Best Practices: Servicing Subordination Requests

After loan disbursement, SBA lenders are often asked by borrowers to subordinate the position of a lien securing an SBA loan.  Lenders must consider these subordination requests in the context of Prudent Servicing actions as set forth in SBA’s Servicing and Liquidation SOP 50 57 3 (the “SOP”).  Generally, the borrower must demonstrate satisfactory credit history, show the ability to repay all obligations outstanding after the proposed subordination, the subordination must be limited to a specific amount and be in writing signed by all relevant parties, and the collateral must retain sufficient equity after the subordination to adequately secure the SBA loan.  This article will explore several common subordination scenarios and considerations for lenders in addressing these requests.

Subordination to Facilitate Refinancing of a Senior Loan

The SOP states lenders should not subordinate the position of a lien securing an SBA loan to facilitate the refinancing of an existing senior loan unless: the terms are favorable to the borrower, there is no increase in the principal balance of the senior lien except for necessary, reasonable, and customary closing costs, the borrower shall not receive proceeds from the refinance, and the SBA’s lien position will not be adversely affected.  A complete financial analysis may not be required when the borrower has been making timely payments on the SBA loan and refinancing provides favorable terms for the borrower.

Subordination to Facilitate a New Loan

In cases of a new loan to the borrower, lenders should not subordinate its lien position securing its SBA financing unless the new loan is needed to satisfy a legitimate business need such as paying for improvements to the collateral that will maintain or increase its value and all other options to obtain financing have been exhausted.

Intercreditor Agreements

For requests from other creditors seeking an agreement with the SBA lender to address lien positions, rights and liabilities of each creditor against a borrower’s collateral, lenders need to determine whether such agreement would adversely impact the lien securing the SBA loan, any change in the SBA lender’s rights and responsibilities concerning servicing and remedies in the event of default should be consistent with Prudent Servicing practices, and there should not be any adverse impact to the SBA lender’s ability to recover payment on the SBA loan.

In all cases with servicing requests, lenders must carefully document their file with the borrower’s request, all supporting documentation (including required due diligence such as appraisals, updated lien searches, etc.), lender’s analysis of the request (which may include a financial analysis when appropriate), and when needed SBA’s approval or clear documentation by citation to the current Servicing and Liquidation Matrix to support any decision made.

For assistance with SBA loan servicing and liquidation matters, contact the attorneys at Starfield & Smith, PC at info@starfieldsmith.com.