Lenders should always make a good faith effort to help delinquent Small Business Administration (SBA) 7(a) borrowers bring their loan current by considering potential workout strategies. However, in some cases a workout strategy may not be feasible and the immediate next step is liquidation. It is incumbent upon lenders to prepare for liquidation as proactively as possible, understand when it is appropriate to classify a loan in liquidation, and understand the necessary steps to develop and pursue a liquidation plan. Doing so will protect the interests of the lender and the SBA, potentially increase recoveries, and limit the possibility of a repair or denial during a guaranty purchase.
The first course of action when a borrower is demonstrating signs of distress – such as as failure to provide financial statements, past due taxes, or increased frequency and duration of slow payments – is to obtain sufficient information to make prudent decisions. While the following list is not all encompassing, it highlights key considerations while you prepare for workout and/or liquidation:
- Review the loan file for deficiencies which could possibly be cured while the borrower may be cooperative
- Determine if the collateral and lien priority required per the Loan Authorization were properly perfected
- Obtain current searches – judgment, UCC, title, etc.
- Contact the landlord to determine if rent is past due (as applicable)
- Evaluate the status of tax payments
- Determine if senior lienholders are current and verify senior lienholder balances
- Order real or personal property appraisals to determine recoverable value (as needed)
- Obtain a signed 4506T and run tax transcripts if borrower financial statements cannot be obtained.
If issues are uncovered during this process, try to address them with the borrower during a site visit or leading up to a site visit.
Conduct a Site Visit
The SBA requires a site visit to be completed and documented within 60 days of uncured payment default, and within 15 days of non-payment default for a bankruptcy and business closure. Lenders are encouraged to conduct site visits as frequently as needed to mitigate risk and facilitate prudent decision making.
The objectives of the site visit should include:
- Confirmation that the business is in operation and occupies the business location
- Inspection and inventory verification of the business collateral securing the loan
- Assessment of environmental risk
- Planning for the care and preservation of all collateral
- Development of a loan workout plan and, if necessary, a liquidation strategy
Classify the Loan in Liquidation Status
After completing a post-default site visit and determining a workout strategy is not feasible, the next step is to accelerate the Note. The loan must be classified in liquidation status once the Note is accelerated.
A Demand Letter is then sent to all Obligors unless prohibited by applicable federal and state law (i.e. bankruptcy).
If the loan was sold in the secondary market, the lender must immediately repurchase the guaranty or request the SBA repurchase while liquidation efforts are being pursued.
Lenders must be aware that the SBA guaranty purchase cannot occur until the borrower has been in payment default for more than 60 calendar days, unless otherwise approved by the SBA in writing. The SBA will not repurchase the guaranty for non-payment default such as failure to provide financial statements.
Develop a Liquidation Plan & Liquidate
The SBA provides lenders a liquidation plan format which serves as a guide through the process. The plan helps ensure the loan is liquidated in a timely, prudent and cost-effective manner that maximizes recovery in the shortest period of time. Key elements considered within the liquidation plan include:
- Site visit findings
- Feasibility of a workout
- Recoverable value of collateral
- Available and selected methods of liquidation
- Routine litigation
- Status of senior liens
- Obligors’ repayment ability
- The lender’s non-SBA loans to Obligors
Submit the 10 Tab Guaranty Purchase Package
After the lender completes liquidation, the 10 Tab Guaranty Purchase package is submitted to the SBA Guaranty Purchase Center for final determination as to whether or not the SBA will honor the guaranty. The package must be submitted within 45 calendar days of emergency repurchase by the SBA, within 180 days of loan maturity or the date the lender completes liquidation. We discuss the Guaranty Purchase process in greater detail within an accompanying IFS Viewpoints article.
Lenders are often forced to react to issues during the liquidation process which can result in missed opportunities that would otherwise maximize collateral recovery and preserve the value of the SBA guaranty. Creating a proactive culture within your servicing and liquidation department will minimize surprises and build confidence throughout key phases of the liquidation process.
SBA’s Servicing and Liquidation Standard Operating Procedure (SOP 50 57 2) provides detailed guidance pertaining to required steps in the liquidation process.
If you are experiencing an SBA 7(a) loan default which appears to be heading towards liquidation, we encourage you to contact the experts at Innovative Financing Solutions for guidance. All workout and liquidation situations must be handled on a case-by-case basis as each situation is unique.
By: Christopher A. Meccariello
Chief Operating Officer