Best Practices: Determining Maturities of New 7(a) Loans Eligible to Receive Section 1112 Payments

SBA Procedural Notice 5000-20093 (the Notice), effective February 12, 2021, focuses on establishing maturities of new 7(a) loans approved between February 1, 2021 and September 30, 2021 which may be eligible for a 6-month payment subsidy of principal, interest and associated fees, subject to a $9,000 monthly cap and availability of funds.  The repayment schedule and maturity of a 7(a) loan must be based on the applicant’s ability to repay the loan, the use of proceeds of the loan and the useful life of any assets being financed with the loan – the same criteria that would have been used had the loan been approved prior to the effects of COVID-19 and the enactment of Section 325 of the Economic Aid to Hard Hit Small Businesses, Nonprofits and Venues Act (the Economic Aid Act).  

Although lenders are permitted to consider Section 1112 payments in determining an applicant’s repayment ability, lenders are not permitted to intentionally shorten the maturity of a 7(a) loan in order to have higher monthly loan payments and a corresponding higher 6 month subsidy which would pay all or a substantial portion of the loan.  To do so could lead to a denial of the SBA guaranty.  The Notice specifically states that lenders may not underwrite a new 7(a) loan with a maturity that would result in full repayment of the loan through Section 1112 subsidy payments (similar to how SBA does not permit Section 1112 payments to be used to cover a balloon payment on a line of credit).  Section 1112 payments are intended to assist businesses during these difficult economic times, but lenders must continue to use prudent lending practices and follow the SBA’s Loan Program Requirements in order to avoid a denial of the SBA guaranty.  The Notice is intended as a reminder that SBA lenders must continue to underwrite all 7(a) loans using prudent lending standards and in compliance with SBA’s Loan Program Requirements as defined in 13 CFR Section 120.10.  

For questions regarding underwriting concerns under the Economic Aid Act and the CARES Act, contact the attorneys at Starfield & Smith at 215-542-7070.