Amy Brownstein, Esquire

In SOP 50 10 5(E), the SBA clarified its policy on variable rate loans and simultaneously addressed an inconsistency that had been contained in SOP 50 10 5(D). As a result of the revisions to the SOP, lenders may now change the spread over the base interest rate when the initial interest rate adjustment is delayed.

SOP 50 10 5(D) included conflicting provisions regarding this issue. In Subpart B, Chapter 3, Paragraph IV.C.2.b, the SOP provided that

"[a]fter 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." (Emphasis added).

Thus, this provision suggested that the spread could be changed at any time after disbursement, as long as the requirements for such change were met.  

The ability to change the spread was limited, however, if the Lender delayed the initial adjustment period. Subpart B, Chapter 3, Paragraph IV.C.3.a provided that

"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 the Authorization. Whenever a lender delays the initial adjustment period, the spread over the base rate used to calculate the initial Note rate must remain the same once the interest rate begins to fluctuate." (Emphasis added).

Thus, notwithstanding the provision allowing adjustment of the spread after disbursement, the spread was not permitted to be adjusted if the initial adjustment period was delayed.

In SOP 50 10 5(E), the SBA deleted the last sentence from the corresponding paragraph in Subpart B, Chapter 3, Paragraph IV.C.3.a. As a result, the restriction prohibiting a change in the spread after a delay in the initial adjustment period has been removed; lenders may now change the spread even after a delay in the initial adjustment period, in compliance with the requirements of Subpart B, Chapter 3, Paragraph IV.C.2.b of the SOP (discussed above).

The significance of this change in SBA's interest rate policy is that lenders may now offer prospective borrowers a lower "introductory rate" as a means of attracting customers. By way of example, a lender could offer a borrower an initial rate of 5% for three years, which is equal to Prime + 1.75% on the date of closing. After the initial three-year period expires, the rate could then adjust at a different interest rate spread, such as Prime + 2.75%. By allowing rates to be structured in such a manner, SBA borrowers should benefit from greater competition and lower interest rates. 

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