Unlike most commercial loans, where funds are disbursed at settlement, SBA 504 loans act differently. The primary reason is that SBA 504 loans are packaged into a bond offering and sold to investors and the proceeds of the bond sale is what provides the money for the loans. Therefore, there is a delay between closing and the actual funding of the 504 loan. Today’s blog topic discusses the closing and funding process and how the loan proceeds are disbursed.
The funds for SBA 504 loans do not reside in an account with the SBA, ready to be disbursed to the borrower when the loan closes. Instead, the SBA, working with Wells Fargo, packages loans that have closed in a given month and creates a bond offering. That bond is then sold to investors – pension funds, mutual funds, private investors, etc. – who are interested in a low-risk investment since the bonds are backed by the SBA in case any of the loans within the bond pool default. Hence, there is a process that needs to take place from the time the loan closes until the loan funds.
At the loan closing, all the loan documents get signed just like any commercial loan. The one difference is that the interest rate is not listed for the loan. That is because the interest rate is not set until the bond that the loan is part of is priced for sale.
There are essentially five steps a loan goes through before the funds are made available. First, the loan closing takes place where all the legal documents are signed. Following closing, all the closing documents as well as proof of any mortgage filings and UCC filings that may be required are sent to the local District Office of the SBA for their legal counsel to review to make sure that the closing documents meet all the requirements of the SBA. Once approved, the District Counsel forwards the documentation to Wells Fargo for their final review and to include the loan in the next available bond offering. The bond is then underwritten, priced, and sold. It is then that the final step takes place and proceeds of the bond offering are disbursed to the various loans through a wire transfer to the interim lender that provided the bridge loan for the SBA 504 loan.
Wells Fargo, referred to at the Central Servicing Agent (CSA), releases a schedule for the year for all the bond offerings that includes the deadlines for the various stages of the funding process. For example, for a loan that is ready to close today, the District Office must receive all the closing documentation for review by September 9th. The District Counsel then has until September 24th to review the closing documentation and submit it to Wells Fargo. The announcement of the bond will be made available to potential investors on October 6th, with the pricing of the bond determined on October 8th. That pricing determines what the effective interest rate the borrower will have for their 504 loan. Finally, on October 14th the bond will be sold and the proceeds will be wired to the respective interim lenders. It should be noted that bonds for 10-year 504 loans are only packaged every-other month since fewer 10-year loans are closed on a monthly basis than 20-year loans and a bond must have a worthwhile dollar amount to be accepted in the bond market for sale.
So as you can see, the timing of the initial loan closing is critical in determining when the loan will fund, take out the interim lender, and determine what interest rate the loan will have. If the closing is delayed or not scheduled until after the first deadline to submit to the District Office, then the loan would be part of the following month’s set of deadlines for funding.
While the closing and funding process for SBA 504 loans might sound long and complicated, the one good thing about it is because these loans are made part of a bond offering backed by the SBA, the return required by the bond holders (the base interest rate for the individual loans) is very low since the risk of the investment is very low. Plus, since the bonds are for either 10 or 20 years, that rate is fixed for the life of the loan.