Assumption, Assignment and Sale of SBA Loans
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In traditional lending and loan servicing, it is commonplace for loans to be assumed, assigned, or sold. Most lenders are likely familiar with these servicing actions, and many lenders have their own requirements and procedures for handling each of them. However, when servicing a Small Business Association (“SBA”) loan, lenders and CDCs must be cognizant of the applicable SBA protocols and handle each of these servicing requests in accordance with the SBA’s loan program requirements.
Assumption of SBA Loan
A borrower may request for another person to assume the borrower’s legal obligations and benefits under the SBA loan documents. Essentially, the assignor-borrower is requesting that another person “step into their shoes” as it relates to the loan. One of the most common reasons a borrower may request an assumption is because the borrower wants to sell their business, along with all of the collateral, to some other entity. In the event the borrower makes an assumption request, the lender or CDC must review and analyze the request in a commercially reasonable manner, consistent with prudent lending standards, and in accordance with the SBA’s loan program requirements. The decision to deny or approve the request must be justified and documented in a loan action record. SOP 50 57 2; SOP 50 55.
An SBA loan can be assumed by another person, provided the assumption:
- Does not have a negative impact on the recoverable value of the collateral;
- Does not release any collateral;
- Does not cause the position of the lien on the collateral to be subordinated by a loan to the assumptor, unless the funds will be used to make improvements to the collateral that will maintain or increase its value;
- Includes additional collateral, unless the existing collateral is adequate to secure the loan;
- Does not have a negative impact on the operation of the business;
- Does not include a real estate contract;
- Does not release existing obligors without the SBA’s prior written approval;
- Includes the assumption terms in a written agreement signed by all of the parties to the agreement; and
- Includes a “due on sale or death” clause that prohibits any future assumption of the SBA loan in the assumption agreement.
In addition, the individual proposed to assume the loan:
- Must meet the applicable eligible requirements to be a 7(a) or 504 borrower, unless the assumption is part of a workout or the loan is in liquidation status;
- Should be the primary owner of the business;
- Should have business experience and management skills that are equal to or better than the current borrower;
- Must have a satisfactory credit history; and
- Must have the ability to repay the SBA loan in full.
In some situations, the lender or CDC may be required to obtain the SBA’s prior written approval before allowing an assumption. If the assumption does not release the original borrower from the SBA loan, the 7(a) lender does not require the SBA’s prior written approval, but the lender must notify the SBA through E-Tran. However, if the assumption does release the original borrower from the SBA loan, the lender is required to obtain the SBA’s prior written approval. A CDC who is designated as a non-PCLP (Premier Certified Lender Program), must also obtain the SBA’s prior written approval to allow an assumption. See Servicing and Liquidation Actions 7(a) Lender Matrix; Servicing and Liquidation Actions CDC Matrix.
In addition, the SBA does not charge a fee for the assumption of a 7(a) loan. However, as an incentive for lenders to retain an existing loan, the SBA allows lenders to charge an assumption fee that is consistent with the assumption fee the lender charges on its non-SBA loans. The fee must be reasonable in relation to the services provided and cannot exceed 1% of the principal balance outstanding at the time of the assumption. On the other hand, the SBA requires a borrower to pay a fee for the assumption of a 504 loan in an amount that cannot exceed 1% of the outstanding principal balance of the loan being assumed. See 50 10 6.
Finally, if the SBA loan to be assumed was in liquidation status, it must be returned to regular servicing when regular payments are resumed pursuant to an assumption. See SOP 50 57 2.
Assignment of SBA Loan
A 7(a) lender may assign, or in other words, transfer, all or a portion of its interest in a SBA loan to another 7(a) lender. An assignment may occur because the borrower requests for the SBA loan to be transferred to another lender, and the lender agrees. Most of the time, however, an assignment occurs because the lender wants to free up credit lines, diversify its portfolio, and authorize more loans.
In order to assign a SBA loan to another 7(a) lender, the lender must obtain the SBA’s prior written approval. A lender may use the Transfer of Participation Agreement when submitting its assignment request to the SBA for approval. The lender must provide the SBA with a copy of the purchase, sale, assignment documents, and any other documents the SBA requires. See SOP 50 57 2.
Sale of SBA Loan in Liquidation Status
A 7(a) lender or CDC may sell an SBA loan that is in liquidation status, provided that:
The sale is to a person other than the borrower;
- The sale price bears a reasonable relationship to the amount that could be recovered through enforced collection proceedings; and
- The SBA has already purchased the guaranteed portion of the 7(a) loan if it was sold on the secondary market, or purchased the 504 loan debenture.
In addition to those listed above, a 7(a) lender must also:
- Obtain the SBA’s prior written approval, if the sale involves a compromise of the principal balance of the loan, or purchase of the loan by a guarantor, a close relative of the borrower, or an associate of the borrower; and
- Have submitted a complete guaranty purchase package and the SBA must have completed its guaranty purchase review process.
See SOP 50 57 2.
A 7(a) lender must also obtain the SBA’s prior written approval if it is selling more than 90% of the loan. If the 7(a) lender is selling less than 90% of the loan, it does not require the SBA’s prior written approval, but it must notify the SBA center of the sale. All CDCs must obtain the SBA’s prior written approval to sell a 504 loan. See Servicing and Liquidation Actions 7(a) Lender Matrix; Servicing and Liquidation Actions CDC Matrix.
All lenders and CDCs should be cognizant of the loan program requirements for the assumption, assignment, and sale of SBA loans. If a SBA lender or CDC is unfamiliar with these requirements, the attorneys at Jimerson Birr can provide advisement and execute a plan for assumption, assignment and sale of SBA-backed loans.
- Brandon C. Meadows, Esquire
- Melissa Murrin, JD Candidate
Continued reading in the series:
- Which Liquidation Actions Require SBA’s Pre-Approval: Part 1 – SBA 7(a) Loan Liquidation
- Which Liquidation Actions Require SBA’s Pre-Approval: Part 2 – SBA 504 Loan Liquidation
- Classifying SBA Loans in Liquidation Status
- How SBA Lenders Ensure Expense Recovery in Loan Liquidation and Litigation
- What Responsibility and Authority do SBA Lenders Have in Servicing and Liquidating Loans?
- Loan Modification and Deferment Requirements for SBA Lenders
- SBA Loan Site Visits: How to Prepare and What to Expect
- SBA Loans: How to Maximize Recovery by Liquidating Real Property
- SBA Loans: How to Maximize Recovery by Liquidating Personal Property
- How to Maximize Recovery on a SBA Loan by Negotiating a Workout Agreement
- SBA Loans: Insurance Requirements and Considerations
- SBA Loans: Offers in Compromise