Oh, Those Prime Rate Increases
You knew it was coming – and yes, it’s here: Prime rate increases have been on the rise.
On March 15th of 2020, the Prime rate went back down to 3.25%. Then it was almost exactly two years before the rate changed, on March 16th, 2022, to 3.50%. Since then, there have been a total of eight more increases, to the current rate of 8.00% as of March 22nd, 2023 (according to www.primerate.com).
What does that mean for SBA 7a lenders?
Since many SBA 7a lenders choose a variable interest rate structure and many of those loans’ variable rates are tied to the Prime rate, you need to understand how and when SBA recognizes interest rate changes and how that affects those loans.
Here are five important points to remember.
This applies only to variable-rate loans in regular servicing status. Obviously, fixed-rate loans are exactly that: fixed rate, and require no adjustment. Meanwhile, handling loans in liquidation is outside the scope of this article. Need some help? Give us a call – our contact information is below.
SBA recognizes rate changes on the first business day of each month. The rate on the first business day of each month is what you’ll use to set the initial interest rate for any new loan application sent to SBA during that month. It’s also what you’ll use to determine when rate changes must be applied to your variable-rate loans. (Note that you may not exceed SBA’s maximum interest rate (basis rate plus allowable spread). This is crucial, so let’s look at two examples.
A new SBA loan: A loan is submitted to SBA for approval on March 25th, 2023. Even though the Prime rate changed to 8.00% on March 23rd, 2023, the initial rate on this loan must be based on the Prime rate on the first business day of the month, March 1st 2023, which was 7.75%. Of course, you also need to be aware of rate change dates on your existing SBA 7a portfolio. Since loan rate changes are often set at intervals other than the first of the month, you’ll need to “look back” at the rate that was in effect on the first of the month for the month the loan’s rate is due to change. That can be confusing, so here’s our second example.
An existing SBA loan: An existing loan has quarterly scheduled rate changes based on the original date of the Note, December 26th, 2022. Therefore, the next scheduled rate change is March 26th, 2023. On that date, the loan’s rate basis changes to 7.75%, based on the Prime rate in effect on March 1st, 2023.
We’re reviewing rate increases in these examples, since that’s what’s been happening recently. It’s probably obvious, but if and when rates begin to decrease, the exact same adjustment process applies.
Do you have a procedure in place to call back the interest rate structure in your core processing system? Without this, you leave yourself open to discrepancies and inevitable dropped balls on managing rate changes efficiently.
And speaking of discrepancies, are you in sync with the FTA (Fiscal Transfer Agent) for loans sold on the secondary market? Bad things happen when you get out of alignment with the FTA. We recommend regular verification of information – and quick action when there are discrepancies. The details are essential. See our article on FTA 1502 reporting for tips on identifying and fixing these issues.
There are times when interest rates don’t change, and there are times when interest rates can change every month. Make sure your team is up to speed and prepared to handle these changes. And, as noted above, any loans in liquidation have a separate set of requirements that we’ve not covered here.
If you need guidance on any of these issues – helping educate your team, managing the changes needed for loans in regular servicing status, or understanding the different issues around loans in liquidation – we’re here to help. Give us a call at 877.576.0819, or drop us a note through our website contact form – or reply to this email! We’ll schedule a time to talk and see how we can best help.