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SBA 504 Q&A: Release of Guarantor or Co-Borrower
Q: How does a borrower obtain a guarantor or co-borrower release on their Small Business Administration (SBA) 504 loan, or is this even possible?
A: Frequently after an SBA loan has been disbursed, circumstances change and give rise to borrower servicing requests, which can range anywhere from a simple request to change a mailing address to a complicated request involving the exchange of collateral. Regardless of the level of complexity, all servicing requests must be reviewed, analyzed and acted upon in accordance with prudent lending practices. When responding to a servicing request, as long as the borrower is viable, the goal should be to meet the borrower’s short- and long-term needs without impairing the integrity of the SBA loan program.
A request for release of a guarantor or a co-borrower should be reviewed, analyzed and implemented pursuant to the requirements of the SBA’s 504 Loan Servicing and Liquidation SOP 50-55, which states:
a. The loan must be Seasoned;
Seasoned Loan or a loan that is “Seasoned” means that for 18 months after the initial disbursement or 18 months after the final disbursement if it occurred more than six months after the initial disbursement, or if there was a default, the borrower cured it and for 12 consecutive months following the 18 month post-disbursement period, the borrower did not:
a. Fail to make a scheduled loan payment;
b. Fund a scheduled loan payment from the sale of collateral;
c. Have more than three consecutive scheduled full payments deferred; or
d. Experience an event of default that required the loan to be classified in liquidation.
b. The release must not conflict with the SBA loan program requirements in 13 C.F.R. Part 120 and SOP 50 10 that require guaranties from specific persons as a condition for the SBA’s guaranty of the loan, (e.g., any person who owns 20% or more of the small business); and
c. The release must not: jeopardize the ability to maximize recovery on the loan; shift the risk of loss to the SBA; or otherwise harm the integrity of the SBA loan program.
As part of the process, Florida First Capital would be required to take the following steps:
1. Obtain supporting documents when necessary, such as:
a. Credit report;
b. Guarantor financial statements and tax returns; and
c. Evidence of authority to take proposed action.
2. Analyze the borrower’s financial condition.
3. Analyze the collateral.
4. Discuss any necessary adequate consideration. Sometimes, depending on the circumstance, it may be necessary to provide additional collateral to the SBA for consideration of the servicing request.
5. Obtain written consent of all obligors.
Upon receipt of all documentation and requesting information, the Certified Development Company (CDC) (Florida First Capital) must generate a credit memo, independent of any analysis prepared by any third party with a conflict of interest, which must include the following:
1) A brief description of the proposed servicing action;
2) The amount funded, date of funding, current balance and status of the SBA 504 loan;
3) The current financial condition of the borrower;
4) The justification for the proposed servicing action, i.e., benefit to the borrower, CDC and SBA – neither abundance nor lack of collateral alone is sufficient justification for a servicing action;
5) Discussion regarding whether or not the proposed servicing action will increase the risk of loss, and if so, any mitigating factor, e.g. the value of SBA’s collateral will be increased, or the borrower’s business performance will be improved;
6) If the proposed servicing action will impact the collateral; a summary of prior servicing actions impacting the collateral and an analysis of the recoverable value of the collateral both before and after the proposed action;
7) A summary of prior servicing experience with the borrower, i.e., loan modifications or problems pertinent to the request; and
8) A list of the obligors and a statement as to whether their consent has been or will be obtained for the proposed servicing action.
While it is Florida First Capital’s policy to petition for approval on behalf of the borrower at submission of all servicing actions, it is important to note final approval authority rests solely with the SBA.
If you have a question you’d like our SBA 504 loan experts to answer, email us at email@example.com or call 850.681.3601 or toll-free at 888.320.5504.