Best Practice: When to Repurchase from the Secondary Market

Determining next steps when dealing with an SBA Borrower that is in payment default can be challenging. If the loan is sold on the secondary market, decisive action becomes even more imperative. Proper SBA loan preparation makes sure that lenders are equipped with the necessary documentation to handle these high-stakes scenarios

Maintaining strict SBA compliance throughout the life of the loan is equally vital. Adhering to the specific guidelines set forth by the administration ensures that the guarantee remains intact and that the lender is prepared for the rigorous oversight that occurs when a loan enters a secondary market workout phase.

A loan servicing action is required on an SBA loan when: (i) the interest paid-to-date is more than sixty (60) days in arrears; or (ii) default in payment of principal and interest has continued uncured for more than sixty (60) days. For loans sold on the secondary market, Lenders may grant a one-time three (3) month deferment to a Borrower without the investor’s consent. Any interest rate adjustments, additional deferments or modifications require the investor’s approval. Any payments after the deferment period must be paid first to bring interest current, and then to principal. A challenge arises if the Borrower is unable to bring the interest payments on the loan current within the 120-day period from the initial date of default of the loan.

The SBA has the right to repurchase a loan from the secondary market at any time. According to Section 6.1 of the SBA Form 1086 Secondary Participation Guaranty Agreement, if a loan is in payment default, the SBA in consultation with the Lender, will decide on whether a deferment is appropriate, or determine whether Lender will be offered the option to purchase the guaranteed portion from the secondary market. However, the Lender purchase option expires once interest paid-to-date exceeds 120 days, at which point SBA will repurchase the loan from the secondary market.

Under SOP 50 57 4, the full amount of accrued interest owed to secondary market investors must be paid through the date of purchase. The Lender will be responsible for all accrued interest owed beyond 120 days. If the SBA pays more than 120 calendar days of accrued interest to a secondary market holder, it will seek reimbursement from Lender for the excess amount. Further, SBA reserves the right to offset guaranty proceeds paid against any excess interest amount due.

Once a loan is repurchased by SBA from the secondary market, SBA Form 750 Deferred Participation Agreement controls the Lenders ability to modify and liquidate the loan. The lender may be able to enter into a longer deferment or modification agreement, however, it is unclear whether the lender may modify a variable interest rate after purchase from the secondary market. 13 CFR 120.521 provides that the interest rate in effect at the time of the earliest uncured payment default, or the rate in effect at the time of purchase (where no default has occurred) is the interest rate that applies to a loan after purchase.

Historically, some SBA loans in workout have remained in the secondary market beyond the 120-day post-default period. Recently SBA has made a renewed effort to purchase loans promptly regardless of whether the investor has agreed to additional deferments or modifications in loan terms, leaving Lenders without much opportunity to cure the default through an established workout plan while leaving the loan sold in the secondary market. Further, SBA has been contacting lenders with excess interest due on defaulted loans requesting prompt repayment.

Against this backdrop, Lenders must implement their workout plans early and strategically keep in mind the 120-day cap which may prompt SBA intervention.

For more information about repurchasing loans from the secondary market, please contact Kim Rayer at krayer@starfieldsmith.com.