June 19, 2013
By Jessica L. Conn, Esquire
Starfield & Smith, PC
When SBA introduced the streamlining documents for the 504 Loan Closing process, significant changes were made to the Third Party Lender Agreement. While many of these changes were simply clarifications, some change the substance of the certifications and covenants made by third party lender. It is important that all third party lenders know what they are agreeing to by executing this new form.
In the first paragraph of the Third Party Lender Agreement, the SBA has added language to clarify how it will treat the third party lender’s costs of collection, maintenance and protection of the third party lender’s lien. Previously the document was silent on this issue. Generally, to the extent the borrower owes the third party lender more than the principal balance on the Note, such excess can be secured by the subject property, but must be subordinate to the CDC’s lien. With the SBA’s changes, however, it is now clear that the third party lender’s costs of maintenance and protection of the third party lender’s lien can be included in the third party lender’s senior lien, even if such costs exceed the amount stated in the Authorization.
In the third paragraph of the Third Party Lender Agreement, the SBA added a certification that states “Third Party Lender further acknowledges that any false statements to CDC can be considered false statements to the federal government under 18 U.S.C. §1001, and may subject the Third Party Lender to criminal penalties…” The concept set forth in this statement is not new, and the document previously had made reference to the fact that statements to the CDC can be considered false statements to the SBA. With the new language, the SBA is clarifying and reinforcing that false statements made to the CDC are false statements made to the federal government. Third party lenders should be aware that the penalties for such acts can be severe.
There were several clarifications made to the section that describes the third party lender’s loan documents compliance with the SBA’s regulations. The two most notable changes were to the section on early call and demand provisions and the section on cross-default. The section on early call and demand provisions had previously stated that the third party’s lender’s loan documents could not contain any early call features or provisions allowing the third party lender to make demand. The language has been clarified to state that the third part lender’s loan documents either don’t contain provisions for early call or demand (other than when the loan is in default) or the third party lender agrees not to enforce such provisions so long as the CDC’s loan has an unpaid balance. This would expressly allows a third party lender to utilize these features prior to a CDC closing its loan (i.e. during construction) or if the 504 loan has been paid off. The cross-default section previously prevented a lender from using a cross-default feature during the term of the third party lender’s loan. Now, it prevents a lender from using a cross-default feature during the term of the CDC’s loan. Again, this allows the third party lender utilize tools that it may typically require conventionally prior to the CDC’s refinance of the interim loan or after the 504 loan is paid in full.
The sixth paragraph of the document addresses a third party lender’s preferential collateral. The document has always contained language stating that, to the extent the third party lender takes additional collateral to secure its loan, it must apply proceeds of the liquidation of such additional collateral prior to the proceeds of the liquidation of common collateral with the CDC and SBA. The SBA has clarified that if the additional collateral was taken, but has no value at the time of liquidation, the third party lender must obtain the CDC and SBA’s consent prior to making a determination not to liquidate on such additional collateral.
The SBA made several changes to the ninth paragraph, which addresses subordination of the 504 loan. First, if the SBA chooses to bring the third party loan current, the third party lender must agree only to charge any pre-default interest rates. The third party lender also must now provide the CDC and SBA 60 days notice if it opts to sell its note, and the CDC and SBA have an option to purchase such note. The SBA has further clarified that all default charges, prepayment penalties and late fees are subordinate to the 504 loan, even once the loan has been sold to a third party. Finally, any swap fees or fees related to an interest rate swap are also subordinate to the 504 loan.
For more information on 504 loan documentation or the updated Third Party Lender Agreement, contact Jessica at email@example.com or 267.470.1188.