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As a follow up to our recent newsletter, Loan Portfolio Transfer Requirements in Mergers and Acquisitions, we are providing this newsletter to discuss the requirements for single SBA 7(a) loan transfers as set forth in SOP 50 56 1 (click here for the SOP on the SBA website).
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Pursuant to 13 CFR § 120.432(a) (click here for link), Lenders selling or transferring the entire interest in a SBA 7(a) loan are required to obtain SBA’s prior written consent. All loan transfers must occur between Lenders in the 7(a) loan program. When the proposed transfer involves a single loan account, Lenders may request a transfer of participation from the SBA Commercial Loan Servicing Center.
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Upon SBA approval, the Lender purchasing a single SBA 7(a) loan must take possession of the promissory note and the other loan documents and service the 7(a) loan. The purchasing Lender will assume all of the obligations and responsibilities of the selling Lender, including but not limited to, all obligations, responsibilities and liabilities resulting from the making, servicing, closing and liquidation of the selling Lender's loan. The purchasing Lender purchases the 7(a) loan subject to SBA’s existing rights to deny liability on its guarantee as provided in 13 CFR § 120.524 (click here for link).
In light of the purchasing Lender’s assumption of all of the selling Lender’s obligations and responsibilities, as well as SBA’s existing rights to deny liability on its guarantee, the purchasing Lender should conduct a full review of the selling Lender’s loan file including, but not limited to, the credit approval, SBA eligibility determinations, SBA Loan Authorization/E-Tran Terms and Conditions, closing documents, and servicing actions.
Once the purchasing Lender has conducted a satisfactory review of the selling Lender’s 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. This form identifies the 7(a) loan to be transferred, is signed by both the selling and purchasing Lenders, and requires responses to 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?
The Transfer of Participation Agreement form can be found here.
Finally, assuming the purchasing Lender is comfortable with its review of the SBA 7(a) loan file and has received approval from the SBA, then the last step is documenting and consummating the 7(a) loan transfer. This document package will vary in complexity to effectively cover the scope of a particular loan, but will typically 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 purchasing Lender.
Alternatively, the selling Lender and purchasing 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.
This article is not intended to be a comprehensive checklist for the considerations in single SBA 7(a) loan transfers, rather is meant to provide a basic framework for Lenders to analyze through the loan assignment process.
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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