February 17, 2021
C-Suite Wednesday – Establishing Loan Maturities for Section 1112 Debt Relief Payments
Last Friday, the SBA issued a Procedural Notice which provides guidance on establishing maturities of new 7(a) loans eligible to receive debt relief payments under Section 1112 of the CARES Act.
For each new 7(a) loan approved beginning on February 1, 2021, and ending on September 30, 2021, the repayment schedule and the loan term must be established in accordance with the existing SBA loan program requirements. Therefore, Lenders may not intentionally shorten loan maturities so that Section 1112 payments cover all or a substantial portion of the loan.
The SBA expects Lenders to establish the repayment schedule and the loan maturity for new loans in the same manner as the Lender’s similarly-sized, SBA-guaranteed loans approved prior to the COVID-19 emergency. However, the Procedural Notice says Lenders may consider the availability of Section 1112 payments as part of their comprehensive review to determine their borrowers’ repayability for the entire maturity of the loan.
To ensure that the SBA will not, in effect, be providing a grant to the borrower, Lenders are prohibited from underwriting any new 7(a) Loan between February 1, 2021 and September 30, 2021 with a maturity that equals the number of months for which the loan is authorized to receive Section 1112 payments.
If the SBA determines upon later review of the loan that a Lender did not comply with SBA loan program requirements in establishing the loan’s maturity, the SBA may deny liability on its guarantee or otherwise take action against the Lender.
If the SBA guarantee is canceled after the loan is made due to character ineligibility, financial information verification issues, or for any other reason, any payments disbursed to the Lender prior to such cancellation must be promptly repaid to the SBA.