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August 3, 2011

Firm News for August 2011: Best Practices: SBA Guaranty Fees

By: Katie G. O’Brien, Esq.

A lender must pay the Small Business Administration (“SBA”) a Guaranty Fee for each loan it makes under the SBA’s 7(a) program. This fee is based on the guaranteed portion of the loan. Beginning January 1, 2011, the maximum amount that the SBA will guarantee to any one Borrower and its affiliates is $3,750,000, unless the loan is approved under a program which specifically permits higher amounts. Moreover, the maximum guaranty percentage is 85% for loans of $150,000 or less and 75% for loans which exceed $150,000.

Since the maximum loan amount under the 7(a) program increased to $5,000,000 this year, many lenders have begun splitting larger loans into smaller loans (less than $2,000,000) which are often easier to sell on the secondary market. Therefore, there has been an increase in multiple 7(a) loans to the same borrower at or about the same time. When lenders make multiple loans to one borrower, or their affiliates, which are approved within 90 days of each other, the loans will be treated as if they were one loan for purposes of determining the guaranty percentage and the amount of the guaranty fee.

When a 7(a) loan is approved by the SBA, the SBA automatically calculates the guaranty fee for that loan. But this automatic calculation does not take into account required changes in the fees because of multiple loans being made to the same borrower. When multiple long-term loans are approved to the same borrower or their affiliates within 90 days, a lender must calculate the guaranty fee (and the guaranty percentage) manually per the calculation below.

  • Loans of $150,000 or less – guaranty fee is 2% of the guaranteed portion

  • Loans of $150,001 to $700,000 – guaranty fee is 3% of the guaranteed portion

  • Loans of $700,001 to $5,000,000 – guaranty fee is 3.5% of the guaranteed portion up to $1,000,000 plus 3.75% of the guaranteed portion over $1,000,000

If there is a difference between the automatic calculation provided by the SBA and the manual calculation performed by a lender, the lender must report the difference to the Central Processing Center or the local SBA office. For example, if a lender has split a $2,600,000 project into a $2,000,000 loan and a $600,000 loan, the guaranty fees “automatically calculated” in the Loan Authorization will be incorrect.

The Loan Authorization’s automatic calculation would be generated as follows:

  • $2,000,000 loan –

    • The loan has a 75% guaranty so the guaranteed portion is $1,500,000 (the amount on which the calculation is based).

    • The guaranty fee for the first $1,000,000 is calculated as 3.5% of $1,000,000, which equals $35,000.

    • The guaranty fee for the remaining $500,000 is calculated as 3.75% of $500,000, which equals $18,750.

    • So the total guaranty fee for the $2,000,000 loan is $53,750 ($35,000 plus $18,750).

  • $600,000 loan –

    • The loan has a 75% guaranty so the guaranteed portion is $450,000.

    • The guaranty fee is calculated as 3% of $450,000, which equals $13,500.

  • Therefore, based on the automatic calculation in the Loan Authorization, a lender would pay the SBA a guaranty fee in the total aggregate amount of $67,250 for both loans.

If, however, a lender performs a manual calculation, the guaranty fee would be calculated as follows:

  • Both loans should be combined into one aggregate amount of $2,600,000 for purposes of calculating the guarantee fee.

    • The guaranteed portion for both loans remains the same as in the automatic calculation above, or $1,950,000 (75% guaranty).

    • The guaranty fee for the first $1,000,000 is calculated as 3.5% of $1,000,000, which equals $35,000.

    • The guaranty fee for the remaining $950,000 is calculated as 3.75% of $950,000, which equals $35,625.

  • Based on a manual calculation, the total guaranty fee is $70,625 ($35,000 plus $35,625).

The lender is responsible for the full guaranty fee of $70,625, rather than the incorrect automatic calculation of $67,250 which is automatically generated in the SBA Authorization. It is a lender’s responsibility to notify the SBA of the additional fees owed to SBA. If there is a conflict between the fees stated in the Authorization and the statutory amount authorized at the time the loan is approved, the statutory amount will govern.

With the increasing amount of multiple loans being made to the same borrower, it is important for lenders to keep these regulations in mind. For more information on SBA regulatory and statutory issues, contact Katie at 267.470.1207 or kobrien@starfieldsmith.com.