Although life insurance is no longer mandatory, Lenders must now determine whether "repayment of the loan is dependent upon an owner's active participation in the business. In other words, if the owner dies, will the business operations be adversely affected and the loan default?" If so, the lender must require life insurance unless the lender decides that it is unnecessary because of the adequacy of collateral and/or the presence of secondary sources of repayment. Although not mentioned in SOP 50 10 5(D), another factor to consider is whether the owner has a succession plan in place and the details of that plan. If the lender determines that, based on its analysis of the specific facts of the file, they are not going to require life insurance, they must document their file by including their decision in the credit memorandum. And as with any other decision that the SBA might question in a guaranty purchase review, Lenders should provide as much information as possible supporting their determination.

Although this change makes life insurance a credit decision instead of a mandatory SBA requirement, if there is a loss on the loan which the SBA determines is due to the death of the owner, and the lender did not require life insurance, the lender will be responsible for such loss. Therefore, lenders who choose to waive life insurance do so at their own risk.

SOP 50 10 5(D) also sets forth two smaller changes regarding life insurance: (1) Because the lender must ensure that the borrower pays the policy premiums, lenders may now set up an escrow account for the payment of the premiums on the policy. Lenders should follow the escrow requirements for commercial real estate taxes and insurance escrows which are set forth on pages 226-227 of SOP 50 10 5(D); and (2) The SBA has clarified that for SBA Express, Export Express and Patriot Express, lenders may follow their institutions' internal policies for life insurance on conventional commercial loans of a similar size.

The SBA has always required that borrowers obtain flood insurance under the National Flood Insurance Program ("NFIP") on real estate and business personal property if any portion of a building that is collateral for the Loan, or any business personal property collateral is located in a building that is in a special flood hazard area. The amount of flood insurance required for real and/or personal property collateral located in a flood zone should be the lesser of the maximum amount of insurance available, or replacement cost. It is important to note that the maximum amount of flood insurance available under NFIP programs is limited to a maximum of $500,000 each, for both building and contents coverage, respectively.

Although these flood insurance requirements have not changed, SOP 50 10 5(D) adds clarification that flood insurance requirements apply equally to condominiums and cooperative units. If a condominium or cooperative unit lies in a flood zone, the condominium association or the cooperative association must obtain flood insurance for the exterior shell of the entire building and the individual unit owner must obtain a separate flood insurance policy for his/her actual unit. What remains unclear is whether the flood policy from the condominium or cooperative association must list the lender as the mortgagee and provide a mortgagee endorsement, or if a certificate showing the coverage is in place is sufficient. Although most condo and co-op associations will not list the mortgagee for a particular unit as a mortgagee on the policy for the entire building, the SOP language is broad enough to make the Agency's intent on this subject unclear. Until such time as this policy is clarified, the best practice is to ask for this coverage and document your file when the request is denied.