Navigating the financial landscape of SBA 7(a) lending requires a precise understanding of allowable fees and expenses and prohibited charges. For lenders, clarity on fee structures isn’t just about pricing a loan correctly. It’s a fundamental component of maintaining the SBA guaranty. Misclassifying a fee or overcharging a borrower can result in a repair or, in extreme cases, a full denial of liability by the Small Business Administration. This guide breaks down the essential cost categories to help you manage compliance and borrower expectations effectively.

The Importance of Fee Compliance

The SBA 7(a) program offers significant benefits to lenders, primarily through the government guaranty. However, this benefit comes with strict regulatory oversight regarding what can be charged to the borrower.

The SBA Standard Operating Procedures (SOP) dictate exactly which fees are permissible. If a lender charges a fee that isn’t authorized, they risk a compliance finding. This could lead to a refund requirement or a threat to the guaranty itself.

Transparency is your greatest asset here. When you clearly outline costs for your borrowers, you build trust and ensure a smoother closing process.

The SBA Guaranty Fee

The most significant cost in many 7(a) loans is the SBA Guaranty Fee. This is a fee paid to the SBA for the privilege of receiving government backing. While the lender is technically responsible for paying this to the SBA, it is almost always passed on to the borrower.

The fee amount depends on the gross loan amount and the maturity term. The SBA reviews and publishes these rates annually, usually effective at the start of the fiscal year in October.

Short-Term Loans (12 Months or Less)

For loans with a maturity of 12 months or less, the fee is generally much lower. This is typically 0.25% of the guaranteed portion of the loan.

Long-Term Loans (More than 12 Months)

For standard term loans, the fee structure is tiered based on the gross loan amount:

• Loans of $150,000 or less: These historically carry a 2% guaranty fee, though this is subject to annual fiscal notices.
• Loans from $150,001 to $700,000: The fee is typically 3% of the guaranteed portion.
• Loans from $700,001 to $5,000,000: The fee structure becomes a blend. It’s usually 3.5% of the guaranteed portion up to $1 million. For the guaranteed portion over $1 million, the rate increases to 3.75%.

You must recalculate this fee if the loan amount changes prior to funding. An error in this calculation is a common processing mistake that can cause headaches during audits.

Permissible Lender Fees

Unlike conventional commercial loans, you cannot simply charge an arbitrary origination fee or “points” to increase yield. The SBA prohibits origination fees. However, you are allowed to charge for specific services and actual costs incurred.

Packaging Fees

You may charge a reasonable fee for packaging the application. This covers the time spent assisting the borrower with the specific SBA forms and structuring the credit.

• The fee must be reasonable and customary for the market.
• It must be disclosed on SBA Form 159 (except lender charged packaging fees up to $2,500)
• If you hire a third-party Agent, such as a broker or referral agent, their fee is also subject to these disclosure rules.  Additionally, third-party agents may not be paid by both the borrower and the lender (the “two-master rule”).

Extraordinary Servicing Fees

If a loan requires monitoring of construction or accounts receivable, you may charge an extraordinary servicing fee.

• This fee isn’t for “standard” or “routine” loan servicing.
• It must be tied to specific, higher-touch monitoring activities, such as construction, or asset-based lending.
• The expense must be documented and aligned with SOP guidelines.

Out-of-Pocket Expenses

Lenders can pass direct costs to the borrower. This includes filing fees, search costs, recording costs, and overnight delivery charges. You cannot add a markup to these costs.

Legal Fees and Closing Costs

Legal representation is a critical part of the 7(a) process, especially for complex transactions. It’s critical to have the advice of an SBA lender legal adviser at your disposal. The SOP allows lenders to charge the borrower for their legal fees associated with closing the loan.

Inside vs. Outside Counsel

• Outside Counsel: You can charge the borrower for the hourly fees of an outside law firm like Starfield & Smith. These fees must be for services actually performed and must be documented and reasonable.
• Inside Counsel: You can rarely charge for the time of your own in-house salaried attorneys. The SBA typically views this as part of the lender’s overhead, unless specific criteria are met which are often difficult to justify.

Using specialized outside counsel ensures that the diligence and closing documents comply with the latest federal requirements. This is a direct investment in the safety and soundness and enforceability of your guaranty.

Third-Party Report Costs

Due diligence is non-negotiable. The costs for these investigations are the responsibility of the borrower, but the lender usually orders the reports to ensure independence.

Appraisals

Real estate and equipment appraisals must meet USPAP standards. The full cost is passed to the borrower.

Environmental Reports

Whether it’s a Records Search with Risk Assessment (RSRA), a Phase I, or a Phase II, environmental due diligence is mandatory for commercial real estate. These costs are fully recoverable.

Business Valuations

For loans involving a change of ownership, a qualified business valuation is often required. The cost varies based on the size of the transaction but is a standard borrower expense.

Budgeting and the Sources and Uses

Properly documenting these fees starts with a “Sources and Uses” analysis. This document acts as the financial blueprint for the transaction.

Every dollar must be accounted for. The “Uses” side should list:

• Loan payoff amounts
• Working capital
• Construction and/or renovation costs
• Equipment purchases
• Real estate purchases
• Business acquisition
• Closing costs (including legal, guaranty fee, and third-party reports)

If the fees are not listed in the terms and conditions of the settlement sheet, you cannot charge them. Accuracy here is vital for the 10-Tab liquidation package if the loan ever defaults.

Common Fee Structures Breakdown

The following table provides a quick reference for which party typically bears the cost in a standard SBA 7(a) transaction.

Fee Category	Responsibility	Notes
SBA Guaranty Fee	Borrower	Technically a lender obligation, but passed to the borrower.
Origination Fee	N/A	Prohibited by SBA.
Packaging Fee	Borrower	Must be reasonable and disclosed on Form 159.  Lender packaging fees only require a 159 if over $2,500
Legal Fees (Outside)	Borrower	For loan closing services. Must be hourly and reasonable.
Appraisal and Business Valuation	Borrower	Real estate, equipment and businesses to be acquired.
Environmental	Borrower	Phase I, RSRA, etc. for commercial real estate
Title Insurance	Borrower	Required for commercial real estate collateral.
UCC Searches	Borrower	Verification of lien priority.
Broker Fees	Borrower	Fees for finding the loan. Subject to limits and the two-master rule

 

Prohibited Fees and Pitfalls

Lenders must be vigilant about avoiding prohibited charges. The SBA is aggressive in protecting small business owners from predatory practices.

Do Not Charge:

• Points: You cannot charge points for the loan.
• Bonus Points: You cannot charge a fee for the “privilege” of getting a loan.
• Renewals: You generally cannot charge a renewal fee for an SBA loan.
• Prepayment Penalties (Lender side): You cannot charge your own prepayment penalty. The SBA has its own prepayment subsidy recoupment fee (5%, 3% and 1% in years 1-3) for loans with a term over 15 years, but the lender cannot add an additional or  separate fee.
• Default interest: SBA does not allow lenders to charge a default interest rate.
• Two-Master Rule Violations: SBA does not allow a referral agent (or broker) to be paid by both the borrower and the lender for the same services.

Q&A: Common Lender Questions

Can we charge a flat fee for legal costs?

No. You generally cannot charge a flat fee that exceeds the actual cost of the legal services. If you charge a flat $3,000 but the attorney only billed $2,000, you must refund the difference. You can only recover actual expenses incurred.

What happens if we overcharged the Guaranty Fee?

You must refund the borrower immediately. If the SBA discovers this during a review, it will be cited as a deficiency. It’s vital to recalculate the fee based on the final funded amount as indicated in ETran.

Can we finance the fees into the loan?

Yes. Most closing costs, including the SBA Guaranty Fee, legal fees, and packaging fees, can be included in the loan principal. This helps the borrower preserve their cash flow.

Are there exceptions for Veteran-owned businesses?

Yes. The SBA periodically offers fee relief for Veteran-owned small businesses. You should always check the current fiscal year notices to see if the borrower qualifies for reduced guaranty fees.

Who pays the fee if a loan is withdrawn?

You typically cannot charge the borrower the SBA Guaranty Fee if the loan does not close. However, you may be able to collect a deposit to cover out-of-pocket costs like appraisals and legal drafting incurred prior to the withdrawal.

Strategic Considerations for Lenders

Managing fees effectively is about balancing profitability with compliance.

• Standardize Your Process: Use a consistent fee sheet for all 7(a) loans to ensure you treat all applicants fairly.
• Document Everything: Keep invoices for every third-party report and legal bill in the loan file.
• Use Form 159: This form is the “source of truth” for agent and lender fees. Ensure it matches your settlement sheet exactly.
• Consult Counsel Early: If a borrower questions a fee or if a transaction has an unusual cost structure, get legal advice before closing.

Partnering for Compliance

The nuances of SBA 7(a) fees can change with every fiscal year and every new SOP issuance. Lenders need a partner who watches these changes daily. Starfield & Smith provides the legal support necessary to navigate these financial regulations. We ensure your fee structures are compliant, your documents are solid, and your guaranty is secure.

Do not leave your compliance to chance. Contact Starfield & Smith today to review your SBA lending procedures and ensure your team is ready for the next fiscal year.