Best Practices: When Is Debt Current and Eligible for Refinancing?

Under 13 CFR §§ 120.140(j)(1) and 120.201 SBA-guaranteed loan proceeds may not be used to pay a creditor in a position to sustain a loss and the debt to be refinanced must be current for at least the last 12 months or for the life of the loan, whichever is less.  As defined on page 113 of SOP 50 10 8 “current” means that a required payment has not remained unpaid for more than 29 days. The SOP continues by stating “[a] loan that has matured and not been paid within 29 days of the maturity date is not current and is not eligible for refinancing.”    It should be simple to determine whether a loan is current or not, but there are certain circumstances when it may not be clear.

One scenario where it may not be clear that the existing loan is current is when a creditor approves a modification to extend the maturity date of the existing loan, but the modification documentation is not signed until after the 29-day time period has expired.  If no payment was made by the borrower during that time, the existing loan may not be considered current.  If the borrower has continued to make regular monthly principal and interest payments to the creditor before the modification was entered into even though the maturity date had passed, then lender may argue that the existing loan was current since at the time of application the maturity date was extended and loan payments were made without interruption for the past 12 months.

Another situation where lender may need to determine whether an existing loan is current arises when the creditor and borrower are parties to a forbearance agreement.  This type of agreement will be used when there has been a default under the loan documents and the creditor is refraining from exercising its legal rights, which may include acceleration of the payment of the debt.   The key to the analysis is why a forbearance agreement is needed.  If borrower defaulted under a financial covenant in the loan documents, the debt could be considered current.  If any part of the reason for the forbearance agreement is due to failure to make a required payment under that debt, the debt would not be considered current unless the forbearance agreement was entered into at least 12 months before the application and payments were made on time during those months.

Please remember that the SBA requires lenders to obtain copies of the loan documents for the existing loan to be refinanced with SBA loan proceeds, including all modifications or other agreements modifying its repayment terms, and proof of payments of such debt for the last 12 months for its file to ensure that the debt to be refinanced with loan proceeds is current.  For questions regarding the refinance of debt, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.