Whenever SBA sends out a new notice or issues a new reg, our JRB Team gets busy. Lately, we’ve been real busy answering questions about the new Information Notices regarding SBA loan fees for the next fiscal year. I’m following up last week’s eBulletin regarding 7 (a) loans, SBA Information Notice 5000-180010, with specific information about Information Notice 5000-180011, which addresses the 504 program. Both Notices are effective FY 2019, October 1, 2018 thru September 30, 2019.
The first question coming our way: “Could you translate this in layman’s language?” That’s our favorite thing to do. But first, some background.
The 504 program is not subsidized by tax dollars. Instead, it is subsidized by fee income. Every year SBA adjusts the fees based on what it forecasts the subsidy rate will be. Fees generated are to cover the cost of any losses SBA anticipates it will sustain.
The Notice’s first change announces a 0.5% (50 basis points) up front guaranty fee. This seems huge! For years there has been no “guaranty fee” for 504 loans. But starting October 1, SBA will charge a guaranty of 0.5% on the net debenture portion. As I said, that seems like a huge change. But, it gets better with the next change: SBA is reducing its “servicing fee” from 0.624% to 0.368% (0.395% for 25 year loans).
That’s what the Notice says. But what does it do? Here’s an example:
Let’s say you have a $1 million net debenture. Your CDC charges a $2,500 closing fee. The debenture your CDC will issue includes that fee, along with the funding fee, processing fee and underwriter fee. So your debenture will round off to $1.025 million. But for loans you get approved after September 30, 2018, that debenture will now be $1.03 million.
Wait! Don’t panic. Because things get better. Right now your borrower would pay $7,185.18 a month on that loan. But with the change in servicing fee starting October 1, your borrower will pay less: $6,985.05. These amounts for the first five years for 20-year loans are rough calculations, yet they demonstrate that the change is minimal, and actually will benefit the borrower.
Of course you’ll hear noise about 504 loan fees increasing. But don’t you believe it. In fact, you can explain it now in layman’s terms.
Keep your questions coming. We love ’em!
Associate CDC/504 Program