Liquidating an SBA loan can be a daunting task for lenders. When staring at what appears to be an uphill battle, lenders should keep in mind the process outlined in this article along with the SBA’s SOP 50 57 2 to prudently liquidate an SBA 7(a) loan in order to work towards keeping their SBA guaranty intact.
Understanding SBA Liquidations
Lenders must keep in mind that it is required to service and liquidate the entire SBA loan balance in a diligent and commercially reasonable manner. Lenders should never use the SBA guaranty as a reason for not prudently liquidating a loan as the SBA states in SOP 50 57 2, that a lender must seek to maximize recovery for both the lender and the SBA throughout the entire liquidation process in order to preserve the guaranty.
Similar to the process of liquidating a non-SBA loan , lenders should adhere to a “waterfall approach” when liquidating collateral securing the SBA loan. Lenders should act promptly on assets that can be easily disposed (i.e. transportable business personal property, such as equipment and motor vehicles). Once business personal property has been liquidated, efforts to liquidate commercial and/or residential property should commence immediately. In order to maximize recovery while completing a liquidation in a timely manner, a lender should conduct proper diligence in order to determine whether the continued pursuit of collateral is cost beneficial. SOP 50 57 2 requires lenders to liquidate any collateral with aggregate recoverable value of greater than $5,000 for business personal property or greater than $10,000 for real property, unless there is a documented compelling reason not to do so.
The last stage of SBA liquidations involves analyzing the financial strength of the remaining guarantor(s) to determine whether a formal deficiency judgement is warranted. Based on the extent of the remaining guarantor’s prior cooperation, an “Offer In Compromise” (‘OIC’) provides an alternative pursuit of the personal guaranty under the SBA Program. If continued pursuit of the personal guarantor(s) is deemed cost prohibitive or the lender is unable to approve an OIC, lenders should promptly submit their final Wrap-Up and Charge-Off Reports and refer the remaining obligor(s) to the Department of Treasury.
While SOP guidance for SBA liquidations allows for lenders to rely on internal policies and procedures for similarly-sized non-SBA commercial loans, a lender must remember that liquidation deficiencies are one of the top reasons for repair. Lenders should be aware of 5 critical deadlines to ensure the security of their SBA loan guaranty:
1. Site Visit
Unless a loan is unsecured or the lender has documented proper justification for abandonment, loans entering liquidation must have a site visit conducted within 60 days of an uncured payment default or within 15 calendar days of an adverse event.
2. Secondary Market Repurchase
When the guaranteed portion of a loan is sold on the secondary market, the lender’s Request to Honor SBA 7(a) Loan Guaranty must be submitted to the SBA at the time the Note is accelerated and the loan reaches liquidation status.
3. Guaranty Purchase Package
Upon confirmation of repurchase from the secondary market by the SBA, lenders must submit a Purchase Package (’10-Tab’) to the appropriate SBA Loan Center within 45 calendar days of the date of purchase.
4. Litigation Plan
All lenders, including delegated lenders, must submit a Litigation Plan to the SBA and receive written approval prior to initiating non-routine litigation, and/or incurring legal fees which are expected to exceed $10,000.
5. Wrap-Up Report
The lender’s Wrap-Up Report must be submitted to the SBA within 30 calendar days after completion of prudent liquidation AND no later than either 24 months from the SBA guaranty purchase date OR 24 months after the effective date of SOP 50 57 2 for loans that the SBA has previously honored the guaranty. The SBA may grant a written extension beyond 24 months in either scenario for active ongoing liquidation efforts.
Throughout the entire liquidation process, lenders must be cognizant that they are liquidating their SBA 7(a) loans as a partner with SBA. Following a detailed procedure while staying within the critical SBA deadlines is the most effective way to ensure prudent liquidation and full protection of the SBA 7(a) guaranty.
About Windsor Advantage, LLC
Windsor Advantage provides banks and credit unions with a comprehensive outsourced SBA 7(a) and USDA lending platform.
Since 2010, Windsor has processed more than $1.9 billion in government guaranteed loans and currently services a portfolio in excess of $1.0 billion for more than 80 lenders nationwide. With over 150 years of collective government guaranteed lending experience, cutting-edge technology and rigid controls, Windsor Advantage is uniquely qualified to assist clients with implementing a thoughtful and profitable lending initiative.
Windsor Advantage has a team of 26 professionals with offices in Chicago, Illinois; Indianapolis, Indiana; and Charleston, South Carolina. For more information, please contact Andrew Sheaffer at (312) 248-8530.
About the Author: Jeff Nitti joined Windsor in June of 2013 and manages the Special Assets department liquidating over $25 million in loans. Prior to Special Assets, Jeff has assisted Windsor’s clients with the processing, closing and funding of over $100 million in loans in his tenure at Windsor. Jeff graduated from the University of Illinois at Urbana-Champaign with a degree in accounting and can be reached at (312) 465-7846.