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August 10, 2011

Firm News for August 2011: Best Practices: Refinancing of Same Lender Debt

By: Amy Brownstein, Esq.

SBA lenders are generally not permitted to approve the refinancing of same institution debt, i.e., obligations already owed to that lender by the borrower, under their PLP delegated authority. This limitation reflects the SBA’s concern that lenders might approve refinancings in order to shift potential losses to the SBA. Such refinancings may be approved under PLP authority only in extremely limited circumstances.

Pursuant to Subpart B, Chapter 2(IV)E.5.b of SOP 50 10 5(C),

“[a]pplications that include the refinancing of same institution debt may not be processed using PLP procedures unless…

(1) The debt is an interim loan that has been made for other than real estate construction purposes and was approved by the lender with in 90 days prior to the issuance of a PLP loan number; or

(2) The debt is a construction loan that has not been disbursed.”

This rule is not set forth only in the SOP; it is also codified in the Code of Federal Regulations at 13 C.F.R. §130.452(a)(2), which provides that:

“[a] Lender may not make a PLP business loan which reduces its existing credit exposure for any Borrower, except in cases where an interim loan(s) has been made for other than real estate construction purposes to the Borrower which was approved by the Lender within 90 days of receipt of the issuance fo [sic] a subsequent PLP loan number.

What does this mean for PLP lenders? Unless a PLP lender is refinancing its own non-construction interim debt and obtains the PLP loan number within 90 days of the approval of the interim loan, or the existing loan is an undisbursed construction loan, the PLP lender must submit proposed refinancings of obligations owed to that lender for SBA approval by standard processing.

Lenders should be extremely careful to act in strict compliance with these provisions. Because the restriction is set forth in the C.F.R., it is unlikely that the SBA will be willing to consider granting exceptions to allow PLP lenders to approve same debt refinancing of loans other than non-construction interim loans or undisbursed construction loans, or to allow such refinancings to be approved outside of the permitted 90 day period. Any lender that fails to comply with these provisions is likely to receive a denial of a guaranty purchase request submitted to the SBA in connection with such refinancing, and may face scrutiny in audits and other oversight proceedings for using proceeds for an ineligible purpose.

For more information regarding PLP refinancing of same-lender debt, contact Amy at abrownstein@starfieldsmith.com, or 215-542-7070.