On April 5, 2004, H.R. 4062, which provides a temporary
extension of authorization for certain SBA programs, was signed into law.
Some of the most important changes are summarized in this Notice. These
changes are effective starting on April 5, 2004, and expire on September 30,
2004, unless extended by subsequent legislation.
7(a) Program Changes
As a result of this legislation, SBA will be able to
provide approximately an additional $3 billion (for a total of approximately
$12.5 billion) in 7 (a) loan guarantees through the end of this fiscal year.
The following is a summary of the 7(a) program changes
that take effect immediately.
Loan Amount
1. Pursuant to this Notice, the temporary $750,000 loan
cap imposed by Policy Notice 5000-902 dated December 30, 2003 and which took
effect on January 8, 2004, is lifted. The limit on the gross amount of a
7(a) loan once again is $2.0 million, under section 7a)(3)(A) of the Small
Business Act (“Act”).
2. H.R. 4062 temporarily increases the loan guaranty
limit under section 7(a)(3)(A) of the Act from $1.0 million to $1.5 million.
(For example, a $2.0 million loan may now have a 75% guaranty.) This
increase in the loan guaranty limit applies to loans approved on or after
April 5, 2004 and through and including September 30, 2004.
Lien Position/Combination Financing
1. Pursuant to this Notice, the portion of Policy Notice
0000-1709 dated January 13, 2004, which temporarily prohibited the piggyback
loan structure (see SOP 50 10 4, Subpart A, Chapter 2, paragraph 4(g)(3))
from qualifying for a 7(a) loan, is rescinded.
2. H.R. 4062 also creates a temporary new term,
“Combination Financing,” to describe a type of financing commonly known as
“piggyback financing”. The legislation provides that Combination Financings
must meet the following requirements:
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The financing must be comprised of both a loan
guaranteed under the 7(a) loan program and a commercial loan which is not
guaranteed by the federal government.
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The commercial loan may be made by the same
participating lender that is making the 7(a) loan or by a different
lender.
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The commercial loan may be (but is not required to be)
secured by a lien senior to the lien securing the 7(a) loan.
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The commercial loan may be made by a PLP lender.
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The commercial loan amount must not exceed the gross
amount of the 7 (a) loan.
If a PLP lender is making both the commercial loan and
the 7(a) loan in a Combination Financing, the lender must submit the 7(a)
loan to the SBA District Office, not the PLP Processing Center, for
processing and approval. Other Requirements for Combination Financing In
addition to the items above, SBA is establishing the following requirements
for Combination Loans:
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The term of the first lien note must be similar to the
term of the SBA guaranteed loan, but no less than half the maturity of the
SBA guaranteed loan.
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The first lien note must be fully amortizing and may
not include a balloon payment.
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The interest rate of the first lien note may be no
higher than the interest rate of the SBA guaranteed loan.
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A default interest rate on the first lien note is not
permitted.
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No additional fees triggered by a default on the first
lien note will be permitted.
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At least 75% of the proceeds of a Combination
Financing must be used for real estate and long-term, fixed assets.
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The lien position for the SBA guaranteed loan may be
no lower than second position.
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For the purpose of determining the size of the SBA
loan, the “project” shall be defined as the total amount financed. It will
not include the borrower’s down payment or any other items.
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The first lien note must be for a purpose that would
be eligible for SBA financing.
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The lender cannot foreclose on the first lien note
without foreclosing on the SBA note, therefore there must be a cross
default provision in both loan notes to ensure they are treated as one
loan.
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Each of these items must be documented in the loan
file to expedite review of the case.
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Please refer to SOP 50 10 (4)(E) Chapter 2 (Business
Loan Eligibility), Paragraph 4 (Utilization of Personal Resources) (d) (3)
through (9).
Guarantee and Annual Fees
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If the commercial loan has a senior credit position to
the 7(a) loan, a one-time fee equal to 0.7 percent of the amount of the
commercial loan is to be paid to SBA. This fee shall be paid by the SBA
participating lender, and must be remitted when the up-front guarantee fee
is paid. This fee may not be passed on to the borrower. If the commercial
loan is in a shared lien (sometimes known as pari passu) or subordinate
lien position to the 7(a) guaranteed loan, this one-time fee does not
apply.
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The on-going annual fee on all loans approved on or
after April 5, 2004 and through and including September 30, 2004, is
increased to 0.36 percent from the 0.25 percent previously allowed under
section 7(a)(23) of the Act.
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For loans approved on or after April 5, 2004 and
through and including September 30, 2004, lenders are not permitted to
retain 25 percent of the up-front guarantee fee on loans with a gross
amount of $150,000 or less (as previously allowed under section
7(a)(18)(B) of the Act), but rather must remit the full amount to SBA.
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For loans approved on or after April 5, 2004 and
through and including September 30, 2004, an additional up-front guarantee
fee equal to 0.25 percent of the amount by which the guaranteed portion of
the loan exceeds $1.0 million, must be paid to SBA.
SBA Express Program Changes
1. SBA Express lenders may now approve SBA Express loans
up to $2.0 million (gross amount) using existing SBA Express procedures.
2. SBA will continue to accept applications for new
participants in SBA Express and will continue to handle renewals under the
current procedures.
3. The legislation does not change the current policies
and procedures governing Export Express or Community Express.
Policy Waivers
The Associate Administrator for Financial Assistance is
hereby delegated the authority to waive the requirements not specifically
contained in the statute.
504 Program Changes
The legislation extends SBA’s authority to collect
certain fees with respect to 504 loans, through September 30, 2004.
We plan to issue a separate notice addressing procedural
issues raised as a consequence of the legislation. SBA District Offices with
questions on this notice may direct their questions to Jim Hammersley,
Director, Office of Loan Programs at
james.hammersley@sba.gov.
Lenders are directed to forward questions to the local SBA field office.
Hector V. Barreto
Administrator
