Best Practices: Interest Rate Changes Under “The Deregulatory Rule”

The Final Rule: Regulatory Reform Initiative: Streamlining and Modernizing the 7(a), Microloan, and 504 Loan Program to Reduce Unnecessary Regulatory Burden (87 FR 38900, commonly known as the “Deregulatory Rule”) became effective on August 1, 2022. The purpose of the Deregulatory Rule is twofold: (1) to remove or revise regulations that are obsolete, unnecessary, ineffective, or burdensome; and (2) to make technical amendments to regulations to incorporate recent statutory changes and other non-substantive changes. The SBA is working on updating the SOP 50 10 6 to reflect the changes made by the Deregulatory Rule, so if there is a discrepancy between the two, please follow the provisions contained in the Deregulatory Rule.

Some of the changes included in the Deregulatory Rule relate to interest rates that can be charged under 13 CFR §120.214 as follows:

LIBOR:

• • LIBOR is removed as a base rate option for variable interest rate 7(a) loans.

• • Lenders may only use Prime or Option Peg Rate as the variable interest base rate (“Base Rate”) for loans approved beginning August 1, 2022.

• • If an alternative rate becomes available, the SBA will announce such alternative by providing notice in the Federal Register.

• • Lenders who already have loans outstanding whose interest rates are based upon LIBOR should work with their borrowers to modify loan documents to revise interest rate to one of the allowed base rates before June 30, 2023.

• • • Please remember that if the loan has been sold on the secondary market, the lender will have to obtain the consent of the investors to modify the Base Rate from LIBOR to an alternative acceptable base rate.

Maximum Variable Interest Rates

Loan amounts, instead of loan maturities, shall be used as the basis for maximum variable interest rates for all 7(a) loans as follows:

• • $50,000 or less: Base Rate + 6.50%

• • $50,001 – $250,000: Base Rate + 6.00%

• • $250,001 – $350,000: Base Rate + 4.50%

• • $350,001 and greater: Base Rate + 3.00%

Community Advantage Pilot Program Lenders may adopt these interest rates.

SBA Express and Export Express:

• • Lenders may who make these loans may continue to use the same base rates, change intervals, payment accruals, and other interest rate terms used by such lender on its similarly-sized non-SBA loans, but the initial rate must not exceed the SBA’s applicable maximum interest rate.

• • These loans may be sold on the secondary market so long as the base rate is one of the base rates allowed under 13 CFR §120.14(c).

Please make sure that your lenders, underwriters, and closers who originate, approve, and assist with loan closings are aware of these important interest rate changes so your guaranty from the SBA will not be in jeopardy. For more information, contact the attorneys at Starfield & Smith, P.C. at 215-542-7070.