A deferment is a way by which a lender can temporarily reduce monthly payment amounts or completely suspend said payments for a brief period of time. When used correctly, a deferment can assist the borrower with cash flow improvement so that it can resume its normal monthly payments to the bank upon expiration of the deferment term. Conversely, when used inappropriately, a deferment can harm the borrower, the lender and the SBA.
According to the SOP 50 57 3 (“SOP”) and 13 C.F.R §120.530, when a borrower has encountered temporary cash flow problems, the bank may defer, or otherwise postpone, any delinquent payments without accelerating the Note or transferring the loan into liquidation status. Although during the deferment period the interest will continue to accrue on the loan, a temporary halt of the P&I payments oftentimes offers a lifeline for the borrower to resolve the source of its cash flow problems. In order to make a prudent decision on whether or not to grant a deferment, lenders should analyze and review borrower’s financial information to make sure that borrower’s business is financially viable and the problems facing the borrower are only temporary and will not harm the borrower, the lender or the SBA (e.g., devaluation of collateral or depletion of borrower’s resources during deferment period).
Lenders have unilateral authority to grant deferments for up to six (6) months when the SBA loan has not been sold in the secondary market. During this deferment period, lenders should monitor borrower’s business operations through phone calls, site visits, monthly financial statement review, etc. The purpose for this type of monitoring is to enable the bank to determine whether an additional deferment period may be necessary and consistent with its prudent services practices to resolve borrower’s temporary cash flow problems. Although, generally, deferments should not exceed six (6) cumulative monthly payments, the SOP allows for additional deferments, but only if the bank can prepare and document a repayment strategy to justify a deferment term that exceeds six (6) months.
For SBA Loans that lenders have sold in the secondary market, a one-time deferment of 3 months is allowed without consent from the investor. Furthermore, if such deferment is granted, the lender must immediately send the notice of the deferment to the Fiscal Transfer Agent (“FTA”) and the SBA Loan Center. Moreover, any additional or subsequent deferments may not be unilaterally granted by the bank and will require prior written consent from the investor.
Interest continues to accrue during the deferment period. Unless the borrower makes interest payments during the deferment period, the accrued interest must be paid in one of the following three ways when the deferment period ends: (i) the borrower may pay the accrued interest in a lump sum; (ii) the loan payments may be increased for a short period of time to allow the borrower to catch-up to the original amortization schedule; or (iii) the borrower may make the same scheduled pre-deferment monthly payments which must be applied first to interest, and then to principal. If a lender opts for option (iii) above and a subsequent re-amortization would result in a higher payment, the lender must assess whether a change to maturity date is needed in addition to the deferment to allow for orderly repayment of the loan. This new language implies that a lender must be mindful of whether a borrower can manage the increased payment and consider an extension of maturity if the borrower cannot. In all cases, lenders may not capitalize or add accrued interest to the principal balance of the loan. For more information of SBA loan deferments, please contact the attorneys at Starfield & Smith, P.C. at 215-542-7070 or email us at email@example.com.