Best Practices: Repurchasing an SBA Loan from the Secondary Market

An important and beneficial aspect of the SBA 7(a) Loan program is the lender’s ability to sell the guaranteed portion of an SBA Loan.  There is an active secondary market for loans backed by the federal government.  This allows lenders to increase their liquidity while also enabling lenders to issue more loans at the same time.  When a loan is sold on the secondary market, the parties enter into an SBA Form 1086 “Secondary Participation Guaranty Agreement” which dictates the terms and conditions of the sale of the loan.

When loans default and the note is accelerated, they may no longer stay in the secondary market. The SBA provides guidance as to when a Loan must be repurchased.  Per the SOP 50 57 (3), “At the time the Note is accelerated and the Loan is classified in liquidation, if the Loan was sold on the secondary market, the Lender must immediately either repurchase the SBA guaranteed portion or request that SBA purchase it.”  Once the loan has been placed in liquidation status (after the Loan has gone 60 days uncured delinquency), the Lender must then begin the process of the loan repurchase.

When requesting that SBA repurchase a loan, the lender must collect and submit certain documents to the SBA.  The lender must provide an SBA form titled “Request to Honor SBA 7(a) Loan Guaranty” which certifies certain information as to the Loan and the Guaranty and the documentation required.  Additionally, the SBA requires that the lender submit the following documents:

• Certified Transcript of Account– while it is not explicitly stated in the SOP, the preferred form for the transcript is the SBA Form 1149. Other forms, including internal Lender forms often contain impermissible fees that the SBA does not allow (i.e. late fees), and it can often delay repurchase while the Lender amends its forms, or transfers the information onto the SBA Form 1149;
• Copy of executed Loan Authorization– since the Loan Authorization is no longer required, it’s unclear if the Terms and Conditions will replace this requirement;
• Note– executed Note, and any modifications, and;
• Written Approval of Modifications– modifications approved by secondary market investor, if any.

When purchasing a loan off the secondary market, it’s important to keep in mind that the SBA will only pay up to 120 days of accrued interest. A lender must be cognizant of the timing and applicable deadlines because the Lender will be responsible for the interest accrued beyond 120 days that must be paid to the secondary market holder.

There is another important element that lenders should consider with respect to loans being purchased from the secondary market- the Guaranty Purchase Package due date.  If the SBA has repurchased the Loan from the secondary market, Lenders must submit a complete Universal Purchase Package (“UPP”) to the appropriate SBA Loan Center within 45 calendar days of the purchase. If the Lender repurchases the loan, then the lender must submit a UPP to the appropriate SBA Loan Center no later than 180 calendar days after the maturity date of the loan, or the date the lender completes the liquidation of a matured loan. If a lender doesn’t have confidence that it can prepare a UPP within 45 days of purchase, it may want to consider purchasing the loan itself, rather than asking SBA to purchase.

It is worth nothing that even if the note has not been accelerated, there are some emergency situations in which a lender would be permitted to repurchase the loan off the secondary market.  The SBA 1086 form states that “in certain critical situations in which Borrower’s ability to remain in business is directly dependent” on changes in the terms and conditions of the payment, the Lender may repurchase the Loan for the benefit of the Borrower.”  (Note: Guaranteed Interests purchased pursuant to this section may not be resold unless the Borrower has made all payments as scheduled in the Note for a period of twelve (12) months.)

Because of the rules and nuances of the secondary market, lenders must be aware of the procedures and requirements to participate in this program and must also be familiar with the SBA 1086 form and the requirements contained within.  Otherwise, it may find itself on the hook for payments it was not anticipating. Stay tuned as SBA anticipates releasing a new SBA 1086 this year.

Lenders seeking further guidance on secondary market sales and repurchases can contact the attorneys at Starfield & Smith at 215.542.7070 or info@starfieldsmith.com.