Interest Rates: Key Topic at NADCO’s SPRING SUMMIT 22 May 15-18
It happens to the best. Dave has been running his CDC for more than twenty years, yet he’d never run into a situation like today’s: With the steep increase in interest rates, all sorts of newly authorized borrowers want to cancel their Authorizations.
DAVE’S COMPLAINT. Three months ago I had so many applications, I needed help underwriting them all. Now I need help just trying to cancel Authorized loans. Some of these authorizations are ready for the next debenture sale. What do I do?
MY TAKE. Indeed, what should Dave do? Dave shouldn’t be hasty to cancel the authorization. He should remind his borrower of the benefit of fixed-rate financing. Today’s fixed rate is under 6%, a historic low. If the borrower had a variable rate instead, over a 25-year loan term, it’s likely the rate would be higher than today’s rate. And there was a reason this borrower chose a fixed rate to begin with: He probably chose a fixed rate on his home loan to make it more likely that he could afford the mortgage payments over time. Same with the business loan. Reminding the borrower of all that might lessen the sticker shock.
But Dave’s borrower insisted on cancelling. Using SBA’s provision for cancelling an authorization shouldn’t be Dave’s next step. Dave should review his paperwork. The CDC is allowed to take a deposit of $2,500 when it begins underwriting and earns a fee of 1% when the loan is authorized. Dave’s CDC can collect its 1% fee from the borrower at the time of authorization, and his CDC should have a Deposit Agreement or Loan Agreement specifying that. When the loan funds, the proceeds pay the 1.5% processing fee, and the CDC must refund anything over the 1%, less actual costs. The CDC keeps its 1% regardless of whether the loan funds.
Dave agrees that a Deposit Agreement is a dandy idea and he’ll use one in the future. But in this case, there’s no Deposit Agreement, and his CDC hasn’t used one. So now what?
IT TAKES A TEAM. JRB Senior Associate Sandy Mortan is expert on many things, including 504 loan funding. I called on his expertise.
AND SANDY SAID … Dave should first check the “pull date” listed in the funding schedule. The pull date establishes the drop-dead date for pulling a loan from the debenture funding pool. It precedes the date the debenture pool is formed and sold to investors. It’s normally invoked when there has been an unremedied material adverse change, although it’s applicable if the borrower wants to cancel.
Importantly, Dave must check the interim loan documentation. He should determine if the TPL will convert the interim loan into a permanent loan and if so, what are the terms? Once all the facts are determined, the borrower will be able to compare his options. If the TPL isn’t able to convert the interim, and if the 504 loan will not be funding, the unexpected result may be a demand for payment in full.
Being proactive and discussing the rate environment with a borrower prior to closing may avoid “rate shock.” Eagle Compliance LLC publishes a weekly market commentary, a good source of info that can be used in the discussion with the borrower.
REASON FOR CONCERN? NOT REALLY. Finally, I reminded Dave that expanding businesses always need capital. Selling a loan product based on low interest rates is always a gamble. Sometimes capital costs more than at other times. But a lender like Dave with a well-established presence in the market and consistent marketing built on 504 loan program advantages shouldn’t fear the interest rate market.
NADCO SPRING SUMMIT 22. “Together Toward Tomorrow.” We’re heading to NADCO’s Spring Summit in D.C. May 15-18. The interest rate environment is a scheduled key topic. One of many in a weighty agenda. We look forward to informative discussions. And importantly, we look forward to The Topics of the Day: modernization and planning for the future of our industry. If you’re attending NADCO, we hope to see you there. As always, stay tuned for our full Spring Summit wrap up.