What FRANdata Thinks

New PARRiS Flags Dictate SBA’s Lender Audits

August 28th, 2018 by Darrell Johnson

Somewhat buried in a recent SBA information notice footnote (5000-180007 Updated Lender Portal), was the announcement of new PARRiS flags which will closely monitor start-up loans, small loans, export loans, and loans to hotels. These SBA-issued new risk-monitoring rules are meant to help SBA determine whether to conduct a lender audit.

The new PARRiS flags include:

  • Last 12-month new business rate (loan approval dollars to businesses that are 2 years of age or less);
  • Last 12-month small loan rate (loan approval dollars to loans ≤ $350,000);
  • Last 12-month export rate (loan approval dollars to businesses that export); and
  • Last 12-month accommodation industry rate (loan approval dollars to businesses in NAICS subsector code 721 – Accommodation).

These flags signal the SBA to pursue auditing a lender’s portfolio. For instance, if a lender does a series of franchise hotel loans that are to start-ups, under the new PARRiS flags they are going to be tagged as “high risk” and might undergo an SBA audit. An audit is very expensive to a lender, something they would wish to avoid. The impact is likely to be lenders stopping additional lending to a brand when they get close to these risk guidelines. This might come as a surprise to many brands, especially those that have good track records and long histories with lenders.

In line with this, we are continuing to encourage our franchisor clients to work with a variety of lenders versus with just a select few. Due to the new flags and threat of audits – a lender may at any moment get more SBA scrutiny. We recommend that franchisors take steps to ensure they have banking relationships with multiple lenders in reserve, or as a matter of practice, to avoid preferred lenders backing away from additional business because of SBA risk monitoring guidelines.

For more information contact your FRANdata client advisor or email us at franchiseregistry@franchiseregistry.com.

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