Best Practices: The Do’s and Don’ts of Refinancing Same Institution Debt under the SBA 7(a) Loan Program

In the SOP 50 10 5(K), the U.S. Small Business Administration (“SBA”) sets forth specific rules on refinancing same institution debt.  If a lender is seeking to refinance its own loan with SBA-guaranteed loan proceeds , then the lender must process the loan through general processing (“GP”) unless one of two very specific exceptions apply.  See SOP 50 10 5(K) at page 133-134.

Exception One:  A PLP lender may only refinance its own loan through the Preferred Lender Program “[i]f the debt is an interim loan that has been made for other than real estate construction purposes and was approved by the Lender within 90 days prior to the issuance of a PLP loan number…” SOP 50 10 5(K) at page 133-134.  For example, under this first exception, if a borrower is purchasing owner- occupied commercial real estate which requires renovations in order to open for business, and the borrower is under pressure to close on the real estate due to time constraints, then the Lender may consider an interim loan.  The interim loan would allow the borrower to purchase the real estate while giving the borrower time to solidify the architectural and construction contracts needed for the renovations.  If the Lender closes on the real estate with an interim loan, then the lender must obtain the PLP loan number within 90 days of lender’s approval of the interim loan or else the lender may not process the loan PLP.

Exception Two:  A PLP lender may only refinance its own loan through the Preferred Lender Program if “[t]he debt is a construction loan that has not been disbursed at the time of application submission.”   SOP 50 10 5(K) at page 134.  An example under the second exception would be if a lender closed on a conventional construction loan but did not disburse any loan proceeds.  Prior to any disbursements, the borrower decides to build an addition to the commercial real estate instead of just renovating it.  The lender determines that the project cannot move forward conventionally due to these changes, and now requires SBA financing for the project.  If, and only if, the lender has not disbursed any loan proceeds on this loan, then the lender could refinance this loan using PLP processing.  If neither of these two exceptions apply and the lender is attempting to refinance its own loan, then the lender would need to submit the loan GP.

Regardless of whether the lender is processing the refinance of its own loan PLP or GP, SOP 50 10 5(K) provides that a lender must obtain and retain in its file a transcript showing the due dates of when payments were due and when payments were received by the lender for the prior 36 months.  See SOP 50 10 5(K) at page 133.  If it has been less than 36 months since the loan closed, then the lender would only need to provide the payment history for the life of the loan since 36 months of payment history would not be available.  The lender would need to explain in its credit memo any late payments or late charges which occurred during those 36 months or life of the loan.  See SOP 50 10 5(K) at page 133.  A late payment is any payment made after 29 days from the due date of the payment.

In addition, a lender may only refinance its own SBA loan through GP processing and only if the lender “is unable to modify the terms of the existing loan because a secondary market investor will not agree to modified terms, or if an increase in the amount of an existing SBA-guaranteed loan is not possible.”  SOP 50 10 5(K) at page 134.

For full details on SBA’s debt refinance requirements, see SOP 50 10 5(K).  For assistance with SBA lending matters, contact the attorneys at Starfield & Smith, PC at 215.542.7070 or email us at info@starfieldsmith.com.