Best Practices: Secondary Market Sales

It has been a longstanding rule that a lender cannot sell a loan on the secondary market if it is not fully disbursed. However, changes in the most recent versions of the SOPs have clarified SBA’s position regarding certain loan structures that utilize loan splitting and multi-disbursement loans and secondary market sales.

Guidance for secondary market sales previously were covered under SOP 50 10. With the issuance of the new SOP 50 56 and SOP 50 10 7.1, these provisions were moved to SOP 50 56, which covers Lender Participation Requirements.

SOP 50 56 indicates that before a loan can be sold, a lender must certify that the loan “is fully disbursed (a loan is considered to be fully disbursed and may be sold on the secondary Market when the Borrower has access to all of the loan proceeds and is able to use them in accordance with the terms and conditions digitally entered in E-Tran).”

Historically, some lenders have found that if a project is too large to be handled at one time, the best way to proceed is to split a project into two components. An example of this would be a project in which one loan is used to purchase real estate and the second loan is used for construction. However, lenders must be cautious with using this structure moving forward.

SOP 50 56 contains a new provision that was never in SOP 50 10 when the secondary market guidance was covered in the closing SOP. SOP 50 56 states:

The Lender may not split a loan for the purpose of selling a loan in the Secondary Market before the funds to complete the project are fully disbursed and the project has been completed. For example, a Lender may not make one loan to acquire real estate to sell in the Secondary Market and then make a second loan for construction.

Since SBA is explicitly indicating that the real estate purchase/construction loan split cannot be used to accelerate a secondary market sale of the real estate purchase loan, lenders must consider their procedures with respect to these types of split loans prior to selling them on the secondary market.  This doesn’t necessarily mean that a lender can’t split a real estate purchase and a construction loan, but rather, that the real estate purchase loan should be held by the lender and not sold on the secondary market until such time as the construction loan is fully disbursed.

Lenders should be aware that this doesn’t indicate that other loan types can’t be split, or even that certain loan splits can’t be sold. The only prohibitions in the SOP 50 10 7.1 regarding loan splits are when they are done in order to charge an additional fee or a higher interest rate. So, for example, if a lender splits a term loan used for a change of ownership with a smaller line of credit that will be used for working capital, this is both permissible and the lender could sell the term loan used for change of ownership, provided it met all other criteria needed to do so.

For more information on secondary market sales as covered by the SOP, contact Jessica Conn at jconn@starfieldsmith.com or 215-542-7070.