SBA SOP 50 10 8.1, C.Ch1.B — Third Party Lender Participation

ii. The Third Party Lender applies any proceeds received as a result of the Additional Collateral to the balance outstanding on the Third Party Loan prior to the application of proceeds from the disposition of the Project Property to the Third Party Loan. h. Interest Rate Swap Contracts:

i. 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 Third Party Loan variable rate loan (presently 5.25%). The Borrower could purchase an interest rate swap contract that would set the interest rate at 7%. When the Note rate is lower than the rate paid by the Borrower on the swap contract (7%), the swap seller keeps the extra amount as compensation for the risk that rates will at some point exceed 7%. 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 7% and the swap seller would pay the difference above 7% 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.

ii. Third Party Loans may use swap contracts. In order to use an interest rate swap on a Third Party Loan, the interest rate swap contract must meet the following conditions: a) 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. b) SBA will not review swap contracts for Borrowers or provide guidance on their use. While swap contracts should not have a significant impact on the cost of the loan, SBA will not publish any guidelines on the cost of these contracts. c) Swap contracts may be used on new or existing Third Party Loans. d) The swap contract does not have to last for the entire length of the Third Party Loan. e) SBA does not have a standard form for an interest rate swap contract. f) Any fees owed the swap counterparty as a result of the default by the Borrower will be subordinated to the SBA 504 loan. i. CDCs must not enter into any Intercreditor agreement with the Third Party Lender other than SBA Form 2287, “Third Party Lender Agreement,” without the prior written consent of SBA. 2. Interim Financing Loans under the 504 program provide permanent or take-out financing (see Ch. 2, Para. C.2. Escrow Closing, below in this Section, for the requirements of an escrow closing with no interim loan). An interim lender (either the Third Party Lender or another lender) provides the interim financing to cover the period between SBA approval of the project and the debenture sale. After the project is completed, the CDC will close the 504 loan. The proceeds from the Debenture sale repay the interim lender for the amount of the 504 project costs that it advanced on an interim basis. a. Any experienced, independent source including the Third Party Lender may supply interim financing provided they meet the conditions described in 13 CFR § 120.890. A CDC may provide interim financing but only for a project financed by another CDC. As stated in the regulation, neither the Borrower nor an Associate of the Borrower may supply interim financing. b. If the Third Party Lender provides the interim loan, it may do so using: i. An interim note which will be paid in full with the net debenture proceeds and a permanent note; or ii. A single note, which includes both the interim and permanent financing that will be reduced by the net debenture proceeds. 3. Financing Involving Industrial Development Bonds or Industrial Revenue Bonds SBA may participate in Projects financed in part, directly or indirectly, by obligations exempt from state or local taxes (for example, real estate tax exemptions). However, in accordance with OMB Circular A-129, “Policies for Federal Credit Programs and Non-Tax Receivables” (January 2013), SBA may not participate in projects financed in part, directly or indirectly, by Federal tax-exempt obligations. For Projects that do not involve Federal tax-exempt obligations, industrial development bonds or industrial revenue bonds (IDBs/IRBs) may be a source of funding for Projects under the following conditions: a. When the bond proceeds are used to fund the Third Party Loan: i. If the bond issuer requires that it hold title to the Project Property, the TPL’s and SBA’s respective liens must be properly recorded before any transfer of the title to the Project Property to the bond issuer; ii. If the bond issuer takes title to the Project Property and leases the Project Property to the Borrower, the bond issuer must assign the lease to the Third Party Lender and all payments under the lease must be paid to the Third Party Lender and serve as the payments under the loan;