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April 2020

Information for Borrowers and Lenders with Existing SBA 7(a) and 504 Loans Outside of the CARES Act

April 28, 2020

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law.  While the Paycheck Protection Program loans (“PPP loans”) and Economic Injury Disaster Loans (“EIDL loans”) offered businesses options for relief via the United States Small Business Administration and financial institutions throughout the country, many have overlooked a provision of the CARES Act that provides significant relief to borrowers with existing SBA 7(a) and 504 loans outside of the PPP and EIDL programs.

Section 1112 of the CARES Act permits the SBA to make up to six (6) months of principal and interest payments to assist borrowers with existing SBA 7(a) and 504 loans. The CARES Act specifically has appropriated up to $17 billion for the program, and it has not been exhausted.  In fact, implementation guidance was just released on April 16, 2020.  A full copy of the procedural notice issued by the SBA can be found here.

Here are some highlights from that guidance:

  • “SBA will pay the principal, interest, and any “associated fees” that Borrowers owe on a “covered loan” in a “regular servicing status” to 7(a) Lenders and Certified Development Companies (CDCs) for a 6-month period.”
    • “Associated fees” include the 504 SBA guarantee fee, the 504 Central Servicing Agent fees, the 504 Certified Development Company fees, and the 7(a) the extraordinary servicing fee authorized by 13 CFR 120.221. 
    • A “covered loan” means an existing 7(a) loan, a 504 loan, but excludes a PPP or EIDL loan under the CARES Act.
    • “Regular servicing status” means any loan that has been closed and final loan disbursement has been made – or, for lines of credit, initial loan disbursement has been made.
    • Borrowers with loans in “liquidation” status or with a payment more than 120 days overdue will not be considered in “regular servicing status.
  • For covered loans made before March 27, 2020 and not on deferment, the SBA will make six (6) consecutive monthly payments starting with the next payment period. The procedural notice provides lender information on when the SBA will submit payments for 7(a) and for 504 loans.
  • For covered loans not on monthly payment schedules, the SBA will annualize payments, total the annual loan payments, divide that number by twelve (12), and multiply by (6) to determine the amount of the SBA subsidy, and will pay to the lender depending on the payment schedule in place.
  • For covered loans made before March 27, 2020 but already on deferment, the SBA gives the borrower the choice to (i) cancel the deferment and receiving payments on the next six payment dates; or (ii) accept payments on the next payment due after the deferment ends.
  • For covered loans origination after March 27, 2020 and before September 27, 2020, the SBA will make loan payments beginning with the first payment due date.
  • If the Borrower has less than six (6) payments remaining, the borrower will be limited to the balance outstanding.

Given this extreme relief that is available for existing and new traditional SBA 7(a) and 504 borrowers, it is important that borrowers and lenders explore options for traditional SBA loans during this period of time.  Remember, traditional SBA 7(a) and 504 loans require that borrowers meet the “credit elsewhere test.”  That test requires a showing that the borrower does not have the ability to obtain some or all of the requested loan funds from alternative sources without causing undue hardship. (13 CFR 120.101).


Visit our COVID-19 Task Force for Ongoing Updates.

This article was authored by Jonathan Boulahanis, Kent Carter, Craig Heryford, and Tyler Duff.

Banking & Finance

Jonathan M. Boulahanis
W. Kent Carter
Tyler Duff
Craig S. Heryford


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