In order to improve collateral coverage, lenders are often required to take real estate collateral owned by guarantors to secure their SBA loans. These liens tend to be junior in nature to first priority purchase money mortgages used originally by the guarantors to acquire the property. With low mortgage rates during the past few years, or to get equity out of these properties, many guarantors are selling their residences and purchasing new properties, or refinancing their current mortgages. While permissible, these actions require prior approval of a servicing request from the borrower soliciting either to subordinate a lien behind a new first mortgage lender, or to release and record a lien against the same real estate, or to substitute collateral with new real estate purchased with proceeds from the sale of the previously encumbered property. How should a lender best protect their SBA guaranty when they receive such a request?
Lenders have several options for responding to these types of servicing requests from a guarantor. Ideally, if the guarantor is refinancing real estate on which the SBA lender presently has a lien, agreeing to subordinate the lien is the safest way to respond to this request, for a lender would not have to release their lien or obtain a new mortgage from the guarantor. However, in some cases, the new lender may not permit a subordination. If the guarantor is refinancing their first mortgage and the new mortgage company will be using a title company to close on the refinance, the SBA lender can provide a release if the title company will agree to record the SBA lender’s new mortgage immediately after they record the new first mortgage. In those cases, a letter from the SBA lender to the title company outlining this arrangement and confirmation, following the closing of the refinance, may be enough to protect the SBA lender.
In cases where the title company does not agree to handle recording the new mortgage for the SBA lender, the SBA lender will need to decide if they are comfortable agreeing to provide a mortgage release if the guarantor commits to execute and deliver a new mortgage in favor of the SBA lender. There is some risk that the guarantor may not provide the replacement mortgage following the mortgage release being recorded. Lenders can mitigate this risk by requiring the guarantor to sign a loan modification agreement in which the guarantor agrees not to permit any intervening liens to be recorded on the real estate, or a recordable agreement not to encumber. The guarantor would be in technical default under the SBA loan if they fail to provide the new mortgage.
Another scenario is a guarantor wanting to sell a property and purchase a new property and provide a new lien on that real estate. Again, this can be tricky for an SBA lender. One way of handling this situation is for the SBA lender to require the proceeds from the sale of the property to be escrowed with the SBA lender and only released when the closing for the new property is to occur and the guarantor has executed a new mortgage in favor of the SBA lender.
Lenders should act prudently in addressing all servicing requests to minimize the chance that the lender loses their lien on collateral which may result in a repair to the SBA guaranty in the event of a loan default. For assistance with SBA loan servicing matters, please visit our website or contact us at 215.542.7070.