As an SBA issues guy I have a low entertainment threshold. So you can imagine my delight to open the Federal Register to find SBA’s newest Final Rule. I was like a ten year old kid opening my birthday presents. Yippee! Just what I always wanted. SBA’s Final Rule on 504 Debt Refinancing as published in the Federal Register on Oct. 12, 2023 and effective Nov. 13, 2023. What a fortunate man I am!
So what’s there? Some same old, same old, from the Interim Final Rule (07/29/2021), and some changes: Among them, the Final Rule eliminates the requirement that a lender verify that it’s unwilling or unable to modify an existing 7(a) loan for a 504 refi; requires only an advance notice be given to a 7(a) lender if its loan is going to be refinanced; and adds subsidy recoupment fees to prepayment penalties and other financing costs to the amount being refinanced determining substantial benefit. Stay tuned for an SBA Notice and follow-up training on the changes. I encourage you to read the Notice in its entirety.
As luck would have it, I was already dealing with a 504 refi of a 7(a) because several of our savvy CDC clients have been processing 504 loans to refinance 7(a) loans due to the recent escalation in 7(a) interest rates. While 504 rates also have increased, their SBA borrowers want to take advantage of the fixed rate in the 504 Refi Program. Interested? If so, here are some things to look for and issues that come up when using a 504 to refi a 7(a):
- First, there’s the issue of collateral. When refinancing a 7(a) with a 504, SBA expects the new collateral to be the same as the old, regardless of appreciated value.
- Another issue arises when the 7(a) lender required the applicant to pledge any asset it ever thought about owning in the mistaken belief that SBA required the hypothecation of everything always, and not just to the point of being secured.
Now that the borrower wants to refinance with a 504 loan, it is likely that the value of collateral has increased since the 7(a) was originated. That’s nice. But the 504 lender still has to lien it.
- What about the excess collateral taken at the time of origination? The 504 lender doesn’t need to lien it if it can show that the 7(a) lender originally took a lien in “an abundance of caution,” i.e., that the 7(a) lender would have made the loan without the collateral in question, but took a lien on it anyway, just because.
So how to prove abundance of caution? If you’re lucky the 7(a) lender’s original credit memo clearly says that a lien is being taken in an “abundance of caution.” That would settle it. Except, don’t expect that any lender will put language in an Authorization or commitment letter stating that it is taking a lien “just because” (in an “abundance of caution”) or admit that they recorded a blind deed of trust on a residence or didn’t perform a standard title search.
What’s the solution? Keep the existing liens. The borrower has been managing business growth despite them. And if in the future it’s found that one or more liens is inhibiting your borrower’s growth, then ask SBA to waive, modify or release that lien.
Still interested? Got questions? We can answer your questions and guide you through the process. Your borrowers will thank you for it! Contact JRB.