April 25, 2017
SBA Hot Topic Tuesday — Effective May 1 SBA to Require Specific Rate Adjustment Note Language in 7(a) Secondary Market Sales
By Bob Coleman
Editor, SBA Hot Topic Tuesday
SBA will require Colson to verify SBA 7(a) notes include the date of the first rate adjustment in order to complete the sale of the loan to the secondary market after May 1.
Lenders can comply with this policy requirement in one of two ways:
1) Put the exact date into the Note; or
2) (Calendar quarter as the change period) Lenders can enter language in the Note that clearly defines the adjustment date (e.g. beginning with the first calendar day of the calendar quarter following the initial disbursement [or date of the Note])
You should continue to include “the interest rate will be adjusted every calendar quarter (the “change period”)” and “Lender will adjust the interest rate on the first calendar day of each change period.”
Source: John Wade, Chief, Secondary Market Division, SBA
If you do not have this specific note language, Colson will accept a loan modification signed by the borrower and lender.
For example, you may have made an initial disbursement in March on a note without the required language. The loan will be fully disbursed in June. This note will require a loan modification if you wish to sell it to the secondary market.
There is another issue I am following. Some lenders have reported they are not able to obtain correct notes from SBAOne or the SBA 7(a) Loan Wizard. If you have this problem, the easy solution is to obtain a loan modification at closing. I’ll obtain more information as we get closer to May 1.
Anyway, I thought you would appreciate the balance of John’s correspondence with the Coleman Report. He wants to emphasize this is not a new requirement, and has been in the SOP for the past 20 years.
“I wanted to get back to you with reference points from the SOP on the disclosure of the first date of rate adjustment on a variable interest rate 7(a) loan.
“I’ve copied excerpts our current SOP and from SOP 50 10 4 dated Dec 1 1997 that reinforce the 6 elements to be disclosed in a Note associated with a variable interest rate. This is only to underscore the longevity of the policy.
“(from SOP 50 10 4, eff. Dec 1 1997)
INTEREST RATE REQUIREMENTS FOR AN SBA NOTE
a. Key Elements
The following elements must be included in the SBA note:
(1) Identification of the rate being used as the base rate;
(2) The publication in which the designated base rate appears regularly;
(3) The lender’s permanent percentage spread to be added to the base rate;
(4) The initial interest rate of the loan (from disbursement to first adjustment);
(5) The date of the first rate adjustment; and
(6) The frequency of rate adjustment, or interval.
“(from SOP 50 10 5 I, eff. Jan 1 2017)
F. Interest Rate Requirements for an SBA Note
1. Fixed rate loans—the lender must specifically state the interest rate in the Note.
2. Variable rate loans—the lender must include the following information in the Note:
a) Identification of the rate being used as the base rate;
b) The publication in which the designated base rate appears regularly (e.g. Wall Street Journal or the Federal Register if using the SBA Optional Peg Rate);
c) The permanent percentage spread to be added to the base rate;
d) The initial interest rate of the loan (from disbursement to first adjustment);
e) The date of the first rate adjustment; and
f) The frequency of rate adjustment.
“In a rising rate environment like we’ve observed this past 16 months, it is important for SBA borrowers to be aware of when a first rate adjustment will occur. The SBA Note is the form of agreement between borrower and lender where these terms and conditions must be disclosed.”