One of the most critical times to understand proper SBA Servicing is when your SBA Loan becomes a non-performing loan. Not properly servicing a non-performing SBA loan could result in a repair of the guaranty or possibly a denial of the SBA guaranty. There are several areas of servicing that need to be addressed in properly servicing a non-performing SBA loan.
One question that I am often asked is when should a SBA loan be moved into liquidation. Moving a SBA loan into liquidation status is clearly defined by SBA. When a SBA Loan is 60 days past due or an adverse event such as a bankruptcy of the borrower or guarantors or litigation against the borrower or guarantors occur, the SBA loan should be requested to be placed in Liquidation status. It is important to note that after a loan is put into liquidation status, the loan can be moved back into regular status if the borrower brings the loan current and keeps the loan current for a period of time. Understanding the next steps once a loan is put into liquidation and which SBA Servicing Center you will be working with is very important in the proper servicing of this loan.
A liquidation plan should be developed for the non-performing SBA loan. Liquidation plans in most cases do not require SBA’s approval. Consult the SBA servicing unilateral authority matrix helps in understanding when a liquidation plan needs to be approved by the SBA. A proper liquidation plan is a critical file document for a non-performing SBA loan.
A litigation plan needs to be developed if a foreclosure will occur or legal action is going to be taken against the borrower or guarantors. Understanding how to properly engage an attorney and how much legal malpractice insurance is required is important in preparing for a litigation plan. Most litigation plans do not have to be approved by the SBA; however, in certain circumstances, SBA must approve the litigation plan. These circumstances include a litigation plan with a budget of $10,000 or more or contested litigation. The litigation plan is another very important document to aid in the proper servicing of a non-performing SBA loan.
Keeping up with Care and Preservation Expenses and Legal expenses is a very important part of servicing a non-performing SBA loan. SBA will reimburse the lender for a portion of these expenses as long as they are allowable according to the SBA SOP 5057 2. Understanding when to submit these expense for reimbursement and how to submit these expenses is another critical part of proper servicing of a non-performing SBA loan.
Understanding which liquidation actions need SBA approval and properly documenting those servicing actions is another critical element in the proper servicing of a non-performing SBA loan. SBA has a unilateral authority matrix that clearly dictates which liquidation actions need SBA’s approval. Most liquidation actions do not require SBA’s approval, but it is important to understand which servicing actions do require approval and making sure to get approval before completing them. It is also very important to have a servicing memorandum and a copy of SBA’s approval in file.
Understanding the Offer in Compromise process with SBA. An OIC is a monetary offer (typically at the end of the liquidation of all business and other worthwhile assets) in exchange for the release of a personal guaranty on the loan. SBA must approve all OICs. When the borrower does not have the ability to pay the loan in full after liquidation of all worthwhile collateral, it may be appropriate to settle for less than the full amount due. The amount being offered must bear a reasonable relationship to the estimated net present value of the projected amount of recovery available through enforced collection. Accordingly, when the liability of the borrower is clear and the SBA can collect fully without protracted litigation or large unrecoverable expenses, there is little basis to settle for less than what is owed.
Understanding the Charge Off and Wrap Up process is also an important part of servicing a non-performing SBA loan. Once all liquidation is complete and no further recoveries are expected, the loan can be charged off. This is done by the lender submitting a final wrap-up report to SBA. SBA has become very concerned about timely submission of Wrap Up Reports by participant lenders and the deadline is now 2 years from the date of guaranty purchase.
Finally understanding how to prepare and submit a 10 Tab package or Purchase Demand Kit to SBA to request that they honor the guaranty is probably one of the most important parts of non-performing SBA loan servicing. This is where you get paid by SBA. Having a good knowledge of what is included in the Purchase Demand Kit and how to properly prepare and submit the package is critical in not only getting paid but getting paid in a timely manner.
If you have questions about non-performing SBA loan servicing, please don’t hesitate to contact me at [email protected] Also there is an excellent training opportunity on this topic, http://colemanreport.com/colemans-certified-sba-7a-loan-liquidation-training/