Increasingly, we have heard from lenders that the SBA has given much scrutiny to the refinance of an existing SBA 7(a) loan with a new 7(a) loan. As a result, financial institutions have experienced a rise in 7(a) loans being assigned from one lender (the “assigning lender”) to another lender (the “assuming lender”). There are a number of reasons why lenders might carry out such a transaction, such as a desire by the assuming lender to acquire a larger part of a customer relationship or to obtain a desired lien priority. The following are some things to keep in mind when navigating through the 7(a) loan transfer process.

The first step for any lender considering an assumption of an existing 7(a) loan is to confirm that the assigning lender approves of the transfer. A 7(a) lender cannot be forced to assign its interest in a loan, even if the borrower is requesting the transfer. A transfer of a 7(a) loan can only be accomplished on a voluntary basis. The parties should also make sure they are in agreement on the basic terms of the assignment (especially purchase price) before they get too far down the road. A Letter of Intent or Loan Purchase Agreement may be used to reflect the terms of the sale.

Once the assuming lender has confirmed the assigning lender is willing to transfer, the next step is for the assuming lender to review the loan file, paying particular attention to the original use of proceeds, eligibility, and credit analysis, priority of any liens, and whether the loan was properly closed and has been appropriately serviced. Essentially, the assuming lender should independently verify that the SBA guarantee is in place and it is otherwise comfortable with the status of the loan. Lenders must review the SOP 50 10 in effect at the time the loan was approved to ensure the applicable Loan Program Requirements were met, including, for example, those pertaining to Appraisals, Environmental Investigations, and SBA Form 912 (Statement of Personal History). The assuming lender should simultaneously document its analysis within its internal credit memorandum.

If the assuming lender is comfortable with the loan file, the next step is to obtain the SBA’s approval of the transfer. A transfer of a lender’s interest in a 7(a) loan cannot happen without the SBA’s prior written approval. SBA approval is requested through the submission of the SBA form Transfer of Participation Agreement to the appropriate SBA Loan Service Center. This form identifies the loan to be transferred, is signed by both the assigning and assuming lender, and requires narrative for certain questions, including:

Did the borrower request the transfer?
Has the loan been sold on the secondary market?
What is the purpose of the transfer?
How will the transfer benefit the borrower?

If the loan has been sold on the secondary market, once the transfer has been approved by SBA, both the assigning and assuming lender should provide notice of the transfer to the fiscal transfer agent (FTA).

Finally, assuming the Lender is comfortable with the loan and has received approval from the SBA, then the last step is documenting and consummating the loan transfer. This document package will vary in complexity to effectively cover the scope of a particular loan, but the core will almost always include an Assignment and Assumption Agreement, a separate Allonge to Promissory Note, and separate recordable assignment/assumption documents for recordable loan documents such as mortgages and assignments of rents. The parties should also coordinate to have any UCC Financing Statements amended to change the Secured Party to the assuming lender.

Alternatively, the assigning lender and assuming lender may wish to execute an Assignment and Assumption Agreement prior to the submission of the Transfer of Participation Agreement. If the parties choose to follow this sequence, they should ensure that the Assignment and Assumption Agreement includes a provision which states that the transfer of the loan is subject to the SBA’s written approval.

Certainly, this article is not intended to be a comprehensive checklist for the considerations in SBA 7(a) loan transfers, rather is meant to provide a basic framework for transactions and implications for lenders to analyze through the loan assignment process.

If you are considering an assignment of an SBA 7(a) loan and have questions, or have any general questions about SBA 7(a) loans, please do not hesitate to contact Your SBA Legal Department® at Jellum Law