Can You Refinance a SBA 504 Loan with a SBA 7a Loan Under SOP 50 10 5 (F)?

Jessica SarterSBA Loans

Commencing in 2014 a 504 loan can, under certain circumstances, be refinanced with a SBA 7a loan.
SOP 50 10 5 (F) Subpart B Chapter 2 Section IV (E) (8) provides in part that a 7(a) loan may be used to finance an existing 504 Loan if both the underlying loan (“Third Party Loan”) and the 504 loan are being refinanced or the Third Party Loan has been paid in full and the 504 loan is being refinanced as part of a larger transaction to provide for expansion or renovations of the Project Property.

The SBA 7a Loan must also meet the requirements of subsection 3, 4 and 5 of Section IV (E).
Subsection 3 refers to the types of business loans that can be refinanced (e.g. short term debt, business related credit card debt etc.).
Subsection 4 sets forth requirements for refinancing installment debt.
Subsection 5 sets forth the required issues to be analyzed and documented with respect to the refinancing (e.g. why was the debt incurred? has imprudent borrowing necessitated a major restructuring of the debt? etc.).

As with any new rules or regulations, questions of interpretation undoubtedly arise. For example with respect to the question “has imprudent borrowing necessitated a major restructuring of the debt?” What if the borrowing was imprudent, but the restructuring puts the borrower in a profitable situation? The SOP is silent as to whether this would make the loan ineligible. Since what is “imprudent” is often quite subjective, a lender might be subject to criticism without further guidance.

What if the SBA 504 loan was made for a purpose that was ineligible for a 7a loan at the time it was made? Section E (1) would seem to prohibit this, but compliance with Section (E) (1) is not one of the sections required to be complied with by Section (E) 8 for refinancing a 504 loan.