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SBA SOP 50 52 2
DISASTER LOAN
SERVICING and LIQUIDATION
Office of Capital Access
Small Business Administration
September 1, 2015
Disaster Loan Servicing and Liquidation
50 52 2
1. Purpose: Update and consolidate SBA policy and procedures on Disaster Loan
servicing and liquidation.
2. Personnel Concerned: All SBA employees.
3. SOPs Cancelled: SOP 50 52 1, SOP 50 50 4 and SOP 50 51 3
4. Originator: Office of Capital Access
Ann Marie Mehlum 9/01/15
Associate Administrator
Office of Capital Access
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SOP 50 52 2
Table of Contents
Chapter 1. Introduction ......................................................................................................... 6
A. Purpose ............................................................................................................................................... 6
B. Authority ............................................................................................................................................. 6
C. General Policy and Goals..................................................................................................................... 6
D. Performance Standards....................................................................................................................... 6
E. Exceptions to Policy ............................................................................................................................ 7
Chapter 2. Definitions ........................................................................................................... 8
A. General Terms ..................................................................................................................................... 8
B. Environmental Terms ........................................................................................................................ 16
Chapter 3. Recordkeeping and Disclosure of Information ..................................................... 18
A. Recordkeeping .................................................................................................................................. 18
B. Disclosure of Information.................................................................................................................. 19
Chapter 4. Monitoring Loans in Regular Servicing Status ...................................................... 24
A. Name, Address or Legal Structure Changes ...................................................................................... 24
B. Borrower's Creditworthiness ............................................................................................................ 24
C. Deceased Obligors............................................................................................................................. 24
D. Care and Preservation of Collateral .................................................................................................. 25
Chapter 5. Loan Payment Administration ............................................................................ 26
A. Payments on Loans in Regular Servicing Status ................................................................................ 26
B. Payments on Loans During and After a Deferment Period ............................................................... 26
C. Payments on Loans in Liquidation Status ......................................................................................... 26
D. Impact of Accepting Payment on a Loan in Litigation Status ............................................................ 27
E. Payments on Loans Returned to Regular Servicing Status ............................................................... 27
F. Prepayment ....................................................................................................................................... 27
G. Paid in Full Loans ............................................................................................................................... 27
H. Reinstatement of Loans Mistakenly Coded as "Paid in Full" ............................................................ 28
Chapter 6. Environmental Risk Management ...................................................................... 30
A. Overview ........................................................................................................................................... 30
B. General Requirements ...................................................................................................................... 30
C. When an Environmental Investigation is Required........................................................................... 31
D. Environmental Investigation Process for Loans in Regular Servicing Status .................................... 31
E. Environmental Investigation Process for Loans in Liquidation Status .............................................. 31
F. Environmental Investigation Reports................................................................................................ 34
G. Remedial Action by SBA as a Secured Creditor ................................................................................. 34
H. Taking Title to Contaminated Property or Control of Business with Environment Risks ................. 34
Chapter 7. Severe Financial Hardship Relief ......................................................................... 40
A. Overview ........................................................................................................................................... 40
B. Requirements for Severe Financial Hardship Relief .......................................................................... 40
C. Severe Financial Hardship Relief Request Packages ......................................................................... 40
D. Review of Severe Financial Hardship Relief Requests ...................................................................... 41
E. Severe Financial Hardship Relief Options ......................................................................................... 43
Chapter 8. Servicing Requests ............................................................................................. 46
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A. General Requirements ...................................................................................................................... 46
B. Review and Analysis .......................................................................................................................... 46
C. Required Documentation .................................................................................................................. 50
D. Implementing Loan Actions .............................................................................................................. 50
E. Borrower’ Requests for Reconsideration .......................................................................................... 51
Chapter 9. Modification of Note.......................................................................................... 52
A. General Requirements ...................................................................................................................... 52
B. Payment Due Date ............................................................................................................................ 52
C. Payment Amount .............................................................................................................................. 52
D. Interest Rate ...................................................................................................................................... 53
E. Maturity Date .................................................................................................................................... 53
F. Loan Amount ..................................................................................................................................... 53
Chapter 10. Modification of Collateral Requirements .......................................................... 56
A. Subordination of Lien Position .......................................................................................................... 56
B. Inter-creditor Agreements ................................................................................................................ 58
C. Substitution of Collateral .................................................................................................................. 58
D. Substitution of Guarantor ................................................................................................................. 59
E. Release of Lien without Consideration ............................................................................................. 59
F. Release of Lien for Consideration ..................................................................................................... 60
G. Release of Guarantor or Co-Borrower .............................................................................................. 60
H. Release of Condemnation Proceeds ................................................................................................. 61
Chapter 11. Insurance Coverage .......................................................................................... 64
A. General Requirements ...................................................................................................................... 64
B. Mortgagee’s Title Insurance.............................................................................................................. 64
C. Hazard Insurance............................................................................................................................... 65
D. Flood Insurance ................................................................................................................................. 66
Chapter 12. Assumption or Sale of Loan .............................................................................. 68
A. Assumption ....................................................................................................................................... 68
B. Sale of Disaster Loan ......................................................................................................................... 69
Chapter 13. Deferments...................................................................................................... 70
A. Overview ........................................................................................................................................... 70
B. General Rule ...................................................................................................................................... 70
C. General Requirements ...................................................................................................................... 70
D. Deferred Amount .............................................................................................................................. 71
E. Loan Payments During Deferment Period ........................................................................................ 72
F. Interest Accrual ................................................................................................................................. 72
G. Procedure When Delinquency Can Not Be Cured............................................................................. 72
Chapter 14. Delinquent Senior Liens ................................................................................... 74
A. General Requirements ...................................................................................................................... 74
B. Best Strategy to Protect Junior Disaster Loan Lien ........................................................................... 75
C. Judicial Foreclosures ......................................................................................................................... 75
D. Protective Bids .................................................................................................................................. 75
E. “No Bid” Position............................................................................................................................... 76
F. Redemption Rights ............................................................................................................................ 76
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G. Excess Proceeds from Senior Lien Foreclosure Sales ........................................................................ 77
Chapter 15. Delinquent Loan Servicing ................................................................................ 78
A. General Requirements ...................................................................................................................... 78
Chapter 16. Classifying Loans in Liquidation ........................................................................ 80
A. When the Note Should Be Accelerated ............................................................................................ 80
B. Demand Letters ................................................................................................................................. 80
C. Obligors in Active Military Service .................................................................................................... 81
D. Liquidation Plans ............................................................................................................................... 81
E. When Loans Should Be Removed from Liquidation Status............................................................... 82
Chapter 17. Workouts......................................................................................................... 84
A. Overview ........................................................................................................................................... 84
B. Required Financial Information......................................................................................................... 84
C. Workout Feasibility ........................................................................................................................... 84
D. Requirement—New Consideration from Borrower .......................................................................... 84
E. Options .............................................................................................................................................. 85
Chapter 18. Real Property Collateral Liquidation ................................................................. 88
A. General Requirements ...................................................................................................................... 88
B. Release of Lien for Consideration ..................................................................................................... 88
C. Voluntary Sale of Collateral by Obligor ............................................................................................. 88
D. Deed in Lieu of Foreclosure............................................................................................................... 89
E. Foreclosure of Real Property – Judicial and Non-Judicial ................................................................. 89
F. Collection of Rents ............................................................................................................................ 90
G. Appointment of Receiver .................................................................................................................. 90
H. Short Sale Approval ........................................................................................................................... 91
I. Credit Bids ......................................................................................................................................... 91
J. Eviction Proceedings ......................................................................................................................... 91
K. Abandonment ................................................................................................................................... 91
L. Title.................................................................................................................................................... 91
Chapter 19. Personal Property Collateral Liquidation .......................................................... 94
A. General Requirements ...................................................................................................................... 94
B. Release of Lien for Consideration ..................................................................................................... 94
C. Voluntary Sale of Collateral by Obligor ............................................................................................. 94
D. UCC Sale ............................................................................................................................................ 95
E. Judicial Foreclosure of Personal Property ......................................................................................... 96
F. Collection of Accounts Receivable .................................................................................................... 97
G. Set-off of Deposit Account ................................................................................................................ 97
H. Surrender of Life Insurance Policy for Cash Value ............................................................................ 97
I. Foreclosure of Lien on Fixtures ......................................................................................................... 97
J. Marine Mortgage Foreclosure .......................................................................................................... 98
K. Manufactured Housing Foreclosure ................................................................................................. 98
L. Abandonment ................................................................................................................................... 98
Chapter 20. Acquired Collateral (REO and Personal Property)............................................ 100
A. Overview ......................................................................................................................................... 100
B. Ownership Responsibilities ............................................................................................................. 100
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C. Timeframe for Disposal ................................................................................................................... 101
D. Sale .................................................................................................................................................. 101
E. Lease................................................................................................................................................ 104
F. Abandonment ................................................................................................................................. 104
Chapter 21. Offer in Compromise ...................................................................................... 106
A. Overview ......................................................................................................................................... 106
B. When Compromise is Appropriate ................................................................................................. 106
C. Offer and Supporting Documents ................................................................................................... 107
D. Review and Analysis of Offer .......................................................................................................... 108
E. Inadequate Offers ........................................................................................................................... 108
F. Payment Terms and Conditions ...................................................................................................... 108
Chapter 22. Litigation ....................................................................................................... 110
A. Events Requiring a Loan be Classified in Litigation ......................................................................... 110
Chapter 23. Expenses and Recoveries ............................................................................... 112
A. Classification of Expenses ............................................................................................................... 112
B. Payment of Non-recoverable Expenses .......................................................................................... 113
C. Payment of Recoverable Expenses ................................................................................................. 113
D. Recoveries ....................................................................................................................................... 114
Chapter 24. Inspector General Referrals ............................................................................ 116
A. Duty to Report Irregularities ........................................................................................................... 116
B. Irregularities Requiring Referral ...................................................................................................... 116
C. Referral Methods ............................................................................................................................ 117
D. Required Information...................................................................................................................... 117
E. Post-referral Responsibility ............................................................................................................. 118
Chapter 25. Charge-off Procedures ................................................................................... 120
A. Charge-off........................................................................................................................................ 120
B. Referral to Treasury Cross-Servicing Program ................................................................................ 120
C. IRS Notification of Cancelled Debt .................................................................................................. 120
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Chapter 1.
Introduction
____________________________________________________________________________
A. Purpose
SOP 50 52 2 sets out the standard operating policies and procedures of the Small Business
Administration (“SBA”) for the administration of Disaster Loans that are in “regular servicing”
and “liquidation” status. The previous version, SOP 50 52 1, applied only to servicing of
Disaster Loans. This version has been revised to include liquidation of Disaster Loans.
This SOP does not apply to Immediate Disaster Assistance Program (IDAP) loans.
Note: A Disaster Loan moves from “approval” status (governed by SOP 50 30) to “regular
servicing” status when the loan has been closed and the final loan disbursement has been made.
It moves from “regular servicing” status to “liquidation” status if the loan is in default and has been
classified in liquidation pursuant to Chapter 16 of this SOP.
B. Authority
The policy and procedures set out in this SOP are based on the Small Business Act, the
Stafford Act, the Debt Collection Improvement Act of 1996 (“DCIA”) and Part 123 of Title 13
of the Code of Federal Regulations.
Note: Because the Agency's authority to make Disaster Loans is based on Section 7(b) of the
Small Business Act, Disaster Loans are also known as "7(b) loans."
C. General Policy and Goals
Borrowers should repay their Disaster Loans in accordance with the terms specified in the
Note (Secured, Unsecured) and other Loan Documents. Provided, however, that loan
servicing and liquidation activities should reflect a balancing of the Agency's interest in: (1)
achieving the goals of the Disaster Loan Program, i.e., helping victims recover from
disasters; and (2) maintaining the integrity of the Disaster Loan Program, i.e., protecting the
taxpayers' interests in the Agency's ability to maximize its recovery if the Borrower defaults
on the loan.
D. Performance Standards
1. Loans in Regular Servicing
Generally, Disaster Loans must be serviced in a prompt, cost-effective, prudent manner
that is consistent with federal debt management and collection guidelines and SBA loan
program requirements and reflects a balancing of the Agency's interest in: (1) achieving
the goals of the Disaster Loan Program, i.e., helping victims recover from disasters; and
(2) maintaining the integrity of the Disaster Loan Program; i.e., protecting the taxpayers'
interests in the Agency's ability to recover on the loan.
2. Loans in Liquidation Status
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Generally, Disaster Loans must be liquidated in a prompt, cost-effective, prudent manner
that is consistent with federal debt management and collection guidelines and SBA loan
program requirements; enables SBA to maximize recovery on the loan in the shortest
amount of time; and reflects a balancing of SBA's interest in: (1) achieving the goals of
the Disaster Loan Program, i.e., helping victims recover from disasters; and (2)
maintaining the integrity of the Disaster Loan Program; i.e., protecting the taxpayers'
interests in the Agency's ability to recover on the loan.
Recoveries should be collected in an efficient and effective manner to protect the value
of the Federal Government’s assets. An attempt should be made to maximize recovery
using all appropriate collection tools. For more information on the management of
recoveries, refer to Circular A-129 and Managing Federal Receivables.
E. Exceptions to Policy
Any Loan Action that conflicts with the use of the word “must” in this SOP, or any other
applicable Loan Program Requirement, must be treated as an exception to policy. An
exception to policy is only appropriate when the applicable Loan Program Requirement does
not adequately address the unique circumstances of a particular loan, and the exception, if
granted, would not contravene an applicable statute or regulation. Prior to taking any Loan
Action that would conflict with a Loan Program Requirement under this SOP, written
approval must be obtained from the Director of Financial Program Operations (“OFPO”).
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Chapter 2.
Definitions
____________________________________________________________________________
The terms defined below have the same meaning wherever they are used in this SOP. Unless
otherwise indicated, defined terms are capitalized wherever they appear.
A. General Terms
1. Agency means the U.S. Small Business Administration (“SBA”).
2. Agent means an authorized representative, including an attorney, accountant,
consultant, packager, lender service provider, or any other Person representing a loan
applicant by conducting business with SBA.
3. Appraisal means a licensed Appraiser’s written opinion as to the value of property.
a. Qualifications of Appraiser
An Appraisal may be performed by an appraiser, broker, auctioneer, retail inventory
specialist or other expert, provided that the Person meets the minimum qualifications
listed below and a good faith effort is made to use a local expert with actual
knowledge of the property and market conditions where it will be sold:
(1) Knowledge and Experience
Has the specific knowledge, training and experience required to develop a
professional opinion as to the value of the specific type of property involved;
(2) Licensed, Certified and Bonded
Meets applicable government licensing, certification and bonding requirements;
(3) Independent
Has no conflict of interest with SBA or the Obligors; and has no financial interest
in the property to be appraised, provided, however, that when it is cost-effective,
the Person who appraised the collateral may also sell it as long as the sale is
widely advertised and otherwise consistent with applicable law. (E.g., an
auctioneer may appraise and sell personal property collateral via a public auction
that complies with Article 9 of the Uniform Commercial Code.)
b. Appraisal Standards
(1) Real Property
(a) A real property Appraisal should comply with the Uniform Standards of
Professional Appraisal Practice whenever required by prudent lending
practices, e.g., to support Loan Actions dealing with release of liens for
consideration, Protective Bids, or deeds in lieu of foreclosure, or when it is
apparent (based on the tax assessed value, current market conditions,
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condition of the property, balance owed on prior liens, etc.,) that there is
equity to secure the SBA loan; and
(b) In all other cases, (i.e., when neither a specific SBA Loan Program
Requirement nor prudent lending practices require an Appraisal in
compliance with the Uniform Standards of Professional Appraisal Practice), a
real property valuation may consist of a broker price opinion (“BPO”)
prepared in substantial compliance with the Broker Price Opinion Board
Standards. For example, a BPO may be used to support a Loan Action to
abandon real property collateral if it is apparent, (based on the tax assessed
value, current market conditions, condition of the property, balance owed on
prior liens, etc.,) that there is little or no equity available to secure the SBA
loan.
(2) Personal Property
(c) A personal property Appraisal should comply with the Uniform Standards of
Professional Appraisal Practice whenever required by prudent lending
practices, e.g., to support Loan Actions dealing with unique items of personal
property such as coin collections, jewelry, or art work; and
(d) In all other cases, (i.e., when neither SBA Loan Program Requirements nor
prudent lending practices require an appraisal in compliance with the Uniform
Standards of Professional Appraisal Practice), a personal property Appraisal
may consist of an auctioneer or other expert's opinion as to value.
b. Report Format
All Appraisal reports should contain the following:
(1) The appraiser's opinion as to value of the property, including an opinion as to the
individual value of any item secured by a UCC lien;
(2) The type of valuation, e.g., liquidation or fair market value, and how the Appraisal
is to be used;
(3) The methodology, standards, resources and markets the appraiser used or relied
on;
(4) A complete and accurate description of the collateral, including its current
condition, photographs, and the manufacturer, model, and serial number of
significant items of personal property, i.e., items with a Liquidation Value of
$5,000 or more;
(5) The date and location of the Appraisal inspection, and the effective date of the
valuation;
(6) The appraiser's certification that he or she has no financial interest in the
property or conflict of interest with SBA or any Obligor; and
(7) The appraiser's qualifications and signature.
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c. Age of Appraisal
Generally, an Appraisal should be less than 120 calendar days old, and must never
be more than one year old, at the time SBA relies on it to make a decision affecting a
Disaster Loan.
4. Associate of the Borrower means an officer, director, key employee of a Disaster
Business Loan Borrower, or a Person who has an ownership interest of more than 20%
in the Borrower's business; any entity in which one or more of the foregoing Persons has
an ownership interest of at least 20%; or any Person in control of, or controlled by, the
Borrower except a Small Business Investment Company licensed by SBA.
5. Basic Living Expenses means those costs that must be paid to obtain the following
categories of goods and services necessary for the survival of an Obligor, their spouse
and dependents as defined by the most current version of the Collection Financial
Standards published by the Internal Revenue Service: (1) food and clothing; (2) out-of-
pocket health care expenses; (3) housing and utilities; and (4) transportation.
6. Borrower means the Person or Persons who executed the Note (Secured, Unsecured)
evidencing the Disaster Loan.
7. Close Relative means a spouse, parent, child or sibling, or the spouse of a parent, child
or sibling.
8. Computer Tracking System means the electronic method used by SBA to create and
maintain a chronological record of the significant activities on a Disaster Loan, such as
Loan Actions, the substance of meetings, telephone calls, or letters regarding the loan,
including computer generated letters and phone calls
9. Conflict of Interest, whether capitalized or not, means a set of circumstances that
creates an actual, apparent, or potential risk that judgment or actions—which should be
based on the general policy and goals set out in Chapter 1, Paragraph C—will be unduly
influenced by a secondary interest.
10. Credit Bid means an offer to purchase at a foreclosure sale submitted by a creditor
who, instead of paying cash, will "credit" the bid amount against the debt owed to the
creditor.
11. Default Charges means all monetary amounts payable as the result of a default on a
senior secured creditor’s loan, such as prepayment penalties, swap fees, late fees and
interest paid at an escalated rate.
12. Disaster Loan means and includes, unless otherwise specifically stated, home and
business physical disaster loans, economic injury loans, and pre-disaster mitigation
loans made under Section 7(b) of the Small Business Act. Disaster Loan does not
include Immediate Disaster Assistance Program (IDAP) loans made under Section 42 of
the Small Business Act.
13. Disaster Home Loan is a consumer loan made to a homeowner or renter to
repair/replace his/her property (both real and personal) or refinance a mortgage (on
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residential real estate) which was damaged or destroyed as the result of a declared
disaster.
14. Disaster Business Loan is a commercial loan made to an individual or legal entity to
repair/replace property (both real and personal) or refinance secured loans that was
damaged or destroyed as the result of a declared disaster. These loans may have also
provided working capital required as a result of a declared disaster.
15. Disposable Pay means that part of the employee's compensation (including salary,
bonuses, commissions, and vacation pay) from an employer remaining after the
deduction of health insurance premiums and any amounts required by law to be
withheld. For purposes of this SOP, “amounts required by law to be withheld” include
amounts for deductions such as Social Security Taxes and withholding taxes, but do not
include any amount withheld pursuant to a court order. (13 C.F.R. § 140.11)
16. Duplication of Benefits refers to the duplicate assistance for any part of a loss for
which the individual or business has received financial assistance under any other
program, insurance or any other source.
17. Good Faith, whether capitalized or not, means the absence of any intention to seek an
unfair advantage or to defraud another party; i.e., an honest and sincere intention to
fulfill one's obligations in the conduct or transaction concerned.
18. Guarantor means a Person who executed a Guaranty as security for a Note (Secured,
Unsecured) executed by a Borrower.
19. Guaranty means SBA Form 2128 (Unconditional Guarantee), SBA Form 2129
(Unconditional Limited Guarantee) or a substantially similar document executed by a
Guarantor that contains an unconditional promise to pay the debt owed on a Note
(Secured, Unsecured) if the Borrower fails to pay it.
20. Including, whether capitalized or not, means "including but not limited to," i.e., the list is
exemplary and not exhaustive.
21. Liquidation Plan means a written plan outlining the actions the Agency intends to take
to maximize recovery on a specific Disaster Loan.
22. Liquidation Value is the likely price collateral will sell for if sold quickly and with limited
exposure to potential buyers. An Appraisal is necessary to determine the Liquidation
Value of real or personal property collateral unless it consists of:
a. Cash or Equivalent—the Liquidation Value of cash or cash equivalent items such as
retirement accounts, trust funds, life insurance policies with a cash surrender value,
certificates of deposit, letters of credit, or other commercial instruments should be the
net amount arrived at after deducting verifiable, documented costs such as penalties
for early withdrawal; or
b. Motor Vehicles and Stock—the Liquidation Value of items that are customarily sold in
a recognized market should be based on industry standards. For example, the
Liquidation Value of motor vehicles should be based on NADA or Kelley Blue Book
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value, and the Liquidation Value of publically traded stock should be based on official
stock exchange prices.
23. Litigation Plan means a written plan, whether or not it is entitled “Litigation Plan,”
outlining the court proceedings that the Agency intends to initiate or defend against in
order to protect its interest in, or maximize its recovery on, a Disaster Loan.
24. Loan Action, (formerly known as an [SBA Form] “327 action”), means an activity or
decision regarding a specific SBA loan including a decision to engage or not to engage
in a particular activity, e.g., a decision not to enter a Protective Bid at a senior
lienholder's foreclosure sale would be a Loan Action.
25. Loan Action Record means the paper or electronic document used to memorialize the
decision and justification for a specific Loan Action. It may consist of a memo, email,
letter, SBA Form 327 or other document provided that it contains: the Borrower's name
and the SBA loan number; a reasonable description of the Loan Action; the justification
for the Loan Action including an analysis of any Supporting Documentation; and a
citation to the applicable SOP provision that provides authority for the proposed Loan
Action.
26. Loan Authorization and Agreement means SBA's written agreement including
subsequent modifications thereto, which sets out the terms and conditions under which
SBA will make a Disaster Loan.
27. Loan Documents means the Loan Authorization and Agreement, Note (Secured,
Unsecured), Guaranty, lien instruments, and all other agreements and documents
related to a Disaster Loan.
28. Loan File, whether capitalized or not, means the electronic or paper folder dedicated
exclusively to storing a hard copy or an electronic copy of all of the Loan Documents
(including the collateral documents regardless of whether they are kept in a separate
folder) pertaining to a specific SBA loan.
29. Loan Program Requirements means the requirements pertaining to SBA’s Disaster
Loan Program, as issued and revised from time to time, imposed by statutes,
regulations, contracts, Loan Authorizations, and SBA Notices and forms.
30. Must, whether capitalized or not, means that the action or prohibition is mandatory.
31. Net Earnings Clause refers to a supplemental annual principal payment that is a
designated percentage of a business loan borrower’s net earnings.
32. Non-recoverable Expense means a cost that cannot be recouped by being added to
the principal balance of the Note (Secured, Unsecured), because, e.g., the cost was not:
(a) related to collection of amounts due under the Note (Secured, Unsecured),
enforcement of the terms of the Loan Documents, or the preservation or disposal of the
collateral; (b) necessary, reasonable or customary; or (c) incurred in accordance with
prudent lending practices or SBA Loan Program Requirements.
33. Note means the promissory note (Secured, Unsecured) executed by the Borrower on a
Disaster Loan.
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34. Obligor means every Person with direct liability for repaying a Disaster Loan, such as
the Borrower and any assumptor, and every Person with contingent liability, such as a
Guarantor.
35. Office of Financial Program Operations ("OFPO") means the SBA office in charge of
administering SBA's loan program operations and managing SBA’s loan portfolio.
36. Person means any individual, corporation, partnership, limited liability company,
association, unit of government, or other legal entity, however organized.
37. Protective Bid means an offer made by a secured creditor to pay a designated price for
property at a foreclosure sale to "protect" the secured creditor's interest in the property
that might otherwise be eliminated by the foreclosure sale.
38. Real Estate Owned ("REO") means real property collateral acquired by SBA (formerly
known as "COLPUR").
39. Recoverable Expense means a necessary, reasonable and customary cost incurred to
collect amounts due under the Note (Secured, Unsecured), to enforce the terms of the
Loan Documents, or to preserve or dispose of collateral, which according to the terms of
the Note (Secured, Unsecured), can be recouped by adding it to the principal balance of
the loan.
40. Recoverable Value means the net dollar amount that a prudent lender could reasonably
expect to recover by liquidating a particular piece of collateral. Recoverable Value is
determined by deducting the following amounts from the Liquidation Value of the
collateral: (a) the balance owed on senior liens (less amounts waived or subordinated
by a Loan Document); (b) Recoverable Expenses associated with any necessary lien
foreclosure action; and (c) if the collateral is likely to be acquired by SBA at the
foreclosure sale (e.g., real property), the expenses associated with the care,
preservation and resale of the acquired collateral.
41. SBA Loan Center means the following SBA facilities:
a. Birmingham Disaster Loan Servicing Center
801 Tom Martin Drive, Suite 120
Birmingham, AL 35211
Toll Free Phone: (800) 736-6048
Local Phone: (205) 290-7141
Fax: (205) 290-7765
E-mail: Birminghamdlsc@sba.gov
The Birmingham Disaster Loan Servicing Center is responsible for housing and
servicing all Disaster Loans in regular servicing status in Guam and surrounding
island nations as well as Regions 1, 2 (except for Puerto Rico and St. Croix), 3, 4
and 5.
d. El Paso Disaster Loan Servicing Center
10737 Gateway West, Suite 300
Effective Date: September 1, 2015 13
SOP 50 52 2
El Paso, TX 79935
Toll Free Phone: (800) 487-6019
Local Phone: (915) 633-7137
Fax: (915) 633-7110
E-mail: ElPasodlsc@sba.gov
The El Paso Disaster Loan Servicing Center is responsible for housing and servicing
all Disaster Loans in regular servicing status in Puerto Rico and St. Croix as well as
Regions 6, 7, 8, 9 (except for Guam) and 10.
e. National Disaster Loan Resolution Center
200 West Santa Ana Boulevard, Suite 180
Santa Ana, CA 92701-4134
Toll Free Phone: (855) 778-3154
Telephone Number: (714) 550-9566
Facsimile Number: (714) 567-0136
TTY / TDD Number: (714) 550-0655
Facsimile Number: (714) 567-0137
E-mail: 0946.reception@sba.gov
The National Disaster Loan Resolution Center is responsible for housing and
liquidating all Disaster Loans in liquidation status in Regions 1 through 10.
42. Seasoned Loan or a loan that is “Seasoned” means that for 18 months after the initial
disbursement or 18 months after the final disbursement if it occurred more than six
months after the initial disbursement, or if there was a default, the Borrower cured it and
for 12 consecutive months following the 18 month post-disbursement period, the
Borrower did not:
a. Fail to make a scheduled loan payment;
b. Fund a scheduled loan payment from the sale of collateral;
c. Have more than three consecutive scheduled full payments deferred; or
d. Experience an event of default that required the loan to be classified in liquidation.
43. Servicing Request means a Loan Action requested by a Borrower regardless of
whether it is simple (e.g., address change) or more complex such as the Loan Actions
covered in Chapters 8 through 15 of this SOP (e.g., subordination of lien position).
44. Severe Financial Hardship means an inability to pay for Basic Living Expenses based
on the criteria set out in Chapter 7.
45. Should, whether capitalized or not, means that the action is recommended but not
required.
46. A Site Visit is a personal visit to inspect and verify the current condition and current use
of SBA collateral. A site visit may be conducted to inspect and verify the current
Effective Date: September 1, 2015 14
SOP 50 52 2
condition and current use of real property collateral or personal property collateral. A
site visit may be conducted by SBA personnel or by an SBA vendor at SBA’s direction.
All site visits should be documented by a Site Visit report, which should be kept in the
Loan File or electronic tracking system.
Note: A Site Visit should be made whenever warranted by prudent lending practices or
whenever an appraisal does not provide enough information as to the current condition
and/or current use of the collateral property. A site visit does not take the place of an
appraisal. Rather, it is a supplement to an appraisal. In most instances, an existing or
current appraisal would suffice to verify the condition or current use of collateral property as
long as the appraisal provides an adequate and detailed description of the current condition
and current use of that property. However, there may be instances when circumstances
dictate the need for a site visit after an appraisal has already been prepared. Circumstances
for a site visit may include, but are not limited to: the existing appraisal does not adequately
address certain concerns about the collateral property; to determine occupancy status of real
property collateral; to determine if damage occurred as a result of a disaster or an event that
took place after the date an existing appraisal and/or; SBA received notice (verbal or written)
of code violations, vandalism, environmental concerns, damage or any other matter which
may affect the value of the collateral property and SBA’s ability to maximize recovery. All
site visits should be documented by a Site Visit report, which should be kept in the Loan File
or electronic tracking system.
47. Site Visit Report means the paper or electronic record documenting the findings and
conclusions after visiting the Borrower’s business premises. A post-default Site Visit
Report should cover, for example, efforts to: determine whether a workout is feasible;
identify the collateral available for liquidation; establish the collateral’s Recoverable
Value; determine whether the Borrower is behind on the rent and whether a liquidation
sale of the personal property collateral can be held on-site; determine whether any real
property collateral is occupied by a Person other than the Borrower; develop a
liquidation strategy; assess any environmental risk associated with the anticipated
method of liquidation; and arrange for the care and preservation of the collateral pending
liquidation.
48. Supporting Document or “Supporting Documentation” means the original, or a
complete and accurate executed copy, (i.e., it must contain all of the required signatures
and include all of the addendums thereto), of any document relied upon to reach a
decision regarding a Loan Action, e.g., a purchase and sale agreement, Appraisal or
Environmental Investigation Report.
49. Treasury means the U.S. Department of the Treasury Bureau of Financial Management
Service.
50. Valuation means a commercially reasonable method of establishing the fair market
value of an asset based upon the type of collateral and type of action being taken. Such
methods may include, but are not limited to, Broker Price Opinion (BPO) reports, Drive-
by appraisals, internet valuation websites, Kelley Blue Book, National Automobile
Dealers Association (NADA) reports, etc.
Effective Date: September 1, 2015 15
SOP 50 52 2
B. Environmental Terms
The definitions of the environmental terms used in this SOP are the same as those used in
SOP 50 10, which are located in Appendix 2 of SOP 50 10, the most current version of
which is accessible from the SOP section of SBA’s Web site.
Effective Date: September 1, 2015 16
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Effective Date: September 1, 2015 17
SOP 50 52 2
Chapter 3.
Recordkeeping and Disclosure of Information
____________________________________________________________________________
A. Recordkeeping
1. General Requirements
All servicing and liquidation Loan Action decisions, including the justification for the
decision, must be documented in the Loan File or Computer Tracking System.
2. Collateral Documents
All original collateral documents such as the Note (Secured, Unsecured), Guaranties,
mortgages, deeds of trust, title insurance policies, security agreements, etc., must be
delivered to a collateral cashier who is responsible for placing the documents in a
collateral file and for properly safeguarding and maintaining them.
3. Loan Action Records and Supporting Documents
Loan Action Records should be dated and kept in the Loan File along with the
Supporting Documents, such as Appraisals, credit reports and Environmental
Investigation Reports, and any other document relied upon before taking the action
memorialized in the Loan Action Record.
4. Correspondence
Copies of all paper and electronic correspondence concerning the loan must be dated
and kept in the Loan File.
5. Telephone Conferences and Meetings
Detailed information concerning telephone calls and face-to-face meetings, i.e., date,
time, place, Persons in attendance, substance of conversation, etc., must be kept in the
Loan File or entered in a Computer Tracking System.
6. Electronically Stored Information
Because electronically stored information may be needed for litigation purposes and is
subject to discovery, all electronically stored information should be preserved in its
originally created or "native" format along with the related metadata.
7. Loan File Retention
a. General Rule
In general, SBA Loan Centers must adhere to applicable Agency record retention
requirements with regard to loan files (Finance, Records Group 50). (See SOP 00
41 for information on records management.)
Effective Date: September 1, 2015 18
SOP 50 52 2
b. Exception—Litigation Hold
If litigation is reasonably anticipated, appropriate steps must be taken to preserve all
potentially relevant information regarding the loan, including electronically stored
information. This preservation requirement supersedes the general rule set out in
Subparagraph a and means that routine retention and destruction policies must be
suspended and a "litigation hold" put on the Loan File and electronically stored
information to ensure the preservation of potentially relevant documents and data.
Note: “Reasonable anticipation of litigation” arises when an organization is on notice of a
credible threat it will become involved in litigation or anticipates taking action to initiate
litigation.” Guideline 1. The Sedona Conference Commentary on Legal Holds: The
Trigger & The Process (Sedona Conference Working Group on Electronic Document
Retention & Production, August, 2007.)
B. Disclosure of Information
This Paragraph provides general guidance for responding to requests for information about
Disaster Loans. For more detailed information and answers to specific questions, consult
legal counsel, the SBA Loan Center FOIA Contact, or the SBA FOIA/PA Office at
foia@sba.gov or (202) 401-8203.
1. Applicable Statutes, Regulations and SOPs
Disclosure of information on Disaster Loans is governed by the following federal
statutes, regulations and SOPs.
a. Freedom of Information Act
The Freedom of Information Act ("FOIA") permits the public to request access to
federal agency records, and requires federal agencies to disclose the records sought
in a written FOIA request unless the Act specifically exempts the records from
disclosure. For more information on FOIA, see SOP 40 03.
Note: Under FOIA, the word "record" means a data compilation (e.g., a book, document,
map, or photograph) regardless of its format or characteristics (e.g., paper, machine
readable or electronic). FOIA does not require agencies to create records, conduct
investigations, render opinions, provide subjective evaluations, answer questions or
develop information in response to a FOIA request.
b. Privacy Act
The Privacy Act prohibits federal agencies from disclosing any record that is
contained in a system of records, which are filed under an individual's name or social
security number, to any Person except pursuant to a written request by or with the
written consent of the individual to whom the record pertains, unless one of the
Effective Date: September 1, 2015 19
SOP 50 52 2
exemptions listed in SOP 40 04 applies, such as reporting to a consumer credit
bureau. Generally, files covered by the Privacy Act include:
(1) Disaster Home Loan files; and
(2) Official Personnel Files (OPFs).
Note: Intentional wrongful disclosure of information in a file covered by the Privacy Act is
punishable as a criminal misdemeanor and could result in fine of up to $5,000.
c. SBA Regulations and SOPs
SBA regulations concerning disclosure of information are located in 13 C.F.R. Part
102. SBA policy and procedures regarding the Freedom of Information Act are
located in SOP 40 03 (Disclosure of Information); and SBA policy and procedures
regarding the Privacy Act are located in SOP 40 04 (Privacy Act Procedures).
2. Response Time
a. Borrower and Borrower Authorized Requests
Generally, when information is sought by the Borrower or disclosure of the
information is authorized by the Borrower, the Agency's response should be provided
within 10 calendar days.
b. FOIA Requests
A FOIA request must be responded to within 20 working days excluding Saturdays,
Sundays and legal holidays. This period begins once the correct office within SBA is
in receipt of the request and any issues (e.g., processing fees) are resolved. If,
however, the responsive records are voluminous, the request requires two or more
offices to confer about the records, or the records are located off-site, the Agency is
entitled to a 10 working day extension. (See Chapter 2 of SOP 40 03 for more
information on the time limits for processing FOIA requests.)
c. Subpoenas
Legal counsel must be consulted to determine the time limits for responding to
requests for information sought pursuant to a subpoena.
3. Responding to Borrower Requests
a. Requests for Verbal Information
Before any information concerning a loan may be disclosed over the telephone to a
Person claiming to be the Borrower, a reasonable effort must be made to verify that
the requestor is in fact the Borrower. This may accomplished, for example, by
asking a series of questions, the answers to which are unique to the Borrower.
Effective Date: September 1, 2015 20
SOP 50 52 2
b. Requests for Documentation Prepared by SBA
At the request of the Borrower, documentation prepared by SBA concerning the
Borrower's loan, (e.g., a printout of the computer screen showing the loan balance or
an Official Transcript of Account), may be provided to the Borrower but must only be
sent to the Borrower's address listed in the Loan File unless the Borrower has
provided a signed release authorizing SBA to send the documentation to another
address.
c. Requests for Return of Documents Provided by the Borrower
At the request of the Borrower, documents provided to SBA by the Borrower, such as
Appraisals, tax returns or Environmental Investigation Reports, may be returned to
the Borrower provided that:
(1) The document was prepared by or for the Borrower at the Borrower's expense,
i.e., the document was not generated by SBA;
(2) The document is no longer needed by the Agency;
(3) Return of the document has been approved by legal counsel;
(4) A copy of the document and the transmittal letter returning it to the Borrower is
kept in the Loan file; and
(5) The document is sent to the Borrower's address listed in the Loan File unless the
Borrower has provided the Agency with a signed release authorizing SBA to
send the document to another address.
4. Responding to Third Party Requests for Information
a. General Rule
Requests for information concerning a loan from any Person other than the Borrower
must either be accompanied by a release signed by the Borrower authorizing SBA to
release the information to the requestor, or treated as a FOIA request.
b. Borrower Authorized Requests for Information
Documentation or verbal information concerning a Borrower's loan may be provided
in response to a third party's request for information that is accompanied by a signed
release from the Borrower authorizing the disclosure. For example, Borrowers
frequently authorize the disclosure of the following information:
(1) Loan Payoff Amount
Generally, the Agency's response to a request, typically from an escrow or title
company, for information concerning the amount needed to pay off a loan, should
be based on information obtained from the Computer Tracking System, and
should include the principal balance, accrued interest, and the daily interest
accrual amount (per diem).
Effective Date: September 1, 2015 21
SOP 50 52 2
(2) Verification of Credit or Mortgage
Generally, the Agency's response to another creditor's request for verification of
a Borrower's credit or mortgage should be based on information obtained from
the Computer Tracking System, and should be transmitted to the authorized
financial institution via mail, fax, or email within 24 hours.
(3) Verification of Disputed Credit Bureau Information
Because the Borrower has authorized the credit bureau to investigate, a second
signed release from the Borrower is not needed to respond to a written credit
bureau request for verification or correction of disputed information on the
Borrower's credit report. Generally, the Agency's response should be based on
information obtained from the Computer Tracking System and transmitted within
10 calendar days. In every case, the Agency's response must be provided within
the time frame set out in the Fair Credit Reporting Act (15 U.S.C. § 1681).
Consult SBA legal counsel for more information on the requirements of the Fair
Credit Reporting Act.
5. Unauthorized Requests for Information
Any request for information concerning a loan from any Person other than the Borrower
that is not accompanied by a release signed by the Borrower authorizing SBA to release
the information to the requestor must be processed as a FOIA request. (See SOP 40 03
or consult legal counsel or the SBA Loan Center FOIA Contact for information on
responding to FOIA requests.)
6. Information Sought By Subpoena
a. Accepting Service of Subpoenas
Only SBA legal counsel should accept service of a subpoena on behalf of the
Agency or an employee acting within the scope of their duties. Subpoenas are time-
sensitive and must be promptly referred to the appropriate authorized Agency official
for response.
b. Responding to Subpoenas
(1) Civil Subpoenas
SBA Loan Center Supervisory Legal Counsel has authority to respond to civil
subpoenas unless they are of an unusual, sensitive or precedential nature, or
involve the Office of the Inspector General, in which case authority to respond
must be obtained from the Associate General Counsel for Litigation.
(2) Criminal Subpoenas
SBA Loan Center Supervisory Legal Counsel does not have authority to respond
to criminal subpoenas. Criminal subpoenas must be referred to the Associate
General Counsel for Litigation for response, and a copy must be sent to the
Legal Division of the Office of the Inspector General.
Effective Date: September 1, 2015 22
SOP 50 52 2
Effective Date: September 1, 2015 23
SOP 50 52 2
Chapter 4.
Monitoring Loans in Regular Servicing Status
____________________________________________________________________________
After a loan has closed, changes often occur that can impact the ability to administer or collect
the loan. They include, for example, a Borrower’s name change, relocation, or consolidation
with another entity; deterioration of the Borrower’s financial condition; and changes that affect
the value of collateral, such as failure to pay real estate taxes that can become a senior lien on
the collateral. SBA Loan Centers are responsible for monitoring each Disaster Loan in their
portfolio and for mitigating the risk of loss associated with any change in accordance with
prudent lending practices. For example:
A. Name, Address or Legal Structure Changes
In addition to updating the Loan File and Computer Tracking System, if a change involving
the name, address, legal structure, etc., of an Obligor or any other relevant Person (e.g., a
standby creditor) could impact the ability to collect the Disaster Loan, appropriate corrective
action must be taken immediately. For example, a UCC-3 should be filed to reflect a name
change and preserve the priority of personal property liens; if a Disaster Business Loan
Borrower changes its legal structure, generally the new entity should be required to formally
assume the Disaster Loan; and if an Obligor dies, in addition to collecting the proceeds from
any life insurance policy pledged as collateral for the loan, legal action may be necessary to
protect the ability to collect the balance owed on the loan.
B. Borrower's Creditworthiness
1. Each loan should be monitored to ensure that the Borrower is making the regularly
scheduled payments on the loan in a timely manner.
2. A primary means for monitoring each loan should be review of delinquency reports
generated by the billing/accounting system. If the system flags a loan for an overdue
payment, the Borrower should be contacted by telephone or letter to identify and correct
potential problems before the loan goes into default.
3. If the Loan Documents require the Borrower to submit financial statements, the
statements should be reviewed and analyzed in a timely manner.
4. If the financial information provided by the Borrower raises concerns regarding the
Borrower’s repayment ability, an executed copy of IRS Form 4506-T should be
requested, and a transcript of the Borrower’s most recent Federal Income Tax return
should be obtained and compared to the questionable information.
Note: If an Obligor files bankruptcy, appropriate action must be taken to protect the ability to
collect the SBA loan.
C. Deceased Obligors
Generally, if an Obligor dies, steps must be taken to protect the Agency's ability to recover
on the Disaster Loan, such as the following.
Effective Date: September 1, 2015 24
SOP 50 52 2
1. Collect Proceeds from Life Insurance Policies Assigned as Collateral
If an assignment of a life insurance policy was required by the Loan Authorization,
collect and apply the insurance proceeds against the principal balance of the loan in
accordance with the Loan Program Requirements in Chapter 11.
2. File a Creditor's Claim in Probate Proceedings
Refer the loan to legal counsel to file a claim against the deceased Obligor's estate and
monitor the probate proceedings to ensure that the claim is paid before the assets are
distributed.
D. Care and Preservation of Collateral
The collateral for each loan must be monitored and prudent action consistent with the goals
of the Agency's Disaster Loan Program must be taken to manage the risk of loss associated
with any change in circumstances.
1. UCC Filings
All UCC filings must be monitored, and any document needed to maintain the perfection
and priority of the lien securing the Disaster Loan must be properly prepared and filed,
including, for example, a UCC-3 to continue an existing financing statement. This duty
continues until the loan has been charged off.
2. Taxes and Assessments
Secured Disaster Loans should be monitored to ensure that all taxes and assessments,
which if unpaid could result in senior liens against the collateral, are paid in a timely
manner.
Note: Although state laws vary, secured creditors generally do not have the right to redeem
collateral after a tax foreclosure sale. Consult legal counsel for case specific information.
3. Insurance
Disaster Loans should be monitored to ensure that all insurance coverage required by
the Loan Authorization is in place throughout the term of the loan. See Chapter 11 for
information on force placing coverage if the Obligor has allowed it to lapse.
4. Senior Secured Loans
In the event a senior lienholder takes adverse action (i.e. foreclosure) against common
collateral securing the Disaster loan, the loans of other creditors secured by the
collateral should be monitored. Timely, prudent, commercially reasonable action must
be taken to prevent elimination of the lien securing the Disaster Loan through a
foreclosure action by the senior lien holder, or dissipation of the equity available to cover
the Disaster Loan through, for example, the imposition of Default Charges.
Effective Date: September 1, 2015 25
SOP 50 52 2
Chapter 5.
Loan Payment Administration
____________________________________________________________________________
This chapter provides SBA's policy and procedures with regard to payments on Disaster Loans
in regular servicing or liquidation status. (See Chapter 10 for information on how to apply the
proceeds from release of liens for consideration).
A. Payments on Loans in Regular Servicing Status
Funds from payments received on loans in regular servicing status must be applied first to
interest accrued up to the date the payment was received, and the remainder, if any, to the
principal balance of the Note (Secured, Unsecured).
B. Payments on Loans During and After a Deferment Period
1. Loan Payments During Deferment
Payments are not mandatory during a deferment period, but are preferred because even
a small payment will keep the Borrower in the habit of making payments and will also
keep the Borrower’s pre-authorized debit method of payment active.
2. Application of Loan Payments After Deferment
When regularly scheduled payments resume at the end of a deferment period, they
should be applied in the same order as other funds from payments received on loans in
regular servicing status. (See Paragraph A above.)
Note: During the Deferment period, only principal payments are deferred, interest will
continue to accrue daily.
C. Payments on Loans in Liquidation Status
1. Overview
Payments (as opposed to recoveries) are generally rare after a loan has been classified
in liquidation, because the Note (Secured, Unsecured) has been accelerated and
demand has been made for payment of the entire amount due. In those cases where
the Borrower is financially able to resume making regularly scheduled payments, the
loan should be returned to regular servicing status. (See Chapter 16 for information on
returning loans classified in liquidation to regular servicing status.)
2. Application of Funds
Unless the terms of an SBA approved workout agreement or some other legally binding
document (e.g., a court approved bankruptcy plan) specifies otherwise, the funds from a
payment on a loan in liquidation status should be applied to principal first, and then
accrued interest.
Effective Date: September 1, 2015 26
SOP 50 52 2
D. Impact of Accepting Payment on a Loan in Litigation Status
Before accepting any payment — other than payment in full — on a loan in litigation status,
determine whether accepting the payment could cure the default and curtail plans for
liquidating the loan. For more information, consult legal counsel.
E. Payments on Loans Returned to Regular Servicing Status
When a Disaster Loan that was classified in liquidation is returned to regular servicing status
and the Borrower resumes making regular payments, unless the terms of a legally binding
agreement provide otherwise, (e.g., a court approved bankruptcy plan or an SBA approved
workout agreement), the funds from the payments must be applied first to interest accrued
up to the date the payment was received, and the remainder, if any, to the principal balance
of the Note (Secured, Unsecured).
F. Prepayment
Disaster Loans may be prepaid at any time without penalties. To prepay a Disaster Loan,
the Borrower must pay the sum of all of the amounts owed on the Note (Secured,
Unsecured) through the date the funds are received, including principal and accrued
interest.
G. Paid in Full Loans
1. Definition of “Paid in Full”
“Paid in full” means that the total amount due on the loan has been paid including
principal, accrued interest, and Recoverable Expenses, if any. When a Disaster Loan is
verified as “paid in full”, the Note (Secured, Unsecured) should be cancelled, and the
collateral should be released in a timely manner.
2. SBA Form 397 (Notice of Fully Paid Account)
Generally, a loan is not considered "paid in full" until receipt of SBA Form 397 (Notice of
Fully Paid Account) from the Denver Finance Center verifying that the loan has been
paid in full. Upon receipt of SBA Form 397, the Note (Secured, Unsecured) should be
stamped "PAID" or "PAID IN FULL" and the cancelled Note (Secured, Unsecured)
should be returned to the Borrower.
3. Procedure for Releasing Collateral
a. Compliance with Applicable State Law
After a Disaster Loan is paid in full, the collateral must be released in accordance
with applicable state law, and that the appropriate Loan Documents should be
returned to the Borrower.
Note: Many states impose significant penalties on creditors who fail to release collateral
in strict compliance with state law. Consult legal counsel for state specific release
requirements.
Effective Date: September 1, 2015 27
SOP 50 52 2
b. General Rule—Release Only After Receipt of SBA Form 397
Generally, the collateral should not be released until after receipt of SBA Form 397
(Notice of Fully Paid Account) from the Denver Finance Center verifying that the loan
has been paid in full.
c. Exception—Release Before Receipt of SBA Form 397
Collateral must not be released prior to receipt of SBA Form 397 (Notice of Fully
Paid Account) unless:
(1) The release is approved pursuant to, and documented by, a Loan Action Record;
(2) An escrow agreement approved by legal counsel is utilized, which conditions
delivery and recording of the release documents on receipt of sufficient funds to
pay the Disaster Loan in full; and
(3) The funds needed to pay the Disaster Loan in full are in the form of:
(a) Certified funds;
(b) A cashier's check; or
(c) A check from a reputable escrow agent.
H. Reinstatement of Loans Mistakenly Coded as "Paid in Full"
1. When a loan is mistakenly coded as "Paid in Full," the collateral should not be released
and the loan should be reinstated as soon as possible.
2. If an SBA Form 397 (Notice of Fully Paid Account) is mistakenly issued, the matter
should be immediately referred to the Denver Finance Center.
Effective Date: September 1, 2015 28
SOP 50 52 2
Effective Date: September 1, 2015 29
SOP 50 52 2
Chapter 6.
Environmental Risk Management
____________________________________________________________________________
This chapter sets out SBA policy and procedures for managing environmental risks associated
with Disaster Loans in regular servicing or liquidation status.
A. Overview
1. Environmental Risks
For secured creditors, the risks associated with Contaminated collateral include, for
example:
a. Impairment of the Borrower’s ability to repay the loan due to the high cost of
Remediation, regulatory fines and penalties;
b. Diminishment of the value and marketability of the collateral;
c. Direct liability for tort claims and Remediation by becoming an owner or operator of
the Property, (e.g., by acquiring title at a foreclosure sale or by taking over the
operation of the Borrower’s business); and
d. Loss of lien priority if a Governmental Entity cleans up the Property.
2. Definitions
Definitions of the environmental terms used in this SOP, which are capitalized when they
appear, are located in Appendix 2 of SOP 50 10, the most current version of which is
accessible from the SOP section of SBA’s Web site. The defined terms include, for
example, the term “Property,” which means commercial real property and does not
include personal property or residential real estate.
B. General Requirements
Prudent servicing and liquidation of a Disaster Loan includes:
1. Conducting adequate due diligence before taking any Loan Action that could result in a
loss, or increase the risk of loss, due to actual or alleged presence of Contamination;
2. Monitoring the loan for compliance with the environmental covenants in the Loan
Documents and requiring the Borrower to take appropriate corrective action when
necessary; and
Note: Indicia of increased environmental risk include, for example, regulatory fines
discovered while reviewing financial statements, the Borrower’s failure to maintain
Engineering Controls, or evidence of a Release discovered during a site visit.
3. Complying with Environmental Laws that allow secured creditors to avoid or significantly
limit potential liability.
Effective Date: September 1, 2015 30
SOP 50 52 2
Note: Many Environmental Laws provide secured creditors with a “safe harbor” from liability
as an owner or operator. Two of the most important laws are the Comprehensive
Environmental Response, Compensation, and Liability Act (“CERCLA”) and the Resource
Conservation and Recovery Act (“RCRA”). To qualify for the exemption under CERCLA or
RCRA, the most critical requirements are that the secured creditor: (1) hold indicia of
ownership primarily to protect its security interest; (2) take no action that could be construed
as “participating in the management” of the Borrower’s facility; and (3) attempt to divest itself
of Contaminated acquired collateral at the earliest practicable and commercially reasonable
time using commercially reasonable means. For Information on the types of activities that
constitute “participating in the management” of a facility or UST system, with regard to
CERCLA see CERCLA Lender Liability Exemption: Updated Questions and Answers; and
with regard to RCRA see 40 C.F.R § 280.210. Consult legal counsel for loan-specific
information.
C. When an Environmental Investigation is Required
An Environmental Investigation must be conducted before taking any Loan Action that could
result in a loss, or increase the risk of loss, due to the actual or alleged presence of
Contamination. For example, an Environmental Investigation must be conducted before:
1. Accepting Property as substitute collateral;
2. Releasing a lien on collateral for substantially less than its estimated Recoverable Value
based on unsubstantiated allegations of Contamination;
3. Abandoning collateral, which would otherwise have Recoverable Value, based on
unsubstantiated allegations of Contamination;
4. Acquiring title to Property held as collateral, e.g., by purchasing it at a foreclosure sale or
accepting a deed-in-lieu of foreclosure;
5. Taking over the operation of a business that uses Hazardous Substances or is located
on Contaminated Property regardless of whether the Borrower owns the Property;
6. Selling REO or acquired personal property collateral for substantially less than its
appraised value based on unsubstantiated allegations of Contamination; and
7. Abandoning REO or acquired personal property collateral based on unsubstantiated
allegations of Contamination.
D. Environmental Investigation Process for Loans in Regular Servicing Status
Environmental Investigations in support of regular loan servicing activities, e.g., substitution
of collateral, should be conducted in accordance with SOP 50 10.
E. Environmental Investigation Process for Loans in Liquidation Status
Environmental Investigations in support of liquidation activities, e.g., acquiring Property at a
foreclosure sale, should be conducted as follows:
Effective Date: September 1, 2015 31
SOP 50 52 2
1. Scope of investigation
The amount of due diligence must be prudent based on the loan specific circumstances
such as the Property’s appraised value, the amount owed on senior liens, the Disaster
Loan balance, the activities conducted at the Property, the results of previous
Environmental Investigations, access to the Property, and the cost and time involved.
2. Use of Environmental Professionals
Environmental Investigations on loans in liquidation status must be conducted by an
Environmental Professional except for the Environmental Questionnaire (“EQ”) portion of
an Environmental Investigation that consists of an EQ and Records Search with Risk
Assessment (“RSRA”).
3. Reliance Letter Requirement
An Environmental Investigation Report prepared by an Environmental Professional must
be accompanied by a Reliance Letter unless the Environmental Investigation consists of
an EQ and RSRA. (See Appendix 3 to SOP 50 10 for the Reliance Letter template.)
4. General Procedure
Generally, the following steps should be taken to conduct a post-default Environmental
Investigation that will provide adequate information for a prudent lender to make an
informed decision regarding the risks of Contamination.
Step 1. Order an Environmental Site Assessment (“ESA”)
High Risk—If the risk of Contamination appears to be high, begin with a Phase I
ESA. Generally, the risk should be considered high if, for example, there are
underground storage tanks at the Property, a NAICS Code for a past or present use
of the Property matches one on the List of Environmentally Sensitive Industries
(Appendix 4 to SOP 50 10), or past Environmental Investigations have concluded
that the Property is Contaminated or that there is a high or elevated risk of
Contamination.
Exception for Non-Industrial Condominiums: The Environmental Investigation of a
condominium in a non-industrial, multi-unit building may begin with a Transaction
Screen or an EQ and RSRA.
Low Risk—If the risk of Contamination appears to be low, begin with a Transaction
Screen or an EQ and RSRA.
Step 2. Conduct Additional Necessary, Cost-effective Inquiries
If a prudent lender could not make an informed decision based on the Environmental
Investigation Report from Step 1, conduct any additional cost-effective inquiry
recommended in the Environmental Investigation Report or otherwise needed to
obtain enough information to make an informed decision. For example, when the
Property appears to have significant Recoverable Value:
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(1) A Phase I ESA should be conducted if a Transaction Screen or EQ and RSRA
shows a high or elevated risk of Contamination;
(2) Inquiries regarding environmental problems beyond the scope of a Phase I ESA
(e.g. asbestos), should be conducted if the problem could have a material effect
on the Recoverable Value of the Property;
(3) A Phase II ESA should be conducted if it is necessary to determine the nature
and extent of Contamination identified by a Phase I ESA; and
(4) A Remediation estimate should be obtained if Remediation is recommended in a
Phase II ESA Report.
Note: For guidance on how to prepare a Remediation estimate, see ASTM E2137-06
(Standard Guide for Estimating Monetary Costs and Liabilities for Environmental
Matters). Note also that SBA officials may request an estimate from the SBA
environmental engineers at the SBA Sacramento Loan Processing Center.
Step 3. Additional Requirements for Gas Stations and Dry Cleaners
If, after obtaining a Phase I ESA, a prudent lender would obtain additional
information before making a decision regarding Property associated with the
operation of a gas station, commercial fueling facility, or a dry cleaner that uses
Hazardous Substances, then the Environmental Investigation should also include:
(1) A Phase II ESA conducted by an independent Environmental Professional with
three years of full-time relevant experience who holds a current Professional
Engineer’s or Professional Geologist’s license;
(2) Any further investigation recommended in the Phase I ESA or Phase II ESA
Report;
(3) An estimate that covers the method, cost and time required for completion of any
recommended Remediation; and
(4) Testing of the equipment related to the operation of the facility.
Note: Generally, if a gas station or dry cleaner has been in operation for five years or
more, there is a high probability that the Property is Contaminated.
Step 4. Extra Requirement if Taking Over Business Using Hazardous Substances
(1) Environmental Regulatory Compliance Audit
Generally, an environmental regulatory compliance audit should be conducted
prior to taking over the operation of a business that handles Hazardous
Substances. The audit should be conducted in substantial compliance with
ASTM E2107-06 (Standard Practice for Environmental Regulatory Compliance
Audits).
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Note: Unknown regulatory compliance violations can significantly diminish a secured
creditor’s estimated recovery. For example, the cost of obtaining licenses and permits
needed to operate the business can be substantial, and outstanding regulatory fines
and enforcement actions can have a chilling affect on the price potential purchasers
are willing to pay for the business assets.
(2) Practice Tip
To avoid “participating in the management” of a Borrower’s business and losing
the secured creditor liability exemption, it is generally advisable to have a
receiver appointed by the court to take possession of the collateral and operate
the business.
F. Environmental Investigation Reports
The results of an Environmental Investigation must be set out in a written Environmental
Investigation Report, which must be kept in the Loan File. An Environmental Investigation
Report should be less than 180 calendar days old at the time it is relied on.
G. Remedial Action by SBA as a Secured Creditor
Given the complexity of the applicable Environmental Laws and the risks involved, a legal
opinion from an attorney with Environmental Law expertise should be obtained before the
Agency undertaking Remedial action. (See 40 C.F.R. § 280.210(b)(2)(i)(B), which deals
with participating in the management of underground storage tanks [“USTs”], as an example
of the risks and complexity of the law.)
H. Taking Title to Contaminated Property or Control of Business with Environment Risks
1. When Appropriate
Title to Contaminated Property should not be acquired, and businesses that use
Hazardous Substances or are located on Contaminated Property should not be taken
over, unless despite the risk of incurring liability as an owner or operator, a prudent
lender would do so based on the estimated net recovery.
2. Requirement – Prior Approval from Associate General Counsel for Litigation
Prior written approval from the SBA Associate General Counsel for Litigation and Claims
must be obtained before taking title to Contaminated Property or taking over the
operation of a business that uses Hazardous Substances or is located on Contaminated
Property regardless of whether the Borrower owns the Property.
3. How to Obtain Approval
A written request must be submitted to the SBA Associate General Counsel for Litigation
and Claims.
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4. Request Format
The request, which must be accompanied by the appropriate Supporting Documents,
must include a thorough analysis of all the relevant factors to determine whether a
prudent lender would take the proposed action despite the risks. Such factors and
Supporting Documents should generally include:
a. Appraised Value of Collateral to be Acquired
Provide the appraised value of the Property supported by a copy of a post-default
Appraisal.
b. Liquidation Value of Collateral to be Acquired
Provide the estimated Liquidation Value of the Property and explain the basis for the
estimate.
c. SBA Loan Balance
Provide the SBA loan balance supported by a copy of the transcript of account or
other credible evidence of the loan balance.
d. Amount Owed on Senior Liens
Provide a list of senior liens against the collateral, including landlord liens and tax
liens, and the amount owed on each, supported by a copy of:
(1) Schedule B, or equivalent, of the post-default title report;
(2) A current UCC lien search if the request includes personal property collateral or
taking over the operation of a business;
(3) Any senior lienholder agreement, landlord lien waiver, subordination agreement
or other Loan Document that establishes the priority of the liens against the
collateral; and
(4) Transcript of account or similar proof of compliance with any provision in the
foregoing documents that requires a senior lender to subordinate any portion of
the senior loan to the SBA loan (e.g., Default Charges).
e. Foreclosure Costs
List the foreclosure costs including any extraordinary expenses such as the legal
fees and administrative expenses associated with a receivership.
f. Nature and Extent of the Contamination
Provide a summary of the nature and extent of the Contamination supported by
copies of the Environmental Investigation Report(s) required by Paragraph F.
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g. Clean-up Costs and Liability
Indicate whether Remediation is required or on-going, and:
(1) If Remediation is not required—attach a copy of the no further action letter,
closure letter or functional equivalent from the responsible Government Entity.
(2) If Remediation is recommended—attach a copy of any document that: (a)
provides a description of the recommended method and cost of Remediation and
anticipated completion date; (b) establishes the identity of those responsible for
Remediation (e.g., Superfund consent decree); or (c) demonstrates the ability of
the responsible party to pay for the cost of Remediation.
(3) If Remediation is on-going—attach a copy of any document that shows the
progress of the cleanup, or that the Person conducting the cleanup has sufficient
financial resources to complete it.
h. Secured Creditor Liability Exemptions
Provide a list of applicable liability exemptions that SBA would qualify for if it took
title, such as the secured creditor exemption under CERCLA, RCRA or a similar
state law, the bona fide purchaser exemption under CERCLA §§ 101(4) and 107(r),
or the involuntary acquisition by a government entity exemption under CERCLA §
101(20)(D).
Note: Pursuant to 40 C.F.R. § 300.1105(a)(3), acquisition of title by SBA through
foreclosure or a deed-in-lieu while administering an SBA loan program is considered an
"involuntary acquisition."
i. Mitigating Factors
List any mitigating factor and attach a copy of the relevant Supporting Document(s),
e.g., an indemnification agreement and the indemnitor’s financial statement.
Mitigating factors include, for example:
(1) SBA Environmental Indemnification Agreement—was executed by a Person with
sufficient financial resources to cover the cost of Remediation;
(2) Escrow Account—has been established to cover the cost of a Remediation plan
approved by the responsible Government Entity;
(3) Solvent Government Cleanup Fund—has unconditionally agreed to cover the
cost of Remediation; or
(4) Lender Liability Environmental Insurance—is in place and will cover the cost of
Remediation after title is acquired.
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j. Tort Liability
Provide information regarding the status and anticipated outcome of any known
litigation regarding alleged injury to people, property or natural resources due to
Contamination at the Property.
k. Exceptions to Title that Impact Marketability
Review Schedule B (or equivalent) of the post-default title report, and indicate
whether there is any recorded covenant, deed restriction or other exception to title
that will have a negative impact on the Property’s Recoverable Value such as a
covenant that requires future owners of the Property to indemnify a major oil
company or a deed restriction that prevents future owners from using the Property
for any purpose other than to operate a gas station that sells a particular brand of
gasoline.
l. Alternative Methods of Recovery
List and analyze the feasibility of alternative methods of collecting the loan balance
that involve less risk. At a minimum, this should include (1) the estimated recovery
from other collateral and the Obligors; and (2) alternative methods of liquidation that
do not require taking title to the Contaminated collateral such as release of lien for
consideration, sale of the Note (Secured, Unsecured) and assignment of the lien to
the purchaser, or appointment of a receiver to operate the business until enough
money can be recovered to pay-off the loan or the collateral can be sold.
m. Acquired Collateral Divestiture Plan
Provide a description of the plan for disposing of any collateral to be acquired, which
includes the holding and resale costs, as well as an explanation of how easy or
difficult it will be to resell. For example, have any third parties expressed an interest
in purchasing the collateral? Is it currently listed for sale by the owner? If so, why
hasn’t it sold?
Note: Generally, in order to preserve its liability exemption, a secured creditor is required
to try to dispose of Contaminated acquired collateral at the “earliest practicable,
commercially reasonable time using commercially reasonable means”. For more
information, see the applicable Environmental Law. For example, 40 C.F.R.
280.210(c)(2)(i) sets out a “bright line” test under RCRA for determining whether a
secured creditor is attempting to sell a gas station in an expeditious manner.
n. Other Relevant Facts or Expenses
List and discuss any other loan-specific relevant facts. For example:
(1) Remediation—Will additional costs be incurred to Remediate the Property prior
to listing it for sale? If so, attach a copy of the legal opinion recommended in
Paragraph G above, provide a Remediation estimate, and indicate how the costs
will be paid;
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(2) Receivership Proceedings—Will a receiver be appointed, for example, to operate
the business or sell the collateral? If so, attach a draft Litigation Plan that
describes the prior experience and qualifications of the proposed receiver and
includes an estimate of costs of the court and receivership proceedings; or
(3) Emptying and Closing USTs—If there are USTs at the Property and a receiver
will not be appointed, indicate whether it will be necessary to empty and close the
USTs. (For more information, see, for example, 40 C.F.R. § 280.230(b).)
o. Estimated Net Recovery
Provide the estimated net recovery from taking the proposed action based on the
analysis of factors “a” through “n” above.
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Effective Date: September 1, 2015 39
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Chapter 7.
Severe Financial Hardship Relief
____________________________________________________________________________
A. Overview
If an Obligor has experienced a material change in circumstances since the Disaster Loan
was made (e.g., catastrophic illness), which has diminished the Obligor’s assets or income
to the extent that enforced collection would result in Severe Financial Hardship, temporary
or permanent payment relief may be appropriate. This chapter provides the policy and
procedures for determining whether Severe Financial Hardship relief is appropriate and
what type of assistance may be provided.
B. Requirements for Severe Financial Hardship Relief
Generally, severe financial hardship relief is offered to an individual. Payment relief based
on Severe Financial Hardship may be appropriate if the Obligor:
1. Is an individual — not an artificial legal entity such as a limited liability company or a
corporation;
2. Is cooperative, e.g., willing but unable to repay the Disaster Loan according to the terms
of the Note (Secured, Unsecured);
3. Has not engaged in fraud, misrepresentation or any misconduct;
4. Has provided SBA with a hardship letter as required by Paragraph C below;
5. Has fully disclosed their financial situation to SBA as required by Paragraph C below;
and
6. Would not be able to pay Basic Living Expenses if SBA were to enforce collection of the
loan.
C. Severe Financial Hardship Relief Request Packages
Each Obligor requesting relief based on Severe Financial Hardship should be instructed to
submit the documentation listed below by a specified deadline. If all of the required
information is not received by the deadline, the request should either be declined or the
Obligor should be advised that the package is incomplete.
1. Hardship Letter
An accurate, clear and concise letter signed by the Obligor seeking Severe Hardship
Relief, which includes:
a. Loan number;
b. Obligor's name and address;
c. How and when Obligor can be contacted;
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d. An explanation of the material change in circumstances that caused the Obligor to be
unable to pay for Basic Living Expenses;
e. The date(s) the Obligor’s circumstances changed (i.e. the day the Obligor was laid
off, got in an accident, became sick, etc.);
f. Copies of documents that substantiate the material change in circumstance, (e.g.,
medical bills);
g. Description of what the Obligor has done to try to cure the default, (e.g. cut back on
expenses, spouse took a job, etc.);
h. An explanation of why any particular living expense listed on SBA Form 770 is
excessive and
i. What the Obligor would like SBA to do to make it possible for the Obligor to repay
the loan, (e.g., forbear for a specified period of time, defer payments, modify the
terms of the Note (Secured, Unsecured), etc.).
2. Federal Tax Return
A signed copy of the federal income tax return (IRS Form 1040) filed by the Obligor for
the previous tax year.
3. Financial Statement With List of Basic Living Expenses
A current financial statement (e.g., SBA Form 770 (Financial Statement of Debtor)),
which shows all of the Obligor's assets, liabilities, income and living expenses including
the following:
a. Living Expenses—food, housekeeping supplies, apparel and services, personal care
products and services, and miscellaneous;
b. Out-of-Pocket Health Care Expenses;
c. Housing and Utilities; and
d. Transportation—ownership costs and operating costs.
4. Borrower’s Authorization and Consent to Verify Information
A signed and dated copy of the “Borrower’s Consent to Verify Information and 3rd Party
Authorization” form (Birmingham Form, El Paso Form, Santa Ana Form).
D. Review of Severe Financial Hardship Relief Requests
To determine whether Severe Financial Hardship relief is appropriate, the Obligor’s hardship
letter and financial information must be reviewed to determine whether the requirements set
out in Paragraph B above have been met. In doing so, the following guidelines should be
applied:
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SOP 50 52 2
1. Hardship Letter
Although each case should be judged on its merits, generally the following events may
be considered a “material change in circumstances” if they result in a significant
decrease in income:
a. Loss of employment or involuntary under-employment;
b. Catastrophic illness or uncompensated medical bills;
c. Death of Obligor or spouse;
d. Call to active military service;
e. Divorce;
f. Disability;
g. Damage to property;
h. Incarceration;
i. Business failure; or
j. Other reasonable cause.
2. Financial Information
a. Adequacy of Disclosure
To determine whether an Obligor has completely and accurately disclosed their
assets, liabilities and income and correctly stated their expenses, at a minimum, the
information on their financial statement, e.g., SBA Form 770, should be compared to
a current credit report and the Obligor’s original loan application. All efforts to verify
the financial information should be documented and any major discrepancies should
be investigated and explained.
b. Income—Poverty Guidelines
Generally, if the Obligor’s income is below the Poverty Guidelines established by the
U.S. Department of Health and Human Services (“DHHS”), enforced collection would
create Severe Financial Hardship and is inappropriate. Whether the Obligor’s annual
income is above or below the poverty line should be determined by comparing it to
the DHHS Poverty Guidelines.
c. Reasonableness of Living Expenses
To ensure that similarly situated Obligors receive the same treatment by SBA, the
living expenses claimed by the Obligor on their financial statement, (e.g., SBA Form
770), should be reviewed to determine whether they are necessary and reasonable,
Effective Date: September 1, 2015 42
SOP 50 52 2
as opposed to personal lifestyle choices, by comparing them to the IRS Collection
Financial Standards for families in the same geographic area with the same income
and number of dependents. If the actual amount spent by the Obligor is higher than
the IRS standard amount, the lower IRS standard amount should be used unless the
Obligor’s hardship letter adequately explains why a particular expense is necessary
and reasonable even though it exceeds the IRS standard.
Note: Generally, the number of persons allowed for calculating Basic Living Expenses
should be the same as the number allowed as exemptions on the Obligor’s federal
income tax return for the previous year.
d. Equity in Assets
If it appears that the Obligor’s financial disclosure was complete and accurate, the
Obligor's assets should be reviewed to determine whether (1) the Obligor has
sufficient equity in any asset(s) to repay the loan; and (2) if so, whether the Obligor
could sell or borrow against the asset(s) to repay the loan without suffering Severe
Financial Hardship. Depending on the circumstances, an Appraisal may be
necessary.
E. Severe Financial Hardship Relief Options
If an analysis of the Obligor’s hardship letter and financial information indicates that the
Obligor would suffer Severe Financial Hardship if SBA were to enforce collection,
permanent or temporary financial relief may be granted based on the following guidelines.
Decisions to grant temporary financial relief should be consistent with federal debt
management and collection guidelines.
1. Balancing Test
When determining what type of Severe Financial Hardship relief is appropriate, the
Obligor’s need for financial relief must be balanced against the Agency’s interest in
protecting the integrity of the Disaster Loan Program, i.e., protecting the taxpayers'
interests in the Agency's ability to recover on the loan.
2. Deferment
Severe Financial Hardship may be used as grounds for providing an Obligor with
temporary financial relief such as deferment of past or future payments of principal,
interest or both for a stated period of time. The first deferment period should not exceed
one year. At the end of the deferment period, a review of the Borrower’s financial status
should be conducted and a decision made to either reinstate the original payment terms
or extend the deferment period. In all cases, an annual review of the Borrower’s
financial status must be conducted as a reminder of the Borrower’s obligation to SBA.
(See Chapter 13 for information on deferments.)
3. Modification of Note
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Severe Financial Hardship may be used as grounds for providing temporary financial
relief by modifying the repayment terms of the Note (Secured, Unsecured). For
example, the interest rate, payment amount, or frequency of payments may be reduced.
Generally: (1) a regular payment of at least $1.00 should be required as a reminder of
the Obligor’s financial obligation to SBA; (2) the payment modification period should not
exceed one year; (3) at the end of one year, the original payment amount and schedule
should be reinstated; and (4) an annual review should be conducted to ascertain the
Obligor’s current financial status and whether continued payment modification is
appropriate. (See Chapter 9 for information on modification of Note.)
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SOP 50 52 2
Chapter 8.
Servicing Requests
____________________________________________________________________________
This Chapter covers Borrower servicing requests made after the loan has been fully disbursed,
with the exception of the followings types of requests, which are covered by SOP 50 30
(Disaster Assistance Program): requests for loan cancellation; reinstatement of a cancelled
loan; and increase in the amount of disaster loans.
A. General Requirements
Frequently after a Disaster Loan has been disbursed, circumstances change and give rise to
Borrower Servicing Requests. They can range anywhere from a simple request to change a
mailing address to a complicated request involving the exchange of collateral. Regardless
of the level of complexity, all Servicing Requests must be reviewed, analyzed and acted
upon in accordance with prudent lending practices. When responding to a Servicing
Request, the goal should be to balance the Agency's interests in: (1) achieving the goals of
the Disaster Loan Program, i.e., helping victims recover from disasters; and, (2) maintaining
the integrity of the Disaster Loan Program; i.e., protecting the taxpayers' interests in the
Agency's ability to recover on the loan.
B. Review and Analysis
Generally, the Loan Documents should not be modified unless there has been a material
change in the Borrower's circumstances since the loan was made. The Supporting
Documents and the level of analysis required to make an informed decision regarding
whether the Servicing Request should be denied or approved, and if so, under what
conditions, will vary depending on the circumstances. In all cases, the decision must be
justified and documented in a Loan Action Record that is independent of any document
prepared by a senior lienholder or any other Person with a conflict of interest. The relevant
steps listed below should be followed to ensure that each Servicing Request is properly
reviewed and analyzed.
1. Document Receipt of the Servicing Request
All Servicing Requests must be entered in a Computer Tracking System or noted in the
Loan File.
2. Determine Whether there is a Conflict of Interest
Determine whether any Obligor on the loan is an SBA employee, a Close Relative of the
employee or a member of their household; and if so, any request that would significantly
affect that Obligor’s liability must be referred to the Office of Financial Program
Operations.
3. Ensure that the Servicing Request is in the Proper Format
Borrower requests for modification of loan terms or conditions should be in writing.
Verbal requests that are grossly lacking merit may be verbally declined provided that the
request and response is recorded in the Computer Tracking System.
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4. Research the Applicable Loan Program Requirements
See Chapters 9 through 15 of this SOP to find the applicable Loan Program
Requirements for the Loan Actions most commonly requested by Borrowers.
5. Determine Whether the Servicing Request is Properly Supported
Servicing Requests should be accompanied by the Supporting Documents that a
prudent lender would need to make an informed decision. For example:
a. Disaster Home Loans
Generally, Servicing Requests on Disaster Home Loans should be supported by the
Borrower's:
(1) Current financial statement (SBA Form 770);
(2) Pay check stubs for the past two months; and,
(3) Federal income tax returns for the past two years.
b. Disaster Business Loans
Generally, Servicing Requests on Disaster Business Loans should be supported by
the Borrower's:
(1) Current financial statement (SBA Form 770); and,
(2) Federal income tax returns for the past two years.
c. Servicing Requests Involving Collateral
In addition to the financial documents listed above, Servicing Requests that involve
collateral, (e.g., subordination, substitution or release of lien), should also be
supported by a current:
(1) Appraisal of the relevant collateral;
(2) Lien search, i.e., a title report if the request involves real property; a UCC search
if the request involves personal property; and
(3) Transcript of account or other credible evidence of the balance owed on any
senior liens.
(4) HUD-1 (e.g. Good Faith Estimate (GFE))
6. Obtain Additional Supporting Documents When Necessary
Obtain any additional Supporting Documentation needed to properly analyze and decide
whether the Servicing Request should be approved. For example:
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SOP 50 52 2
a. Credit Report
Generally, a new credit report should be ordered to verify the financial information
submitted in support of the proposed Loan Action.
b. Guarantor Financial Statements and Tax Returns
A current financial statement, and federal income tax returns for the past two years
should be required from all of the Guarantors—not just the Borrower—when a
complete analysis of each Obligor’s repayment ability is necessary.
c. Refinance, Purchase & Sale, and Other Relevant Documents
A complete executed copy of all of the relevant documents, (e.g., purchase and sale
agreement, escrow instructions, estimated closing statement [HUD-1], seller carry-
back note, etc.), must be obtained if the Servicing Request involves the sale or
refinance of collateral.
Note: (HUD-1) should be required if the Borrower's request involves the sale or
refinancing of SBA collateral be certain to review the HUD-1 to ensure that proceeds of
the collateral will not be disbursed to the Obligor or junior lienholders.
d. Environmental Investigation Report
A Servicing Request must be supported by an Environmental Investigation Report
when required by Chapter 6.
e. Evidence of Authority to Take Proposed Action
Proper evidence should be obtained to establish that each Person whose signature
is necessary had the required authority to execute the Loan Documents involved in
the Servicing Request, e.g., a board of directors’ resolution if the document was
signed on behalf of a corporation.
7. Analyze the Borrower's Financial Condition
Analyze the Borrower's financial documents to determine whether the Borrower is viable,
i.e., will be able to repay the loan if the request is approved. If the Borrower is viable,
proceed to Step 8. If not, the Servicing Request should be denied and more appropriate
action taken. (See, for example, Chapter 7 [Severe Financial Hardship Relief] or
Chapter 16 [Classifying Loans in Liquidation].)
8. Analyze the Agency’s Collateral Position
If the Servicing Request will impact the collateral, a thorough collateral analysis,
including any effect on the collateral’s recoverable value, before and after the requested
modification, should be conducted.
9. Check for Problems
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The Loan Documents, such as the loan application and collateral documents, as well as
the information in the Computer Tracking System should be reviewed to: (1) ensure that
the Servicing Request is consistent with the Borrower's previous representations; and (2)
ascertain whether there are any non-monetary defaults, collateral deficiencies, or
problems with the Loan Documents that need correction.
10. Balance the Interests
Decide whether the requested Loan Action is needed to help the Borrower recover from
the disaster, and if so, balance the Borrower's need for the proposed Loan Action with
the Agency's interest in maintaining the integrity of the Disaster Loan Program; i.e.,
protecting the taxpayers' interests in the Agency's ability to recover on the loan.
11. List Conditions for Approval
a. Compliance with Terms and Conditions of Loan
Approval of a Servicing Request must be conditioned on curing the defaults and
correcting any collateral deficiencies or issues with the Loan Documents identified in
Step 9. For example, the Borrower should be required to reinstate lapsed insurance
coverage, repay any over-disbursement or duplication of benefits, and make all past-
due supplemental payments based on net earnings clause.
b. Adequate Consideration
In order for a change in the Loan Documents to be legally binding, the Borrower
must provide consideration, (i.e., something of value), before or at the same time that
the Borrower receives the benefit of the requested change. For example, as
consideration for granting the Servicing Request, the Borrower could be required to:
(1) Fix errors in the Loan Documents identified in Step 9;
(2) Waive defenses to litigation;
(3) Release lender liability claims; or
(4) Provide additional collateral.
c. Written Consent of All Obligors
Every effort must be made to obtain the written consent to any material change in the
terms and conditions of the loan from each Obligor in order to protect the ability to
recover from them in the event of default.
12. Comply with Applicable DOJ Decision Making, Notice and Approval Requirements
Prior written approval must be obtained from the Department of Justice (“DOJ”) (via the
SBA District Counsel responsible for handling the litigation) before making any decision
that impacts the collateral or liability on a loan classified in litigation and referred to DOJ.
13. Comply with the Applicable Recordkeeping Requirements
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In accordance with Chapter 3, the response to the Servicing Request must be noted in
the Computer Tracking System or Loan File; a copy of the Loan Action Record and
Supporting Documents must be kept in the Loan File; and the substance of any
telephone calls or face-to-face meetings regarding the Servicing Request must be
documented in the Loan File or entered into a Computer Tracking System.
C. Required Documentation
1. Written Request
Servicing requests should be in writing. When SBA personnel review the request, their
analysis should consider the following:
a. A brief description of the proposed Loan Action;
b. The amount funded, date of funding, current balance and status of the loan;
c. The current financial condition of the Borrower;
d. The justification for the proposed Loan Action, i.e., benefit to the Borrower and
SBA—neither abundance nor lack of collateral alone is sufficient justification for a
Loan Action;
e. Whether the proposed Loan Action will increase the risk of loss, and if so, any
mitigating factor, e.g., the value of SBA's collateral will be increased, or the
Borrower's business performance will be improved;
f. If the proposed Loan Action will impact the collateral, a summary of prior Loan
Actions impacting the collateral and an analysis of the Recoverable Value of the
collateral both before and after the proposed Loan Action;
g. A summary of prior servicing experience with the Borrower, i.e., loan modifications or
problems pertinent to the request; and
h. A list of the Obligors and a statement as to whether their consent has been or will be
obtained for the proposed Loan Action.
D. Implementing Loan Actions
Loan Actions must be implemented in accordance with prudent lending practices, for
example, it may be necessary to:
1. Modify Existing Loan Documents
If the Loan Action modifies the terms and conditions of the Note (Secured, Unsecured)
or any other Loan Document, each impacted Loan Document must be properly modified;
2. Prepare New Loan Documents
Collateral Documents
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Any new Loan Document needed to implement the Loan Action (e.g., a deed of trust
or a security agreement needed to obtain a lien on substitute or additional collateral)
must be properly prepared and executed by the appropriate parties. On business
loans this includes obtaining any necessary board of director resolution or other
evidence of a legal entity's authority to execute the new Loan Documents.
3. Record New or Modified Loan Documents
Whenever necessary, reasonable or customary, new or modified Loan Documents must
be properly recorded.
E. Borrower’ Requests for Reconsideration
Requests from Obligors for reconsideration of an Agency decision regarding a Servicing
Request should be entertained only if the Obligor has provided relevant new facts. Valid
requests for reconsideration should be processed in the same manner as the original
request. Requests that are not supported by new facts may be verbally denied without
processing a Loan Action Record provided that appropriate comments are added to the
Computer Tracking System.
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Chapter 9.
Modification of Note
____________________________________________________________________________
A. General Requirements
Requests for modification of the repayment terms of the Note should be reviewed, analyzed
and implemented pursuant to the requirements of Chapter 8, and the provisions of the
applicable statutes, regulations and contracts, including the Note.
Written Consent of All Obligors - Every effort must be made to obtain the written consent to
any material change in the terms and conditions of the loan from each Obligor in order to
protect the ability to recover from them in the event of default.
B. Payment Due Date
The payment due date on the Note (Secured, Unsecured) may be changed to facilitate the
Borrower's ability to repay the loan. For example, payments originally scheduled to be
made on the first of the month, may be scheduled for the 15th of the month. Similarly,
payments originally scheduled to be made on a monthly basis, may be changed to a
quarterly or annual basis if there is justification for the change such as the seasonal or
cyclical nature of the Borrower's revenue stream, provided that the modification does not
negatively impact the amount of principal reduction.
C. Payment Amount
1. Temporary Reduction
The amount of the payment required by the Note (Secured, Unsecured) may be
temporarily reduced to a fixed amount for a specified period of time, if the general
requirements in Paragraph A and the following requirements are met:
a. The reduction should generally be for no longer than 12 months;
b. The reduced monthly payment is enough to cover accruing interest; and
c. The Borrower is advised that the reduction will create a balloon payment that will be
due at the end of the loan term.
2. Permanent Reduction
The amount of the payment required by the Note (Secured, Unsecured) may be
permanently reduced to a fixed amount, if the general requirements in Paragraph A and
the following requirements are met:
a. The Borrower has established the need for relief based on Severe Financial
Hardship as set out in Chapter 7 (Severe Financial Hardship Relief); and
b. The loan is re-amortized to ensure that the reduced monthly payment is enough to
pay the loan in full within 30 years of the date of the original Note.
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D. Interest Rate
The interest rate specified in the Note (Secured, Unsecured) may be modified if the
general requirements in Paragraph A and when Severe Financial Hardship has been
established pursuant to Chapter 7, the interest rate on a Disaster Loan may be reduced,
provided that the Note and other affected Loan Documents, if any, are properly modified.
E. Maturity Date
A disaster loan may be made for a period not exceeding 30 years, except that the
maturity date may be extended as provided below:
1. For loans with maturities of 20 years or less, the maturity date of a disaster loan
may be extended as follows:
(a) For a period not to exceed 5 years if:
(i) The borrower under such loan is a homeowner or a small business
concern (and not a renter, a non-profit entity, or a large business); and
(ii) The loan was made to enable:
(A) the homeowner to repair or replace his home, or
(B) the small business concern to repair or replace plant or equipment
which was damaged or destroyed as the result of a disaster; and
(C) SBA determines such action is necessary to avoid severe financial
hardship, and
(b) For a period not to exceed 10 years if such extension will aid in the orderly
liquidation of such loan.
2. For loans with maturities of more than 20 years, the maturity date of a disaster
loan may be extended under the criteria described in ¶ 1(a) above only.
F. Loan Amount
1. Increase
The amount of a Disaster Loan may only be increased in accordance with the Loan
Program Requirements set out in SOP 50 30 (Disaster Assistance Program).
2. Decrease
The amount of a fully disbursed Disaster Loan cannot be decreased.
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Note: The amount owed on a fully disbursed Disaster Loan (as opposed to the amount of the
loan) may, in some instances, be increased through the addition of Recoverable Expenses to the
principal loan balance. See Chapter 23 for information on Recoverable Expenses and when they
may be added to principal. The amount owed on a fully disbursed Disaster Loan (as opposed to
the amount of the loan) may, in some instances, be reduced through a compromise agreement.
See Chapter 21 for information on offers in compromise.
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Chapter 10.
Modification of Collateral Requirements
____________________________________________________________________________
A. Subordination of Lien Position
1. General Requirements
Requests for subordination should be reviewed, analyzed and implemented pursuant to
the requirements of Chapter 8 and the following guidelines:
a. The Borrower’s Servicing Request must include the reason for the subordination and
a description of how the new money will be used;
b. The requested subordination should be necessary to:
1) Provide temporary Severe Financial Hardship relief (See Chapter 7);
2) Refinance an existing loan secured by a senior lien on terms that are more
favorable terms for the Borrower; or
3) Pay for necessary repairs or improvements to the collateral, which are
required in order to preserve its value. Substantial upgrades are not in
keeping with the purpose of the Disaster Loan Program and should not be
allowed.
c. The loan should be current;
d. The loan should be Seasoned;
e. The Borrower should have a satisfactory credit history;
f. No cash out of the equity in the collateral should go the Borrower unless the
Borrower pays down the Disaster Loan in substantial part or the purpose of the
subordination is to provide temporary Severe Financial Hardship relief in accordance
with Chapter 7;
g. There should be sufficient equity in the collateral to adequately secure the Disaster
Loan after the proposed subordination;
h. The Borrower should have the ability to repay all of the obligations (according to the
terms of the loan agreements), which would be outstanding after the proposed
subordination;
i. The subordination should be limited to a specific amount and should not extend to
future advances; and
j. The terms of the transaction must be set out in a properly executed subordination
agreement.
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2. Subordination to Facilitate Refinance of a Senior Loan – No Cash out
In addition to the general requirements in Paragraph A.1, the position of a lien securing a
Disaster Loan should not be subordinated to facilitate the refinance of an existing senior
loan unless:
a. The refinancing is on terms that are more favorable to the Borrower;
b. There is no increase in the principal balance of the loan secured by the senior lien
except for necessary, reasonable and customary closing costs;
c. The subordination will not otherwise adversely affect the priority of the lien securing
the Disaster loan. For example, intervening junior lienholders, if any, must not be
able to claim priority over the lien securing the Disaster Loan as a result of the
subordination.
Note: When analyzing a request for subordination to facilitate the refinance of a senior
loan, a complete financial analysis may not be necessary if the Borrower has been
making timely payments and the refinance terms are more favorable for the Borrower.
3. Subordination to Facilitate Refinance of a Senior Loan – Cash out
In addition to the general requirements in Paragraph A.1, the position of a lien
securing a Disaster Loan should not be subordinated to facilitate the refinance of an
existing senior loan unless:
a. The refinancing is on terms that are more favorable to the Borrower;
b. There is no increase in the principal balance of the loan secured by the senior lien
except for necessary, reasonable and customary closing costs;
c. The subordination will not otherwise adversely affect the priority of the lien securing
the Disaster loan. For example, intervening junior lienholders, if any, must not be
able to claim priority over the lien securing the Disaster Loan as a result of the
subordination.
d. All other avenues of obtaining the funds have been exhausted; and
e. If the Borrower is financially sound and has fully recovered from the disaster, the
Borrower pays down the Disaster Loan balance by 50% or more if the size of the
new loan is substantial.
4. Subordination to Facilitate a Short-term Working Capital Loan
Under rare circumstances, the priority position of a lien securing a Business Disaster
Loan may be subordinated to a short-term working capital loan when doing so is
necessary to enable the Borrower to continue operating and to maximize recovery on
the loan. (See Chapter 17 for information on workouts.)
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B. Inter-creditor Agreements
Requests for execution of an inter-creditor agreement, (i.e., an agreement among creditors
who made separate loans to the same borrower with commonality of purpose or collateral,
which sets forth the various lien positions and the rights and liabilities of each creditor and
its impact on the other creditors), should be reviewed, analyzed and implemented pursuant
to the requirements of Chapter 8 and the following guidelines:
1. The inter-creditor agreement should not adversely impact the position of the lien
securing the Disaster Loan;
2. The delineated rights and responsibilities with regard to loan servicing responsibilities,
and the remedies in the event of default, should be consistent with prudent lending
practices; and
3. Entering into the inter-creditor agreement should not adversely impact the ability to
recover on the Disaster Loan.
C. Substitution of Collateral
Requests to allow a substitution of collateral, including substitution of a residence held as
collateral, should be reviewed, analyzed and implemented pursuant to the requirements of
Chapter 8 and the following requirements and guidelines:
1. The substitution should be needed to achieve the Agency mission of helping the
Borrower recover from the disaster, e.g., the disaster damaged collateral will be sold and
a new collateral will be purchased.
2. The collateral offered in substitution should be similar in nature (e.g., real property for
real property) or provide a higher level of confidence (e.g., a certificate of deposit for an
account receivable), and the amount of equity in the substitute collateral available to
secure the Disaster Loan should be the same or greater than the amount of equity
available in the existing collateral.
3. If the substitute collateral is commercial real property, due diligence, as required by
Chapter 6 (Environmental Risk Management), must be conducted to ensure that the
risks of Contamination are minimal;
4. The Borrower should have a satisfactory credit history;
5. The Borrower's current financial statement should reflect that the Borrower has the
ability to pay all of its obligations that will be outstanding after the substitution;
6. All of the proceeds from the sale of the existing collateral, other than the funds needed to
pay off senior liens and necessary, reasonable and customary closing costs, should be
used to purchase the new collateral or to pay down the Disaster Loan unless the
purpose of the substitution is to provide temporary Severe Financial Hardship Relief in
accordance with Chapter 7;
7. The release and substitution must not impair the ability to foreclose upon the remainder
of the collateral or collect the loan balance from the Obligors;
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8. The release of the existing lien(s) or proceeds thereof must be done after or concurrent
with the recording of the new lien(s) in the required position of priority and done pursuant
to an escrow agreement signed by all of the parties involved in the transaction; and
9. The Obligor(s) must comply with the Loan Program Requirements set out in SOP 50 30
(Disaster Assistance Program) with regard to title insurance, hazard insurance, and flood
insurance coverage on the substitute collateral.
D. Substitution of Guarantor
1. General Requirements
Requests to allow substitution of a Guarantor should be reviewed, analyzed and
implemented pursuant to the requirements of Chapter 8 and the following guidelines:
a. The loan must be Seasoned;
b. The financial strength of the proposed substitute Guarantor should be equal to or
greater than the financial strength of the existing Obligor;
c. The loan must be current or be brought current before the substitution of Guarantor
takes place; and
d. With regard to Disaster Business Loans, neither the release of the existing Guarantor
nor the substitution for the proposed Guarantor should adversely impact the
operation of the business.
2. Condition – Temporary Retention of Original Guarantor
With regard to Disaster Business Loans, substitution of the proposed Guarantor may be
conditioned on retention of the original Guarantor for a transitional period (e.g., two
years) during which time there must be no material adverse change in the financial
condition of the business.
E. Release of Lien without Consideration
Requests for the release of liens on real or personal property collateral without consideration
before the loan has been paid in full should be reviewed, analyzed and implemented
pursuant to Chapter 8 and the following guidelines and requirements:
1. The loan must be Seasoned;
2. The Borrower must have the ability to repay the SBA loan in full in accordance with the
terms of the Note;
3. The Recoverable Value of the remaining collateral should be sufficient to adequately
secure the Disaster Loan after the proposed release;
4. The release document(s) must not impair SBA's interest in, or ability to foreclose upon,
the remainder of the collateral; and
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5. The release must not occur during the pendency of a senior lienholder foreclosure action
on the collateral (Chapter 14) unless the release is in connection with a short sale
approved in accordance with Chapter 18.
F. Release of Lien for Consideration
Requests for the release of liens on real or personal property collateral for consideration
should be reviewed, analyzed and implemented pursuant to the requirements of Chapter 8
and the following requirements:
1. General Requirements
a. The Obligor requesting the release must disclose the source of the funds to be paid
to SBA for the release, which must not conflict with the information the Obligor
provided to SBA to establish eligibility for the Disaster Loan;
b. The amount of consideration received must be approximately equal to or greater
than the Recoverable Value of the collateral, (See Chapter 6 [Environmental Risk
Management] with regard to the due diligence that must be performed if the collateral
is alleged to be worth substantially less than its estimated Recoverable Value due to
the alleged presence of Contamination.);
c. The release must not impair SBA's interest in or ability to foreclose upon the
remaining collateral, or otherwise jeopardize SBA's ability to maximize recovery on
the loan;
d. The release must not occur during the pendency of a senior lienholder foreclosure
action on the collateral (Chapter 14) unless the release is in connection with a short
sale approved in accordance with Chapter 18;
e. Duplication of benefits must not occur as a result of releasing SBA's lien. (For
example, when SBA has a lien on both the Borrower's disaster damaged residence
and new residence and the Borrower asks SBA to release its lien on the damaged
residence so that it can be sold, all of the net proceeds from the sale of a Borrower's
disaster damaged residence must be applied to the Disaster Loan in inverse order of
maturity in order to avoid duplication of benefits.); and
f. The funds received as consideration for the release of lien, including liens on
unimproved real property, must be applied to the principal balance of the loan.
G. Release of Guarantor or Co-Borrower
A request for release of a co-Borrower or to release or limit the liability of a Guarantor should
be reviewed, analyzed and implemented pursuant to Chapter 8 and the following
requirements:
1. Loans in Regular Servicing Status
a. The loan must be Seasoned;
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b. An analysis of the relevant financial statements must indicate that the co-Borrower or
Guarantor is no longer necessary; or that reducing the Guarantor’s liability to a
limited amount—rather than releasing the Guarantor, is reasonable based on the
circumstances;
c. The release must not conflict with SBA Loan Program Requirements, such as those
found in 13 C.F.R. Part 123 and SOP 50 30 (Disaster Assistance Program) that
require Guaranties from specific Persons (e.g., any Person who owns 20 per cent or
more of a small business Borrower) as a condition for SBA financing; and
d. The release must not jeopardize the ability to maximize recovery on the loan; shift
the risk of loss to SBA; or otherwise harm the integrity of the SBA loan program.
e. The release should be conditioned on receipt of consideration in an amount
approximately equal to or greater than the amount that could be collected through
enforced collection proceedings from the Guarantor or co-Borrower requesting the
release.
2. Loans in Liquidation Status
a. The release should be conditioned on receipt of consideration in an amount
approximately equal to or greater than the amount that could be collected through
enforced collection proceedings from the Guarantor or co-Borrower requesting the
release;
b. The Guarantor or co-Borrower requesting the release should be required to provide
the same documentation that is required for an offer in compromise;
c. The request for release and accompanying documentation should be reviewed,
verified and analyzed pursuant to the requirements of Chapter 21 (Offer in
Compromise); and
d. The funds received as consideration for the release must be applied to the principal
balance of the loan.
Note: Obligors cannot be released without prior written approval from DOJ and the SBA
District Counsel responsible for handling the litigation if the loan is involved in litigation
referred to the Department of Justice (“DOJ”).
H. Release of Condemnation Proceeds
Requests for release of condemnation proceeds should be reviewed, analyzed and
implemented pursuant to the requirements of Chapter 8 and the following guidelines:
1. Costs Payable from Condemnation Proceeds
a. Attorney Fees and Costs
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Reasonable, necessary and customary attorney fees and costs incurred to obtain fair
compensation for the condemned property may be paid from the condemnation
proceeds.
b. Repairs Required as Result of Partial Taking
When only a portion of the Borrower’s property is condemned, the necessary,
reasonable and customary cost of repairs or modifications to the remaining property
needed as a direct result of the partial taking may be paid from the condemnation
proceeds. (E.g., driveway or parking lot repairs needed after a partial taking for a
road widening project.)
2. Condemned Property Replaced
When the net condemnation proceeds (i.e., amount remaining after the deductions
authorized by Subparagraph 1) will be used to replace the condemned property, they
should only be released pursuant to an escrow agreement approved by legal counsel
that conditions release of the funds on:
a. Receipt of a perfected lien on the substitute collateral in the required lien position;
and
b. Compliance with the title, hazard and flood insurance requirements set out in
Chapter 11.
3. Condemned Property Not Replaced
When the net condemnation proceeds (i.e., amount remaining after the deductions
authorized by Subparagraph 1) will not be used to replace the condemned property:
a. Condemnation Proceeds < $5,000
If the amount of condemnation proceeds is relatively insignificant, i.e., $5,000 or less,
and the release will not adversely affect the ability to recover on the Disaster Loan,
they may be released directly to the Borrower.
b. Condemnation Proceeds > $5,000
If the amount of condemnation proceeds is more than $5,000, they should be applied
to the principal balance of the Disaster Loan, and up to $5,000 may be released
directly to the Borrower if the release will not adversely affect the ability to recover on
the Disaster Loan.
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Chapter 11.
Insurance Coverage
____________________________________________________________________________
A. General Requirements
Servicing Requests to modify the requirements in the Loan Authorization pertaining to
insurance should be reviewed and analyzed in accordance with the requirements in Chapter
8 and those set out below.
1. No Duplication of Benefits
Servicing and liquidation actions on Disaster Loans must not result in a duplication of
benefits (“DOB”) to the disaster victim.
Note: Various forms of assistance and programs (e.g., flood insurance, disaster repair grants,
loans, etc.) help people whose properties have been damaged by natural disasters to rebuild
and relocate. By law, (e.g., 44 C.F.R. § 206.191), federal assistance cannot duplicate the
benefits provided by other sources. Consequently, if property owners have already received
assistance to repair their properties from one program, the other program must ensure they
don’t provide assistance to cover the same loss.
2. Proper Documentation
All decisions regarding insurance, including the justification for the each decision, must
be documented in a Loan Action Record and kept in the Loan File.
B. Mortgagee’s Title Insurance
1. Substitute Collateral
When existing real property collateral is released and substitute real property collateral
taken, a mortgagee’s title policy insuring the lien on the substitute real property collateral
should be obtained if a mortgagee’s title insurance policy was required by SOP 50 30
(Disaster Assistance Program) for the original real property collateral. (See Chapter 10
for information on substitution of collateral.)
2. Additional Collateral
When real property collateral is taken as additional collateral, whether a mortgagee’s title
insurance policy should be obtained will vary depending on the circumstances including
the amount of equity available in the property to secure the Disaster Loan.
3. Installment Sale of REO
When REO is sold on an installment basis, a mortgagee’s title insurance policy must be
obtained to insure the purchase money lien on the REO. (See Chapter 20 for
information on term sales of acquired collateral.)
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C. Hazard Insurance
1. Events Triggering Review of Coverage Amount
The adequacy of the Borrower's hazard insurance coverage should be reviewed
whenever the Borrower requests a serving action such as an increase in the loan
amount, an extension of the maturity date, or reinstatement of the maturity date.
2. Modification of Coverage on Existing Collateral
Generally, the hazard insurance coverage requirements set out in the Loan
Authorization should not be terminated or reduced unless the insured assets have been
sold or have substantially depreciated.
3. Coverage on Substitute or Additional Collateral
When existing collateral is released and substitute collateral taken, the substitute
collateral should be insured and the insurance policies should contain a mortgagee
clause, or substantial equivalent, in favor of SBA in accordance with the Loan Program
Requirements in SOP 50 30 (Disaster Assistance Program). (See Chapter 10 for
information on substitution of collateral.)
4. Coverage on Acquired Collateral
Generally, SBA self-insures. However, prudent action must be taken, on a case-by-case
basis, to ensure that all acquired collateral with unusually high Recoverable Value is
adequately insured in order to protect the ability to recover on the Disaster Loan.
5. Forced Placement
If hazard insurance is required by the Loan Documents and the Obligor has allowed the
coverage to lapse, the decision whether to force-place insurance should be based on
prudent lending practices and made on a case-by-case basis. If coverage is continued
by SBA, the cost should be treated as a Recoverable Expense.
6. Release of Policy Proceeds
a. General Rule—Collateral Repaired or Replaced
When SBA is named as a loss payee on a hazard insurance policy, the proceeds
should not be released unless the Supporting Documentation submitted with the
request verifies that the insured collateral has been properly repaired or replaced
and that no construction or repair related liens have been filed against the property,
particularly if the insurance check is for $100,000 or more.
Reminder—No Duplication of Benefits: See Paragraph A.1, which prohibits any
Loan Action that would result in the duplication of benefits to the disaster victim.
b. Exception—Controlled Distribution
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(1) If a request for release of insurance proceeds is not accompanied by Supporting
Documentation establishing that the insured collateral was repaired or replaced,
instead of endorsing and delivering the insurance check to the Borrower,
disbursement of the insurance proceeds should be controlled and monitored.
(2) Generally, insurance proceeds, which are required to be used to repair or replace
collateral, should be disbursed pursuant to an escrow agreement approved by
SBA legal counsel. An escrow company, the first lien holder or an impartial third
party such as an attorney, architect or construction loan officer at a financial
institution may serve as the escrow agent.
D. Flood Insurance
1. General Rule—Termination or Modification Not Permitted
When a Disaster Loan is secured by improved real estate, manufactured housing or
other personal property located in a FEMA-designated special flood hazard area
("SFHA") and the community participates in the National Flood Insurance Program
("NFIP"), the Borrower must maintain flood insurance for the life of the loan. (See the
National Flood Insurance Reform Act of 1994 for more information.) This requirement
pertains to substitute collateral as well as the original collateral for the loan.
2. Events Triggering Flood Insurance Review
The need for flood insurance, as well as the adequacy of any existing flood insurance
coverage, should be reviewed whenever the Borrower requests a servicing action. Use
of FEMA Form 81-93 (Standard Flood Hazard Determination Form) is required and a
copy must be retained in the Loan File.
3. Forced Placement
If at any time during the life of a loan, real or personal property collateral, which is
located in a SFHA, is not covered by flood insurance or is covered by an inadequate
amount of flood insurance, the Borrower must be instructed to obtain adequate flood
insurance. If the Borrower fails to do so within 45 calendar days, flood insurance must be
purchased on the Borrower’s behalf at the Borrower’s expense. (The cost should be
treated as a Recoverable Expense.) All Borrower Servicing Requests should be
declined until the Borrower is in compliance with the applicable flood insurance
requirements. (See the National Flood Insurance Reform Act of 1994 for more
information.)
4. Unavailability of Flood Insurance
If a Borrower had the required flood insurance when the loan was made, but the
coverage has lapsed because the community dropped out of the NFIP, documentation
establishing why the property is no longer covered by flood insurance must be
maintained in the Loan File.
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Chapter 12.
Assumption or Sale of Loan
____________________________________________________________________________
A. Assumption
Requests to allow another Person to assume a Disaster Loan, (i.e., take over the Borrower's
legal obligations and benefits under the Loan Documents), should be reviewed, analyzed
and implemented pursuant to the requirements in Chapter 8. In addition:
1. The assumption must be necessary to ensure repayment of the loan after a material
change in circumstances, for example:
a. The assumption is necessary to ensure that a new legal entity formed by a Disaster
Business Loan Borrower will be liable for the loan if the Borrower changes the form
of the legal entity under which it does business (e.g., LLC to corporation);
b. The assumption is part of a plan for providing Severe Financial Hardship relief
pursuant to Chapter 7; or
c. The assumption is needed to implement a workout plan on a loan in liquidation
status.
2. The proposed assumptor must have a satisfactory credit history;
3. The proposed assumptor must have the ability to repay the Disaster Loan in full;
4. No collateral should be released;
5. No collateral should be subordinated except as provided in Chapter 10, Paragraph A
with regard to funds that will be used to make improvements to the collateral that will
maintain or increase its value;
6. The proposed assumption must not have a negative impact on the Recoverable Value of
the collateral;
7. The existing collateral should be adequate to secure the loan; if not and whenever
possible, additional collateral should be required as a condition for the assumption;
8. Existing Obligors must not be released without SBA’s prior written approval;
9. The terms of the assumption must be set out in a written agreement signed by all of the
parties to the agreement;
10. The assumption agreement must include a "due on sale or death" clause that prohibits
any future assumption of the SBA loan;
11. The terms of the assumption must not include a real estate contract, i.e., the seller may
not retain title to the property until an agreed upon amount is paid; and
12. With regard to Disaster Business Loans:
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a. The proposed assumptor should be the primary owner of the business; and
b. The proposed assumptor should have business experience and management
skills that are equal to or better than the Borrower's; and
c. The proposed assumption should not have a negative impact on the operation of
the business;
13. With regard to Disaster Home Loans:
a. The proposed assumptor must be a prospective purchaser of the residence; and
b. Must inhabit the property as their primary residence.
B. Sale of Disaster Loan
Servicing Requests involving the purchase and sale of a Disaster Loan should be reviewed,
analyzed and implemented pursuant to the requirements in Chapter 8, and meet the
following requirements:
1. The loan must be in liquidation status;
2. The sale must be an arms-length transaction to a Person other than the Borrower; and
3. The sales price must bear a reasonable relationship to the amount that could be
recovered through enforced collection proceedings in a reasonable amount of time.
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Chapter 13.
Deferments
____________________________________________________________________________
A. Overview
A deferment is a temporary solution to a temporary problem. When used appropriately, i.e.,
when a Borrower is experiencing a temporary cash flow problem, a deferment can enable
the Borrower to improve its cash flow so that it can resume payments on its Disaster Loan.
When used inappropriately, i.e., when the Borrower’s problems are permanent, a deferment
can harm the Borrower and SBA. Especially if, for example, during the deferment period,
the collateral loses its value and the Obligors deplete all of their resources.
Note: With regard to Disaster Business Loans, free, confidential technical and management
counseling is available to small businesses through the nationwide network of SCORE Chapters
and Small Business Development Centers, Women’s Business Centers and Veterans Business
Outreach Centers.
B. General Rule
If the Borrower’s cash flow problem is temporary, delinquent payments, as well as full or
partial future monthly payments, may be deferred (i.e., postponed without classifying the
loan in liquidation) for a stated period of time in order to enable the Borrower to get past the
temporary setback.
Note: Payments should not be deferred solely because a Borrower has entered the military
service. The determination as to whether a deferment is appropriate must be made on a case-by-
case basis pursuant to the requirements in this chapter. Consult legal counsel for questions
regarding the Servicemembers Civil Relief Act.
C. General Requirements
Prior to granting a deferment, the following documents must be obtained, reviewed and
analyzed in order to determine whether the Borrower’s cash flow problem is temporary, i.e.,
whether the Borrower will be able to overcome the cause of its cash flow problem, and be
able to make regular payments at the end of the proposed deferment period.
1. Statement Documenting Temporary Nature of Cash Flow Problem
A written statement from the Borrower outlining the reason(s) for their cash flow
problem, as well as the reason(s) why the Borrower believes that it is a short-term,
rather than a long-term, problem.
Note: If the loan is more than 90 calendar days past due and the Borrower’s problems
appear to be permanent or long-term, more appropriate Loan Action should be taken such as
charge-off and Treasury referral, or liquidation of the collateral. (See Chapters 15 and 16.)
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2. Current Financial Information
The Borrower must provide current financial information, as required by Subparagraphs
a and b below, unless the request for a deferment is in response to a new disaster or
based on other extraordinary circumstances, such as a fire that destroyed or significantly
damaged the Borrower's home or business premises; or the Borrower provided a
reasonable written explanation for the temporary financial difficulty and has not
previously been granted a deferment or reduction of the Disaster Loan payment amount.
a. Disaster Home Loans
A current financial statement, preferably on SBA Form 770 (Financial Statement of
Debtor), which should be signed under penalty of perjury and must show the
Borrower’s assets, liabilities, income and expenses.
b. Disaster Business Loans
(1) Financial Statement
(a) A current financial statement, preferably on SBA Form 770 (Financial
Statement of Debtor), which should be signed under penalty of perjury and
must show the Borrower’s assets, liabilities, income and expenses;
(b) The Borrower’s last year-end financial statement; and
(c) If the Borrower has any affiliates, a current consolidated financial statement;
(2) Business Federal Income Tax Returns
A complete copy of the Borrower and each affiliate’s business federal income tax
return that was filed with the IRS for the past two years or a written explanation
as to why a copy is not available; and
(3) Personal Federal Income Tax Returns
A complete copy of the personal federal income tax returns each Guarantor filed
with the IRS for the past two years or a written explanation as to why a copy is
not available.
Note: Obtaining current financial information at this stage is critical. It is not only needed
to make a prudent lending decision regarding the appropriateness of a deferment, but
provides valuable information that will be difficult to obtain in the event enforced collection
becomes necessary.
D. Deferred Amount
1. Number of Monthly Payments Per Deferment
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Generally, the amount deferred at one time should not exceed six cumulative monthly
payments, but when justified, up to 12 cumulative monthly payments may be deferred at
one time.
2. Number of Deferments Per Life of Loan
Generally, Borrowers should not be given more than one deferment. Additional
deferments may, however, be granted when justified and documented in the Loan File.
Generally, no more than a total of five years of payments should be deferred over the life
of the loan.
E. Loan Payments During Deferment Period
Although the full amount of each monthly payment may be deferred if justified, partial
payments should be required if the Borrower is able to make them. The amount of any
partial payment required during the deferment period must be based on the Borrower’s
ability to pay as documented by the financial analysis required by Paragraph B above.
F. Interest Accrual
Interest continues to accrue during a deferment period. Generally, at the end of the
deferment period, when payments resume, the funds will be applied to accrued interest
before principal. (See Chapter 5.)
Note: If the delinquent Borrower is in active military service, consult legal counsel or SBA's Office
of Veterans Business Development for information regarding the Servicemembers Civil Relief
Act and the Veterans Entrepreneurship and Small Business Development Act.
G. Procedure When Delinquency Can Not Be Cured
As provided in Chapter 15, when a Disaster Loan is more than 90 days past due and there
is no prospect of bringing it current, e.g., through a deferment or workout:
1. Loans that are secured by collateral other than household goods with a balance greater
than $25,000 should be sent to the NDLRC for liquidation; and
2. All other loans should be charged-off and referred to Treasury for offset and cross-
servicing if the balance is legally collectible.
Note: See Chapter 25 for information on charge-off and referral to Treasury.
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Chapter 14.
Delinquent Senior Liens
____________________________________________________________________________
A. General Requirements
Time is of the essence when a secured senior loan becomes delinquent because statute-
specific and agreement-specific deadlines must be met, senior lienholders may impose
Default Charges and initiate foreclosure actions, and collateral values can rapidly
deteriorate. Therefore, whenever notice of default or foreclosure is received from a senior
lienholder:
1. Enforce Lienholder Agreements
The notice and subordination requirements in any lienholder agreement executed by the
senior lender must be enforced to mitigate the risk of loss on the loan.
2. Mitigate the Loss to SBA
a. Do Not Release the Lien Securing the Disaster Loan
After receipt of notice of a senior lienholder foreclosure sale, even if a “no bid”
position is justified, the lien securing the Disaster Loan must not be released prior to
the foreclosure sale unless the request is in conjunction with an arms-length short
sale that meets all of the applicable requirements in Chapter 18. (Release of lien not
only eliminates SBA’s right to redeem the property in the event it sells for less than
anticipated, it eliminates SBA’s right to receive consideration for release of its
redemption rights. It also eliminates SBA’s right to collect the excess proceeds from
the foreclosure sale in the event the collateral sells for more than the amount owed
on the senior lien.)
b. Protect the Equity Available for the Disaster Loan
Swift, prudent, commercially reasonable action must be taken to prevent elimination
of the lien securing the Disaster Loan or dissipation of the equity available to secure
it.
3. Monitor Senior Lienholder’s Foreclosure Proceedings
Whenever a senior lienholder initiates a foreclosure action, the foreclosure proceedings,
including the sale, should be closely monitored.
4. Report the Sale
A report describing all of the relevant facts concerning the sale, including those listed
below, should be prepared along with the details of a plan that addresses how the
collateral will be sold if it was acquired (Chapter 20) or how the loss will be mitigated if it
was not acquired. (Subparagraphs d-g below).
a. Sale date;
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b. Amount the collateral sold for;
c. Purchaser’s name and contact information;
d. Amount of unsubordinated debt owed to senior lienholder on the sale date;
e. Estimated market value of the foreclosed-upon collateral.
f. Amount of surplus sale proceeds available junior lienholders;
g. Whether SBA has redemption rights, and if so, the last day to exercise them; and
h. The impact of the foreclosure sale on the lien position of any other common
collateral.
B. Best Strategy to Protect Junior Disaster Loan Lien
When it is apparent that an Obligor is in default on a loan secured by a senior lien on the
collateral for a Disaster Loan, steps should be taken to develop a prudent and commercially
reasonable strategy for protecting the equity available for application to the Disaster Loan.
C. Judicial Foreclosures
If a senior lienholder initiates a judicial foreclosure action, the legal counsel responsible for
handling the litigation should be notified immediately and instructed to take whatever legal
action is necessary, reasonable and customary under the circumstances. For example, in
addition to, or in lieu of, any of the other options listed in this chapter, legal counsel may:
1. File a disclaimer or an answer;
2. Foreclose the lien securing the Disaster Loan in the same action; or
3. Cross-claim for judgment against the Obligors.
Note: If the loan has been referred to DOJ, legal counsel is responsible for managing the
litigation in coordination with the local U.S. Attorney's Office, which has final decision-making
authority with regard to litigation strategy, credit matters and settlements.
D. Protective Bids
1. When to Enter
A Protective Bid should be entered at a senior lienholder's foreclosure sale if the
Recoverable Value is determined to be sufficient or prudent lending practices would
advise entering a Protective Bid based on the circumstances that are not reflected in the
Appraisal, but are documented in the loan file. A Protective Bid decision should be fully
documented in the Loan file.
2. Protective Bid Amount
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a. Maximum Amount
The maximum amount of a Protective Bid should be the lesser of the balance owed
on the Disaster Loan or the Recoverable Value of the collateral.
b. Tolerance Range
The amount of a Protective Bid should include a "tolerance range," (i.e., a
percentage by which the authorized bidder is allowed to increase or decrease the
amount of the Protective Bid depending on unanticipated events at the foreclosure
sale).
c. Impact on Ability to Collect Deficiency
Because state laws vary, legal counsel should be consulted prior to entering a
Protective Bid to ascertain the impact, if any, the Protective Bid amount may have on
the ability to collect the deficiency, if any, owed on the loan balance after the bid is
entered.
E. “No Bid” Position
1. When a “No Bid” Position is Appropriate
A “no bid” position at a senior lienholder’s foreclosure sale is appropriate when there is
justification for abandoning the collateral being foreclosed upon. Per prudent lending
practices, a “no bid” position may also be justified based on circumstances, which are
not reflected in the Appraisal but are documented in the Loan File. A No Bid decision
should be fully documented in the Loan file.
2. Failure to Conduct an Environmental Investigation
Failure to conduct the Environmental Investigation required by Chapter 6 does not justify
taking a "no bid" position when there is equity that should be protected. In emergency
situations, prudent judgment must be exercised and the best possible due diligence
under the circumstances must be conducted in order to avoid unnecessary loss.
F. Redemption Rights
While under federal law, SBA has one year from the date of a judicial foreclosure sale to
redeem, i.e., buy back, the foreclosed-upon property (28 U.S.C. § 2410(c)). Under state
law, the redemption rights associated with a Disaster Loan generally stem from SBA’s status
as a junior lienholder. Whether junior lienholders have redemption rights varies by state.
Consult legal counsel for case specific information and advice.
1. When Redemption is Appropriate
The redemption rights on a Disaster Loan should be exercised whenever redeeming the
property would be prudent and commercially reasonable. For example, redeeming the
foreclosed-upon property would be appropriate if it sold for significantly less than market
value at the senior lienholder's foreclosure sale and redeeming (i.e., acquiring) the
property and reselling it would maximize recovery on the loan.
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2. Release for Consideration
If redemption rights are available under federal or state law but it would not be prudent
or commercially reasonable to redeem the foreclosed-upon property, the redemption
rights associated with the Disaster Loan may be released upon receipt of cash in a lump
sum equivalent to 50% of the property's Recoverable Value, but only after the senior
lienholder's foreclosure sale has been confirmed.
G. Excess Proceeds from Senior Lien Foreclosure Sales
Generally, as a matter of law, surplus funds generated by a foreclosure sale are paid to the
junior secured creditors in accordance with the priority of their liens against the property.
Therefore, the following requirements apply whenever the property is not acquired via a
Protective Bid at a senior lienholder’s foreclosure sale:
1. Ascertain Whether There are Surplus Funds Available for Junior Lienholders
2. Collect Subordinated Funds Improperly Held by the Senior Lienholder
3. Collect Excess Sale Proceeds Deposited with the Clerk of the Court
Promptly claim and collect any surplus funds deposited with the clerk of the court (or
other Person) that are available for application to the Disaster Loan balance by virtue of
the position of the lien securing the Disaster Loan.
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Chapter 15.
Delinquent Loan Servicing
____________________________________________________________________________
A. General Requirements
1. Verify that the Obligor is Still Legally Responsible for Repaying the Loan
Prior to taking any collection action against an Obligor, including those listed in this
chapter, ensure that the Obligor is still legally obligated to repay the loan. For example,
verify that the Obligor’s liability for the Disaster Loan has not been discharged in
bankruptcy, that the statute of limitations for collecting the debt has not expired, and that
the Obligor has not completed an SBA-approved offer in compromise.
2. Comply with Debt Collection Improvement Act
SBA's efforts to collect delinquent loans are subject to the requirements of the Debt
Collection Improvement Act of 1996 ("DCIA"). Therefore, unless enforced collection is
barred by a valid legal defense, (e.g., statute of limitations, discharge in bankruptcy,
compromise, etc.) strict adherence to the DCIA timeline is required.
3. Use Automated Letters and Telephone Calls When Feasible
For efficiency of operations, automated collection letters and telephone calls should be
utilized whenever feasible.
4. Document Collection Efforts
All contact with the Borrower to collect a Disaster Loan must be documented in the Loan
File or Computer Tracking System to ensure and prove compliance with the DCIA.
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Chapter 16.
Classifying Loans in Liquidation
____________________________________________________________________________
A. When the Note Should Be Accelerated
1. General Rule
The Note (Secured, Unsecured) on a Disaster Loan should be accelerated whenever
there has been an event of default, it is clear that the Obligor(s) cannot, or will not, keep
the loan current through regularly scheduled payments, and enforced collection against
collateral is being considered.
2. Examples of Events of Default
a. The loan is more than 60 days past due on a payment and there is no SBA approved
deferment or catch-up plan in place;
b. A senior lienholder has initiated a foreclosure action against collateral securing the
loan;
c. A lawsuit, which could adversely affect repayment of the Disaster Loan, has been
initiated against an Obligor;
d. An Obligor has filed a voluntary petition in bankruptcy, or an involuntary petition in
bankruptcy has been filed against an Obligor;
e. With regard to Disaster Business Loans, the business has been shut down or
abandoned;
f. Substantial collateral has been abandoned or is in danger of disappearing, losing its
value, or being stolen;
g. A receiver (i.e., a disinterested person appointed by a court) has been appointed, or
some other action has been initiated to liquidate the collateral or an Obligor's assets;
or
h. Any other circumstances that could substantially and adversely affect repayment of
the Disaster Loan.
B. Demand Letters
Note: In the event of a default on a Disaster Loan, the Note (Secured, Unsecured) gives the
holder the right to accelerate the Note (Secured, Unsecured) and liquidate the loan "without
notice or demand." In practice, however, the collateral documents, (e.g., deed of trust), or
applicable state law generally require the creditor to make a formal demand for payment. If
litigation is necessary, most courts expect to see a demand letter as part of the evidence offered
by the creditor to prove its case.
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Unless prohibited by applicable law (e.g., the automatic stay in bankruptcy), when the Note
is accelerated, demand should be made on all of the Obligors for payment of the entire loan
balance;
C. Obligors in Active Military Service
The military service status of an Obligor must be determined before taking liquidation action
that could adversely impact the Obligor; and if an Obligor is in active military service, any
action taken must be in compliance with the Servicemember's Civil Relief Act ("SCRA"),
(Appendix to 50 U.S.C. §§ 501-596).
Note: SCRA provides servicemembers relief from certain obligations and temporarily suspends
judicial and administrative proceedings and transactions involving civil liabilities when military
service affects the servicemember’s ability to meet or attend to civil matters. The protections are
not automatic. Generally, servicemembers must request them and show that their military service
has materially impaired their ability to meet their obligations. Creditors may, however, seek relief
in court by proving otherwise. For detailed information, consult legal counsel or SBA's Office of
Veterans Business Development.
Note, Continued
Simply stated SCRA:
1. Places limitations on foreclosures and interest rates;
2. Requires creditors to forgive interest in excess of 6 percent on certain pre-service debts;
Protects servicemembers from default judgments if they fail to appear at trial or respond to a
lawsuit because of their military service (50 USC App. § 521);
3. Authorizes the court to stay lien foreclosure actions or adjust the servicemember's obligation
to preserve the interests of all parties (50 USC App. § 533);
4. Makes a servicemember's personal assets that were not pledged as collateral unavailable to
satisfy a business obligation (50 USC App. § 596);
5. Prohibits creditors from pursuing adverse actions (e. g., notifying credit reporting agencies,
denying credit, changing terms) against servicemembers solely because they exercise their
rights under SCRA (50 USC App. § 518); and
6. Imposes criminal sanctions on creditors who violate certain provisions of the statute including
those pertaining to mortgage foreclosures.
D. Liquidation Plans
A well drafted Liquidation Plan can help ensure the highest possible recovery on a loan in
the shortest amount of time. A Liquidation Plan should be prepared for all Disaster Loans
classified in liquidation within 30 calendar days of receipt of the Loan File by the NDLRC.
Workout Negotiations — Not an Exception:
Generally, during the first few weeks following liquidation classification, a workout (Chapter
17) should be negotiated whenever feasible. However, during this same time period, the
information and reports needed to liquidate the collateral (Chapters 18 and 19) and enforce
collection from the Obligors (Chapters 20, 21 and 23), such as Appraisals or other forms of
valuation, title reports, UCC searches, Environmental Reports, asset searches, credit
reports, etc., should be obtained so that in the event an acceptable workout plan cannot be
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implemented, lien foreclosure and other enforced collection activities can commence without
further delay or loss.
E. When Loans Should Be Removed from Liquidation Status
1. Returned to Regular Servicing
Disaster Loans should be removed from liquidation status and returned to regular
servicing when regular payments are resumed pursuant to an approved written workout
agreement, bankruptcy plan, reaffirmation agreement, assumption, or other written
agreement that provides for resumption of regular payments.
2. Paid in Full
Disaster Loans should be removed from liquidation status and classified as “paid in full”
when SBA Form 397 (Notice of Fully Paid Account) is received from the Denver Finance
Center. (See Chapter 5 for information on paid in full loans.)
3. Charged-off
Disaster Loans should be removed from liquidation status and classified as “charged-off”
when the remaining loan balance has been charged-off in accordance with the Loan
Program Requirements set out in Chapter 25.
Note: See Chapter 5 for information on how to apply payments on loans in liquidation, and Chapter
23 for information on how to apply recoveries.
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Chapter 17.
Workouts
____________________________________________________________________________
A. Overview
The term “workout” refers to the debt collection and negotiation process as well as the final
plan agreed upon by a creditor and a debtor with regard to how the debtor’s delinquent
obligation to the creditor can be “worked out” (i.e., resolved). Generally, a workout
agreement restructures the material terms and conditions of the debtor’s delinquent loan in
order to: avoid the need for actions such as foreclosure or bankruptcy; enable the debtor to
cure defaults and improve repayment ability; and to enable the creditor to maximize
recovery on the loan.
B. Required Financial Information
Current financial information is essential in order to make prudent lending decisions
regarding the feasibility and structure of a workout agreement. If the Obligors are not willing
to provide the required Financial Information, workout negotiations should not be pursued.
The Requirement Package for a Workout is posted on SBA’s website (Birmingham, El Paso,
Santa Ana).
Note: Obtaining current financial statements at this stage is critical. Not only are they needed to
make prudent lending decisions regarding the feasibility and structure of a workout agreement, but
they also provide valuable information that would be difficult to obtain in the event the workout is
unsuccessful and enforced collection becomes necessary.
C. Workout Feasibility
To determine whether a Disaster Loan Borrower is a good candidate for the workout
process, in addition to reviewing the existing Loan Documents, review the financial
information required by Paragraph B above, and ascertain whether the Borrower is: (1)
willing and able to address the problems that caused the default; (2) acting in good faith,
and (3) capable of making payments pursuant to a workout agreement. If a workout is
feasible, negotiations should begin immediately and a final workout plan should be put
into effect as soon as possible. If an acceptable workout plan is not in place within a
reasonable time, (e.g., 60 calendar days), the next step towards enforced debt collection
should be taken.
Note: Free, confidential technical and management counseling is available to small
businesses through the nationwide network of SCORE Chapters, Small Business
Development Centers, Women’s Business Centers and Veterans Business Outreach Centers.
D. Requirement—New Consideration from Borrower
In order for a workout agreement to be legally binding, the debtor must provide
consideration, (i.e., something of value) before or at the same time that the debtor receives
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the benefit of the workout agreement. For example, in exchange for an agreement to
forbear or restructure the loan, the Obligors should generally be required to:
1. Make a good faith payment
2. Correct Loan Document errors;
3. Provide additional collateral; and/or
4. Waive defenses
E. Options
The elements of a plan to work out the problems on a Disaster Loan will vary depending on
the circumstances. The final decision, and justification for it, must be documented in the
Loan File. The decision should be supported by a credit memo that includes a cash flow
and complete liquidation analysis based on the financial information required by Paragraph
B. The most common workout options are listed below.
1. Forbearance
Enforced collection activities may be postponed for a stated period of time in order to
provide the Borrower with an opportunity to improve its cash flow and avoid foreclosure.
2. Reinstatement of Maturity Date
If the Note has been accelerated, the maturity date may be reinstated. (See Chapter 9
for information on maturity date extensions.)
3. Deferment and Catch-up Plan
Delinquent and future payments of principal, interest or both may be deferred for a
stated period of time to enable the Borrower to overcome a temporary cash flow problem
and a catch-up plan may be negotiated to avoid the need for a balloon payment at
maturity. (See Chapter 13 for information on deferments.)
4. Modification of Repayment Terms of Note
The repayment terms of the Note may be modified, (e.g., the payment amount or interest
rate may be lowered or the maturity date may be extended). (See Chapter 9 for
information on Note modification.)
5. Assumption of Loan
Another Person may assume the loan. (See Chapter 12 for information on
assumptions.)
6. Voluntary Sale of Collateral
The Borrower may be allowed to voluntarily sell all or part of the collateral provided that
the sale is commercially reasonable, closely monitored, and all of the net proceeds are
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applied to the principal balance of the Disaster Loan or used to facilitate the workout
plan. (For SBA Loan Program Requirements pertaining to voluntary sale of collateral,
see Chapter 18 with regard to real property collateral and Chapter 19 with regard to
personal property collateral.)
Note: The amount of accrued interest or principal owed on an SBA loan may only be reduced
through the offer in compromise process or administrative write-off. (See Chapter 21 for
information on offers in compromise from going concerns.)
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Chapter 18.
Real Property Collateral Liquidation
___________________________________________________________________________
A. General Requirements
If an acceptable workout agreement has not been implemented within a reasonable time
after the loan was classified in liquidation, all collateral that has Recoverable Value should
be liquidated, unless there is a compelling reason for not doing so. The most common
methods of liquidating real property collateral are discussed below.
B. Release of Lien for Consideration
See Chapter 10 for information on release of lien for consideration.
Note: Proceeds from release of SBA’s lien on real property—including raw land—must be applied
to the loan balance in the following order: (1) principal; and (2) accrued interest. (Chapter 10)
C. Voluntary Sale of Collateral by Obligor
An Obligor may be allowed to conduct a voluntary sale of all or part of the real property
collateral securing an SBA loan provided that:
1. A voluntary sale would maximize recovery on the loan;
2. The property is being sold at a price that is reasonable as compared to comparable
sales.
3. The Obligor has possession or control of the collateral;
4. All other lienholders have provided their written consent to the sale;
5. A current Appraisal has been obtained;
Note: See Chapter 2 for SBA requirements pertaining to “Appraisals”. Given the inherent
conflict of interest, do not rely solely on an appraisal prepared for an Obligor or another
creditor with a lien on the same collateral.
6. The Recoverable Value of the collateral has been established;
7. The SBA is kept informed throughout the sale;
8. The costs of sale are reasonable, necessary and customary;
9. The lien securing the SBA loan is only released in exchange for cash in an amount equal
to or greater than the Recoverable Value of the collateral; and
10. All of the net proceeds are applied to the principal balance of the SBA loan.
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Note: Consideration may be given to whether the Obligor's cooperation during the liquidation
process increased the overall recovery on the loan when analyzing whether a proposed
compromise amount is adequate. (Chapter 21)
D. Deed in Lieu of Foreclosure
Deed in Lieu of Foreclosure should not be accepted unless it is absolutely necessary to
maximize recovery. Real property collateral may be liquidated by accepting a deed in lieu of
foreclosure (i.e., a deed by which a debtor conveys fee-simple title to a secured creditor as a
substitute for foreclosure) if doing so would maximize recovery on the loan. All deeds in lieu
must be accompanied by a written agreement executed by all of the Obligors as to the
amount to be applied to the loan balance once title has been transferred. Although
accepting a deed in lieu may save time and money, it has inherent risks. For example, it
could eliminate the right to collect any deficiency. It could also eliminate the opportunity to
foreclose the SBA lien and remove any junior liens before marketing the property as REO.
Because state laws vary regarding the impact of accepting a deed in lieu, consult legal
counsel before undertaking this method of liquidation.
Note: Most title insurance companies offer deed in lieu of foreclosure services that include not
only a new title (commitment) report, but review of title issues, recording of the deed in lieu
documents, and issuance of a title policy to the Person to whom the lender sells the property after
acquiring it via a deed in lieu.
E. Foreclosure of Real Property – Judicial and Non-Judicial
1. General
Foreclosure is a legal action taken to sell property that was pledged as security for a
loan. Since the laws pertaining to the foreclosure of mortgages, deeds of trust, and
other types of real property liens vary by state, consult legal counsel to determine which
type of foreclosure action is the most appropriate with regard to a particular loan. The
two primary methods of real property lien foreclosure actions are judicial foreclosure and
non-judicial foreclosure.
2. Primary Residences
Unless the Obligor-owner has engaged in fraud, misrepresentation or other relevant
misconduct, a good faith effort should be made to reach a workout prior to initiating a
foreclosure action against the Obligor's primary residence. (See Chapter 10 for
information on release of liens for consideration, and Chapter 21 for information on
offers in compromise.)
3. Judicial Foreclosure
Judicial foreclosure requires filing a lawsuit.
a. Advantages
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(1) Deficiency judgment may be obtainable; and
(2) May only need one action to foreclose liens and obtain judgment on the Note and
Guaranties.
b. Disadvantages
(1) Higher costs and fees than non-judicial foreclosure;
(2) More time-consuming than non-judicial foreclosure; and
(3) The mortgagor and junior lienholders usually have statutory redemption rights.
4. Non-Judicial Foreclosure
Non-judicial foreclosure, which ends with the private sale of the property by a trustee, is
available only if the deed of trust or mortgage securing the loan contains a clause or
provision granting a power of sale. A law suit is not filed, but strict compliance with the
applicable state statutory provisions governing non-judicial foreclosure is mandatory.
a. Advantages
(1) Fees and costs are generally lower than judicial foreclosure;
(2) Takes less time than judicial foreclosure; and
(3) The mortgagor and junior lienholders usually do not have statutory redemption
rights.
b. Disadvantages
(1) Deficiency judgment may not be obtainable, and
(2) Judicial action may still be necessary if there are occupants who need to be
evicted.
F. Collection of Rents
If the Loan Documents include an assignment of rents and there are tenants paying rent to
an Obligor, consult legal counsel as to the applicable state law regarding the collection of
rent pending a workout or foreclosure action. In some cases, this may be accomplished by
means of a letter to the tenants. In other cases, a receiver may need to be appointed.
G. Appointment of Receiver
A receiver is a Person appointed by the court to preserve and protect the collateral in
connection with, or in lieu of, foreclosure proceedings. Receivers should only be used in
exceptional circumstances when, for example, to maximize the recovery and minimize loss
on a loan, it is necessary to operate the business (e.g., hotel or gas station) until it can be
sold or the collateral can be liquidated. The laws governing receiverships vary by state.
Generally, however, the court will authorize the receiver to take possession of the property,
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manage it, collect rents, and take any reasonably necessary action to protect and preserve
its value.
H. Short Sale Approval
A “short sale” is when the proceeds from the owner’s sale of real property fall short of the
total amount due on debts secured by liens against the property, and because the owner
cannot afford to repay the full amount of secured debt, the secured creditors agree to
release their liens for less than the amount that would otherwise be due at closing.
I. Credit Bids
A Credit Bid means an offer to purchase at a foreclosure sale submitted by a creditor who,
instead of paying cash, will "credit" the bid amount against the debt owed to the creditor.
J. Eviction Proceedings
If title to real property collateral is acquired through foreclosure or otherwise and the Obligor-
owner refuses to vacate, or there are other Persons unlawfully occupying the premises, it
may be necessary to evict them. Eviction laws vary by locality. Consult legal counsel to
determine the appropriate course of action.
K. Abandonment
The pursuit of recovery on real property collateral may be abandoned if the collateral has no
significant Recoverable Value.
Note: The presence of Hazardous Substances may not significantly impair the Recoverable
Value of real property collateral. See Chapter 6 (Environmental Risk Management) for SBA
requirements pertaining to the due diligence required before collateral may be abandoned based
on unsubstantiated claims that it is Contaminated.
L. Title
1. Title to collateral should not be acquired unless it is necessary to maximize recovery on
the loan.
2. To avoid taking title to collateral, foreclosure sales should be aggressively advertised in
order to attract a large number of potential buyers.
3. SBA employees, as well as their Close Relatives and Associates must not, directly or
indirectly, bid on, purchase or otherwise acquire title to collateral.
4. SBA's ownership of acquired collateral should be reflected on the title as follows:
"Administrator, U.S. Small Business Administration, an Agency of the United States
Government."
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5. Title to personal property collateral should not be taken in SBA’s name except in unusual
circumstances, (e.g., when title to real property collateral will be taken in SBA’s name
and the personal property is an integral part of the value of the real property such as a
special use manufacturing plant and the equipment needed to operate it).
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Chapter 19.
Personal Property Collateral Liquidation
____________________________________________________________________________
A. General Requirements
If an acceptable workout agreement has not been implemented within a reasonable time
after the loan was classified in liquidation, all collateral that has a significant Recoverable
Value should be liquidated, unless there is a documented compelling reason for not doing
so. The most common methods of liquidating personal property collateral are discussed
below.
Note: Prudent action must be taken to avoid loss of collateral or dissipation of collateral value
during workout discussions. For example, to ensure that personal property collateral for a
Disaster Business Loan such as machinery and equipment, inventory, furniture and fixtures is
liquidated as quickly as possible if a workout is not feasible, it is generally advisable to have an
auctioneer accompany you on a site visit to inspect and appraise the collateral as soon as the
loan is classified in liquidation. That way, you can make preliminary UCC sale plans that can be
implemented without further delay if the need arises.
B. Release of Lien for Consideration
See Chapter 10 for information on release of lien for consideration.
Note: Proceeds from release of SBA’s lien on personal property must be applied to the loan
balance in the following order: (1) principal; and (2) accrued interest. (Chapter 10)
C. Voluntary Sale of Collateral by Obligor
An Obligor may be allowed to conduct a voluntary sale of all or part of the personal property
collateral securing a Disaster Loan provided that:
1. A voluntary sale would maximize recovery on the loan;
2. The collateral is being sold at a price that is reasonable as compared to comparable
sales.
3. The Obligor has possession or control of the collateral;
4. All other lienholders have provided their written consent to the sale;
5. A valuation has been obtained;
6. The Recoverable Value of the collateral has been established;
7. SBA is kept informed throughout the sale;
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8. The costs of sale are reasonable, necessary and customary;
9. The lien securing the Disaster Loan is only released in exchange for cash in an amount
equal to or greater than the Recoverable Value of the collateral; and
10. All of the net proceeds are applied to the principal balance of the Disaster Loan, with the
remainder, if any, to accrued interest.
Note: When analyzing whether a proposed compromise amount is adequate, consideration may
be given to whether the Obligor's cooperation during the liquidation process increased the overall
recovery on the loan. (Chapter 21)
D. UCC Sale
Liens on assets such as consumer goods, vehicles, equipment, inventory or fixtures created
under UCC Article 9 may be foreclosed by conducting a UCC sale.
1. Types of UCC Sales
a. Private Sale
A private UCC sale is not open to the general public, usually does not occur at a pre-
appointed time and place, and may not be advertised to the general public. Although
public sales are preferred, a private UCC sale may be conducted if doing so would
maximize recovery on the loan, e.g., when the collateral can be sold as part of the
sale of a going concern.
b. Public Sale
A public UCC sale is open to the general public, occurs at a pre-appointed time and
place, and is widely advertised. The use of widely advertised public UCC sales is
encouraged.
(1) Auction or Retail Sale
The most common type of public UCC sale is a public auction where the
collateral is sold to the highest bidder. Another common type is a retail sale of
the collateral conducted over a limited number of days during which time the
prices are gradually reduced. Retail sales are often followed by a public auction
of any remaining collateral.
(2) Sealed Bid Sale
A sealed bid sale is typically advertised to members of the general public who
submit confidential bids to be opened at a predetermined time and place. A
sealed bid sale differs from a public auction in that it does not allow for interaction
between competing bidders.
2. Requirements
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a. Possession of the Collateral
The secured creditor must be able to repossess the collateral without a "breach of
the peace." (UCC § 9-609) If not, legal counsel should be consulted to determine
whether litigation, such as a replevin action, is appropriate to obtain possession of
the collateral.
b. Reasonable Notice of the Sale
Reasonable notice of the sale must be sent to all Obligors and junior lienholders
unless the collateral is perishable, threatens to decline speedily in value, or is sold in
a recognized market such as the New York Stock Exchange. (UCC § 9-611) To
ensure compliance, notice of the sale should be sent to all of the Obligors and junior
lienholders at least ten calendar days prior to the sale. To prove compliance, the
Loan File should include a copy of: (1) the post-default UCC lien search verifying the
priority of the lien securing the Disaster Loan and the identity of any junior
lienholders entitled to notice; (2) the notice sent to the Obligors and junior
lienholders; and (3) proof that the notice was transmitted.
c. Commercial Reasonableness
Every aspect of the sale including the method, manner, time, place and terms must
be "commercially reasonable." (UCC § 9-610) To prove compliance, the Loan File
should, at a minimum, contain a copy of the following documents:
(1) Post-default inventory and Appraisal of the property sold;
(2) UCC sale brochure and advertisements; and
(3) Final accounting for the sale that includes the gross amount of proceeds, an
itemized list of expenses, including how they were calculated, and the net
amount recovered.
Note: A good auction company will keep detailed records of the sale including, for
example, a list of registered bidders, the name of each buyer, and the amount paid for
each item.
d. Bill of Sale
The bill of sale should state that the personal property is sold "as is" and "without
warranties of any kind including those relating to title, possession, quiet enjoyment or
the like." (For more information, see UCC § 9-610.)
E. Judicial Foreclosure of Personal Property
Although the self-help remedies authorized by the UCC tend to be more economical and
efficient, personal property liens may also be foreclosed by filing a lawsuit. For example, if
the personal property collateral consists of trade fixtures attached to real property collateral
and the real property lien must be judicially foreclosed, foreclosing both the real and
personal property liens in the same law suit may be appropriate.
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F. Collection of Accounts Receivable
When a Disaster Loan is secured by a lien on accounts receivable, a determination as to
whether the pledged accounts have Recoverable Value should be made as soon as
possible after an event of default. Thereafter, swift, aggressive action must be taken to
collect any accounts with Recoverable Value in a manner consistent with applicable law.
1. Collection by Borrower
The Borrower, who will be liable for any deficiency and is best able to handle disputed
claims, may be allowed to collect accounts provided that precautions are taken to ensure
that the proceeds are applied to the loan balance.
2. Collection by SBA
In order to protect the right to a deficiency judgment, when it appears that further
collection efforts by SBA would be futile, the Obligors should be provided with written
notice of the SBA’s intent to cease collection efforts, and given the opportunity to pursue
collection of the remaining accounts, provided that precautions are taken to ensure that
the proceeds are applied to the loan balance.
G. Set-off of Deposit Account
When a Disaster Loan is secured by a lien on a deposit account, on the occurrence of an
event of default, the cash in the deposit account should be applied to the Disaster Loan
balance in compliance with UCC § 9-607 and the terms of any applicable control agreement.
H. Surrender of Life Insurance Policy for Cash Value
When a life insurance policy with a cash surrender value has been assigned as collateral for
a Disaster Loan and a deficiency exists after all of the other collateral has been liquidated,
the policy should be surrendered to the insurance company for its cash value and the
proceeds applied to the principal balance of the loan unless, under the circumstances, it
would be more prudent to keep the coverage in place, even if it requires advancing funds to
pay the premiums. (Premium payments should be treated as Recoverable Expenses.)
I. Foreclosure of Lien on Fixtures
A lien on fixtures may be foreclosed pursuant to UCC Article 9 or applicable real property
foreclosure law. (UCC § 9-604) (See Paragraph D above for information on UCC sales.
See Chapter 18 for information on real property lien foreclosure.)
Note: A creditor who removes fixtures is responsible to the owner of the real property, other than
the debtor, for the cost of repairing any physical damage caused by the removal, but not for any
diminution in the value of the real property caused by the absence of the fixtures. (UCC § 9-604)
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J. Marine Mortgage Foreclosure
A marine mortgage on a documented vessel can only be foreclosed by filing an admiralty
action in the appropriate federal district court, which will issue a warrant for the arrest of the
vessel.
K. Manufactured Housing Foreclosure
The law governing the liquidation of security interests in manufactured housing is
complicated, varies from state-to-state, and depends on several factors including (1) how
the lien was created; and (2) whether the manufactured housing is located on real property
that is owned by the Obligor or leased by the Obligor. Legal counsel should always be
consulted prior to initiating foreclosure proceedings involving manufactured housing.
Generally, however, the most common method of liquidation is a U.C.C. sale. (See
Paragraph D above.)
L. Abandonment
The decision and justification for abandoning personal property collateral must be
documented in the Loan File.
Note: The presence of Hazardous Substances may not significantly impair the Recoverable
Value of collateral. See Chapter 6 (Environmental Risk Management) for SBA requirements
pertaining to the due diligence required before collateral may be abandoned based on
unsubstantiated claims that it is Contaminated.
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Chapter 20.
Acquired Collateral (REO and Personal Property)
___________________________________________________________________________
A. Overview
1. Recordkeeping
When real property collateral is acquired (“Real Estate Owned” or “REO”) or personal
property collateral is acquired, e.g., through liquidation proceedings, it should be
properly recorded.
B. Ownership Responsibilities
Upon acquiring title to collateral, the following actions should be taken:
1. Possession and Control
a. Begin eviction proceedings if anyone is unlawfully occupying REO and will not leave
voluntarily.
b. Take possession of the acquired collateral;
c. Change the locks immediately on vacant buildings. Depending on the
circumstances, arrange for additional security if necessary to prevent damage or to
avoid liability associated with ownership; and
2. Inventory
Inventory and photograph all acquired collateral, including personal property located in
and around REO.
3. Accounting
Keep an accurate and complete record of the costs associated with the acquisition,
holding and resale of the acquired collateral.
4. Taxes
a. Monitor and pay taxes and assessments to avoid liens, interest accrual, and
penalties.
b. A tax waiver letter should be sent to the taxing authority. Taxes are only paid up to
the foreclosure date.
5. Care and Preservation
a. Take reasonable steps to prevent deterioration, such as arranging for utility services
and essential repairs and maintenance.
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b. If the property has historic significance, consult legal counsel to ensure compliance
with Section 106 of the National Historic Preservation Act of 1966.
6. Insurance
See Chapter 11 for SBA Loan Program Requirements pertaining to insurance coverage
on acquired collateral.
C. Timeframe for Disposal
Acquired collateral should be disposed in a manner that will maximize recovery in the
shortest amount of time.
D. Sale
Acquired collateral should be disposed of by sale.
1. Method of Sale
Acquired collateral should be sold by whatever method, (e.g., broker's sale, public
auction, sealed bid sale, etc.), will maximize recovery in the shortest amount of time.
2. Collateral should be sold ‘as is’ and without warranty
3. Bidding or Acquisition by SBA Employees
SBA employees, as well as their Close Relatives and Associates must not, directly or
indirectly, bid on, purchase or otherwise take title to acquired collateral.
4. Transfer of Title and Closing Costs
a. REO—Quitclaim Deed
Title to REO should be conveyed by means of a quitclaim deed (i.e., a deed that
conveys a grantor's complete interest in the property but neither warrants nor
professes that the title is valid) except in unusual circumstances where the use of a
warranty deed is necessary to maximize the recovery in the shortest amount of time
or is required by state law.
b. Personal Property—Non-recourse Bill of Sale
Acquired personal property collateral should be conveyed by means of a bill of sale
that specifies that the property is sold "as is" and "without warranties of any kind
including those relating to title, possession, quiet enjoyment or the like."
c. Closing Costs
Buyers should be responsible for all closing costs except in unusual circumstances
where payment of the seller's customary share of the closing costs is necessary to
maximize the recovery in the shortest amount of time or when it is customary in a
certain locale.
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5. Sales Price
The sales price for acquired collateral should be based on an Appraisal. (See Chapter 6
[Environmental Risk Management] for SBA requirements pertaining to the due diligence
that must be performed before selling acquired collateral alleged to be worth
substantially less than its appraised value due to the alleged presence of
Contamination.)
6. Use of Real Estate Brokers
REO may be sold by listing it with a real estate broker provided that:
a. The terms of the listing agreement are consistent with this SOP;
b. The listing price is supported by an Appraisal;
c. The listing broker has a good reputation for selling the type of property involved in
the area where the property is located, is properly licensed, and is a member of the
most appropriate multiple listing service;
d. All agreements are in writing and signed by the necessary parties;
e. The amount of the listing and selling brokers' commissions is reasonable, necessary
and customary in the community where the property is located for the type of
property involved; and
f. Neither the listing nor selling broker has an actual, apparent, or potential conflict of
interest with regard to the REO, Obligors, or SBA .
7. Sale to Obligors, Associates or Close Relatives of the Borrower
Acquired collateral should not be sold, assigned or otherwise transferred to Obligors,
Close Relatives of Obligors, or Associates of the Borrower for less than the full amount
due on the Disaster Loan unless it is necessary to maximize recovery and the following
conditions are met:
a. A comprehensive public foreclosure sale of the collateral was held;
b. A good faith effort was made to resell the acquired collateral to a disinterested party;
c. The acquired collateral is sold for fair market value;
d. It is an all cash sale;
e. If the sale is to an Obligor to repurchase the Obligor’s primary residence, the REO
will continue to be the Obligor’s primary residence; and
f. The sale will not harm the integrity of SBA’s Disaster Loan Program.
8. Purchase Offers
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All offers to purchase acquired collateral must:
a. Be in writing, signed by the party making the offer, and accompanied by a good faith
deposit in an amount that is customary for the area;
b. Not be disclosed to other prospective purchasers or their Agents; and
c. Be reviewed and analyzed based on the sales efforts to date and the value of the
property established by an Appraisal.
9. Term Sales
a. When Permitted
Acquired collateral should not be sold by means of a term sale unless doing so is
necessary to maximize recovery.
b. Buyer Pre-qualification
Potential purchasers buying on credit must be pre-approved.
c. Terms of Purchase and Sale
With regard to all term sales, the purchaser must:
(1) Make a significant down payment, which should be at least 20% of the purchase
price;
(2) Properly execute a promissory note for the balance, which (a) is assignable; (b),
has a maturity date that does not exceed 15 years for REO or five years for
personal property; (c) has an appropriate interest rate; (d) requires a monthly
payment amount that exceeds the amount of interest accrued each month; and
(e) contains an acceleration clause that requires the purchaser to immediately
pay the entire balance due in the event of default;
(3) Provide collateral to secure payment of the promissory note in the form of a
properly perfected first-position lien on the assets being sold, and when
appropriate, properly executed Guaranties;
(4) With regard to REO, pay for the cost of a mortgagee’s title insurance policy; and
(5) Purchase adequate insurance coverage for the assets being sold, i.e., hazard
insurance and any other type of insurance required by statute, e.g., flood
insurance, or prudent lending practices, and provide proof that each policy
includes a mortgagee clause or equivalent in favor of SBA.
10. Profit on Sale
Because state laws vary, after the sale proceeds have been applied to the loan balance,
legal counsel should be consulted to determine whether there are any state specific laws
governing distribution of the surplus.
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E. Lease
Generally, acquired collateral should not be leased. However, if it has not sold after a
reasonable amount of time, acquired collateral may be leased if doing so is necessary to
maximize recovery, provided that:
1. A comprehensive public foreclosure sale of the collateral was held;
2. A good faith effort was made to sell the acquired collateral;
3. The terms and conditions of the lease, including the rental rate, are consistent with
prevailing market rates and terms;
4. A written lease is used, which is legally enforceable, assignable, allows the acquired
collateral to be shown to prospective buyers, and can be terminated on reasonable
notice if a favorable purchase offer is received;
5. The acquired collateral is not leased to an Obligor, Close Relative of an Obligor, or an
Associate of the Borrower unless a comparable or more desirable proposal cannot be
obtained;
6. Leasing the acquired collateral will not harm the integrity of SBA’s Disaster Loan
Program; and
7. The leased property is inspected at least semi-annually and the inspection findings
included in the Computer Tracking System.
F. Abandonment
Acquired collateral must not be abandoned unless abandonment of the specific REO or
acquired personal property collateral has been pre-approved by SBA as an exception to
policy obtained in accordance with the procedures set out in Chapter 1.
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Chapter 21.
Offer in Compromise
____________________________________________________________________________
A. Overview
1. Definition
An offer in compromise is an offer made by an Obligor to pay less than what is owed in
full settlement of the Obligor’s obligation on their Disaster Loan. A compromise may be
considered when the agency is unable to enforce collection with a reasonable time
period. Submitting the offer does not ensure that it will be accepted. Rather, it begins a
process of evaluation and verification by SBA. Generally, an offer in compromise will be
accepted if it reflects the Obligor’s true ability to pay, and will be rejected if the Obligor
can pay the loan in full via a lump sum payment or an installment agreement, or if
acceptance of the offer would harm the integrity of the SBA Disaster Loan Program.
2. Legal Authority
The general requirements for compromise of a debt owed on an SBA loan are based on
31 U.S.C. § 3711 and 31 C.F.R. Part 902 (Standards for Compromise of Claims – by an
agency of the Federal Government).
3. Effect of Compromise with One Obligor on Remaining Obligors
A compromise with one Obligor does not release the remaining Obligors because each
is jointly and severally liable, i.e., full payment may be requested from one or all of the
Obligors. No attempt should be made to divide payment responsibility between the
Obligors or to use the compromise amount accepted from one Obligor as the basis for
the compromise amount required from another. (31 C.F.R. § 902.4)
4. Finality
An offer in compromise that is approved by SBA is final and conclusive on the Obligor
and SBA unless it was obtained through fraud, misrepresentation, or mutual mistake of
fact.
Note: Acceptance of a compromise offer is considered to be a loss to the Federal
Government and may adversely impact the Obligor’s ability to obtain future financing from the
Federal Government including another SBA loan.
B. When Compromise is Appropriate
1. General Requirements
a. All Collateral Liquidated
Generally, compromise negotiations with an Obligor may only be initiated after all of
the collateral has been liquidated; and
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b. Additional Requirement for Business Loans—Business Closed
Generally, compromise negotiations with an Obligor on a Disaster Business Loan
should not be initiated until after the business is closed.
c. Exceptions
(1) Lien on Personal Residence
If the only remaining collateral is a lien on the personal residence of the Obligor
making the offer, compromise negotiations may proceed if the Obligor is willing to
pay an additional amount as consideration for release of the lien. (Chapter 10) If
the Obligor is unwilling or unable to pay an acceptable amount for release and
compromise, rather than extinguish the debt for a nominal amount, compromise
negotiations must cease and appropriate action must be taken. (E.g., file suit to
foreclose the lien and obtain a deficiency judgment against the Obligor, or
abandon the lien, charged-off the loan, and referred the Obligor referred to
Treasury for additional enforced collection efforts.)
(2) Viable Going Concern
Compromise negotiations with a going concern may be initiated in rare
circumstances if the viability of the business concern is at stake and acceptance
of the offer will not harm the integrity of the SBA Disaster Loan Program. (See
Paragraph D below for detailed information and Loan Program Requirements
regarding compromise with a going concern.) The offer in compromise process
must not be used as a means for a business that is experiencing temporary cash
flow problems to write down its debt. (See Chapters 9-17 for information on tools
that can be used to help resolve temporary cash flow problems such as re-
amortization, deferment, or a workout.)
C. Offer and Supporting Documents
Each Obligor submitting an offer in compromise must submit the required documentation
(Birmingham, El Paso, Santa Ana):
1. Written Offer
A signed written offer that should refer to the penalties under 18 U.S.C. § 1001 for false
statements, and identify the source of the funds for the offer, e.g., SBA Form 1150 (Offer
in Compromise); and
2. Financial Statement
A current financial statement that should be signed under penalty of perjury and must
show the Obligor's assets, liabilities, income and expenses, e.g., SBA Form 770
(Financial Statement of Debtor). In addition:
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a. Going Concerns—If the Obligor is a going concern, the Obligor’s last year-end
financial statements must also be provided.
b. Affiliates—If the Obligor has any affiliates, a current consolidated financial statement
(or a current financial statement from each affiliate) must also be provided.
3. Personal Federal Income Tax Returns
A complete copy of the personal federal income tax returns that the Obligor filed with the
IRS for the past two years or a written explanation as to why a copy is not available;
4. Business Federal Income Tax Returns
For each going concern and affiliate, a complete copy of the business federal income tax
returns that were filed with the IRS for the past two years or a written explanation as to
why a copy is not available; and
5. Optional—Proof of Severe Financial Hardship
If the Obligor would like SBA to take into account special circumstances such as
catastrophic illness, loss of employment, etc., the Obligor should also submit the
documentation required by Chapter 7 for Severe Financial Hardship Relief.
D. Review and Analysis of Offer
To determine whether an offer in compromise is acceptable, a good faith effort must be
made to verify the accuracy of the Obligor's financial disclosure and to evaluate the
adequacy of the amount offered.
E. Inadequate Offers
1. Counter Offer
Generally, if an offer in compromise was made in good faith, but the amount offered
does not bear a reasonable relationship to the amount that could be recovered in a
reasonable amount of time through enforced collection, a good faith effort should be
made to arrive at an acceptable amount by countering the offer.
2. Decline Offer and Refer to Treasury
If the Obligor will not agree to an acceptable compromise amount, the offer should be
declined; and, as soon as all other cost-effective avenues of collection have been
exhausted, the loan can be charged-off and referred to Treasury for offset and other
enforced collection efforts.
F. Payment Terms and Conditions
1. Cash Compromise—Preferred
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The compromise amount should be paid in one lump sum on a specified date.
Generally, payment should be received within 60 calendar days of the compromise
approval date.
2. Term Compromise—If Necessary to Maximize Recovery
The compromise amount should only be payable in installments as a last resort to
maximize recovery on the loan. (31 C.F.R. § 902.2) If the compromise amount is to be
paid in installments:
a. The terms of the compromise must be set out in a written, legally enforceable
document;
b. The amount due under the compromise agreement must be evidenced by a
promissory note with a specified maturity date;
c. Payment of the promissory note should be secured by collateral;
d. The compromise agreement should prohibit release of the collateral securing the
promissory note until the entire compromise amount has been paid in full;
e. The compromise agreement must provide that in the event of default, the full loan
balance, less sums paid on the promissory note, will be reinstated and become
immediately due and payable; and
f. The compromise agreement should provide for remedies in the event of default such
as entry of a confession of judgment or delivery and recording of a deed or bill of
sale to the collateral securing the promissory note.
g. Establish a note receivable for the amount of the promissory note evidencing the
compromise amount.
Note: If a compromise involves settlement of litigation conducted by SBA in conjunction with the
U.S. Attorney’s Office, the compromise amount must be approved by and paid directly to the
Department of Justice (“DOJ”).
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Chapter 22.
Litigation
____________________________________________________________________________
A. Events Requiring a Loan be Classified in Litigation
A Disaster Loan should be classified in litigation status if:
1. An Obligor has filed a voluntary petition in bankruptcy or an involuntary petition in
bankruptcy has been filed against an Obligor and Legal Counsel determines that
SBA’s interests could be adversely impacted by the filing;
2. A deceased Obligor's estate is being administered in probate proceedings;
3. A receiver (i.e., a disinterested Person appointed by a court) has been appointed,
or some other action has been initiated to liquidate the collateral or an Obligor’s
assets;
4. A lawsuit, which could adversely affect repayment of the Disaster Loan, has been
initiated against an Obligor;
5. SBA has been named as a defendant in a suit involving an Obligor or collateral
for a Disaster Loan;
6. Litigation is cost-effective and necessary to enforce collection on a Disaster
Loan; or
7. Any other circumstances where legal representation is necessary to protect the
Agency’s ability to recover on the Disaster Loan or to protect the integrity of the
Disaster Loan Program.
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Chapter 23.
Expenses and Recoveries
____________________________________________________________________________
This chapter covers expenses related to collecting sums due under the Note (Secured,
Unsecured), enforcing the terms of the Loan Documents, and preserving or disposing of
collateral. (See Chapter 20 for information regarding expenses related to acquired collateral.)
A. Classification of Expenses
Expenses are classified as either Recoverable Expenses, which can be recouped, or Non-
recoverable Expenses, which cannot be recouped. (See Paragraphs B and C below.) An
expense may be classified as Recoverable or Non-recoverable in whole or in part.
1. Non-recoverable Expenses
Non-recoverable Expenses are costs that cannot be added to the principal balance of
the loan. They include:
a. Any expense that is not related to collection of amounts due under the Note
(Secured, Unsecured), to enforce the terms of the Loan Documents, or preservation
or disposal of the collateral for the loan; and
b. Any fee or cost, or portion thereof, that is not necessary, reasonable or customary.
2. Recoverable Expenses
As set out in Chapter 2 (Definitions), Recoverable Expenses are the SBA approved,
necessary, reasonable and customary costs incurred to collect amounts due under the
Note (Secured, Unsecured), to enforce the terms of the Loan Documents, or to preserve
or dispose of collateral, which according to the terms of the Note, can be added to the
principal balance of the loan. Recoverable Expenses include, for example:
a. Searches
(1) UCC lien searches;
(2) Title reports; and
(3) Credit and asset search reports.
b. Appraisals and Other Reports
(1) Appraisals;
(2) Environmental Investigation Reports; and
(3) Site Visit Reports prepared by contractors.
c. Litigation Expenses
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(1) Service fees; and
(2) Costs such as court reporter fees.
d. Collateral Care and Preservation
(1) Utility bills;
(2) Insurance premium payments;
(3) Caretaker fees;
(4) Repair bills;
(5) Real estate and personal property taxes; and
(6) Expenses related to non-tax senior liens.
B. Payment of Non-recoverable Expenses
Payment of a Non-recoverable Expense over $500 incurred by SBA must be documented
by a Loan Action Record, which may consist of a "stamp" on a copy of the invoice and
should include a "worksheet" copy of SF 1034, (Public Voucher for Purchases and Services
Other than Personal) and the original invoice.
Note: See SOP 20 05 (General Cashier Control Procedures) for expense codes.
C. Payment of Recoverable Expenses
Payment of Recoverable Expenses over $500 must be documented by a Loan Action
Record that includes, at a minimum, the following:
1. A copy of the original itemized invoice that must be dated and include: (1) a thorough
description of the goods or services provided; (2) the date the goods were provided or
the services were performed; (3) the amount charged for each service or product
provided; and (4) the total amount due. In addition, if the invoice is for services billed on
an hourly basis, it must specify the name, title, hourly billing rate and time spent by each
individual who performed services covered by the invoice;
2. The name of payee and check delivery instructions;
3. The reason for the expenditure;
4. A copy of any document prepared by the vendor (e.g., site visit report, Environmental
Investigation Report, Appraisal, or legal pleading) for which payment is sought;
5. The deadline for payment; and
6. Whether the payment is covered by the Prompt Payment Act.
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Note: The Prompt Payment Act requires federal agencies to pay interest and penalties on
late payments for contracted expenses. See SOP 20 17 and Subpart 32.9 of the Federal
Acquisition Regulation for further guidelines. Note, however, that if the cost was not incurred
pursuant to a contract, e.g., real estate taxes, payment is not subject to the Prompt Payment
Act.
D. Recoveries
1. Application of Recoveries to Loan Balance
Unless the terms of a workout agreement or some other legally binding document, such
as a court order, specify otherwise, recoveries (i.e., funds obtained through liquidation
activities) should be applied in the following order:
a. Non-Litigation Recoveries
(1) Recoverable Expenses incurred in the liquidation process;
(2) Principal balance of the loan; and
(3) Accrued interest.
b. Litigation Recoveries
When recoveries are the result of litigation handled by SBA legal counsel in their
capacity as a Special Assistant U.S. Attorney or by the local U.S. Attorney's Office:
(1) 10% surcharge to DOJ pursuant to Section 3011 of the Federal Debt Collection
Procedures Act;
(2) Recoverable Expenses incurred in the liquidation (including litigation) process;
(3) Principal balance of the loan; and
(4) Accrued interest.
2. Remittance of Recoveries to Denver Finance Center
The net proceeds recovered on Disaster Loans not paid through pay.gov or DOJ should
be remitted to the Denver Finance Center within 15 business days of receipt with the
proper transaction code for applying the funds. (See SOP 20 19 [Loan Accounting
Procedures] for information on transaction codes.)
3. Recovery Collection
Recoveries should be collected in an efficient and effective manner to protect the value
of the Federal Government’s assets. An attempt should be made to maximize recovery
using all appropriate collection tools. For more information on the management of
recoveries, refer to Circular A-129 and Managing Federal Receivables.
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Chapter 24.
Inspector General Referrals
____________________________________________________________________________
A. Duty to Report Irregularities
All SBA officials and contractors must be on the lookout for fraud and report any known or
suspected irregularities involving SBA programs, program participants, or personnel to the
Office of the Inspector General ("OIG").
B. Irregularities Requiring Referral
Examples of irregularities that must be referred to the OIG include:
1. Loan Application Fraud
False statements made or submitted by a loan applicant with regard to eligibility for SBA
financing, for example:
a. Overstating income;
b. Understating or failing to disclose liabilities;
c. Overstating the value of assets offered as collateral;
d. Failing to disclose criminal records;
e. Making false statements regarding U.S. citizenship or immigration status;
f. Misrepresenting the true ownership of damaged property;
g. Using false Social Security Numbers;
h. Creating false work histories; or
i. Submitting altered tax returns.
2. Loan Closing Fraud
False documents submitted by a loan applicant with regard to a loan closing
requirement, for example:
j. False evidence of insurance;
k. False invoices or receipts needed to support disbursements; or
l. False lien waivers.
3. Loan Agent Fraud
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Actions by Agents who orchestrate, facilitate or otherwise support any of the illegal acts
committed by loan applicants, or Obligors such as those listed in this chapter.
4. Misuse of Loan Proceeds
Misuse of loan proceeds or any other funds in which SBA has an interest.
5. Conversion of Collateral
Conversion, concealment, vandalism or unauthorized disposal of collateral for an SBA
loan.
6. SBA Employee Misconduct
Misconduct by an SBA official, or Close Relative of an SBA official, such as soliciting or
accepting a bribe in connection with making, closing, servicing, or liquidating a Disaster
Loan.
C. Referral Methods
A referral to the OIG can be made by:
1. Calling the OIG Hotline toll-free at 1-800-767-0385;
2. Completing the on-line OIG Complaint Submission Form at
http://web.sba.gov/oigcss/client/dsp_welcome.cfm and submitting the referral via the
Internet; or
3. Mailing the referral to:
U.S. Small Business Administration
Office of Inspector General
Investigations Division, Mail Code: 4113
409 Third Street, SW
Washington, DC 20416
D. Required Information
1. Answers to Basic Questions
A referral to the OIG should include as much information as possible in response to
these basic questions:
a. Who is involved? (Name, occupation, address, phone numbers, email address, etc.)
b. What occurred and how is SBA involved?
c. When and where did, or will, the activity take place?
d. Why does the activity appear to be illegal or improper?
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e. What dollar amount is involved? (E.g., loan amount or value of converted collateral.)
f. Who can confirm the allegation and how can that Person be contacted?
g. Who can provide more information?
2. Copies of Relevant Documents
When applicable, copies of documents that support the statements made in response to
the above questions should be submitted as part of the referral.
E. Post-referral Responsibility
After referring a matter to the OIG, the Person who made the referral should:
1. Report any new or additional information discovered about the matter to the OIG;
2. Not disclose or discuss the existence of the OIG referral or investigation to any Person
other than SBA officials on a need-to-know basis;
3. Coordinate any activities related to the loan with the OIG in order to avoid taking any
action that could be detrimental to the investigation or subsequent prosecution; and
4. With OIG approval, and in coordination with the OIG, take appropriate and timely action
to maximize recovery on the loan.
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Chapter 25.
Charge-off Procedures
____________________________________________________________________________
A. Charge-off
1. General
Charge-off is an SBA administrative action whereby a loan is moved from “liquidation”
status to “charged-off” status. It has no impact on the Obligors’ liability for the loan
balance. Decisions regarding when to charge-off a loan should be consistent with
federal debt management and collection guidelines.
2. When Appropriate
Charge-off is appropriate when:
a. All reasonable efforts have been exhausted to achieve recovery from: (1) voluntary
payments on the Note (Secured, Unsecured); (2) liquidation of the collateral; and (3)
litigation and other enforced collection activities against all of the Obligors;
b. The estimated cost of further collection efforts exceeds the anticipated recovery;
c. The only remaining avenue of recovery is from Obligors who cannot be located or
who are unable to pay the loan balance; or
d. The loan balance is uncollectible due to discharge in bankruptcy (i.e., release of the
debtor from any further personal liability for pre-bankruptcy debts), expiration of the
statute of limitations (i.e., the passing of the deadline for suing), or the existence of
another defense available to the remaining Obligors under state or federal law.
B. Referral to Treasury Cross-Servicing Program
Note: Under the Cross-servicing Program, in addition to offset, delinquent debt is collected
through the use of a wide variety of tools such as administrative wage garnishment, skip tracing,
negotiated repayment plans, use of private collection agencies, DOJ litigation, and preventing
receipt of additional federal financial assistance. Prior to referral, SBA sends an automated letter
to the Obligors giving them 60 calendar days to either pay the loan in full or negotiate an
acceptable payment plan.
1. When Referral Required
After charge-off the loan and remaining Obligors must be referred to Treasury for
inclusion in the Cross-servicing Program, (Debt Collection Improvement Act of 1996)
unless further collection is barred by a valid legal defense such as compromise,
discharge in bankruptcy, or the statute of limitations.
C. IRS Notification of Cancelled Debt
1. When IRS Form 1099-C Required
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IRS Form 1099-C (Cancellation of Debt) must be filed with the IRS and mailed to the
Borrower whenever the loan balance has become uncollectible (e.g., as the result of a
compromise).
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