April 11, 2018






The Importance of Getting the Default Date Right!

  By Margherita Stutz (Umpqua Bank)


You have an SBA 7(a) loan that has defaulted, and now you are ready to begin working on your Lender’s Transcript of Account. SBA Form 1149 is SBA’s preferred transcript of account format; however, lenders may use an internally created form provided it includes all the items detailed on Tab 6 of the Regular 7(a) Guaranty Purchase Tabs

One of required bits of information that must be provided is the “next payment due date” -- also called the “default date”. This is an extremely important date for two very specific reasons.  First and most importantly, it is the date that will be used to determine whether the loan would be categorized as an early default loan and therefore require special treatment when completing and submitting the purchase package. 

An SBA loan is considered an Early Default when the default occurs within 18 months of the initial disbursement of the proceeds; or, if the final disbursement occurred more than 6 months after the initial disbursement, then the 18-month period starts from the date of final disbursement. If the borrower cures the default and makes scheduled loan payments for 12 consecutive months after the initial 18-month period (i.e., 30-months), the loan would not be considered an early default.  But, if the default date is within that 18-month period; then your guaranty purchase submission MUST include all the documentation detailed in Tab 7 of the Regular 7(a) Guaranty Purchase Tabs.  (See SOP 50 57 2, page 14 for full definition of 'early default'.)

The second significant reason why the default date is so important (and required) is that pursuant to the SBA Note: “If SBA purchases the guaranteed portion of the unpaid principal balance, the interest rate becomes fixed at the rate in effect at the time of the earliest uncured payment default. [ed. see definition below] If there is no uncured payment default, the rate becomes fixed at the rate in effect at the time of purchase.” From December 2008 to December 2015, we enjoyed seven years of no fluctuation in the Wall Street Journal Prime; however, we are once again in an environment of periodic rate changes, which could impact the interest rate in effect at the time of the default date. 

This is especially important if a payment modification or deferral was granted. If the borrower happens to default on the first payment due at the cessation of the payment deferral or modification; then the earliest uncured payment default reverts to the date of the past due payment.  For example: A borrower is due for the January 1 payment and a payment deferral is granted that sets the next payment to be due on May 1.  If the interest rate on January 1 is 6.25%; and the Wall Street Journal Prime increases by .25% on March 1, and the May 1 payment is not made; the interest rate is fixed at the 6.25% in effect on earlier January 1 due date, not the 6.50% in effect on May 1.  

The critical importance of understanding the default date is clear. The examples given illustrate that when preparing and assembling the many components of a guaranty purchase package, it is important to not only consult SOP 50 57 2, but also to thoroughly read each Tab to ensure that you are providing the required information. Make sure that you carefully read each document (e.g., Authorization, Note, guaranty, etc.) to ensure that you are adhering to specific provisions contained within each document. 

 

Definition, SOP 50 57 2, page 138:

Note: The term “earliest uncured payment default date” means the date of the earliest failure by a Borrower to pay the full amount of a regular installment of principal or interest when due. Payments, which are made by a Borrower before the Lender requests that SBA purchase its guaranty, are applied to the earliest uncured payment default amount and if the installment is paid in full, the earliest uncured payment default date advances to the next unpaid installment date. If the Borrower makes a payment after the Lender has exercised its right to request that SBA purchase its guaranty, the earliest uncured payment default date does not change (13 C.F.R. § 120.523) and the payment must be applied to the principal balance of the loan in accordance with Chapter 4.


Margherita Stutz is senior vice president, SBA Portfolio Director at Umpqua Bank. With over 30 years banking and financial management experience, she oversees the SBA/USDA Servicing, Operations and Liquidation teams. In her previous position, she was the senior liquidation officer for US Bank’s SBA Division Special Assets Group.Margherita is a NAGGL instructor and teaches a variety of servicing and liquidation courses for the association. 

 




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