While SBA borrowers are allowed to prepay their SBA 7(a) loans (in whole or in part), it is important for lenders to understand the prepayment scenarios that require specific procedures.
SOP 50 10 6 requires that every SBA 7(a) Authorization contain prepayment language that must be inserted into the repayment terms section of the promissory note. The following italicized language is provided in the SBA 7(a) Authorization Wizard:
Loan Prepayment:
Notwithstanding any provision in this Note to the contrary:
Borrower may prepay this Note. Borrower may prepay 20 percent or less of the unpaid principal balance at any time without notice. If Borrower prepays more than 20 percent and the Loan has been sold on the secondary market, Borrower must:
a. Give Lender written notice;
b. Pay all accrued interest; and
c. If the prepayment is received less than 21 days from the date Lender receives the notice, pay an amount equal to 21 days’ interest from the date lender receives the notice, less any interest accrued during the 21 days and paid under subparagraph b., above.
If Borrower does not prepay within 30 days from the date Lender receives the notice, Borrower must give Lender a new notice.
For SBA 7(a) loans that have been sold on the secondary market, the lender is required to comply with the prepayment procedures set forth in Article VII of the Secondary Participation Guaranty Agreement (SBA Form 1086) for any prepayment which is greater than twenty percent (20%) of the principal amount outstanding at the time of the prepayment.
If a borrower remits to the lender a prepayment without providing the required twenty-one (21) day notice, the lender may not have the opportunity to provide written notice of the borrower’s intent to make the prepayment, which notice must be received by the Fiscal Transfer Agent at least ten (10) business days prior to prepayment date, as required in Section 7.3 of the Secondary Participation Guaranty Agreement. Without the ten (10) business day advance written notice, the receipt of the prepayment funds by the Fiscal Transfer Agent will serve as the notification and the secondary market investor will expect interest to be paid to the tenth (10th) business day (counting the date the funds are received).
In addition to the prepayment requirements described above, lenders must also keep in mind that, pursuant to SOP 50 10 6, for loans with a maturity of fifteen (15) years or longer, the borrower must pay to the SBA a Subsidy Recoupment Fee when the borrower voluntarily prepays more than twenty-five percent (25%) of its loan in any one (1) year during the first three (3) years after first disbursement.