Best Practices: 7(a) Loan Program Reduces Lender Fees and Increases Guaranty Percentages

SBA released Information Notice 5000-20084 on January 27, 2021.  In accordance with the Economic Aid Act, the Notice provides for temporary changes to SBA loan programs, including higher guaranty percentages and fee reductions, to assist small businesses.  A brief overview of the changes to SBA loan programs and lenders’ responsibilities follow.

Guaranty Percentage Increases

For standard 7(a) loans, 7(a) small loans, CAPLines, PLP loans, and Community Advantage loans, the SBA guaranty percentage is increased to 90 percent, effective December 27, 2020 through September 30, 2021.  For Express loans in an amount of $350,000 or less, the SBA guaranty percentage is increased to 75 percent for the same time period.  The Economic Aid Act did not increase the guaranty percentage for Export Express loans.  The guaranty percentages will automatically revert to previous levels of 75 percent for certain 7(a) loans and 50 percent for Express loans on October 1, 2021.

Except for Export Working Capital and International Trade loans, lenders should keep in mind that SBA’s maximum SBA guaranty amount to a single borrower (including affiliates) remains at $3,750,000.  This means that on larger SBA 7(a) loans, financing may result in a pro-rated reduction in the guaranty percentage to remain within SBA’s maximum level of participation.  PPP loans that have not been forgiven or repaid may need to be included in this calculation.

Loan Amount Changes on Express Facilities

The Economic Aid Act also extended the maximum loan amount of $1,000,000 for SBA Express loans through September 30, 2021.  On October 1, 2021, the maximum amount will change to $500,000 for such loans.

Fee Reductions

For 7(a) loans approved on or after December 27, 2020, for which fees have been paid, SBA will rebate ongoing annual fees and upfront guaranty fees that SBA received and E-Tran will automatically make guaranty fee adjustments retroactively.  Lenders must pay the funds rebated by SBA to the borrower within 10 business days of receipt by a lender, and lenders must retain documentation of the payment to borrower in its loan file.  If loan proceeds paid the SBA guaranty fee, the SBA will deem the rebate to be working capital and lenders should document their file accordingly.  If any affected loans were sold in the Secondary Market, lenders must modify the Loan Authorization in accordance with procedures set forth in SOP 50 10.

The reduction of the SBA guaranty fee to zero and the lender’s annual servicing fee to zero for all 7(a) loans approved between December 27, 2020 and September 30, 2021 is contingent on available appropriated funds.  SBA indicates it will monitor loan activity and advise if any changes to the fee reductions become necessary.

For SBA compliance matters, contact the attorneys at Starfield & Smith at 215.542.7070.