Best Practices: Loan Deferments In An Uncertain Time

The rapidly evolving environment precipitated by the coronavirus is likely to have a wide reaching adverse economic impact on many American small businesses.  In response, many SBA lenders are looking for opportunities to assist their borrowers that are likely to suffer an adverse economic impact from the current crisis.  On March 10, 2020, SBA published Information Notice 5000-20004 which reminds SBA lenders of their unilateral authority to grant payment deferments in certain circumstances.

SOP 50 57 indicates that deferments are “temporary solutions to temporary problems.”  Accordingly, it is incumbent upon lenders to document the nature of the borrower’s cash flow problem and the borrower’s prospects for recovery after the deferment period expires.  The SOP requires that lenders review a borrower’s financial information in connection with a deferment decision, and specifically requires SBA lenders to assess the viability of the borrower’s business post deferment.  The SOP further indicates that deferments should not be granted to borrowers that are already 60 days or more past due on their loans.  This guidance is not mandatory, however, and if a lender determines that a deferment for a borrower that is more than 60 days past due is warranted, the lender should document its file as to the circumstances why a deferment is warranted under the particular facts then applicable to the borrower’s situation.  As always, all servicing decisions, unilateral or not, should be adequately documented to withstand SBA scrutiny in a guaranty purchase scenario.

SBA Lenders may grant payment deferments of up to 6 months for loans not sold on the secondary market, and up to 3 months (without investor approval) for loans sold on the secondary market.  For loans not sold on the secondary market, the deferred amount should not exceed six (6) payments or 20% of the loan amount.  Any deferments exceeding these amounts should have a well documented justification and strategy for the borrower’s recovery.  Payment deferments can either be deferments of principal only, or deferments of payments of principal and interest for the deferment period.  It is important to note that if the borrower does not pay interest during the deferment period, the borrower will need to catch up on their interest payments post-deferment, meaning that the first payments following the deferment period will likely all be applied to interest only for a period of time until the interest payments are brought current.  If the borrower is required to catch-up on interest payments, it is possible that their monthly payments may increase when the loan is reamortized.

The fluid situation presented by the coronavirus emergency makes it difficult to fully assess a borrower’s viability or the economic impact that small businesses will suffer as a result of the economic disruption that this crisis will certainly cause.  SBA lenders should make sure that they are documenting their deferment decisions as best they can with the information that is currently available at the time that the deferment decision is made.  Should circumstances change significantly, lenders should update their servicing files accordingly.

For more information on SBA requirements for loan deferments, please contact Ethan at 267-470-1186.