April 3, 2013
Best Practices: Amending Note Terms Under SOP 50 57
by Kimberly A. Rayer
While most Lenders are well versed on SBA loan eligibility and loan closing conditions, many are not as familiar with the SBA’s requirements when it comes time for loan servicing requests from their Borrowers. The new SOP 50 57 sets out that the general policy and goal for loan servicing and liquidation for SBA 7(a) loans is as follows:
Borrowers should repay their SBA loans in accordance with the terms specified in the Loan Authorization, Note and the other Loan Documents. However, when loan servicing and liquidation activities are necessary, they should reflect a balancing of SBA’s interest in: (1) achieving the goals of the loan program, i.e., helping entrepreneurs start, build and grow viable small businesses; and (2) maintaining the integrity of the loan program, i.e., ensuring that the Agency can maximize its recovery if the Borrower defaults on the loan.
Lenders should start with this policy in mind when considering whether to grant a change in Note terms for a Borrower who is having difficulty making timely loan payments.
Once a Lender determines that it is consistent with SBA policy to grant a change in Note terms, the Lender must prepare a Loan Action, which is defined as “an activity or decision regarding a specific SBA loan including a decision to engage or not to engage in a particular activity, such as a decision not to enter a Protective Bid at a senior lien holder’s foreclosure sale.” The Loan Action decision, along with the Lender’s rationale for the Loan Action and all supporting documentation (i.e. appraisals, business plans, financials, etc.) should be dated and kept in the Lender’s loan file or tracking system. The Lender must also determine whether the Loan Action: (i) falls under Lender’s unilateral authority; (ii) requires notice to the SBA or (iii) requires prior approval by the SBA.
One of the most common Loan Actions is to grant a deferment period to allow a Borrower some payment relief. For Notes that are not sold on the secondary market, Lenders may use their unilateral authority to allow up to a 6 month deferment in payment if a Borrower is experiencing a temporary cash flow problem. During a deferment period interest may continue to accrue and a Borrower should make interest only or some minimal payment on the Note, although it is not specifically required by the SOP 50 57. At the end of the deferment period a Lender can re-evaluate if a further deferment makes sense, but only if the Borrower is viable and there is clear path to repayment of the loan. If the Note is sold on the secondary market, a Lender is prohibited from modifying payment terms unless the guaranteed portion has been purchased by the SBA or written consent of the secondary market investor has been obtained. However, there is an exception for a one time deferment that does not exceed a period of three months.
Requests to modify interest rates, term out a revolving line, change the installment amount or extend maturity dates are all within a Lender’s unilateral authority if the Note is not sold on the secondary market, but as the policy states above, Lenders must thoroughly analyze whether the Borrower’s business is viable or whether the deferment period or extended maturity date only delays liquidation and wastes the Lender’s opportunity to liquidate valuable collateral. Lenders should also be mindful that changes in Note terms must still comply with SBA regulations, which prohibit balloon payments at maturity.
Finally, as part of their process for documenting a Loan Action, Lenders should prepare an allonge or amendment to the Note or other Loan Documents, as needed, and obtain the consent of the guarantors to the modification. This helps to ensure that there is no confusion as to the new Note terms or the continued enforceability of the loan documents against Borrower, guarantors and any liens against collateral.
For questions regarding SBA loan modifications, please contact Kimberly Rayer at KRayer@StarfieldSmith.com or at (215) 542-7070.