Last October, SBA added a new provision to its SOP prohibiting lenders from using a 7(a) loan to “refinance a short-term obligation that was created with the intent of refinancing it with a 7(a) loan.” SOP 50 10 6, Part 2, Section B, Chapter 1, Paragraph A.1.b.iii., page 228. The change in the SOP was intended to eliminate excessive fees charged to borrowers on these short-term loans; however, the provision created confusion among lenders. Many interpreted the language as precluding the use of an SBA-guaranteed loan to refinance any short-term loans which were originally made with the intention of being refinanced with a 7(a) loan. To eliminate this confusion, SBA issued SBA Policy Notice 5000-814473, Effective September 8, 2021. The Notice clarified those circumstances when short-term conventional loans, originally made with the intent of being refinanced with an SBA loan, may subsequently be refinanced with a 7(a) facility.
First and foremost, only same institution, short-term financing is eligible for refinancing with an SBA-guaranteed loan. Provided the lender makes a determination that there is a valid business reason and need for an interim loan, a lender may make a short-term interim loan which may be refinanced with a subsequent SBA loan. Like most determinations under general SBA principles, the determination must be borrower-centric and not for the benefit of the lender. The interim loan is made at the lender’s risk.
The SBA goes on to define a short-term loan as one being 12 months or less. Fees charged to the borrower on the interim loan may not be “prohibited fees” such as commitment fees, origination fees, application fees or points. If prohibited fees are charged to the borrower on the interim loan, they will need to be refunded to the borrower at the time of the refinance. Additionally, the total of all fees charged to the borrower for the interim loan and the SBA-guaranteed loan may not exceed the SBA’s maximum allowable fees.
Not unlike any typical SBA refinancing, the collateral securing the interim loan must be the same as the collateral for the SBA loan and in the same lien position, unless the loan is otherwise fully secured. The interim loan must be current at the time of the refinance and being paid as agreed. Finally, the interest rate on the interim loan may not exceed SBA’s maximum allowable rates. As with any prohibited fee, excessive interest collected must be refunded to the borrower at the time of the refinance.
Going forward, a lender may be able to help a borrower with a short-term bridge loan where the borrower is facing an undesirable outcome, even when the lender intends to approve an SBA-guaranteed loan, provided it complies with all of the foregoing requirements. Lenders must document and retain in their files all information regarding the need for the short-term interim financing, as well as the interest and fees charged. For more information regarding refinancing interim advances, contact the attorneys at Starfield & Smith at 215-542-7070.