Some folks call me “the wise old man of SBA lending.” I’ve been around for a while, and this is the first time in my long, long SBA memory that the maximum 7(a) interest rate has changed. In fact, I was so taken aback that I made several calls to verify. It’s true.
As its title implies, SBA Notice 2022-13483 the Regulatory Reform Initiative: Streamlining and Modernizing the 7(a) Microloan, and 504 Loan Programs To Reduce Unnecessary Regulatory Burden, is a comprehensive reform package. It posted on the Federal Register on June 30, 2022 and is effective August 1, 2022. Note to CDCs and 504 lenders: this eBulletin is an FYI. I’ll address issues relevant to 504 lending in future eBulletins.
Now, let’s focus on what I believe is a first-time change in the maximum 7(a) interest rate. Don’t feel like plowing through the 11-page Notice for this section? Here’s a recap:
Bye, Bye, LIBOR. As you know, SBA has been allowing three methods for setting the maximum interest rate on a 7(a) loan: Lenders could use either the Prime Rate, the SBA Optional Peg Rate; or LIBOR as the base rate and add a spread. We’ve all known for some time that LIBOR is going away. SBA Notice 2022-13483 reminds us that June 30, 2023 is LIBOR’s final phase out.
After LIBOR, What? After LIBOR, What? No generally accepted replacement for LIBOR has been identified or widely adopted at this time. So 7(a) lenders are stuck with either Prime or the Optional Peg Rate to establish their interest rates. You can speculate that over the years a number of 7(a) loans have been authorized that set an interest rate of X basis points over LIBOR. Those loans will require Note Modifications before LIBOR sunsets in 2023. And if a loan has been sold in the secondary market, investors will also have to consent to a modification of the 7(a) Note.
Lots of Work to Do? Phew! When I first read this, I thought it was a sea change and everyone would be busy reviewing 7(a) Notes and checking the rates. However, SBA estimates that only 3% of SBA’s total portfolio of non-disaster business loans use LIBOR as a base rate. That still translates into thousands of loans, but it’s some relief.
Change in the Variable Rate Basis. In the same Notice, SBA announced that it will use loan amounts as the basis on which the variable interest rate is set, instead of loan maturities. Basically it means that the max rate will now be based on loan size
- $50,000 and less: Base + 6.0
- Greater than $50,000 and up to and including $250,000, Base + 6.0
- Greater than $250,000 and up to and including $350,000: Base + 4.5
- Greater than $350,000: Base + 3.0
This change applies to all 7a loans: SBA Express, Export Express, Community Advantage Pilot, and regular 7(a).
To quote another old philosopher, Bob Dylan, “The Times Are A-Changin’.” Indeed.