Category Archives: AdviceOnLoan

Tightening Ahead by the Fed–What Past Says About Future

By Charles H. Green

According to economist Kevin Kliesen, there’s a high likelihood that the Federal Reserve will begin its interest rate normalization process sometime in 2015, but to be certain, that decision will ultimately depend on the data and resulting economic forecasts. As a means of trying to understand what to expect, he suggested reviewing previous tightening cycles employed by the Fed may reveal evidence about what effects lie ahead.

Kliesen is Business Economist and Research Officer at the Federal Reserve Bank of St. Treasury Yield Curve After NormalizationLouis, and spoke before an audience gathered for the second quarter economic forecast presented by the Robinson College of Business at Georgia State University recently.

Is each “tightening” cycle different in terms of its effect on the economy and the market, or are the effects broadly similar?

It’s widely known that the Fed removed the word ‘patience’ in it’s March statement concluding the FOMC meeting, which had been used at end of QE3 program as an expression of the pace they expected to proceed. However in March, Fed Chair Janet Yellen remarked that conditions “may warrant and increase in the fed funds rate target sometime this year.”

Historically the Fed’s decision to raise rates has always been more difficult than lowering rates and is always debated intensively. Former Fed Chair Arthur Burns described it as the anguish of the central banking, how rasing rates evoked violent criticism. Yet more often, the Feds are accused of favoring the financial markets at the expense of the public and savers.

The Fed’s debate usually plays out through speeches offering various viewpoints of the twelve district presidents, all of which are monitored intensively. In their April survey, the majority (74%) of Blue Chip forecasters, a major revision from the January  survey when 65% believed that rates would rise in June.

Why all the uncertainty? It seems as though the data is not cooperating. As more data is collected, any decision to raise the Fed funds rate seems to be pushed farther out, indicating that both the Fed’s and private forecasters have been too optimistic. Inflation has continued to be much weaker than expected. But recall Chair Yellen’s remark earlier this year: “Don’t wait for 2% inflation target.”

History suggests that monetary policy makers have stayed ‘too easy’ too long in the past. With as many economic factors affected by monetary policy, such as spending on interest-sentisitve goods, bank lending, corporate balance sheets, household net worth and asset prices, it’s easy to understand how the macro economy can be heating up faster than traditional economic factors can track.

In previous cycles, rate tightening always exceeded the market’s expectations, particularly during 2004-2006 (+4.25%), which carries its own risks and exposure. Normally, credit risk spreads and stock prices fall early in the cycle, with risk spreads rising later. But it takes about a year for industrial production and consumer spending to fall off. And in three of the four last cycles, it took about a year for the Treasury rate yield curve to to invert.

Net effect: the year following liftoff of the normalization, the economy generally improves, followed by slower growth later.

And it’s worth noting that Kliesen related that “history suggests that long expansions with low inflation tend to have smaller increases in the Fed’s policy rate, so keeping inflation low and stable is key. But history also suggests that each tightening cycle depends significantly on underlying economic conditions, and oil shocks have been important in the past.”

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Economy Will Grow in 2nd Quarter: Dhawan

By Charles H. Green

Real GDP grew at a paltry 0.2% for the first quarter of 2015, but economist Rajeev Dhawan doesn’t think the factors that drove this stagnation are here to stay. “After I read the GDP report, the word WOW escaped my lips,” Dhawan said. “WOW here stands for weather, oil and the world economy. The report showed clear damage from these three factors.”

Dhawan heads the Economic Forecasting Center at Georgia State University in Atlanta, Rajeev Dhawanand spoke before an audience gathered for the second quarter economic forecast presented by the Robinson College of Business on Wednesday.

It was unusually cold Northwest weather that drove nondurable goods consumption growth down to negative 0.3% (especially grocery purchases) in the first quarter, but on the flip side, spending on utilities (heating) rose. Conversely, overall gasoline savings were socked away into savings accounts, denying the previously forecasted upswing in consumer spending.

Dhawan predicted that the weather factor is temporary, except for the drought being experienced in the West, but in any case, the low oil prices will start to creep upward again as U.S. fracking production declines. “We’ve almost reached the bottom, with oil rig counts having dropped sharply with only a little bit to go,” said Dhawan. “But prices will not reach the heights of $120 a barrel anytime soon. I expect oil to start creeping up to $70/barrel by year’s end and stay in that range for the coming year.”

Dhawan Expects Economy to Bounce Back in Second Quarter

The world economy is facing problems on two fronts: First, China’s economy has failed to recover after a planned slowdown to curb inflation, affecting many emerging economies because of their supply chain connections. Second, the Eurozone is strangely experiencing negative government bond yields, due to the repeated threats of Greece’s exit from the Eurozone, during the trillion dollar bond-buying program (quantitative easing) of the European Central Bank.

Overall, these issues played out with a 7.2% decline in early 2015 exports. “The three WOW components shaved off close to 2.5% of U.S. growth in the first quarter,” Dhawan said. But, he asserted that these negative effects can be offset as the country rebounds in the second quarter.

“Weather is a temporary factor. As the seasons progress, it will soon reverse course and add to nondurable consumption. Most of the numerical damage to the GDP is now behind us,” said Dhawan.

Another side effect of the stagnant first quarter GDP results is the delay in a potential Federal Reserve interest rate hike.  “Oil, the global economy and investment should have stabilized by the end of October,” Dhawan reported. “This means that December is the earliest the Fed can raise rates.”

Highlights from the Economic Forecasting Center’s National Report

  • Following a gain of 2.4% in 2014, real GDP grew at a stagnant 0.2% in the first quarter of 2015. Growth of 3.3% is expected for the second quarter, bringing the overall rate to 2.5% for 2015. It will expand at a better rate of 2.8% in 2016 and grow 2.7% in 2017.
  • Business investment will grow a weak 3.2% in 2015, recover to 5.8% in 2016 and 6.4% in 2017. Expect jobs to grow by a monthly rate of 254,000 in 2015, 240,000 in 2016 and 232,000 in 2016.
  • Housing starts will average 1.107 million units in 2015, rise to 1.194 in 2016 and 1.253 in 2017. Expect auto sales of 16.8 million units in 2015, 16.9 in 2016 and 17.1 in 2017.
  • The 10-year bond rate will average 2.1% in 2015, and should rise to 3.3% before the end of 2017.

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SBA Head: Immigrants are Vital to U.S. Businesses

By Ravinder Kapur

There are about 11 million undocumented immigrants in the U.S. and their numbers make up 3.5% of the population and 5.1% of the labor force, making one in every twenty workers illegal.  Many of these workers are employees of small businesses and are the subject of an on-going debate regarding immigration reform.

In a recent interview with Bloomberg, SBA Administrator Maria Contreras-Sweet talked Maria Contreras-Sweetabout her discussions with small business owners and their concerns regarding the country’s immigration policies and the impact that it can have on their business.

Said Contreras-Sweet, “Small businesses have told us a series of stories. First, what they share with us is that they do not have the capacity to be the Federal Government and worry about who is here and why they are here. They just want to be able to get the best people that they can find. The one thing they want: for immigration reform to pass, so that they don’t have to act like government officials or cops. They just want to do the business that they were set up to do.”

The common perception is that undocumented workers do not pay taxes and also take jobs away from native-born workers. While this may be true to some places, it is not wholly borne out by facts:

  • Many undocumented workers file income tax returns and more than 3 million have taxes deducted from their wages. They are also large contributors into the Social Security system. The net effect is that while undocumented workers pay taxes and social security, the benefits that they can enjoy as a result of their contributions are restricted by their status.
  • The wages of many undocumented workers are below the minimum wage levels, giving their employers an advantage over those who pay at or above the base wage. This seems to imply that the presence of undocumented workers drives down wages or takes jobs away from native-born workers. However, in the sectors where these workers draw lower wages, there is little competition from legal workers for the available jobs.
  • The issue of undocumented workers and immigration reform is a complex one which has grown over the years, with strong views emerging regarding the way forward among various sections of the population. Nevertheless, it is indisputable that this section of the workforce is sizeable and plays an important role in the economy.

That the SBA’s Administrator has weighed into this debate is obvious: she herself immigrated from Mexico as a child and has realized the American dream of being a successful business owner, bank founder and ranking government official. It also highlights that immigrant labor is very important to small business owners, who are not caught up in the ideological politics that have hamstrung any meaningful reform over the past 30 years.


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It’s All About Incentives, the Rest is Just Commentary

By Amaresh Gautam

That people respond to incentives is one of the most fundamental economic principles. A correct incentive system for employees can be the difference between a successful and a failed business enterprise. An incorrect incentive plan for the C-Suite, can lead to fraud by the management of a large corporation. And tDollar

Incentives in a financial system as complicated as that of United States can get distorted at multiple levels. The incentive of a lending manager can be to motivate them to distribute as many loans as they can within their territory, and they may not be getting penalized for making bad loans. But one potential result will be that they won’t be bothered about credit quality, and will become too aggressive in meeting the target numbers.

Likewise, the CFO of a large financial organization may know that the risk of going bankrupt is minimal, since the institution will be presumably be rescued by the federal government, but the reward of making a successful risky bet has no limits. Thus they may be incentivized to take excessive risks.

According to remarks in a recent speech by Janet Yellen, Chair of Federal Reserve Board of Governors, a combination of responses to distorted incentives throughout the financial system created an environment conducive to a crisis.

It’s not possible for a single small business lender (or borrower) to do anything about perverse financial incentives corroding the system, even if they become aware of them. Correcting them lies within the job of the financial regulators. However, it’s still within the realm of self-preservation that one should maintain some degree of rationality when encountering perverse incentives.

Meaning? If another financial instituion reaches out to hire you, and offers compensation with incentives that sound unrealistically too good to be true, do a sanity check in your head before responding. Are you really worth that much more than what you are currently compensated, or are there some perverse incentives at play?

Remember the old adage: if it sounds too good to be true, it usually is.

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New Alliances Make Small Business Loans Easier

By Ravinder Kapur

A slew of partnerships and joint offerings creating associations between small business lending companies and other organizations that provide financial and related services to qualified borrowers, is opening up new avenues for private enterprises seeking loans. While non-traditional financing sources have been growing for some time, these recently announced alliances seek to leverage the relationships that companies have forged with small businesses over the years, with the innovative financing platforms and their investor base. 

Guidant Financial, a small business financing facilitator, and InvestNextDoor, which Financing Affiliationsconnects investors with borrowers, have announced a strategic partnership to extend a minimum of $100 million in loans to business owners.

This partnership will allow Guidant to provide capital to our existing lead flow of small businesses, which either are not a match for traditional financing sources, or would likely entertain more expensive financing that could compromise their long term success,” said Jeremy Ames, President and co-founder of Guidant Financial.

Sage Payment Solutions, a full-service payments provider to private enterprises, has partnered with Kabbage, an online lender, to offer its customers financing by using the latter’s technology platform. Sage has a large base of small and mid-sized businesses to whom they provide software and other services. This tie-up will now allow them to offer finance using the Kabbage technology platform.

Sage is focused on providing small businesses with the software, services and resources they need to grow and thrive,” said Paul Bridgewater, CEO of Sage Payment Solutions. “This partnership with Kabbage allows Sage to provide small businesses with much-needed financing.”

Newtek, a business lender, has created an affiliation with Lending Club, a peer-to-peer lender, to offer revolving lines of credit, small balance working capital loans and collateralized term debt facilities of up to $10 million.

Commenting on the tie-up, Lending Club’s founder and CEO Renaud Laplanche said, “We share Newtek’s commitment to helping U.S. small businesses understand the options and access the credit they need to thrive and grow. We’re thrilled that we can offer access to responsible options that are perfectly suited for our marketplace offering, and excited to work with Newtek to make credit more available to small businesses.”

As recently report here, FranConnect, a franchise software provider and business lending marketplace BoeFly, have partnered to offer a facility to prospective franchisees so that they can understand how much of funding they are likely to have access to. BoeFly cites about 5,000 lenders who use its platform to find borrowers, most of whom are from the franchise industry. This online tool, “bQualTM” can be accessed by FranConnect’s users to assess their borrowing potential.


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Intuit Invests in $100M Fund for Small Business Lending

By Ravinder Kapur

The ‘QuickBooks Financing’ platform will now have access to the proceeds of a new fund totaling $100 million, in which Intuit is one the investors, aimed at lending to small business loan applicants that allow lenders to access their QuickBooks online accounting data. This platform enables financial partners, vetted by Intuit, to lend to small business borrowers quickly and seamlessly.

The financing platform, which gives small businesses the option of taking loans from QuickBooks Financingseveral lenders who approve the applicant’s credit by analyzing real-time data, has already provided over $150 million in loans to QuickBooks customers, reports MarketWatch. This facility has the unique advantage of simultaneously allowing multiple lenders to analyse a potential borrower’s current data while also giving the small business borrower the option of choosing the lowest finance cost.

Dan Wernikoff, senior vice president and general manager of Intuit’s Small Business Group says that, “This fund solves the short-term credit crunch by giving small business faster access to lower-rate loans. QuickBooks Financing makes it easy for small businesses to access tailor-made solutions without having to complete paperwork or negotiate with lenders.”

Small businesses often have an urgent need for funds to enable them to benefit from a business opportunity that requires an immediate response. In such circumstances approaching a traditional lender may not work because of the time and effort required for completing the required forms and compiling data to support the application. Additionally, the processing time by the lender, even if the decision is positive, may be such that the business opportunity for which the funds were required has already slipped by.

To overcome the rigidity of traditional lenders many small businesses resort to using their personal credit cards for borrowing money to purchase inventory or pay wages. The QuickBooks Financing platform, with its access to borrowers real-time accounting data and online lenders, provides an ideal solution to this problem and facilitates the functioning and growth of small businesses.

Data compiled by Intuit indicates that 60% of QuickBooks customers have their loan requests refused by lenders as applications do not meet the financier’s credit approval criteria. On the other hand targeted campaigns on the QuickBooks Financing platform have resulted in an acceptance rate of 70%. This could be attributed to lenders having access to the current data of potential borrowers in a pre-determined format compiled automatically.

While the QuickBooks Financing platform has met with some success the moot point is whether many borrowers are ready to part with their online accounting data for the purpose of raising funds. However, the continued interest of investors in the program indicates that it has found acceptance with a large number of QuickBooks customers.

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Hot Air: Politicians Eschew SMEs for Big Business

By Charles H. Green

The Advocates for Independent Business, a consortium of fifteen trade associations that represent small business industries ranging from booksellers to florists, offered a sobering picture of the pandering nature of politicians, who hail small businesses as the bedrock of America, but throw billions of dollars to subsidize big business. Representing the advocates, Stacy Mitchell and Fred Clements penned a recent Op-Ed for the Wall Street Journal to make their case.

Said Mitchell and Clements, “A report by the research organization ‘Good Jobs First,’ Hot Airfound that two-thirds of the $68 billion in business grants and special tax credits awarded by the federal government over the past 15 years went to big corporations. State and local economic development incentives are similarly skewed. While the members our business associations—mostly independent retailers—must finance their own growth, one of their biggest competitors, Amazon, has received $330 million in tax breaks and other subsidies to fund its new warehouses.”

They continued, “Multinational companies also benefit from a host of tax loopholes. A local pharmacy or bike shop cannot stash profits in a Bermuda shell company or undertake a foreign “inversion.” The result is that small businesses pay an effective federal tax rate that is several points higher on average than that paid by big companies, according to a Small Business Administration study from 2009.”

To skew the lines of this argument further, it’s illuminating to recognize that many politicians demonstrate selective inconsistency in how they apply their own political ideology. In the face of smaller industries–such as independent businesses–who have little to offer other than simple votes, most politicians offer nothing in return.

While many wax on platitudes and rhetoric about the importance of apple pie and small business, after the election, many begin stammering about the “moral hazards” presented by government programs that incentivize small business resources, such as the U.S. Small Business Administration or U.S. Export-Import Bank.

But that’s in sharp contrast with how they view industries that can financially support their election campaigns. Ironically, it’s some of these same politicians who support government subsidies for agri-business giants like Monsanto and Archer Daniels Midland; who fight the imposition of sales tax collection on internet sales; who won’t address a broken corporate tax code that allows billions of U.S.-manufactured good sales to have profits rerouted to Ireland or another tax haven, to circumvent native tax coffers.

It’s the very definition of “crony capitalism.” And that is the real moral hazard we contend with.


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SBA Offers LINC to All Participating Lenders

By Charles H. Green

Last February, the SBA announced a pilot program to help small business owners locate a participating small business lender who offered SBA-guaranteed loan products called the ‘Leveraging Information and Networks to Access Capital’ program, or “LINC”. Initially the program was only accessible by the non-profit SBA lenders during its beta testing. During the recent “Small Business Week,” SBA Administrator Maria Contreras-Sweet announced that the pilot period was ending and that the program is now available to all participating SBA lenders.

“Effective today, all SBA lenders can participate in LINC, a platform that is bringing Business Loansentrepreneurs and SBA lenders together to increase access to capital. There’s a hunger among entrepreneurs to find financing to get their business off the ground or take the next big step in their expansion plan. The SBA stands there ready to help them, now with a few simple clicks,” said Contreras-Sweet.

The LINC matchmaking tool is now available to all 7(a) lenders nationwide, which constitutes a huge step toward giving small business entrepreneurs access to essential sources of capital in all 50 states and the U.S. territories.

“Since we launched this program in February, close to 14,000 matches have been made with LINC. If you have a bankable business idea backed by good credit and sound financial planning, the SBA is streamlining the process for you to get the capital you need,” said Contreras-Sweet.

The LINC portal is a proactive strategy in the marketplace to promote the SBA’s financing products to additional small business owners. In particular, it’s likely to benefit smaller, younger business owners who have not established banking or lending relationships to approach, and can save time and effort by narrowing their search for capital to SBA participating lenders.

For lenders, it offers one more lead generating source to connect with an ever fragmented, competitive small business environment. In particular, for those lenders  who have embraced smaller lending for SBA loans under $350,000, this tool is likely to increase their volume of inquiries.

Lenders may sign up for LINC electronically or email with questions.


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Lending Club’s Loans Zoom 107% in Latest Quarter

By Ravinder Kapur

Peer-to-peer lender Lending Club reported loan originations of $1.64 billion in the first quarter of 2015, up from $791 million last year, and reduced its net loss to $6.4 million from the net loss of $7.3 million in the earlier period. It’s total loan issuance stood at $9.3 billion, with 71% of the borrowings being utilized for refinancing existing loans or paying off  consumer credit cards.

The first quarter’s operating revenues were also higher at $81 million, an increase of 109% Lending Clubover last year’s $38.7 million and the company expects to close the year with annual revenues of $385 million to $392 million. A recent partnership with Citi to provide loans to low and moderate income borrowers and one with Home Advisor to provide home improvement financing are expected boost business.

We continued to benefit from strong network effects this quarter, and took that opportunity to grow faster than we had planned,” said Renaud Laplanche, CEO and founder.

The company has stringent credit criteria and as per data on its website the profile of the average borrower exhibits a FICO score of 699, a debt-to-income ratio (excluding mortgage) of 17.5%, 16.1 years of credit history, personal income of $73,619 (top 10% of U.S. population) and a loan size of $14,448.

Lending Club encourages investors to spread their risk and lend to multiple borrowers by selecting from the detailed list available online. Alternatively, they can set the investment criteria and an automated system will allocate their funds to borrowers with the desired profile. An investment of $2,500 can be spread over one hundred borrowers.

This facility is accompanied by an option to choose borrowers according to a grade signifying credit risk assigned by the company. The grades assigned are A (average borrower interest rate of 7.51% per year) through F (interest rate of 25.13%) and an investor may opt for his preferred risk-return profile to place his funds.

If a loan becomes delinquent Lending Club arranges recovery from the borrower on behalf of the investor. For this it charges a fee of 18% of the amount recovered if the loan is 16 or more days late and no litigation is involved. In the event that legal means are adopted to recover the amount, 30% of hourly attorney fees and costs are recovered. The company has retained an option to increase collection charges to 30% from 18%.

Lending Club’s loan originations have shown an upward trend over the years and its business model seems to have found acceptance with both borrowers and investors. The main challenges before the company includes its ability to control costs so that it can become profitable and maintain delinquencies at acceptable levels thereby ensuring a ready stream of investors.

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SBA Issues Latest Program Rule Revisions: SOP 50 10 5(H)

By Charles H. Green

In January, I reported on rumblings I had picked up on about yet one more revision to the Standard Operating Procedures (SOP) by the SBA, and voila, on April 30 Ann Marie Mehlum, the Associate Administrator for Capital Access, released an Information Notice announcing a revision, SOP 50 10 5(H). This version of the SOP will be effective and apply to all applications received by SBA on or after May 1, 2015.

If you’re feeling a little weary about changes to the SBA financing program rules, you SOPdeserve it–in fact you might be exhausted already. Participating lenders have been pummeled with nine SOP revisions or updates since President Obama took office in January, 2009. These changes have occurred under three different Administrators (out of five serving during these years) and have in toto made some significant changes to the lending programs.

Below is a brief outline of SBA’s summary of the primary areas which have been updated in this version. You can read their full statement in SBA’s Information Notice and download the new SOP 50 10 5(H) here.


 1) Revised Language Regarding Lender Oversight Monitoring and Reviews

In Chapters 1 and 3, SBA revised the language discussing how SBA oversees 7(a) lenders and Certified Development Companies (CDCs). First, SBA incorporated changes in the risk-based review protocols for lenders and CDCs. Second, SBA removed the delineation between “on-site” and “off-site” reviews and related fees

2) Incorporated Regulatory Changes Made to the 504 Program Regarding CDC Affiliation, Corporate Governance and Insurance Requirements

In Chapter 3, SBA has incorporated the regulatory changes regarding CDC Affiliation that became effective March 21, 2014. SBA has also incorporated the regulatory changes to corporate governance and insurance requirements for CDCs that became effective April 21, 2015.


1) Clarified the Policies Regarding Debt Refinancing for 7(a) Loans

In Chapter 2, SBA has clarified the policies regarding debt refinancing for 7(a) loans. Formerly, the SOP stated that SBA guaranteed loan proceeds may not be used to refinance debt used to finance a loan purpose that would have been ineligible at the time it was originally made. SBA is clarifying this provision by adding language to explain that a lender may refinance debt originally used to finance a loan purpose that would have been ineligible at the time it was made, if the condition that would have made the loan ineligible no longer exists.

3) Modified Documentation Requirements for Export Express Loans

Also in Chapter 2, SBA has removed language regarding documenting only the first full disbursement on an Export Express loan for a general line of credit as it may cause confusion. For such loans, lenders must demonstrate that at least 70% of the line of credit was used for export purposes.

4) Updated Real Estate Appraisal Requirements for 7(a) Loans

In Chapter 4, SBA has updated the real property appraisal requirements to conform to changes recently made in the Uniform Standards of Professional Appraisal Practice (USPAP).

5) Updated Business Appraisal Requirements for 7(a) Loans

Also in Chapter 4, SBA is updating the requirements for a business appraisal in the 7(a) loan program. First, SBA changed its terminology from “business valuation” to “business appraisal” to align with the terminology used in the lending industry. Second, SBA is adding a new accreditation to the list of qualified sources to perform a business appraisal: Accredited Business Certified Appraiser (ABCA). Third, SBA is updating the business appraisal requirements for change of ownership transactions involving a Special Purpose Property.

6) Required Use of E-Tran for all 7(a) Loan Applications

In Chapters 4 and 6, SBA is revising the SOP to state that all 7(a) applications for guaranty will be accepted only via E-Tran. E-Tran capacity has been increased to accept larger files.

7) Modified Process for Delegated Lenders to obtain loan increase and decreases

In Chapters 4 & 7, SBA is simplifying the process by which delegated lenders obtain SBA consent to increases and decreases in loan amounts prior to final disbursement. Delegated lenders will now access E-Tran directly to obtain loan increases and decreases for loans submitted under their delegated authority.


1) Clarified Language Regarding Borrowed Contributions for 504 Loans

In Chapter 1, SBA has clarified the specific circumstances under which the borrower must obtain SBA written approval to pay the loan for its equity contribution at a faster rate than the 504 loan.

2) Updated Real Estate Appraisal Requirements for 504 Loans

As discussed above with regard to 7(a) loans, SBA has updated the real property appraisal requirements in Chapter 3 to conform to changes recently made in USPAP.


In Appendix 2 (Definitions) and Appendix 3 (Reliance Letter), SBA updated the most recent version of the Transaction Screen assessment report to ASTM E1528-14.

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