Your Borrowers don’t always experience smooth sailing.
Sometimes they get stuck, run into difficulties, and end up with what everyone hopes is a temporary cash flow problem.
And our recent Q&A article with Doug Hood indicates that payment assistance requests – a.k.a. deferrals! – are on the rise.
SBA encourages Lenders to work with their Borrowers in this situation, while emphasizing that a deferral is not intended as a band-aid for a permanent problem. Loss of collateral value and financial risk-taking by a Borrower are not solutions for their failing business.
That said, Lenders and Borrowers can work together in good faith to get through a temporary situation.
There are two steps to determining if a deferment is an answer to the problem the Borrower is facing.
Review the Borrower’s financial information using, as SBA requires, Prudent Servicing practices. Is this cash flow problem truly temporary?
If so, delinquent and some future payments may be deferred for up to six months, without putting the loan into liquidation. Note that interest continues to accrue during this time!
And there are, of course, requirements to observe.
If the loan was NOT sold on the secondary market, SBA allows payment deferment of up to six consecutive months.
The Borrower’s situation must be monitored closely during that time, through site visits, calls, statement reviews, and so on, according to those Prudent Servicing practices.
Any deferment past the initial six months must be justified with a documented loan repayment plan. Note that SBA is not a fan of deferments exceeding six months or 20 percent of the original loan amount.
If the loan WAS sold on the secondary market, SBA allows only a single deferment of up to three consecutive months.
In some cases, this can be adjusted if the investor provides written consent prior to the deferment being granted.
Any deferment of loans sold on the secondary market must be communicated, in writing, to both the FTA and the SBA Loan Center.
As noted, interest continues to accrue, and SBA offers several options for Lenders to collect that interest.
The Borrower can pay the accrued interest even during the deferment timeframe.
The Borrower can pay the interest in a lump sum at the end of the deferment timeframe.
When the Borrower resumes payments, Lender may increase the payment amount until the Borrower has paid the interest accrued during deferment.
Or, if the Borrower continues to make the same payments after the deferment as they were prior, SBA requires payments to be applied first to the interest accrued during deferment, and then to principal. In this case, the loan may be extended for up to 10 years.
Note that interest accrued during the deferment may NOT be added to the principal balance!
Be aware that, if the Step 1 analysis determines that the Borrower’s situation is in fact more serious and not temporary, there are other options. SBA encourages Lenders to explore alternatives such as workouts or forbearance agreements, as outlined in their SOPs.
No one wants Borrowers to struggle. It’s stressful for the Borrower as well as for the Lender. The clients we work with have real empathy for their Borrowers and their families and communities. Working together, the Lender and Borrower can steer through these difficult times and come out successful.
If you’d like some help managing the aspects of your loan portfolio that may be showing signs of difficulty, by all means give us a call at 877.576.0819, or connect with us on our website to schedule a time to talk. Helping our clients help their clients is what we’re here for!