How does the 25 percent test for the SBA prepayment fee work?
Short answer
The fee applies when voluntary prepayments in one of the first three 12-month periods exceed 25% of the highest principal balance. The loan must run 15 years or more, under 13 CFR § 120.223(a).
13 CFR § 120.223 tests each of the first three 12-month periods after first disbursement.
What counts
A prepayment is a payment of principal above what the amortizationPaying a loan down on a schedule, so each payment covers interest and part of the balance. Full definition schedule requires. Scheduled payments do not count. Several prepayments in the same period are added together.
What the fee is measured on
Once the total in a period passes 25%, the fee applies to all prepayments made in that period, not just the excess. The rates are 5%, 3% and 1% of the prepaid amount in years one, two and three.
Example on a $1,000,000, 25-year loan
- Prepay $250,000 in the first 12 months. That is exactly 25%, so the regulation's test is not met.
- Prepay $300,000 in the first 12 months. That is 30%, so the fee is 5% of $300,000, or $15,000.
- Prepay $300,000 in the third 12 months, when the highest balance is $900,000. That is over 25%, so the fee is 1% of $300,000, or $3,000.
Wording differs across SBA documents
SBA's lender page says 25% or more of the outstanding balance. The SOP's sample Note language says more than 25% of the outstanding principal balance. The regulation says more than 25 percent of the highest outstanding principal balance. Read your Note and ask your lender which measure it will use.
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