One of the things I learned when I was a little lender was, “Never, not ever, even once ever, release a guarantor.” That was long ago. I’m all grown up now and still remember that maxim. And so the other day I tested the rule when Denise, her CDC’s servicing  manager called. How it went:

DENISE. Richard, Crabtree Enterprises has been one of those difficult borrowers. The owner, Mr. Crabtree, has routinely ignored requests for year-end financials and has sent us hazard insurance policies with the wrong named insured. When he finally sends financial statements, they’re always late, their net worth never reconciled, and the sum on the long-term debt schedule never equals the liability on the balance sheet. It’s a lot of work to clean this stuff up. You know the type: Mr. Crabtree’s loan payments are always current. But he is never, ever cordial. Now, he’s selling the building.

ME. Hooray! You must be thrilled to get Mr. Crabtree off the books.

DENISE. One small problem, Richard. The buyer wants to assume the loan. Oh, and Mr. Crabtree wants to release the additional personal and corporate guarantors of the old loan – all six of them and their spouses.

ME. First, let’s address what happens when the buyer assumes the loan. It’s been a while, so I’m dusting off SOP 50 55, Loan Servicing and Liquidation for 504 loans. Checking, checking … On page 34 it says, “A CDC may charge a fee to assume a 504 Loan …” And it refers us to SOP 50 10 7.1.

Now, you’ve told me that the Crabtree loan is current, the collateral value is probably at least constant, and that the buyer has decent credit, isn’t incarcerated, and has significant management experience. Also, Debt Service Coverage is acceptable. So an assumption would be reasonable, although a prepayment would eliminate the grouchy Mr. Crabtree. With an assumption, your CDC could keep the servicing fee. And SOP 50 10 7.1 allows the CDC to earn a point with an assumption. Not a bad deal. (2. Allowable Fees; pp. 60-61; 5) Assumption Fee, pg.61)

And about releasing those guarantors: That’s the tough one. SBA and I were” little lenders” together and learned the same lesson about releasing guarantors. If the loan is seasoned, and the release doesn’t diminish the likelihood of repayment, it’s reasonable to request the release of guarantees that were not required as part of SBA loan program requirements. So it’s reasonable to request the release of the guarantors.

Go ahead and tell Mr. Crabtree that you’re submitting the request to SBA for its review and approval. If the Agency approves, Who knows? Crabtree might be so happy he’ll bring your CDC more deals!

Richard Jeffrey, Senior Associate
CDC/504 Program