SBA SOP 50 10 8.1, App18.A — General Policy on Interest Rates

v. Ceiling and floor (if any). 2. Base Rate, Alternative Base Rate, Allowable Spread, and Frequency (13 CFR § 120.214): a. A loan may have a variable interest rate. The base rate may be one of the following:

i. The Prime Rate; or

ii. The SBA Optional Peg rate. b. A loan with a variable interest rate may utilize an Alternative Base Rate. The Alternative Base Rate may be one of the following: i. Secured Overnight Funding Rate (SOFR); or ii. 5-year Treasury Note Rate; or iii. 10-year Treasury Note Rate. c. The allowable spread when using the base rate (i.e., prime rate or SBA Optional Peg) is determined by the loan amount. i. Loans of $50,000 and less: Base rate + 6.5%; ii. Loans of $50,001 up to and including $250,000: Base rate + 6%;

iii. Loans of $250,001 up to and including $350,000: Base rate + 4.5%;

iv. Loans of $350,001 and higher: Base rate + 3%. d. When using an Alternative Base Rate, the maximum interest rate (Alternative Base Rate plus spread) is determined by the loan amount with a cap based on the Prime interest rate. i. Loans of $50,000 and less: Prime + 6.5%; ii. Loans of $50,001 up to and including $250,000: Prime + 6.0%; iii. Loans of $250,001 up to and including $350,000: Prime + 4.5%; iv. Loans of $350,001 and higher: Prime + 3.0%. e. The Lender must designate in its application for guaranty the amount of the percentage spread to be added at each adjustment date. The same spread must be used for all adjustments. 3. Policy on Variable Interest Rates a. Standard Policy: SBA’s maximum allowable interest rate applies both to the initial Note rate on a variable rate loan and to the combined rate that is obtained by adding the spread to either the base rate or Alternative Base Rate as outlined in Appendix 18: 7(a) Interest Rate Requirements. The spread applied to adjustments must be less than or equal to the maximum allowed by SBA at the time of origination. b. Post-Approval Changes to the Interest Rate: i. Pre-Disbursement Changes: After loan approval and prior to first disbursement, the Lender may change the initial Note rate, including changing the base rate, Alternative Base Rate, the spread over the base rate or Alternative Base Rate, or change 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 either notify the LGPC of the change or make the change through E-Tran Servicing, or successor SBA Loan System. 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. ii. Post-Disbursement Changes: After the loan is disbursed, on a variable rate loan, the Lender may change the base rate, Alternative Base Rate, or spread as long as the change 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 either notify the CLSC of the change or make the change through E-Tran Servicing, or successor SBA Loan System. For further guidance, see SOP 50 57. c. Frequency of Interest Rate Adjustment: i. The first adjustment may occur on the first calendar day of the month following initial disbursement, using the base rate or Alternative 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 the SBA Loan System. ii. The Lender must specify in the Note the frequency at which the interest rate adjustment will occur. a) This adjustment period as identified in the Note may not be changed without the written consent of the Borrower. b) 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 or Alternative Base Rate in effect on the first business day of the adjustment period. c) 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. iii. 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. d. Interest Rate Requirements for an SBA Note: i. For fixed rate loans, the Lender must state the specific interest rate in the Note. ii. For variable rate loans, the Lender must include the following information in the Note: a) Identification of the rate being used as the base rate or Alternative Base Rate; b) The publication in which the designated base rate appears regularly (e.g., Wall Street Journal from Prime or Treasury Rates, Federal Reserve Bank of New York for SOFR, or the Federal Register if using the SBA Optional Peg Rate). All allowed interest rates are also published on the SBA’s website; c) The percentage spread, including any changes to percentage spread if applicable, to be added to the base rate (e.g., in a construction loan); d) The initial interest rate of the loan (from disbursement to first adjustment); e) The date or timing of the first rate adjustment; and f) The frequency of rate adjustment. e. 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: i. Both the floor and ceiling are stated in the Note; and ii. 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. For example, if the Note rate is 10% and the ceiling is 12%, the floor must be 8% or lower. f. 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. g. 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. 4. 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. 5. Interest Rate Swap Contracts: a. An interest rate swap is a contract between two parties where one party pays a fee in exchange for an agreement by the other party to pay any interest in excess of an established amount. The contract may last for all or part of the term of the loan. The swap contract only relates to the payment of interest. Example: A Borrower has a prime plus 2% interest rate on a 7(a) variable rate guaranteed loan. The Borrower could purchase an interest rate swap contract that would set the interest rate at 8%. When the Note rate is lower than the rate paid by the Borrower on the swap contract (8%), the swap seller keeps the extra amount as compensation for the risk that rates will at some point exceed 8%. When the Note rate is higher than the rate paid by the Borrower on the swap contract, the Borrower would continue to pay the fixed rate of 8% and the swap seller would pay the difference above 8% to the Lender. The ability to stabilize the amount of the loan payment each month is the benefit to the Borrower of an interest rate swap contract. b. In order to use an interest rate swap in the 7(a) program, the interest rate swap contract must meet the following conditions: i. The interest rate swap contract is an agreement between the small business Borrower and the Lender or, if the swap seller is not the lender, a third party. SBA is not a party to the interest rate swap contract. ii. The interest rate swap contract does not affect the amount of money owed by the Borrower to SBA in the event SBA purchases the guaranty. In the event of a Borrower default, interest will be calculated using the base rate or Alternative Base Rate and spread in the variable interest rate Note, not the swap contract. iii. SBA will not be responsible if the swap seller defaults during the life of the contract. The Borrower will be liable for the interest as required in the Note. iv. Loans with accompanying interest rate swap contracts may be sold on the Secondary Market. The Lender is still required under the Secondary Market contract (SBA Form 1086) to forward interest and principal pursuant to the original terms of the loan. It is the Lender’s responsibility to work with the swap seller to make sure funds are available for submission to the fiscal and transfer agent according to the time schedule in the Form 1086.

v. The full amount of the principal and interest required under the Note must be reported by the lender on the SBA Form 1502.