On February 6, the Small Business Administration (SBA) published a procedural notice, followed by a notification in the Federal Register on February 10, announcing alternative base rate options for variable interest rate loans under the SBA’s 7(a) Loan Program. Currently, a 7(a) lender can use either the Prime rate or the Optional Peg Rate as the base rate when determining the interest rate on such loans. The agency stated it would permit lenders to use three “Alternative Base Rate” options: (i) the 5-year Treasury Note Rate; (ii) the 10-year Treasury Note Rate; and (iii) the Secured Overnight Funding Rate (SOFR). With respect to SOFR, the SBA acknowledged that financial institutions use a range of products to deliver an equivalent reference rate and clarified that lenders may continue using their established in-house SOFR reference rates of 30 days or less, noting these closely align with the daily SOFR rate.

These changes, effective March 1, allow lenders to select base rates that the agency determines are “widely adopted” in small business commercial lending, with the maximum interest rate capped at the Prime rate plus the allowed spread based on loan amount. The SBA stated it will regularly publish these rates on its website, along with the Prime rate and Optional Peg Rate, and noted that these updates will amend the agency’s standard operating procedures and supersede prior guidance. While loans using alternative base rates are not currently eligible for secondary market sales, the SBA stated it will evaluate market demand for these products.