Best Practices: Loan Servicing Request to Substitute Real Estate Collateral Part 2

Our June 15, 2022 article discussing servicing requests involving real estate collateral for SBA loans generated spirited discussion and feedback from several readers. See Best Practices: SBA Loan Servicing Request to Substitute Real Estate Collateral | Starfield & Smith Attorneys at Law (starfieldsmith.com). At the time of our prior article, due to the low interest rate environment, servicing requests to allow a guarantor to sell a current residence and move to a new residence and substitute that new real estate as collateral for the SBA Loan, or refinance their first mortgage on currently pledged real estate were an everyday occurrence for SBA lenders servicing their SBA portfolios. The same day that we ran our article, the Federal Reserve raised interest rates 75 basis points, and there have been two additional interest rate increases in both July and September. The impact of the increase to interest rates has resulted in a slowdown in real estate collateral servicing requests by guarantors.

Some feedback following the last article expressed concern regarding requests for a release and re-record where the new lender may be selling their loan to Fannie Mae or Freddie Mac and a subordinate lien being re-recorded by the SBA lender may be violating the terms of these programs. In discussing options regarding real estate servicing requests in our last article, the main take away should be that any time a lender is faced with a servicing request, the lender needs to evaluate these requests on a case by case basis so that the lender fully understands the request and responds accordingly.

If a lender reviews a servicing request, specifically a release and re-record request, and a lender has concerns that there are red flags with the request, a lender can decline to approve that servicing request, especially if the lender believes that the request will result in a violation of another government program. A SBA lender has a right to ask questions of a guarantor, and their potential new lender, to verify whether a subordinate lien will violate the terms of the new loan being made.

As a matter of course, lenders try to find an acceptable resolution for all parties in the case of a real estate collateral servicing request. However, if the lender feels uncomfortable with a servicing request the lender has every right to ask more questions, review the terms of the potential new loan including whether the loan documents permit a subordinate lien, and deny a request that the lender determines will jeopardize its lien position on the real estate collateral or does not comply with other banking rules and regulations.

For additional information pertaining to real estate servicing requests, or general SBA assistance, feel free to contact our firm at 215.542.7070.