SBA’s New Rules Might Refinance Your Home Equity Line of Credit
With a Business Loan and Release the HELOC Lien Against Your House
If you used your home equity line of credit (HELOC) for business purposes, you may be able to refinance with a federally guaranteed bank loan under the U.S. Small Business Administration’s new refinancing rules for its 7(a) program.
This is especially important to know because home values have declined as much as fifty percent in some parts of the country. As a result, many homeowners with HELOC’s have negative equity and nervous bankers that want to be paid off.
SBA’s new rules may allow you to pay off your HELOC and have the existing lien removed from your home. Extensive modifications to SBA’s standard operating procedures, SOP 50 10 5(E), became effective on June 1.
“With the recent changes in our SOP, we now recognize that home equity credit lines are also types of personal debt that could be used for an eligible business purpose,” says Mike Arriola, SBA’s senior area manager for western North Carolina. “Provided the applicant can furnish evidence that the HELOC was used for an eligible business purposes” in order to qualify, he adds.
But unlike qualifying for a home loan, Arriola says that the applicant would have to “satisfy other SBA refinancing requirements” for small-business lending. The requirements begin with owning a successful small business that has a track record of sufficient cash flow to pay back the refinanced loan. It may also mean pledging business collateral, including machinery, furnishings, fixtures and equipment. Moreover, it includes having an acceptable personal and business credit history and being in an industry that your banker believes will continue to thrive.
I told Ethan Smith that this new initiative by SBA could be a big deal because so many business owners used their homes to finance their businesses during the recession since they lacked other alternatives. Smith is principle with Starfield & Smith, P.C., a Pennsylvania-based law firm that specializes in SBA-guaranteed small business and commercial real estate financing. “I think it is a big deal,” he replied. “This is a complete change in policy by the agency.”
I also asked if the refinancing would pay off the HELOC and remove the lien on the home. “Yes,” he said. “I would think that the SBA lender would likely require the HELOC to be closed and the lien satisfied.“
But the savvy attorney dug deeper and cited that there may be a conflicting rule. “SBA rules state that when a lender refinances a debt, that it must take the same collateral as the loan being refinanced.” If enforced, refinancing would pay off the HELOC lien and lien it again with the SBA loan. “As always, there is a great deal of ambiguity and uncertainty in the SBA’s drafting,” he says.
The agency will likely correct the ambiguity. Until then, you can check with your bank to see if they are willing to refinance your HELOC using SBA 7(a) without waiting for the correction. Additionally you can check with the over 2,200 lenders at BoeFly.com. Many of them are among the most active SBA lenders in the nation and have lawyers that can make quick decisions when there are ambiguities in SBA rules.
Notably, SBA has the option of voiding its guaranty if lenders do not follow its rules. But that rarely happens unless the borrower defaults. Therefore lenders may be more willing to take the chance with well-qualified borrowers who are less likely to default. So it makes sense to get multiple offers from BoeFly’s lenders because there is a greater chance that several of them are ready to refinance your HELOC right now at historically low interest rates.
Additionally, you can download SBA’s modified SOP and scroll through the 400 pages to bone up on most of SBA’s lending programs. The 7(a) refinancing program for HELOCs begins on page 132.
Jerry Chautin is a former entrepreneur, commercial mortgage banker and business lender. He writes and blogs about business and real estate for several publications and is SBA’s 2006 national “Journalist of the Year.” Jerry is a volunteer business mentor with SCORE, “Mentors to America’s Small Business,” offering free business advice. Post your comments and ask questions on this Blog or send Jerry an e-mail.
Copyright © 2012 Jerry Chautin — All rights reserved.