construction Loan Provisions have undergone some language reorganization within the SOP. The language surrounding blanket waivers has been moved up to be in closer proximity to the P&P language requirement. However, a large section of the items that lenders need to obtain have been shifted down in the document, thus leading to instances of lender requirements being misplaced within the section mandating that they are needed “prior to the commencement of any construction.” It’s important to note that these tasks — specifically, (vi) interim and final inspections to verify compliance with plans and specifications, and (ix) acquiring lien waivers or releases from involved parties — are typically carried out during the construction phase. While there may be instances where a construction loan requires addressing liens prior to SBA’s involvement, lien waivers and releases are generally processed throughout the construction phase.
SBA Form 601: Finally, while not a modification from SOP 50 10 6, there is a potential source of confusion in the language that pertains to the SBA Form 601. In the SOP, this document is referred to as the “Applicant’s Agreement of Compliance,” which may lead to the belief that this form is to be completed only by the borrower. In reality, however, per the SBA’s website, the “Agreement of Compliance” form must be filled out by the borrower, the contractor, and any subcontractors for construction work exceeding $10,000.
Although the reintroduction of the Construction Loan Provisions in SOP 50 10 7.1 is a welcomed change for SBA construction lenders, we understand that it can be challenging to keep up with the SOP’s ever-evolving loan requirements. To assist SBA construction lenders in navigating the SBA SOP 50 10 7.1’s requirements for maintaining compliance, Partner has developed an SBA 7(a) Construction Loan Checklist for your convenience.