You have questions, we have answers! To keep you informed and help you navigate through the SBA process, this Q&A section will keep you in-the-know and give you answers when you come across these questions and issues in your 7(a) loan projects.
This month, we take on questions regarding:
- Payment Deferrals
- Default Interest Rates on SBA Express Loans
- Amortization Changes Upon Release of Commercial Real Estate
Question #1:
Q: We have a borrower who has continued to make their payments, but it is becoming increasingly difficult. The property is listed for sale, and they are balancing the idea of continuing to operate at a loss until circumstances improve or selling the property at a loss upfront to stem the ongoing cash flow drain.
My question for you is what might be available and how would us as the lender/client go about requesting a deferral of payments for a period of time? The bank recognizes that it would not be in any party’s (client, bank, or SBA) best interest to have them “walk away."
A: The bank is able to defer payments when it is a temporary situation for the borrower as a unilateral action with no notification required to SBA. That being said, if the loan is sold in the secondary market, any deferments over 90 days (cumulative) must have investor approval. If the loan is sold you would need to send the servicing request directly to the FTA and submit subsequent notification and evidence of investor approval to the commercial loan servicing center.
The Servicing SOP 50 57 3.1 (Chapter 12) covers Deferments and that starts on page 90 – please see below:
C. General Requirement - Temporary Cash Flow Problem
| 1. Lenders should review and analyze the Borrower's financial information in accordance with Prudent Servicing practices, to ensure that the Borrower's cash flow problems are temporary and that the Borrower is financially viable. |
| 2. When an SBA loan is more than 60 calendar days past due and the Borrower's problems appear to be permanent or long-term, Lenders should not grant a deferment. Instead, Lenders should transfer the Loan into liquidation status and pursue more appropriate Loan Actions such as workout, liquidation of collateral and/or compromise with the Obligors. (See Chapters 17-21 of this SOP.) |
If you decide to grant a deferral, for loans NOT sold on the secondary market:
D. Deferred Period
|
1. Loan Not Sold in Secondary Market
For SBA loans that Lenders have not sold in the secondary market, Lenders may grant payment deferments of up to six consecutive months. During the deferment period, Lenders should monitor the Borrower's operations (through phone calls, site visits, monthly financial statement review, etc.) so that at the end of the deferment period, the Lender is able to determine whether an additional deferment is necessary and consistent with Prudent Servicing practices. Prior to granting an additional payment deferment, Lenders must prepare and document a Loan repayment strategy to justify a deferment of more than six months. Generally, deferments should not exceed six cumulative monthly payments, or 20 percent of the original Loan amount, whichever is less. |
If the loan IS sold on secondary market:
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2. Loan Sold in Secondary Market
For SBA loans that Lenders have sold in the secondary market, Lenders may grant only one payment deferment of up to three consecutive months without the prior written consent of the investor. Lenders must immediately notify the FTA and the appropriate SBA Loan Center in writing if they defer any payments for Loans sold in the secondary market. Any additional payment deferment requires the prior written consent of the investor. (See Section 3.8 of Secondary Participation Guaranty Agreement (SBA Form 10861). |
Interest Accrual during deferment period and payments:
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3. Interest Accrual
Generally, interest will continue to accrue during a deferment period, and Lenders may collect the accrued interest in one of the following ways: |
| a. Lenders may allow Borrowers to pay accrued interest during the deferment period; |
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b. Lenders may allow Borrowers to pay the accrued interest in a lump sum at the end of the deferment period; |
| c. After the deferment period, Lenders may increase the Loan payments for a period of time to allow the Borrower to catch up to the original amortization schedule; |
| d. If a Lender allows the Borrower to resume making the same pre-deferment regular payments after the deferment period ends, the Lender must apply the payments to accrued interest first and then to principal, and extend the original Loan maturity date for up to 10 years to ensure the orderly repayment of the Loan (see Chapter 4 of this SOP for guidance on the application of payments for Loans in regular servicing status, and Chapter 7 of this SOP for guidance on maturity date extensions.); |
| e. Lenders may not capitalize or add accrued interest to the principal balance of the Loan. |
E. Amount of Payments during Deferment Period
| Payments during a deferment period are not mandatory, but are preferred since even a small payment, such as $1.00, will keep the Borrower in the habit of making payments and will also keep the Borrower's pre-authorized debit method of payment active. |
Question #2:
Q: In the results of a recent OCRM review, our institution was cited for the following exception:
The default rate is 18.0 percent. Based on the 6/13/24 origination date, the maximum rate allowed is 15.0 percent (Prime plus 6.50 percent).
Our institution was unaware that the default rate had to fall within the maximum allowed rates per SBA as well. This was an Express line of credit priced at Prime + 1.0%. Please advise.
A: Below is from page 135 of SOP 50 10 7.1:
Default Interest Rates:
SBA Express: The default interest rate is a change (increase) in the interest rate charged to the Borrower as a result of a failure to meet certain conditions specified in the loan agreement. A Lender may charge a default interest rate if it does so for its similarly-sized non-SBA guaranteed commercial loans, as long as the interest rate does not exceed the amounts permitted for SBA Express loans. The amount of interest SBA will pay to a Lender following default of an SBA Express loan is capped at the maximum interest rates for the Standard 7(a) loan program.
The maximum rates allowed (page 133 of SOP 50 10 7.1) are as follows:
|
Product
7(a) Small and SBA Express Loans |
Interest Rate
The published maximum allowable fixed rate or if variable: |
| Loans $50,000 or less | Cannot exceed Prime or SBA Optional Peg Rate + 6.5% |
| Loans $50,001 up to and including $250,000 | Cannot exceed Prime or SBA Optional Peg Rate + 6.0% |
| Loans $250,001 up to and including $350,000 | Cannot exceed Prime or SBA Optional Peg Rate + 4.5% |
| Loans $350,001 up to and including $500,000 | Cannot exceed Prime or SBA Optional Peg Rate + 3.0% |
Question #3:
Q: Looking to confirm on the below and see if WBD agrees or disagrees. Our borrower is selling the commercial real estate securing the loan (only RE securing loan) and will now be renting from an unrelated third party. We will require full pay down from loan proceeds. The question is whether we need to, should, or cannot adjust the amortization now that we no longer have RE as collateral. The amortization was originally 14 years based on blended real estate and business asset amortization (currently 12 years remaining). If we had done the loan without the real estate from the beginning, we would have done 10 years and would now be at 8 years remaining.
A: The maximum maturity is based on what was initially financed. SBA would not require the maturity to be shortened with the release of the real estate that was financed so you could keep the maturity as is and re-amortize the loan balance after the pay-down over the remaining 12 years. Or, if you prefer, you could reduce the maturity to 10 years from the original note date and re-amortize the loan balance after the pay-down over the 8 years that would be remaining. It is important to assess what is prudent based on the business cash flow.
