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April 29, 2015

Best Practices: Proving Eligibility for Debt Refinance Transactions

by Ethan W. Smith

When SBA lenders use loan proceeds to refinance existing debt, there are a number of additional requirements that must be met for the loan to be eligible.  Perhaps the most basic of these requirements is the requirement that the original use of proceeds for the debt being refinanced must have been eligible at the time the debt was originally incurred.  SOP 50 10 5 (G), Subpart B, Chapter 2, Paragraph IV. E. 1. (p.109)  states: “SBA guaranteed loan proceeds may not be used to refinance debt originally used to finance a loan purpose that would have been ineligible for SBA financing at the time it was originally made.”  While this requirement seems to be rather straightforward, in practice it can pose some challenges for the unwary SBA lender.

PLP lenders, operating under their delegated authority, bear the burden of proving that their loans are eligible and are underwritten and closed in accordance with all SBA Loan Program Requirements.  So, how does a PLP lender prove that the original use of proceeds for the debt being refinanced was eligible?  In many cases, obtaining documents from the borrower such as settlement statements and copies of loan and other transaction documents (such as a purchase and sale contract, invoices, receipts, etc.) is the most straightforward approach to proving the eligibility of the refinanced loan.  If the debt was incurred less than seven years ago, then the borrower should have these documents and be able to produce them to satisfy the SBA’s eligibility requirements.

But what happens if the original debt is an older debt, a debt that has been refinanced multiple times, or the borrower just can’t provide the necessary documentation for the lender’s eligibility determination?  A lender in this position has a few options: 1) if the debt being refinanced, a copy of the deed and the title work should provide information regarding the debt being refinanced in the chain of title; 2) have the borrower check with the title company or attorney that handled the transaction to see if documents can be obtained from these sources; 3) UCC indexes often permit both active and lapsed financing statements to be searched which can provide evidence of prior debts and the collateral taken; 4) credit reports can provide evidence regarding current and closed debts; 5) an affidavit from the borrower; and 6) if sufficient documentation cannot be obtained, submitting the loan GP/CLP for SBA approval.

Each of these options may provide information from which the lender can reconstruct the purpose of the loan with s sufficient amount of detail to satisfy the SBA eligibility requirements.  However, getting to this conclusion may take some detective work on the part of the lender.  Read the documents and review their terms.  Can you glean any information from them?  Who are the parties to the loan and who are the debtors?  When were the debts incurred?  Does the timing match the borrowers representations regarding the debt?  These are just a few questions that can help solve the eligibility puzzle.

By using the tools and information at their disposal, SBA lenders can often obtain information sufficient to prove the eligibility of their debt refinance loans and avoid repairs or denials of the SBA loan guaranty.  For more information on debt refinance eligibility, please contact Ethan at 267-470-1186 or at  esmith@starfieldsmith.com.