It happens every year about now. SBA sends out a notice, and immediately lenders ask us to translate it into ordinary English. At JRB we’re multilingual: We speak ordinary English and Bureaucrat-ese. Here goes:
Q: Richard: Help! I’m panicking here!! I just got SBA Information Notice 5000-19017 and it says that the servicing fee on our 504 loans is being reduced. I don’t understand. We planned on a servicing fee of 0.625% on our 504 loans. Now, SBA says that’s being reduced to 0.3205.%. This will hurt our income a lot!
A: As we tell our lending friends “Don’t panic. Keep calm and call JRB.”
Look closely at the notice. The CDC servicing is not being reduced. This fee is one component of the “All-in Rate” – what the borrower actually pays. So there are really three fees, all included in the borrower’s monthly payment:
CDC Servicing Fee. A CDC may charge anywhere from 0.625% to 1.000% servicing fee on its 504 loans. As a CDC, you may set your own servicing fee. While many CDCs charge 0.625%, many charge 1.000%. (Note: If you’re charging 0.625%, it might make sense to charge 1.000% on your new loans. It’s still a low rate for your borrowers.) Importantly, whatever servicing fee you choose at Authorization, that’s the fee your CDC will receive for the life of the loan.
SBA Servicing Fee. The revenue this fee generates helps subsidize the 504 program. Every year SBA calculates how much money it takes to subsidize the 504 program. Then the SBA servicing fee is re-calculated for loans originated that year. But the fee the borrower pays is set at the time of authorization and is fixed for the life of the loan. Let’s say your loan was authorized in FY 2019 and the SBA servicing fee was 0.368%. fixed for the life of that loan. But for loans you’re originating now, in FY 2020, the SBA servicing fee is 0.3205%. A drop of 0.0463% on a $1 million loan might save the borrower just under $500 a year, enough for a nice steak dinner at a Ruth’s Chris!
Central Servicing Agent (CSA) Fee. That fee is 0.10% and is fixed at the time the loan is authorized. While some time in the future that fee could change for new loans, it’s been 0.10% for years and years.
The Upshot. No reason to panic: your CDC servicing fee didn’t change. But you can raise it if you like. The SBA’s fee changed. And as a result, the loans you originate this year will be even better for your new borrowers. In fact, your borrowers will save enough for that nice, juicy steak.
Aren’t you glad you asked? Keep your questions coming.
Senior Associate CDC/504 Programs