Changes in the SOP 50 10 5(D) significantly alter the procedures required of Lenders with delegated authority when determining if a franchise, license, fuel supply, or similar agreement makes an SBA loan applicant ineligible for an SBA loan - even if that agreement appears on the franchise registry. The SBA routinely reviews and approves of franchise agreements and the SBA's Franchise Registry provides lenders with a list of those agreements that have been approved. SOP 50 10 5(D) significantly changes how lenders with delegated authority must proceed even when a franchise appears on the Franchise Registry.
Previously, lenders could rely upon SBA's the SBA's determination that the franchise agreement did not create an affiliation between a loan applicant and a franchisor, if the lender obtained a copy of the SBA's Certification of No Material Change Form, signed by the franchisor, and the franchise agreement in question was the same as the agreement approved by SBA. If the agreement did not appear on the registry, lenders with delegated authority were required to perform an independent eligibility review of the agreement based upon the SBA's often complicated affiliation policies on franchise, license, and fuel supply agreements.
Under the new SOP, lenders must obtain a password to log into the Franchise Registry's homepage and search for the franchise system in question. If a franchise is on the registry, the old Certification of No Material Change form may no longer be relied upon to ensure that the franchise is eligible. If a franchise is on the registry, lenders must open the "loan folder" found on the Franchise Registry webpage and determine the specific year or version of the signed agreement between the franchisor and the loan applicant. If the date of the agreement does not correlate with a version of the agreement which appears in the loan folder, the agreement must be independently reviewed for eligibility by lenders with delegated authority. If the specific year of the agreement is listed within the loan folder, lenders must enter the summary page for that specific agreement to determine the date of SBA's approval of the agreement, whether there is an addendum required and whether there are any "eligibility notes".
In order to rely upon the agreement's inclusion on the registry, lenders must document the loan file with 1) a copy of the approved version of the agreement executed by the borrower and the franchisor along any other approved attachments or exhibits, 2) if applicable, an executed copy of all required addenda for the version of the agreement signed by the parties, 3) a franchisor-signed copy of the Certification of Franchise Documents specific to the approved document (and which excludes all other documents), and 4) documentation that the lender complied with any eligibility notes applicable to the approved agreement. It is important to emphasize that each agreement has a specific certification and that any additional documents required by the franchisor, but not explicitly listed on the certification, have not been approved by SBA and could render the applicant ineligible for SBA financing.
The SOP clarifies additional issues relevant when an agreement is not included on the Franchise Registry. The SBA's franchise findings list provides information on agreements reviewed by SBA counsel but not included on the Franchise Registry, including an identification of problem provisions noted by past reviews and whether or not a "fix" has been negotiated. When a provision listed in the findings as a problem remains in the reviewed agreement, the agreement must be found ineligible unless there is a noted fix and the available fix is obtained. It is important to note that while the franchise findings list can be a useful guide, it cannot be relied upon by PLP lenders as a determination of eligibility, even if a noted fix is obtained.
There are also important changes in the SOP 50 10 5(D) related to the review of specific provisions in franchise or other similar agreements. First, the SOP 50 10 5(D) includes a prohibition that the applicant's billings be required to be handled by a third party. Additionally, while SBA requires that the franchise agreement explicitly state that franchisor's consent to a proposed transfer of the franchise shall not be unreasonably withheld or delayed, SBA has clarified this policy, indicating that language requiring a franchisor to use "reasonable business judgment" in approving such a proposed transfer is not sufficient . Finally, the SOP 50 10 5(D) at page 98 adds additional requirements for franchises involved in the fitness industry.
For more information regarding these and other changes to the SOP that became effective on October 1, 2011, contact the author at cevans@starfieldsmith.com or 215-542-7070.