In a Construction Lending Session held by SBA on June 22, 2023, the SBA provided a reminder that SBA SOPs provide explanatory language and guidance based on statute and the Code of Federal Regulations (CFR). The CFR is the codification of general and permanent rules published in the Federal Register by the executive departments and agencies of the Federal Government. The SOP 50 10 7 no longer has explanatory text on certain topics, but statutes and regulations continue to apply.
In a recent Starfield and Smith article on August 30, 2023, by Mike Zidansek, “Best Practices: Construction Performance Bonds Under SOP 50 10 7”, it was highlighted that under the CFR, for all loans that finance construction, the borrower must provide evidence of a 100% payment and performance bond to the SBA Lender unless this requirement is waived by SBA. 13 C.F.R. §120.200. However, under the prior SOP 50 10 6, Lenders were granted a blanket waiver to this bonding requirement if either of the following conditions were met:
- The Lender retained a third-party construction management firm that provides reasonable and prudent construction monitoring and funds control for all disbursements; or
- The Lender monitors construction and controls disbursements through an existing internal construction management department that routinely manages construction for its similarly sized conventional loans.
The new SOP 50 10 7 removed both the requirement for a payment and performance bonds as well as the blanket waiver described above. However, SBA acknowledged that without the issuance of the Technical Updates from the SBA (Expected Soon), the CFR takes precedence over the SOP. The intent in the Technical Updates is to resolve the conflict by adding “On 7(a) loans which finance construction, the Borrower must supply a 100 percent payment and performance bond and builder’s risk insurance, unless waived by SBA.”
In the meantime, until the Technical Updates is issued, it is recommended that for SBA guaranteed loans of $350,000 or greater that include a construction component and, where a payment and performance bond is requested to be waived; the loan be submitted for general processing. It is also recommended that the Lender document the credit memo with justification regarding its construction requirements as it pertains to the above.