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In recent weeks, we have issued newsletters regarding the requirements and guidance for the transfer of SBA loan portfolios (click here) and single SBA 7(a) loans (click here). SOP 50 56 1 also governs the ability of SBA lenders to enter into 7(a) loan participation sales (click here to access SOP 50 56 1).
Pursuant to SOP 50 56 1:
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Lenders are permitted to enter into 7(a) loan participation sales, pursuant to 13 CFR § 120.432(b) and 13 CFR § 120.433 provided the purchaser is another 7(a) lender participant. Participation sales involve the sale of a portion of an SBA 7(a) loan and are private sale transactions between Lenders.
- Lenders that sell loan participations are required to retain the SBA Note and service the loan on behalf of all participants. While participations may be for amounts equivalent to a loan’s guarantee percentage, purchasing Lenders are not permitted to sell a participation interest into SBA’s secondary market.
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Lenders are required to notify OCRM at OCRM@sba.gov if the Lender sells a participation in any portion of an SBA 7(a) loan to another Lender. Lenders that wish to sell a participation in which the unguaranteed amount retained is below 10% of the outstanding principal balance of the loan must obtain SBA’s prior written consent, which SBA may withhold in its sole discretion.
- Requests for prior approval shall be made in writing to OFA’s Secondary Market Division. The request from the selling Lender shall include a form of the participation agreement acceptable to SBA, identification of the purchasing Lender, and identification of the SBA loan(s) proposed for sale. These documents may be submitted electronically or by overnight mail or courier. OFA will coordinate its review with OCRM, and if approved, will issue conditional approval to the selling Lender. Lenders must close on the approved transaction and notify OFA upon the closing of the transaction.
In addition to the requirements set forth in SOP 50 56 1, it is advisable for lenders to understand key provisions for the Participation Agreement as it is the main risk-allocation document for sellers and buyers, and best practice is to negotiate key operational and workout issues before the loan participation closing rather than after a loan goes into default. At a minimum, the Participation Agreement should address issues such as the following:
- Sale percentage and retained interest – important to clarify the economic ownership of the purchaser, and the seller’s continuing exposure
- Loan servicing standards – defines the seller’s duties for loan administration, monitoring, notices and collections
- Information sharing – to ensure that the buyer receives credit and collateral information necessary for the buyer’s ongoing independent monitoring of the loan
- Voting and consent rights – establishes who can approve amendments, waivers, restructurings, enforcement actions, or dispositions of collateral
- Representations and warranties – allocates risk for underwriting quality, legal compliance, lien status, and completeness of disclosures
- Repurchase and recourse provisions – provides remedies for breaches, early payment defaults, unperfected liens, or ineligible loans
- Transfer restrictions – controls whether either party may assign its interest and to whom
- Default and workout mechanics – reduces conflict when a loan must be restructured, accelerated, or liquidated
- Expenses and indemnities – allocates legal fees, enforcement costs, and losses arising from breaches or servicing failures
- Collateral liquidation mechanics – establishes the processes for liquidation of collateral upon borrower default and allocation of net recovery proceeds
While the issues listed above are not necessarily comprehensive for every loan participation transaction, a Participation Agreement that addresses these core issues can have a significant impact in reducing potential claims between a seller and buyer in the event of a loan default and liquidation.
If your lending institution has questions about SBA 7(a) loan transfers, or other SBA lending matters, please contact us at SBAQuestions@JellumLaw.com.
This article is provided for general information and educational purposes only. It does not solicit, establish, or continue an attorney-client relationship. The contents should not be construed as legal advice or opinion. If the organization would like formal legal advice, our professional liability insurer (as well as the applicable attorney ethical rules) requires that we establish a formal attorney-client relationship. If you are interested in learning more about working with Jellum Law, please contact us at SBAQuestions@JellumLaw.com.
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