October 18, 2018
Best Practices: Proposed Rule Change: Permissible Fees
by Laura P. Amato
On September 28th, the SBA issued proposed rule RIN: 3245-AG74 (“Proposed Rule”) which proposes several changes to SBA’s current regulations. One such change would affect the type and amount of fees that a Lender or Agent may collect from a small business loan applicant (“Applicant”). In response to finding that there is a significant amount of confusion surrounding who may charge fees to an Applicant, and what fee amount may be considered “reasonable”, the SBA has proposed the changes described below.
Under 13 CFR 120.221, Lenders are permitted to collect four (4) types of fees from Applicants: (1) service and packaging fees; (2) extraordinary servicing fees; (3) out-of-pocket expenses, and (4) late payment fees. Service and packaging fees must be “reasonable” that is, customary for similar lenders in the geographic area where the loan is being made.
Under the Proposed Rule, the SBA would impose a limit on the maximum fee that can be collected for servicing and packaging. The maximum fee that can be collected for loans in the amount of $350,000 and under, would be $2,500 and for loans $350,001 and over, the maximum fee would be $5,000. An SBA lender would not be permitted to split the loan into two loans and collect two service and packaging fees, unless there was a legitimate business need for the Applicant to obtain two loans (e.g., an Applicant requires a term loan for a business acquisition and a line of credit for working capital).
The Proposed Rule would also modify the extraordinary servicing fee limit. Under the current rule, extraordinary servicing fees are limited to 2.0% per year on the outstanding balance of the part of the loan requiring special servicing. The Proposed Rule would eliminate this cap for loans that are either an “Export Working Capital Loan” or a “Working Capital CAPLine” and are disbursed based on a borrowing base certificate.
There is no proposed change to the rule concerning out-of-pocket expenses or late payment fees; lenders may still be reimbursed by Applicants for out-of-pocket expenses (such as title policy fees, appraisal fees, legal fees, filing fees) and impose a late payment fee.
The Proposed Rule would also impose a limit on the maximum fees that an “Agent” may collect from an Applicant. The current rule broadly defines an Agent as any authorized representative who conducts business with the SBA to facilitate an Applicant obtaining an SBA-guaranteed loan (e.g. preparing a loan application for an Applicant, communicating with the SBA on behalf of the Lender or Applicant, etc.). The current rule distinguishes two subcategories of Agents: “Lender Service Providers” and loan “Packagers”. For purposes of the fee limitation, the Proposed Rule eliminates this distinction. Whether an Agent provides services as a Lender Service Provider, a Packager, or both, the maximum fee that an Agent may charge an Applicant is as follows:
- for loans $350,000 and under: 2.5% of the loan amount or $7,000, whichever is less.
- for loans $350,001 – $1,000,000: 2.0% of the loan amount or $15,000, whichever is less.
- for loans over $1,000,000: 1.5% of the loan amount or $30,000, whichever is less.
These limits would apply on a per-loan basis, thus, if there is more than one Agent providing services to an Applicant, the fee for all Agents would be combined to ascertain the maximum fee that can be charged to the Applicant.
The Proposed Rule will also eliminate the so-called “Dual Agency” exception. Under the current rule, an Agent who acts as a Packager and is compensated by the Applicant may simultaneously act as a Referral Agent and be compensated by the lender, so long as such Agent fully discloses the referral activities to the Applicant and the loan packaging activities to the lender. The SBA has determined that this dual agency creates, at minimum, an appearance of a conflict of interest, regardless of the Agent’s disclosure. Under the Proposed Rule, an Agent would not be permitted to act both as a Referral Agent compensated by the Lender and a Packager compensated by the Applicant, for the same loan.
Lenders have until November 28, 2018 to submit comments to the Proposed Rule for consideration. For assistance with SBA matters, please contact Laura at 215.390.1061 or firstname.lastname@example.org.