SBA SOP 50 10 8, B.Ch3.B.4 — Interest Rates

vi. After approval and prior to final disbursement, Lender must either notify the LGPC of any changes to the Note terms related to the interest rate or make the change through E-Tran Servicing. After final disbursement, Lender must either notify the appropriate Commercial Loan Servicing Center of any changes to the Note terms related to the interest rate or make the change through E-Tran Servicing. vii. The 7(a) Lender may not split a loan into two loans for the purpose of charging a higher interest rate to the Applicant. Policy on Variable Interest Rates

i. Standard Policy: SBA’s maximum allowable interest rate applies only to the initial Note rate on a variable rate loan. Subsequent changes in the base rate are not subject to the maximum rate at the time of loan application; however, the maximum spread over the base cannot exceed SBA’s stated maximum.

ii. Post-Approval Changes to the Interest Rate: a) Pre-Disbursement Changes: After loan approval and prior to first disbursement, the Lender may change the initial Note rate, including changing the base rate, the spread over the base rate, or changed from a fixed rate to a variable rate, or from a variable rate to a fixed rate, provided the new interest rate does not exceed the maximum allowable interest rate at the time of the loan application. The Lender must obtain the Borrower’s written consent to the change in the interest rate (separate and apart from executing the loan documents) and must notify the LGPC of the change or make the change through E-Tran Servicing. For example, an SBA-guaranteed loan was approved with a variable rate. Since the loan was approved, the prime rate changed. The Borrower has asked the Lender if the loan can be switched to a fixed rate. If the loan has not been disbursed and the fixed rate selected does not exceed the maximum allowable fixed rate at the time of loan application, the Lender may make this change per the Borrower’s request. b) Post-Disbursement Changes: After the loan is disbursed, on a variable rate loan, the Lender may change the base rate or the spread over the base rate as long as the new base rate or spread is based on a method permitted when the loan was approved and is consistent with the interest rate regulations at the time the loan was approved. The Lender must obtain the Borrower’s written agreement and must notify the appropriate SBA CLSC of the change or make the change through E-Tran Servicing. For further guidance see SOP 50 57.

iii. Frequency of Interest Rate Adjustment: a) The first adjustment may occur on the first calendar day of the month following initial disbursement, using the base rate in effect on the first business day of the month. Lenders may delay the initial adjustment period. For example, Lenders have used periods as long as 5 years in order to provide the Borrower with an interest rate that is set for the first 5 years of the loan. After that time, the interest rate will begin to fluctuate as stated in E-Tran. b) The Lender must specify in the Note the frequency at which the interest rate adjustment will occur. i) This adjustment period as identified in the Note may not be changed without the written consent of the Borrower. ii) Subsequent adjustments may occur no more frequently than monthly. All subsequent adjustments will set the interest rate on the first calendar day of the adjustment period using the base rate in effect on the first business day of the adjustment period. iii) The rate of interest will change on the first calendar day of the adjustment period even though the rate may not be known until the second business day of that period. For example, if the first of the month is a Sunday, the base rate is the prime rate in effect on Monday. This rate will be reported in the Wall Street Journal on Tuesday, the third calendar day and second business day of the month. Many lenders use the calendar quarter as the adjustment period, especially those that sell the guaranteed portion in the Secondary Market. c) After the interest rate begins fluctuating, the loan can be re-amortized. Typically, loans are re-amortized every time the interest rate is adjusted to ensure full amortization by the maturity date.

iv. Interest Rate Requirements for an SBA Note: a) For fixed rate loans, the Lender must state the specific interest rate in the Note. b) For variable rate loans, the Lender must include the following information in the Note: i) Identification of the rate being used as the base rate; ii) The publication in which the designated base rate appears regularly (e.g., Wall Street Journal or the Federal Register if using the SBA Optional Peg Rate); iii) The percentage spread, including any changes to percentage spread if applicable, to be added to the base rate; iv) The initial interest rate of the loan (from disbursement to first adjustment); v) The date or timing of the first rate adjustment; and vi) The frequency of rate adjustment.

v. Interest Rate Ceilings and Floors: SBA will permit a Lender to limit the upward and downward adjustments by establishing a floor and ceiling provided that: a) Both the floor and ceiling are stated in the Note; and b) The difference between the stated rate in the Note and the floor is equal to or greater than the difference between the stated rate in the Note and the ceiling. c) For example, if the Note rate is 10% and the ceiling is 12%, the floor must be 8% or lower.

vi. Accrual Method: SBA does not require a specific accrual method, unless the loan is sold in the Secondary Market. Loans sold on the Secondary Market must either use 30/360 or Actual/365 as the interest accrual methods. While the interest accrual method 365/360 is permitted on loans not sold on the Secondary Market, Lenders are cautioned that they cannot use this accrual method and charge the maximum allowable rate of interest because this will result in an Annual Percentage Rate that exceeds SBA’s regulatory maximum.

vii. Amortization: (13 CFR § 120.214(e)): Lender should use an amortization schedule that is appropriate for the type of loan. SBA does not allow balloon payments. A fixed interest rate loan must use a payment that will fully amortize the loan by the maturity date. Typically, variable rate loans are re-amortized every time the interest rate is adjusted to ensure full amortization by the maturity date. The amortization schedule may also be adjusted to meet the cash flow needs of the business. Fixed and Variable Rate Combinations: The Lender may use a fixed rate on either the guaranteed or unguaranteed portion and a variable rate on the other portion of the loan. SBA allows such combinations as long as neither rate exceeds the SBA maximum interest rate. A Lender may use this structure to make a loan that permits it to retain a variable interest rate on the unguaranteed portion and sell a fixed rate guaranteed portion on the secondary market. If the Lender uses a combination, the entire loan is considered to be a variable interest rate loan. The interest rate on both the guaranteed and unguaranteed portions must be based on the variable rate.