May 10, 2017
Best Practices: Effective May 1, 2017, Variable Rate Notes Must Include First Rate Adjustment Language
by Kristen G. Dickey
As interest rates have been rising over the past year and a half, the Small Business Administration (“SBA”) wants to be sure that SBA borrowers understand when their interest rate will adjust. Therefore, effective May 1, 2017, the SBA now requires Colson to verify that every SBA note includes the date of the first rate adjustment in order for the loan to qualify for sale on the secondary market.
The SBA Standard Operating Procedure (“SOP”) identifies six elements to be disclosed in an SBA note associated with a variable interest rate loan. Page 132 of SOP 50 10 5(I), which became effective January 1, 2017, states:
F. Interest Rate Requirements for an SBA Note:
2. Variable rate loans – the lender must include the following information in the Note:
a. Identification of the rate being used as the base rate;
b. The publication in which the designated base rate appears regularly (e.g. Wall Street Journal or the Federal Register if using the SBA Optional Peg Rate);
c. The permanent percentage spread to be added to the base rate;
d. The initial interest rate of the loan (from disbursement to first adjustment);
e. The date of the first rate adjustment; and
f. The frequency of rate adjustment.
Lenders have two (2) options methods to comply with this policy requirement:
1. Specify the exact date of the first interest rate adjustment after the following sentence in Section 3 Payment Terms” of the SBA note: “The interest rate will be adjusted every ___________________ (the ‘change period’).” For example, for a loan that closes on May 15, 2017:
i. The interest rate will be adjusted every calendar quarter, beginning July 1, 2017; OR
ii. The interest rate will be adjusted every 10 years, beginning May 15, 2027.
2. Add specific language that defines the adjustment date after the following sentence in Section 3 Payment Terms” of the SBA note: “The interest rate will be adjusted every ___________________ (the ‘change period’).” For example:
i. The interest rate will be adjusted every calendar quarter, beginning with the first calendar day of the calendar quarter following the initial disbursement; OR
ii. The interest rate will be adjusted every calendar quarter, beginning with the first calendar day of the calendar quarter following the date of the Note.
If a lender does not have specific language in the SBA note for a loan that has already closed but not been sold on the secondary market, Colson will accept a loan modification to correct the SBA note language signed by the borrower and lender.
Lenders should also consider having the SBA Loan Authorization (“Authorization”) note terms include the additional language above clarifying the date of the first rate adjustment. If this language is not included in an Authorization that has already been approved by the SBA, then the lender should obtain a 327 action to revise the note terms.
Lenders who intend to sell their loans on the secondary market must take care that they are complying with current SBA regulations and guidance from the SBA. For more information regarding this topic, please contact Kristen at (407) 667-8811 or at firstname.lastname@example.org.