Servicing SBA Loans During the COVID-19 Crisis
With COVID-19 shutting down whole swaths of the economy, the SBA has issued a notice to SBA 7(a) Lenders and 504 Certified Development Companies (CDCs), reminding them of their unilateral authority to provide borrowers with temporary relief through deferred payments under certain circumstances.
The message is that lenders can and should work with otherwise viable businesses suffering cash flow problems right now.
For 7(a) business loans, if the loan is not sold on the secondary market, Lenders may grant a deferment for up to six months. For a loan sold on the secondary market, Lenders may grant a one-time unilateral deferment of up to 90 days without investor consent. There is a process to notify the investors after the fact. Future deferments – at this time – would require investor consent.
CDCs also may defer payments for up to six cumulative monthly payments or 20% of the original loan amount, whichever is less. Unless the SBA has purchased the Debenture, the CDC must notify the Central Servicing Agent (CSA) of any deferment to avoid acceleration of the Note and the need to purchase the Debenture.
SBA regulations encourage some payment during the deferment period, even as little as $1 to promote the habit of making payments and keep the borrower's pre-authorized debit payment method active.
Interest accrues during a deferment period, and maybe handled in one of these ways:
Interest may be paid during the deferment period;
The deferred interest may be paid in a lump sum at the end of the deferment period;
After the deferment period, the loan payment may be increased for a period of time necessary for the borrower to catch up to the original amortization schedule; or
When payments resume, they may be applied first to accrued interest, then to principal.
SBA regulations provide that deferment is a "temporary solution to a temporary problem." The regulations require lenders to analyze a borrower's financial information under prudent lending standards case-by-case to determine if the borrower's cash flow problems are short-term or permanent. Absent additional guidance from the SBA, we would discourage lenders from issuing blanket deferrals across their entire portfolio. Besides a Deferral Agreement, lenders may want to use a Deferral Request Form that requires each borrower to (1) explain the need for the deferral, (2) outline the steps taken to mitigate cash flow issues, (3) address any non-COVID-19 business interruption cash flow issues, and (4) provide updated financial information.