Amendment to the Interagency Guidance on Appraisals and Evaluations for Financial Institutions, effective April 2, 2018, raised the threshold for required appraisals from $250,000 to $500,000. This change could affect how SBA loans are handled.
Appraisal guidelines for financial institutions are written by their regulatory authorities. SBA is not a party to the Interagency Guidelines. SBA’s requirements for appraisals are established by law. For 504 loans, Title V, Section 502 E ii of the Small Business Investment Act requires an appraisal if the estimated value of commercial real estate serving as collateral is more than $250,000, or if an appraisal is necessary to evaluate creditworthiness. For 7(a) loans, the same language is in Section 3 E ii of the Small Business Act.
That is the law until Congress passes and the president signs a new law affecting the Small Business Investment Act and the Small Business Act.
Until the new Interagency Guidelines, legislation governing SBA loans was pretty much in step with commercial lending guidelines so issues were rare. Now we have two sets of threshold guidelines – $250,000 and $500,000 – in effect at the same time.
So What Are the Issues? For 7(a) loans, lenders might not be aware that although they can make a conventional commercial loan involving real estate of $300,000 without an appraisal, an SBA 7(a) loan of $300,000 now requires an appraisal. A loan guaranty might be in jeopardy if the lender follows Interagency Guidelines instead of federal law.
Importantly for 504 loans: It is possible that a financial institution will not order an appraisal if the commercial real estate component is under $500,000. However, the CDC must order one.
For additional information or clarification on this matter, please give us a call at 503-990-6868.