§936c Refinancing and Prepayment of Ffb Loans

Summary

A borrower with a Federal Financing Bank loan guaranteed under section 936 may pay off or refinance all or part of the loan. If they do, the borrower must pay a penalty. The penalty is the smallest of three money calculations: (1) the difference between the loan balance and its present value when discounted at the Treasury’s current cost of funds for a similar maturity; (2) an amount equal to one year’s interest on the outstanding balance, adjusted by the ratio of quarterly payments left to the quarterly payments remaining after the loan has been 12 years old; or (3) the present value of one year’s interest plus the present value of the shortfall between scheduled payments and payments that would be due if the loan’s rate equaled the Treasury’s cost of funds for the same period until the loan reaches the 12-year point. If the loan agreement already allowed refinancing for payment of one year’s interest, the borrower may instead pay option (2) if the loan has reached the 12-year point, or option (3) if it has not. The borrower can pay the penalty in cash at refinancing or add it to the loan principal; if added to principal, they must also pay 2.5% of that added amount at closing. After the penalty is paid, the loan can be refinanced at the Treasury’s cost-of-funds rate for a term the borrower picks, but the rate cannot exceed 7% per year and the new term cannot go past the loan’s original maturity. Including the penalty in the principal is not limited by yearly loan-approval amounts, and the borrower’s refinancing request cannot be denied or delayed. A borrower may choose to cap the refinanced rate at 7% for eligible loans, but that cap can apply to no more than 50% of the borrower’s outstanding guaranteed loans, requires a 1% fee of the principal when chosen, and must be requested in writing within 1 year after the implementing regulations take effect.