Best Practices: Refinancing Interim Advances under SOP 50 10 6

In the most recent iteration of the SOP, the SBA added a provision prohibiting the use of loan proceeds when refinancing interim advances if those advances were made with the intent of being subsequently refinanced with a 7(a) loan.  SOP 50 10 6, A.1.b.iii, page 228.  For quite some time, however, the SBA has allowed loan proceeds to be used to refinance interim advances made both prior to the issuance of a PLP number as well as subsequent to the issuance of an SBA Authorization.  The SBA has not issued any formal guidance behind the reason for this new more stringent requirement.  Lenders must tread carefully to stay within program guidelines when underwriting refinancings involving prior interim advances made by them or other lenders.

Interim Advances Made Prior to SBA Approval

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 is not considered to be same institution debt refinancing.  Additionally, a construction loan that has not been disbursed at the time the PLP loan number is issued is not considered by the SBA to be same debt refinancing.  In both instances, the loan may be processed by the lender under its delegated authority.  SOP 50 10 6, A.1.h.iii, page 231.  Guidance from the Agency on the continued eligibility of these interim advances would add clarity, but these refinancings of interim advances would seem to continue to be eligible even though they were likely made by the lender with the clear intent to refinance the advance with a 7(a) loan.  

Interim Advances Made Subsequent to SBA Approval 

Once an SBA Authorization has been issued, and prior to any disbursement, a lender may make interim advances a long as the interim advances reasonably comply with the terms of the SBA Authorization.  Once made, the lender may be reimbursed for those interim advances with loan proceeds.  SOP 50 10 6, A.l.ii, page 232.  While these interim advances are made at the lender’s own risk, they are specifically excepted from the reach of the new requirement that they not be created with the intent of refinancing them with a 7(a) loan.

Looking at the Debt Refinancing provisions of the new SOP 50 10 6 in their entirety, it does not necessarily follow that interim advances can never be refinanced.  Rather, as pointed out by NAGGL in a recent webinar, it seems the Agency is striving to discourage lenders from splitting loans solely for the purpose of charging additional fees or dissuading them from charging fees to the borrower for an interim loan that will be refinanced with a 7(a) loan.

For more information regarding debt refinancing, contact the attorneys at Starfield & Smith at 215-542-7070.