Full text
SBA SOP 50 55
504 LOAN
SERVICING and LIQUIDATION
Office of Capital Access
Small Business Administration
October 1, 2013
504 Loan Servicing and Liquidation
50 55
1. Purpose: Update and consolidate SBA policy and procedures on 504 Loan servicing
and liquidation.
2. Personnel Concerned: All SBA employees.
3. SOPs Cancelled: SOP 50 50 4 and SOP 50 51 3
4. Originator: Office of Capital Access
J. Patrick Kelley 10/01/13
Acting Associate Administrator
Office of Capital Access
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Table of Contents
Chapter 1. Introduction ........................................................................................................... 9
A. Purpose ............................................................................................................................. 9
B. Authority ............................................................................................................................ 9
C. General Policy and Goals .................................................................................................. 9
D. Performance Standards..................................................................................................... 9
E. Exceptions to Policy .......................................................................................................... 9
Chapter 2. Definitions ............................................................................................................11
A. General Terms .................................................................................................................11
B. Environmental Terms .......................................................................................................20
Chapter 3. CDC Responsibility and Authority......................................................................21
A. Servicing ..........................................................................................................................21
B. Liquidation ........................................................................................................................21
C. Litigation ...........................................................................................................................22
D. Decision Making ...............................................................................................................23
E. Use of Independent Contractors .......................................................................................26
F. Use of Treasury Checks ...................................................................................................26
G. Recordkeeping .................................................................................................................27
H. Loan Monitoring................................................................................................................29
I. Reporting Requirements...................................................................................................30
J. SBA Takeover of Servicing, Liquidation, or Litigation .......................................................32
K. Enforcement Action by OCRM..........................................................................................32
Chapter 4. Loan Fees and Loan Payment Administration...................................................33
A. Loan Fees ........................................................................................................................33
B. Pre-Debenture Purchase Payments on Loans in Regular Servicing Status ......................34
C. Pre-Debenture Purchase Payments on Loans During and After a Deferment Period .......34
D. Post-Debenture Purchase Payments on Loans in Liquidation Status ...............................35
E. Post-Debenture Purchase Payments on Loans Returned to Regular Servicing Status .....36
F. Prepayment ......................................................................................................................36
G. Paid in Full Loans .............................................................................................................39
Chapter 5. Environmental Risk Management .......................................................................41
A. Overview ..........................................................................................................................41
B. General Requirements .....................................................................................................41
C. When an Environmental Investigation is Required............................................................42
D. Environmental Investigation Process for Loans in Regular Servicing Status.....................42
E. Environmental Investigation Process for Loans in Liquidation Status ...............................42
F. Environmental Investigation Reports ................................................................................45
G. Remedial Action by a Secured Creditor ............................................................................45
H. Taking Title to Contaminated Property or Control of a Business with Environment Risks .45
Chapter 6. Servicing Requests..............................................................................................51
A. General Requirements .....................................................................................................51
B. Review and Analysis ........................................................................................................51
C. How To Obtain SBA Approval of a Proposed Loan Action ................................................54
D. Implementing Loan Actions ..............................................................................................56
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Chapter 7. Modification of Note ............................................................................................57
A. General Requirements .....................................................................................................57
B. Payment Due Date ...........................................................................................................57
C. Installment Amount...........................................................................................................57
D. Interest Rate.....................................................................................................................58
E. Maturity Date ....................................................................................................................58
F. Loan Amount ....................................................................................................................58
Chapter 8. Modification of Collateral Requirements............................................................59
A. Subordination of Lien Position ..........................................................................................59
B. Inter-creditor Agreements .................................................................................................61
C. Substitution of Collateral...................................................................................................61
D. Substitution of Guarantor..................................................................................................62
E. Release of Lien without Consideration .............................................................................63
F. Release of Lien for Consideration ....................................................................................63
G. Release of Guarantor or Co-Borrower ..............................................................................64
H. Sale of Operating Company .............................................................................................65
I. Release of Condemnation Proceeds ................................................................................65
Chapter 9. Insurance Coverage.............................................................................................67
A. General Requirements .....................................................................................................67
B. Mortgagee’s Title Insurance .............................................................................................67
C. Hazard Insurance .............................................................................................................67
D. Life Insurance...................................................................................................................68
E. Flood Insurance................................................................................................................70
Chapter 10. Modification of Management Covenants ..........................................................71
A. General Requirements .....................................................................................................71
B. Financial Statements ........................................................................................................71
C. Restrictions on Compensation, Dividends, Fixed Assets, etc............................................71
D. Standby Agreements ........................................................................................................71
Chapter 11. Assumption or Sale of Loan .............................................................................73
A. Assumption ......................................................................................................................73
B. Sale of Loan in Liquidation Status ....................................................................................74
Chapter 12. Deferments .........................................................................................................75
A. Overview ..........................................................................................................................75
B. General Rule ....................................................................................................................75
C. General Requirements .....................................................................................................75
D. Deferred Amount ..............................................................................................................76
E. Loan Payments During Deferment Period ........................................................................76
F. Interest Accrual ................................................................................................................77
G. Notice to CSA...................................................................................................................77
H. Catch-up Plan ..................................................................................................................77
I. CDC Monitoring During Deferment and Catch-up Period..................................................77
Chapter 13. Delinquent Secured Senior Loans ....................................................................79
A. General Requirements .....................................................................................................79
B. Procedure for Developing Best Strategy to Protect Junior Lien Securing 504 Loan ..........80
C. Payment Advances to Bring Senior Secured Loan Current ..............................................82
D. Senior Loan Purchase or Pay Off .....................................................................................82
E. Judicial Foreclosures ........................................................................................................83
F. Protective Bids .................................................................................................................83
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G. “No Bid” Position ..............................................................................................................84
H. Redemption Rights ...........................................................................................................85
I. Excess Proceeds from Senior Lien Foreclosure Sales .....................................................85
J. Impact of Senior Lien Foreclosure on Other 504 Loan Collateral......................................86
Chapter 14. Classifying Loans in Liquidation ......................................................................87
A. When Loans Must be Classified in Liquidation .................................................................87
B. When the Note Must Be Accelerated ................................................................................87
C. Debenture Purchase ........................................................................................................87
D. Demand Letters ................................................................................................................87
E. Skip Tracing .....................................................................................................................88
F. Obligors in Active Military Service ....................................................................................88
G. Liquidation Plans ..............................................................................................................88
H. Assignment of Loan Documents .......................................................................................91
I. Payments and Recoveries on Loans in Liquidation Status ...............................................92
J. When Loans Should Be Removed from Liquidation Status ...............................................92
Chapter 15. Debenture Purchase ..........................................................................................93
A. When CDC Must Request Debenture Purchase ...............................................................93
B. Impact of Debenture Purchase on 504 Loan ....................................................................93
C. Referral to Treasury Offset Program.................................................................................94
Chapter 16. Site Visits ...........................................................................................................95
A. When Required ................................................................................................................95
B. Preparation.......................................................................................................................95
C. Goals................................................................................................................................96
Chapter 17. Workouts ............................................................................................................99
A. Overview ..........................................................................................................................99
B. Required Financial Information .........................................................................................99
C. Feasibility Test ...............................................................................................................100
D. Timing ............................................................................................................................100
E. Requirement—New Consideration from Borrower ..........................................................100
F. Options...........................................................................................................................100
G. Agreement Provisions ....................................................................................................102
H. SBA Approval .................................................................................................................102
Chapter 18. Administrative Wage Garnishment .................................................................103
A. Legal Authority ...............................................................................................................103
B. When to Initiate ..............................................................................................................103
C. Requirements .................................................................................................................103
D. Garnishment Amount .....................................................................................................104
E. Employee’s Rights..........................................................................................................104
F. Modification Based on Financial Hardship ......................................................................104
G. Suspension or Termination .............................................................................................105
Chapter 19. Federal Salary Offset .......................................................................................107
A. Legal Authority ...............................................................................................................107
B. When to Initiate ..............................................................................................................107
C. Requirements .................................................................................................................107
D. Offset Amount ................................................................................................................107
E. Employee’s Rights..........................................................................................................108
F. Modification Based on Financial Hardship ......................................................................108
G. Suspension or Termination .............................................................................................109
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Chapter 20. Real Property Collateral Liquidation ..............................................................111
A. General Requirements ...................................................................................................111
B. Procedure for Selecting Best Method of Liquidation .......................................................111
C. Release of Lien for Consideration ..................................................................................114
D. Voluntary Sale of Collateral by Obligor ...........................................................................114
E. Deed in Lieu of Foreclosure ...........................................................................................115
F. Lien Foreclosure.............................................................................................................115
G. Collection of Rents .........................................................................................................117
H. Appointment of Receiver ................................................................................................117
I. Short Sale Approval .......................................................................................................117
J. Credit Bids......................................................................................................................120
K. Eviction Proceedings ......................................................................................................120
L. Abandonment .................................................................................................................120
Chapter 21. Personal Property Collateral Liquidation .......................................................121
A. General Requirements ...................................................................................................121
B. Procedure for Selecting Best Method of Liquidation .......................................................121
C. Release of Lien for Consideration ..................................................................................123
D. Voluntary Sale of Collateral by Obligor ...........................................................................123
E. UCC Sale .......................................................................................................................124
F. Judicial Foreclosure .......................................................................................................127
G. Collection of Accounts Receivable .................................................................................127
H. Surrender of Life Insurance Policy for Cash Value .........................................................128
I. Foreclosure of Lien on Fixtures ......................................................................................128
J. Marine Mortgage Foreclosure.........................................................................................128
K. Credit Bids......................................................................................................................128
L. Abandonment .................................................................................................................129
Chapter 22. Acquired Collateral ..........................................................................................131
A. Overview ........................................................................................................................131
B. Title to Collateral ............................................................................................................131
C. Ownership Responsibilities ............................................................................................131
D. Expense Reimbursement ...............................................................................................132
E. Timeframe for Disposal ..................................................................................................132
F. Sale ................................................................................................................................133
G. Lease .............................................................................................................................135
H. Abandonment .................................................................................................................136
Chapter 23. Offer in Compromise .......................................................................................137
A. Overview ........................................................................................................................137
B. When Compromise is Appropriate ..................................................................................137
C. General Requirements ...................................................................................................138
D. Compromise with a Going Concern ................................................................................139
E. Offer and Supporting Documents ...................................................................................139
F. Review and Analysis of Offer..........................................................................................140
G. Inadequate Offers...........................................................................................................142
H. Payment Terms and Conditions .....................................................................................142
I. Obtaining SBA Approval .................................................................................................143
J. Completing the Compromise Process ............................................................................143
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Chapter 24. Litigation ..........................................................................................................145
A. When Litigation is Appropriate ........................................................................................145
B. General Requirements ...................................................................................................145
C. Legal Counsel Hired by CDCs ........................................................................................146
D. Litigation Plans ...............................................................................................................146
E. Documentation ...............................................................................................................148
F. Attorney Fees and Costs ................................................................................................148
G. Suit for Judgment on Note or Guaranty ..........................................................................150
H. Judicial Foreclosure and Deficiency Judgment ...............................................................150
I. Settlement Offers ...........................................................................................................151
J. Bankruptcy Proceedings.................................................................................................151
K. Probate Proceedings ......................................................................................................153
L. Enforcement of Judgments .............................................................................................153
M. Application of Litigation Recoveries ................................................................................153
Chapter 25. Expenses and Recoveries ...............................................................................155
A. Classification of Expenses ..............................................................................................155
B. Recoveries .....................................................................................................................156
C. Payment of Non-recoverable Expenses Incurred by CDCs ............................................157
D. Recoupment of Recoverable Expenses Incurred by CDCs .............................................157
E. SBA Review and Approval .............................................................................................157
Chapter 26. Reimbursable Loss on 504 Loans ..................................................................161
A. All 504 Loans .................................................................................................................161
B. PCLP 504 Loans ............................................................................................................161
Chapter 27. Inspector General Referrals ............................................................................165
A. Duty to Report Irregularities ............................................................................................165
B. Irregularities Requiring Referral ......................................................................................165
C. Referral Methods ............................................................................................................166
D. Required Information ......................................................................................................166
E. Post-referral Responsibility .............................................................................................167
Chapter 28. Charge-off and Wrap-up Procedures..............................................................169
A. Charge-off ......................................................................................................................169
B. Wrap-up Report ..............................................................................................................169
C. Referral to Treasury Cross-Servicing Program ...............................................................172
D. IRS Notification of Cancelled Debt .................................................................................173
E. Credit Bureau Reporting .................................................................................................174
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Chapter 1.
Introduction
____________________________________________________________________________
A. Purpose
SOP 50 55 sets out the standard operating policies and procedures of the Small Business
Administration (“SBA”) for the administration of 504 Loans that are in “regular servicing” and
“liquidation” status.
Note: A 504 Loan moves from “approval” status (governed by SOP 50 10) 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 14 of this SOP.
B. Authority
The policy and procedures set out in this SOP are based on Title V of the Small Business
Investment Act of 1958 (15 U.S.C. § 695, et seq.), Part 120 of Title 13 of the Code of Federal
Regulations, and applicable federal debt collection statutes, regulations and guidance,
including the Debt Collection Improvement Act of 1996 (“DCIA”).
C. General Policy and Goals
Borrowers should repay their 504 Loans in accordance with the terms specified in the Note
and other Loan Documents. However, when loan servicing and liquidation activities are
necessary, they should reflect a balancing of SBA’s interest in: (1) achieving the goals of the
loan program, i.e., helping entrepreneurs start, build and grow viable small businesses; and
(2) maintaining the integrity of the loan program, i.e., ensuring that the Agency can
maximize its recovery if the Borrower defaults on the loan.
D. Performance Standards
504 Loans must be serviced and liquidated in a diligent, fair but aggressive, commercially
reasonable manner, which is free of conflicts of interest and Preferences, and is consistent
with prudent lending practices and the SBA Loan Program Requirements in effect at the
time the action is taken. (13 C.F.R. § 120.535 )
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, written joint-approval of the
Director of Financial Program Operations (“OFPO”) and the Director of the Office of
Financial Assistance must be obtained by submitting a request through the appropriate SBA
Loan Center.
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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. 504 Loan means a loan made under Title V of the Small Business Investment Act.
2. Agency means the U.S. Small Business Administration (“SBA”).
3. Agent means an authorized representative, including an attorney, accountant,
consultant, packager, lender service provider, or any other Person representing a loan
applicant or a CDC by conducting business with SBA. (13 C.F.R. § 103.1(a))
4. Appraisal means: (1) with regard to loan servicing actions pertaining to substitution of
collateral, the Loan Program Requirements governing the original collateral for the loan
set out in SOP 50 10; and (2) with regard to all other loan servicing and liquidation
actions, an expert's written opinion as to the value of property prepared specifically for
the CDC and SBA’s use with regard to a particular loan, which is obtained in accordance
with the requirements listed below. (A shared appraisal, e.g., an appraisal prepared for
a Third Party Lender and shared with SBA, does not meet SBA Loan Program
Requirements for any 504 Loan servicing or liquidation Loan Action other than one that
involves substitution of collateral.)
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, the CDC or 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.)
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b. Appraisal Standards
(1) Real Property
(a) A real property Appraisal to support a substitution of collateral Loan Action
should comply with the appraisal requirements in SOP 50 10 that applied to
the original collateral;
(b) 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,
condition of the property, balance owed on prior liens, etc.,) that there is
equity to secure the SBA loan; and
(c) 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 Appraisal 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
(a) A personal property Appraisal to support a substitution of collateral Loan
Action should comply with the appraisal requirements in SOP 50 10 that
applied to the original collateral;
(b) 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
(c) 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.
c. 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 of personal property valued at $5,000 or more at the
time the loan was made;
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(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, the CDC or any Obligor; and
(7) The appraiser's qualifications and signature.
d. 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 or the CDC relies on it to make a
decision affecting a 504 Loan.
5. Associate of the Borrower means an officer, director, key employee of the 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. (13 C.F.R. § 120.10)
6. Associate of a CDC or Third Party Lender or other senior lender means an officer,
director, key employee, or holder of 20% or more of the value of the CDC, Third Party
Lender or other senior lender's stock or debt instruments; an Agent involved in the loan
process; or any entity in which one or more of the foregoing Persons, or a Close Relative
of any such Person owns or controls at least 20%. (13 C.F.R. § 120.10)
7. Authorized CDC Liquidator ("ACL") means a CDC in good standing that has authority
to conduct 504 Loan liquidation or litigation pursuant to 13 C.F.R. § 120.975. (13 C.F.R.
§ 120.10)
8. Borrower means the Person or Persons who executed the Note evidencing the 504
Loan.
9. Central Servicing Agent ("CSA") means the entity that receives and disburses funds
among the various parties involved with 504 Loan financing under a master servicing
agreement with SBA. (13 C.F.R. § 120.802)
10. Certified Development Company ("CDC") means an entity authorized by SBA to
deliver 504 Loan financing to small businesses. (13 C.F.R. § 120.10)
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11. Close Relative means a spouse, parent, child or sibling, or the spouse of a parent, child
or sibling. (13 C.F.R. § 120.10)
12. Computer Tracking System means the electronic method used by SBA or a CDC to
create and maintain a chronological record of the significant activities on a 504 Loan,
such as Loan Actions and the substance of telephone calls, meetings or letters
regarding the loan.
13. 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.
14. 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.
15. Debenture means an obligation issued by a CDC and guaranteed 100 percent by SBA,
the proceeds of which are used to fund a 504 Loan. (13 C.F.R. § 120.802)
16. 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.
17. Eligible Passive Company (“EPC”) is a small entity or trust, which does not engage in
regular and continuous business activities, that leases real or personal property to an
Operating Company for use in the Operating Company's business, and which complies
with the conditions set forth in 13 C.F.R. § 120.111. (13 C.F.R. § 120.10)
18. Financial Hardship means an inability to pay for basic living expenses, i.e., the 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.
19. 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.
20. Guarantor means a Person who executed a Guaranty as security for a Note executed
by a Borrower.
21. Guaranty means SBA Form 148 (Unconditional Guarantee), SBA Form 148 L
(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 if the
Borrower fails to pay it.
22. Including, whether capitalized or not, means "including but not limited to," i.e., the list is
exemplary and not exhaustive.
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23. Liquidation Plan means a CDC's written plan outlining the actions that it intends to take
to maximize recovery on a specific 504 Loan, which includes the information outlined in
the template accessible from www.sba.gov/for-lenders.
24. 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
value, and the Liquidation Value of publically traded stock should be based on official
stock exchange prices.
25. Litigation Plan means a CDC's written plan outlining the court proceedings it intends to
initiate or otherwise participate in to maximize recovery on a specific SBA loan, which
includes the information outlined in the template accessible from www.sba.gov/for-
lenders as well as any other information or documentation required by Chapter 24, such
as the qualifications of the attorney the Lender intends to hire, a copy of the engagement
letter, and the justification for, and estimate of, any expense listed in Chapter 24 that is
presumed to be unnecessary, unreasonable and non-customary such as the use of
multiple law firms, travel, or the appointment of a receiver to perform routine liquidation
duties.
26. 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.
27. 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; the CDC’s name and contact information; 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.
28. Loan Authorization means SBA's written agreement including subsequent
modifications thereto, entitled Authorization for Debenture Guaranty, which sets out the
terms and conditions under which SBA will guarantee the Debenture for a 504 Loan. It
is not a contract to make a loan. (13 C.F.R. § 120.10)
29. Loan Documents means the Loan Authorization, Note, Guaranty, lien instruments, and
all other agreements and documents related to an SBA loan.
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30. 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.
31. Loan Program Requirements means the requirements pertaining to SBA’s 504 Loan
Program, as issued and revised from time to time, imposed by statutes, regulations,
contracts, Loan Authorizations, Debentures, and SBA Notices and forms. (13 C.F.R. §
120.10)
32. Must, whether capitalized or not, means that the action or prohibition is mandatory.
33. Non-recoverable Expense means a cost that is not SBA approved and cannot be
recouped by being added to the principal balance of the Note, because, e.g., the cost
was not: (a) related to collection of amounts due under the Note, 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.
34. Non-routine Litigation means any litigation on a 504 Loan conducted by a CDC (not
SBA) where: (a) factual or legal issues are in dispute and require resolution through
adjudication (e.g., all Chapter 11 bankruptcy proceedings); (b) legal fees are estimated
to exceed $10,000 in the aggregate; (c) the CDC has a conflict of interest with SBA; or
(4) the CDC has made a separate loan to the same Borrower that is not an SBA loan.
(13 C.F.R. § 120.540(c)(1))
35. Note means the promissory note (e.g., SBA Form 1505) executed by the Borrower on a
504 Loan.
36. Obligor means every Person with direct liability for repaying an SBA loan, such as the
Borrower and any assumptor, and every Person with contingent liability, such as a
Guarantor.
37. 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.
38. Operating Company (“OC”) is an eligible small business actively involved in
conducting business operations located on real property owned by an Eligible Passive
Company, or which uses in its business operations personal property owned by an
Eligible Passive Company. (13 C.F.R. § 120.10)
39. Person means any individual, corporation, partnership, limited liability company,
association, unit of government, or other legal entity, however organized. (13 C.F.R. §
120.10)
40. Preference means an arrangement not pre-approved by SBA that gives a CDC a
preferred position compared to SBA relating to the making, servicing, or liquidation of a
504 Loan. (13 C.F.R. § 120.10) E.g., a CDC would receive a Preference if it released
the collateral for a 504 Loan in order to use it as security for a non-SBA loan to the same
Borrower.
Effective Date: October 1, 2013 16
SOP 50 55
41. Project means the purchase or lease, and/or improvement or renovation of long-term
fixed assets by a small business, with 504 Loan financing for use in its business
operations. (13 C.F.R. § 120.802)
42. Project Property means one or more long-term fixed assets, such as land, buildings,
machinery, and equipment, acquired or improved by a small business with 504 Loan
financing for use in its business operations. (13 C.F.R. § 120.802)
43. 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.
44. Real Estate Owned ("REO") means real property collateral acquired by a CDC or SBA
(formerly referred to by SBA as "COLPUR").
45. Recoverable Expense means an SBA approved, necessary, reasonable and customary
cost incurred to collect amounts due under the Note, 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 recouped by adding it to the principal balance of the loan.
46. 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 or the CDC at
the foreclosure sale (e.g., real property), the expenses associated with the care,
preservation and resale of the acquired collateral.
47. Routine Litigation means any litigation on a 504 Loan conducted by a CDC (not SBA)
where: (a) no factual or legal issues are in dispute (e.g., non-adversarial matters in a
Chapter 7 and undisputed foreclosure actions); and (b) the estimated legal fees do not
exceed $10,000 in the aggregate. (13 C.F.R. § 120.540(c)(2))
48. SBA Loan Center means the following SBA facilities:
a. SBA Commercial Loan Service Center (“CLSC”) West
Geographic Coverage: SBA Regions 5, 6 (except Arkansas, Oklahoma and Texas)
7, 8, 9, and 10.
Loan Type and Status:
Fully disbursed 504 Loans in regular servicing and liquidation status.
Street Address:
801 R Street, Suite 101
Fresno, CA 93721
Web Site Address: http://www.sba.gov/FresnoCLSC
Effective Date: October 1, 2013 17
SOP 50 55
Telephone Numbers:
Phone: (559) 262-4960
Toll Free: (800) 347-0922
Fax Numbers:
Servicing: (202) 481-0483
Liquidation: (202) 481-6481
Express Purchase: (202) 481-0663
Post-Servicing: (202) 481-1756
Email:
Servicing: fsc.servicing@sba.gov
Liquidation: fsc.504liquidations@sba.gov
Express Purchase: fsc.purchasing@sba.gov
Post-servicing: fsc.postservicing@sba.gov
b. SBA Commercial Loan Service Center (“CLSC”) East
Geographic Coverage: SBA Regions 1, 2, 3, 4, and 6 (except New Mexico and
Louisiana).
Loan Type and Status:
Fully disbursed 504 Loans in regular servicing and liquidation status.
Street Address:
2120 Riverfront Drive, Suite 100
Little Rock, AR 72202-1794
Web Site Address: http://www.sba.gov/LittleRockCLSC
Telephone Numbers:
Phone: (501) 324-5871
Toll Free: (800) 644-8564
Fax Numbers:
Servicing: (202) 292-3878
Liquidation: (202) 481-6481
Email:
Servicing: lrsc.servicing@sba.gov
Liquidation: lrsc.504liquidation@sba.gov
Customer Service: lrsc.customerservice@sba.gov
Express Purchase: LRSC.ExpressPurchase@sba.gov
49. 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;
Effective Date: October 1, 2013 18
SOP 50 55
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.
50. 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 7 through 13 of this SOP (e.g., subordination of lien position).
51. Should, whether capitalized or not, means that the action is recommended but not
required.
52. Site Visit Report means the paper or electronic record documenting the CDC’s findings
and conclusions after visiting the Borrower’s business premises. A post-default Site Visit
Report should cover, for example, the CDC’s 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.
53. 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.
54. Third Party Lender means a commercial or private lender, investor or Government
Entity that made a loan that is part of the financing for a 504 Loan Project. (13 C.F.R. §
120.801)
55. Third Party Lender Agreement means SBA Form 2287 (Third Party Lender
Agreement), which memorializes the agreement between the Third Party Lender, SBA
and the CDC outlining the parties’ rights and responsibilities with regard to a particular
504 Loan.
56. Third Party Loan means a loan made by a Third Party Lender that is part of the
financing for a 504 Loan Project.
57. Treasury means the U.S. Department of the Treasury Bureau of Financial Management
Service.
58. Wrap-up Report refers to the documentation, whether or not it is entitled “Wrap-up
Report,” that a CDC must provide to the SBA Loan Center after completing the
liquidation of a 504 loan, which includes the information outlined in the template
accessible from http://www.sba.gov/for-lenders.
Effective Date: October 1, 2013 19
SOP 50 55
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: October 1, 2013 20
SOP 50 55
Chapter 3.
CDC Responsibility and Authority
____________________________________________________________________________
A. Servicing
Each CDC is responsible for servicing all of the 504 Loans in its portfolio that are classified
in regular servicing status.
B. Liquidation
The scope of a CDC's liquidation authority and responsibility is based on its designation as:
a Premier Certified Lender Program ("PCLP") CDC; an Authorized CDC Liquidator ("ACL");
or a non-PCLP CDC or a non-ACL. (13 C.F.R. § 120.975)
1. ACLs
A CDC that has received written approval from SBA to act as an ACL is responsible for
liquidating all of the 504 Loans in its portfolio (13 C.F.R. § 120.975(b)).
2. PCLP CDCs
a. ACL PCLP CDCs are responsible for liquidating all of the 504 Loans in their
portfolios. (13 C.F.R. § 120.975(a))
b. Non-ACL PLCP CDCs are responsible for liquidating only the PCLP 504 Loans in
their portfolios. (13 C.F.R. § 120.848(f))
Note: A CDC may apply to become an ACL by submitting an application to the
appropriate SBA Loan Center, which will review the application and forward its
recommendation to the Office of Financial Program Operations for a final decision. (For
information on SBA requirements to become an ACL, see 13 C.F.R. § 120.975.)
3. Non-ACLs and Non-PCLP CDCs
a. SBA Loan Centers are primarily responsible for liquidating the 504 Loans that do not
fall under the liquidation authority of PCLP CDCs and ACLs.
b. SBA Loan Centers may authorize non-PCLP CDCs and non-ACLs to liquidate
specific 504 Loans on a case-by-case basis.
c. All PCLP CDCs and non-ACLS should:
(1) Serve as the primary contact with the Obligors;
(2) Obtain information concerning Third Party Loans;
(3) Enforce the terms of the Third Party Lender Agreement;
Effective Date: October 1, 2013 21
SOP 50 55
(4) Prepare Liquidation Plans;
(5) Conduct site visits;
(6) Immediately notify the SBA Loan Center of any foreclosure action, bankruptcy, or
other action or omission that could adversely impact the 504 Loan; and
(7) At the request of the SBA Loan Center:
(a) Identify local appraisers, auctioneers and other independent contractors;
(b) Attend foreclosure sales on behalf of SBA; and
(c) Assist with the care and marketing of REO and acquired personal property
collateral.
C. Litigation
1. ACLs and PCLP CDCs, as set forth below, are responsible for conducting all litigation
needed to ensure recovery on all of the 504 Loans in their portfolios—including charged-
off loans that have not been referred to Treasury pursuant to Chapter 28.
a. ACLs—are responsible for conducting all of the litigation needed to ensure recovery
on all of the 504 Loans in their portfolio;
b. PCLP CDCs—are responsible for conducting all of the litigation needed to ensure
recovery on all of the PCLP-approved loans in their portfolio; and
c. Non-PCLP CDCs and non-ACLs—do not have general litigation authority and
therefore are not responsible for conducting the litigation on the 504 Loans in their
portfolio unless the SBA Loan Center has specifically authorized them to handle the
litigation on a specific loan as documented by a Loan Action Record that includes the
concurrence of the District Counsel responsible for the geographic area where the
litigation will occur.
2. After a charged-off loan has been referred to Treasury, SBA has sole authority for
managing any litigation that may become necessary. CDCs must immediately notify the
SBA Treasury Offset Division (via fax 202-481-0592 or email
BirminghamTOPS@sba.gov) of any pending litigation, including bankruptcy filings, so
that the loan can be recalled from Treasury and appropriate action taken by SBA legal
counsel. Appropriate action may include, for example, referring the loan back to the
CDC to handle the litigation under the supervision of SBA legal counsel. (See Chapter
24 for information on litigation, including when SBA’s prior written approval of a CDC’s
Litigation Plan is required.)
Effective Date: October 1, 2013 22
SOP 50 55
D. Decision Making
1. Unilateral Authority
ACLs and PCLP CDCs have unilateral authority to take all necessary action to service
and liquidate the 504 Loans they are responsible for, subject to SBA’s right to take over
the servicing or liquidation of any loan as provided in Paragraph E and except as
provided in Subsections 2 and 3 below, provided that the CDC’s actions are consistent
with the performance standards set out in Chapter 1.
2. Unilateral Actions that Require Notice to SBA
A CDC must provide the appropriate SBA Loan Center with written notice of each
substantive unilateral Loan Action taken on a 504 Loan.
3. Actions Requiring Prior SBA Approval
a. All CDCs
All CDCs including PCLP CDCs must obtain SBA’s prior written approval before
taking any Loan Action that involves:
(1) Exception to policy;
(2) Preference or other activities that create a conflict of interest;
(3) Compromise of the principal loan balance;
(4) Litigation Plan or amended Litigation Plan;
(5) Increase in loan amount;
(6) Acquisition of title to any property in SBA’s name;
(7) Operation or control of a business that handles Hazardous Substances or is
located on Contaminated Property;
(8) Acquisition of title to Contaminated property;
(9) Transfer, sale or pledge of more than 90% of the loan; or
(10) Any Loan Action for which SBA’s prior written consent is required by another
Loan Program Requirement.
b. Non-PCLP CDCs
All CDCs except PCLP CDCs must obtain SBA’s prior written approval before taking
any Loan Action that involves:
(1) Implementation of a Liquidation Plan or amendment thereto;
Effective Date: October 1, 2013 23
SOP 50 55
(2) Substantial alteration of the terms or conditions of any Loan Document including
the Loan Authorization. Modification of the terms and conditions of the Loan
Authorization are covered by Chapters 7, 8, 9, and 10 of this SOP. They include,
for example:
(a) The terms of the Note;
(b) The collateral requirements, and therefore, issues such as:
i. Subordination of lien position;
ii. Substitution of collateral;
iii. Substitution of Guarantors;
iv. Release of lien, provided that collateral with a cumulative market value of
less than 10% of the Debenture amount or $10,000, whichever is less,
may be released without SBA’s prior consent;
v. Release of a Guarantor or Co-Borrower;
(c) Insurance coverage; and
(d) Management covenants.
(3) Acceptance of a workout agreement;
(4) Acceleration of the maturity of the Note;
(5) Deferment that exceed six cumulative monthly payments or 20% of the original
loan amount, whichever is less;
(6) Compromise of any portion of the loan balance;
(7) Assumption or sale of the loan regardless of the percentage;
(8) Release of a claim against a standby creditor;
(9) Purchase or pay off of any indebtedness (other than the 504 Loan) secured by
the collateral for a defaulted 504 Loan collateral.
(10) Protective Bid position or amount; or
(11) Exercise or release of redemption rights.
4. Where to Send Notices and Requests for SBA Approval
Notices and requests for SBA’s prior approval should be sent to the appropriate SBA
Loan Center. (See the definition of “SBA Loan Center” in Chapter 2 for a complete list.)
Effective Date: October 1, 2013 24
SOP 50 55
Note: Templates for requesting SBA review and approval of the most commonly requested
types of servicing actions are available for CDC use at www.sba.gov/for-lenders. SBA Loan
Centers should respond to CDCs’ requests for approval of proposed Loan Actions within 15
business days. (13 C.F.R. § 120.541)
5. Requests for Reconsideration
When SBA’s prior approval is required, a request for reconsideration of an SBA Loan
Center’s decision regarding a proposed Loan Action may only be submitted if relevant
new facts are provided. The request for reconsideration must be prepared and
submitted in accordance with the procedures that applied to the original request.
6. Appeal of Final Decision
a. Liquidation—Liquidation Plan, Loan Action or Expense
The final decision of a SBA Loan Center Director or designee regarding approval of a
Liquidation Plan, liquidation Loan Action (e.g., compromise), or liquidation expense
that is not related to litigation or environmental risk management, may be appealed
to the Director of OFPO (designee of the director of the Office of Financial
Assistance (“OFA”), who will consult with the Associate General Counsel for
Litigation, provided that the appeal: (1) is in writing; (2) includes a copy of the
decision and Supporting Documents; (3) states the reason(s) why the decision is
believed to be incorrect; and (4) is submitted within 30 calendar days of the decision.
(13 C.F.R. § 120.542(d))
b. Litigation—Litigation Plan or Expense
The final decision of a SBA Loan Center Director or designee regarding approval of a
Litigation Plan or expense, (e.g., attorney fees and costs), may be appealed to the
Associate General Counsel for Litigation, who will consult with the Director of OFPO,
(designee of the Director of OFA), provided that the appeal: (1) is in writing; (2)
includes a copy of the decision and Supporting Documents; (3) states the reason(s)
why the decision is believed to be incorrect; and (4) is submitted within 30 calendar
days of the decision. (13 C.F.R. § 120.542(e))
c. Environmental Risk Management—Denial of Request re Contaminated Property
The final decision of an SBA Loan Center Director or designee denying a request for
approval to take title to Contaminated Property or to take over the operation of a
business that handles Hazardous Substances or is located on Contaminated
Property may be appealed to the Associate General Counsel for Litigation, who will
consult with the Director of OFPO, (designee of the Director of OFA), provided that
the appeal: (1) is in writing; (2) includes a copy of the decision and Supporting
Documents; (3) states the reason(s) why the decision is believed to be incorrect; and
(4) is submitted within 30 calendar days of the date of the decision.
Effective Date: October 1, 2013 25
SOP 50 55
E. Use of Independent Contractors
A CDC may hire an independent contractor to perform liquidation (not servicing) duties
provided that:
1. The proposed contractor does not have an actual, apparent, or potential conflict of
interest with SBA, the CDC, or the Borrower;
2. The services to be performed are not the type of activities that are customarily
considered a cost of doing business that should be absorbed as overhead;
3. The CDC is not receiving a servicing fee from the Borrower or another Person; (e.g.,
payment of servicing fee required under workout agreement); and
4. The CDC obtains the SBA Loan Center's prior written approval of the qualifications of
the contractor, the terms and conditions of the engagement contract, and any
modifications to the contract.
F. Use of Treasury Checks
1. When Treasury Checks May Be Used
A Treasury check may be ordered from the SBA Denver Finance Center and used in
accordance with Chapter 13 to purchase or pay-off a delinquent senior secured loan or
to enter a Protective Bid.
2. How to Order a Treasury Check
a. Lead Time
Requests for Treasury checks must be submitted to the SBA Loan Center in
sufficient time to allow for review and submission of approved requests to the SBA
Denver Finance Center, which normally requires at least ten days lead time to issue
a Treasury check.
b. Required Information
A request for a Treasury check must be in writing and must set out (1) the exact
amount of the check to be issued; (2) the name, address and Taxpayer Identification
Number of the payee; and (3) the reason the check is required. In addition:
(1) Check for Protective Bids
If the Treasury check is for a Protective Bid, the request must indicate that the
Person conducting the foreclosure sale will accept a Treasury check rather than
a cashier's check, and include copies of the following documents:
(a) The foreclosure sale notice;
(b) A current title search or UCC lien search;
(c) Verification of amount owed to senior lienholders; and
Effective Date: October 1, 2013 26
SOP 50 55
(d) A Post-default Environmental Investigation Report if required by this SOP.
(2) Check for Pay Off or Purchase of Senior Lien
If the Treasury check is to pay off or purchase a Third Party Loan or another loan
secured by a senior lien, it must be transmitted to the senior lienholder by means
of an escrow letter that contains appropriate instructions concerning the
conditions under which the Treasury check can be cashed, e.g., the senior
lienholder's note and collateral documents have been assigned to SBA, or the
senior lienholder's note has been stamped "paid" and the collateral has been
released. In addition, the request must also include a copy of:
(a) The Third Party Lender Agreement or the agreement with the senior
lienholder, if any; and
(b) The Third Party Lender or senior lienholder's transcript of account, which
must document that the purchase or payoff amount is consistent with the
limitations, if any, in the Third Party Lender Agreement or similar agreement
on Default Charges.
7. Limitation on Dollar Amount
The amount of a Treasury check cannot exceed $999,999. If the amount needed
exceeds $999,999, an additional check for the remainder must be ordered for an amount
that is not exactly the same as the original check or one of the checks may be cancelled.
8. Prevention of Unauthorized Use
Treasury checks must be kept in a secure location and only handled by an authorized
SBA or CDC employee, who is either attending the foreclosure sale for which the check
was obtained or transmitting the check pursuant to escrow instructions.
9. Disposition of Unused Checks
CDCs must promptly return all unused Treasury checks to the SBA Loan Center, which
will promptly return the unused Treasury checks to the SBA Denver Finance Center.
Unused Treasury checks should be transmitted by overnight mail, along with an
explanation for the return. In no event may unused Treasury checks be kept for more
than six months.
G. 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.
Effective Date: October 1, 2013 27
SOP 50 55
2. 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.
3. Correspondence
Copies of all paper and electronic correspondence concerning the loan must be dated
and kept in the Loan File.
4. 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.
5. 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. Upon request by
SBA, Lenders must make electronically stored information available to SBA in a timely
manner.
6. Loan File Retention
a. General Rule
A CDC must retain its Loan File on a 504 Loan for nine years after the loan is paid in
full or for ten years after the loan is charged-off, whichever is applicable.
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.)
Effective Date: October 1, 2013 28
SOP 50 55
H. Loan Monitoring
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. CDCs are responsible for monitoring each 504 Loan
in their portfolio and for mitigating the risk of loss associated with any change in accordance
with prudent lending practices. (13 C.F.R. §120.970) For example:
1. Name, Address or Legal Structure Changes
In addition to notifying SBA and updating the Loan File or Computer Tracking System, if
a change in 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 504 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
Borrower changes its legal structure, generally the new entity should be required to
formally assume the 504 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.
2. Borrower's Creditworthiness
a. The Borrower's creditworthiness, i.e., financial and operational condition, should be
monitored on an on-going basis to ensure that early warning signs that the Borrower
is in financial trouble are not overlooked. This may be done, for example, through
review of financial statements the Borrower is required to submit on a periodic basis,
contact with the Borrower via the phone calls or site visits, or review of relevant
financial data from sources such as credit reports, credit scores and tax returns.
b. 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.
c. If the Loan Documents require the Borrower to submit financial statements, the
statements should be reviewed and analyzed in a timely manner.
d. 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.
e. SBA does not permit CDCs to charge a default interest rate or a separate servicing
fee for past due financial statements. (SOP 50 10) (Submission of the past due
financial statements should be required as a condition for considering any future
servicing request made by the Borrower.)
Effective Date: October 1, 2013 29
SOP 50 55
Note: If an Obligor files bankruptcy, appropriate action must be taken to protect the ability
to collect the SBA loan. See Chapter 24 (Litigation) for information on bankruptcy
proceedings.
3. UCC Filings
All UCC filings must be monitored, and any document needed to maintain the perfection
and priority of the lien securing the 504 Loan must be properly prepared and filed,
including, for example, a UCC-3 to continue an existing financing statement. This duty
continues regardless of whether the loan has been charged off or the Borrower has filed
for Bankruptcy.
4. Taxes and Assessments
Secured 504 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 law varies, secured creditors generally do not have the right to redeem
collateral after a tax foreclosure sale. Consult legal counsel for case specific information.
5. Insurance
504 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 9 for
information on force placing coverage if the Obligor has allowed it to lapse.
6. Senior Secured Loans
The loans of other creditors secured by senior liens against the collateral for a 504 Loan
should be monitored and timely, prudent, commercially reasonable action must be taken
to prevent: elimination of the lien securing the 504 Loan through a foreclosure action by
the senior lien holder, or dissipation of the equity available to cover the 504 Loan
through, for example, the imposition of Default Charges.
I. Reporting Requirements
1. Quarterly Delinquency Report
A CDC must submit a quarterly delinquency report to the appropriate SBA Loan Center
on each loan in its portfolio that is 60 days or more past due until the Debenture has
been purchased. (13 C.F.R. § 120.830(f)) The format for the report is accessible from
www.sba.gov/for-lenders. Quarterly delinquency reports must be submitted no later than
30 days after March 31st, June 30th, September 30th and December 31st.
Effective Date: October 1, 2013 30
SOP 50 55
2. Quarterly Liquidation Status Report
a. Reporting Requirement
Within 15 business days of receiving notice that a Debenture has been purchased,
and every 90 days thereafter until a Wrap-up Report has been filed, ACLs and PCLP
CDCs must provide the SBA Loan Center with a written liquidation status report that
includes, at a minimum, a description of the status of the following:
(1) Obligors;
(2) Collateral;
(3) Workout negotiations;
(4) Recoveries and expenses incurred;
(5) Liquidation and litigation proceedings; and
(6) REO and acquired personal property collateral.
b. Failure to Comply—Referral to OCRM
ACLs and PCLP CDCs who fail to provide timely quarterly status reports may be
referred to the SBA Office of Credit Risk Management for appropriate action.
3. Reports to Credit Reporting Agencies
In accordance with the Debt Collection Improvement Act of 1996, CDCs are required to
report information to the appropriate credit reporting agencies whenever they extend
credit via a 504 Loan. Thereafter, they should continue to routinely report information
concerning servicing, liquidation, and charge-off activities throughout the life-cycle of the
loan. (See Chapter 28 for more information regarding credit reporting requirements for
loans in charge-off status.)
4. Site Visit Report
A Site Visit Report, which should be kept in the Loan File, should be prepared after
every visit to the Borrower’s business premises regardless of whether the loan is in
regular servicing or liquidation status. Non-PCLP CDCs must provide the SBA Loan
Center with a Site Visit Report along with their proposed Liquidation Plan. PCLP CDCs
must provide the SBA Loan Center with a Site Visit Report along with the first quarterly
liquidation report due after Debenture purchase. If a site visit was not conducted, the
reason why a site visit was neither necessary nor prudent must be documented in the
Loan File and explained in the Wrap-up Report. (See Chapter 16 for information on site
visits.)
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5. Wrap-up Report
ACLs and PCLP CDCs, as well as non-ACL and non-PCLP CDCs authorized by SBA to
liquidate specific 504 Loans, must submit a Wrap-up Report to the appropriate SBA
Loan Center upon completion of the liquidation activities associated with each 504 Loan
for which they are responsible for liquidating. (See Chapter 28 for information on Wrap-
up Reports including SBA’s right to charge off the loan balance, refer the loan to
Treasury if appropriate, and with regard to PCLP 504 Loans, bill the PCLP CDC for its
share of the loss.)
6. Other Reports
CDCs must provide SBA with interim or other types of reports as requested. (13 C.F.R.
§ 120.830(g))
J. SBA Oversight and Remedies
1. Takeover of Servicing, Liquidation, or Litigation
SBA may, in its discretion, take over the servicing or liquidation, including litigation, of
any individual 504 Loan. (13 C.F.R. § 120.535(d)) If SBA elects to do so, the CDC must
immediately re-assign any Loan Documents held in the CDC’s name to SBA and provide
any requested assistance.
Note: SBA may take over the litigation on a 504 Loan handled by CDC’s counsel if SBA
determines that the outcome could adversely affect SBA’s administration of the loan program
or that SBA, as a Federal Government agency, is entitled to legal remedies that are not
available to the CDC. (13 C.F.R. § 120.540(d)) For example, SBA may take over when: the
litigation involves important government policy or program issues; the case appears to have
precedential value; the CDC has a conflict of interest; or the legal fees charged by CDC’s
counsel are not reasonable, necessary or customary.
2. Administrative or Enforcement Action by OCRM
If a CDC fails to properly service or liquidate its 504 Loan portfolio, the SBA Office of
Credit Risk Management may take administrative action (e.g., non-renewal of ALP
status) or enforcement action pursuant to 13 C.F.R. § 120.1400 and 13 C.F.R. §
120.1500. (See SOP 50 53 for information regarding SBA’s credit risk management
policy and procedures.)
3. Reimbursement of Loss Due to CDC Fraud or Negligence
See Chapter 26 [Reimbursable Loss on 504 Loans] for information regarding SBA’s right
to recover the total amount of the Debenture from a CDC that has engaged in fraud,
negligence or misrepresentation. (13 C.F.R. § 120.938(b))
Effective Date: October 1, 2013 32
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Chapter 4.
Loan Fees and Loan Payment Administration
____________________________________________________________________________
This chapter provides SBA policy and procedures with regard to loan fees and collecting and
processing loan payments. (See Chapter 25 for information regarding recoveries on loans in
liquidation status.)
A. Loan Fees
CDCs may impose the following fees with regard to the 504 Loans in their portfolios:
1. Servicing Fee
a. Pre-Debenture Purchase
Pre-Debenture purchase, a CDC may charge the Borrower a monthly servicing fee in
an amount based on a percentage of the unpaid balance of the loan as determined
at five-year anniversary intervals. (See SOP 50 10 and 13 C.F.R. § 120.971(a)(3) for
more information.)
b. Post-Debenture Purchase
Post-Debenture purchase, a CDC may charge the Borrower a monthly servicing fee
as part of the terms of a workout agreement, (Chapter 17), provided that:
(1) The loan was approved on or after October 1, 2009;
(2) The post-Debenture purchase servicing fee is less than or equal to the amount of
the pre-Debenture purchase servicing fee;
(3) The amount of the payment due under the workout agreement that will be
applied to the 504 Loan balance is sufficient to ensure that the loan balance will
be paid in full no later than ten years after the original maturity date of the loan;
and
(4) The post-Debenture purchase servicing fee payments are not due and payable
until the loan has been returned to regular servicing status.
2. Late Fee
a. Monetary Obligations
Pre-Debenture purchase, a CDC may charge the Borrower a late fee on any loan
payment received after the fifteenth of the month, provided that the fee does not
exceed five percent of the late payment amount or $100, whichever is greater. (13
C.F.R. § 120.971(a)(4))
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b. Non-Monetary Obligations
A CDC may not charge a fee or impose a monetary penalty for failure to comply with
non-monetary terms of the Loan Authorization. For example, failure to provide
annual financial statements within the time specified in the Loan Authorization cannot
be used as the basis for imposing a monetary penalty on a 504 Loan.
3. Assumption Fees
A CDC may charge a fee to assume a 504 Loan, provided it obtains SBA's prior written
approval and the amount does not exceed one percent of the outstanding principal
balance of the loan. (See SOP 50 10 and 13 C.F.R. § 120.971(a)(5) for more
information.)
4. Fees Associated with Out-of-Pocket Expenses
CDCs may pass on to the Borrower the amount of any out-of-pocket expense incurred
by the CDC as a direct result of the Borrower's improper action or omission, provided
that the expense is consistent with standard industry practice. For example, the fee to
repeat an ACH debit that was initially rejected due to non-sufficient funds.
B. Pre-Debenture Purchase Payments on Loans in Regular Servicing Status
1. Payee
Pursuant to the Servicing Agent Agreement (SBA Form 1506), Borrowers are required to
make their regular monthly 504 Loan payments to the CSA, and if there is a problem, the
CDC is responsible for collecting the scheduled loan payments.
2. Application of Funds
Pursuant to the CDC Note (SBA Form 1505), the CSA is required to apply funds from
regularly scheduled loan payments in the following order:
a. Monthly fees;
b. Accrued interest; and
c. Principal.
Note: The CSA retains the payments made by the Borrower in a Master Reserve Account
until a semi-annual payment is due on the Debenture.
C. Pre-Debenture Purchase 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.
Effective Date: October 1, 2013 34
SOP 50 55
2. Catch-Up Plan Payments
Catch-up plan payments should be applied in the following order:
a. SBA approved loan fees;
b. Accrued interest,
c. Principal, and
d. Late charges.
3. Application of Loan Payments After Deferment
When regularly scheduled payments resume at the end of the deferment period, they
should be applied in the same order as other funds from payments received on loans in
regular servicing status. (See Paragraph B above.)
D. Post-Debenture Purchase 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 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 14 for information on returning loans classified in
liquidation to regular servicing status, and Chapter 25 for information on how to apply
recoveries.)
2. Impact of Accepting Payment on Liquidation Plan
Before accepting any payment—other than payment in full—on a loan in liquidation
status, determine whether accepting the payment could cure the default and curtail plans
for liquidating the loan. For more information, consult legal counsel.
3. Payee
All post-Debenture purchase loan payments must be made payable to SBA—not the
CSA or the CDC. (See Chapter 15 for information on the impact of Debenture
purchase.)
4. 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, post-Debenture
purchase, the funds from a payment on a loan in liquidation status should be applied in
the following order:
a. Principal balance of the loan;
b. Accrued interest; and
Effective Date: October 1, 2013 35
SOP 50 55
c. SBA permitted loan fees.
E. Post-Debenture Purchase Payments on Loans Returned to Regular Servicing Status
The provisions in this Paragraph apply when the 504 Loan has been classified in liquidation,
SBA has purchased the Debenture, the loan has been returned to regular servicing status,
and the Borrower has resumed making regular payments.
1. Payee
All post-Debenture purchase loan payments must be made payable to SBA—not the
CSA or the CDC. (See Chapter 15 for information on the impact of Debenture
purchase.)
2. Application of Funds
Unless the terms of a legally binding agreement provide otherwise, such as a court
approved bankruptcy plan or an SBA approved workout agreement, post-Debenture
purchase, funds from payments received on loans returned to regular servicing status
must be applied in the following order:
a. Accrued interest;
b. Principal;
c. SBA permitted loan fees; and
Note: For information on SBA permitted loan fees, see Chapter 4 (Loan Fees and
Penalties) as well as the most current version of SOP 50 10.
d. Additional principal.
F. Prepayment
The following information applies to 504 Loans prior to Debenture purchase. Post-
Debenture purchase, the CSA is no longer involved and the 504 Loan may be prepaid at
any time. (For prepayment policies and procedures regarding 503 loans, see the SBA
regulations and SOPs in effect at the time the 503 loan was made.)
1. When 504 Loans and Debentures Can Be Prepaid
a. When a Borrower Can Prepay a 504 Loan
Generally, if a Borrower provides the CDC with 45 days prior written notice, the
Borrower can prepay its 504 Loan on the third Thursday of any month. (See the
CDC Note [SBA Form 1505] and the Servicing Agent Agreement [SBA Form 1506].)
Effective Date: October 1, 2013 36
SOP 50 55
b. When a CDC Can Prepay a Debenture
If the Borrower prepays the 504 Loan, the CDC must prepay the corresponding
Debenture with interest and premium. (13 C.F.R. § 120.940) Generally, if a CDC
provides SBA with at least 30 days written notice, the CDC can prepay a 504 Loan
Debenture on any semi-annual Debenture payment date prior to the Debenture
maturity date. (See the Development Company 504 Debenture [SBA Form 1504].)
2. Prepayment Amount
a. 504 Loan Prepayment Amount
Full, but not partial, prepayment of a 504 Loan is allowed. Pursuant to 13 C.F.R. §
120.940, the terms of the CDC Note (SBA Form 1505) and the Servicing Agent
Agreement (SBA Form 1506), to prepay the 504 Loan, the Borrower must pay the
sum of all of the following amounts due and owing through the date of the next semi-
annual Debenture payment:
(1) Principal balance;
(2) Interest;
(3) SBA guaranty fees;
(4) CSA fees;
(5) CDC servicing fees;
(6) Late fees;
(7) Expenses incurred by CDC for which the Borrower is responsible; and
(8) Prepayment premium, if owed.
b. Debenture Prepayment Amount
Pursuant to the terms of the Development Company 504 Debenture (SBA Form
1504), to prepay a Debenture the CDC must pay the sum of all of the following
amounts due and owing through the date of the next semi-annual Debenture
payment:
(1) Outstanding principal balance of the Debenture;
(2) Interest accrued and unpaid to the prepayment date; and
(3) Prepayment premium, if owed.
Note: If the Borrower wires the correct amount to prepay the 504 Loan, the CDC will
have the total amount required to prepay the corresponding Debenture.
Effective Date: October 1, 2013 37
SOP 50 55
c. Prepayment Premium Amount
Pursuant to the terms of the CDC Note (SBA Form 1505), Borrowers who prepay
during the first half of the term of the 504 Loan must pay a prepayment premium.
The formula for determining the amount of the prepayment premium is specified in
the corresponding Development Company 504 Debenture (SBA Form 1504).
3. Procedure for Prepayment of 504 Loans and Debentures
When a Borrower provides notice that it wishes to prepay a 504 Loan, proceed as
follows:
Step 1. Obtain CSA's Estimate of Prepayment Amount
Obtain an estimate of the amount required to prepay the Debenture from the CSA.
Step 2. Schedule Prepayment with CSA
Schedule a date for prepayment of the Debenture with the CSA. (The request must
be received by the CSA at least eight calendar days prior to the requested
prepayment date.)
Step 3. Send Borrower Prepayment Instructions
Advise the Borrower of the estimated prepayment amount; and provide the Borrower
with information regarding the prepayment process.
Step 4. Obtain Exact Prepayment Amount from CSA
Obtain the exact prepayment amount from the CSA. (The information should be
available after the sixth business day of the month of prepayment.)
Step 5. Instruct Borrower to Wire Prepayment Funds to CSA
Notify the Borrower of the exact prepayment amount and instruct the Borrower to
wire the necessary funds to the CSA no later than noon Eastern Standard Time on
the third Thursday of the month in which the prepayment is scheduled.
Note: The CSA will not accept checks. Further, if the CSA does not receive the correct
amount on time, it will terminate the transaction and the CDC will need to reschedule the
prepayment to the next semi-annual Debenture payment date, which could result in the
need for additional funds.
Step 6. Obtain CSA Verification of Payment
Obtain confirmation from the CSA that the Debenture has been paid in full, generally
from the CSA’s Web site.
Effective Date: October 1, 2013 38
SOP 50 55
Step 7. Request Loan File and Cancellation of Note
Provide the SBA Loan Center with written confirmation that the loan has been paid in
full along with a request for the Loan File and the cancelled Note, i.e., the Note
marked “Paid in Full.”
Step 8. Release the Collateral
After receipt of the Loan File and Note marked as “Paid in Full,” release the collateral
securing the 504 Loan in accordance with state law requirements.
4. Cancelling or Rescheduling Prepayment Date
Once a prepayment date has been scheduled, if it appears that the Debenture cannot be
prepaid as planned, notify the CSA as soon as possible; and cancel the prepayment or
follow the procedural steps outlined in Paragraph C above to reschedule it.
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, interest, and any prepayment penalty, late charges, and Recoverable
Expenses. When a 504 Loan is verified as “paid in full”, the Note should be cancelled,
and the collateral should be released in a timely manner.
2. Procedure for Releasing Collateral
The CDC is responsible for ensuring that the collateral is released in accordance with
applicable state law, and that the appropriate Loan Documents are returned to the
Borrower. If SBA is holding the collateral documents, the SBA Loan Center will provide
the CDC with the necessary documents so that the collateral can be released in a timely
manner.
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: October 1, 2013 39
SOP 50 55
Effective Date: October 1, 2013 40
SOP 50 55
Chapter 5.
Environmental Risk Management
____________________________________________________________________________
This chapter sets out SBA policy and procedures for managing environmental risks associated
with 504 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 an SBA 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 if
necessary; and
Note: Changes in the Borrower’s financial condition that could signify an increase in
environmental risk include, e.g., regulatory fines discovered while reviewing financial
statements. Activities that could signify an increase in environmental risk include, e.g., failure
to maintain Engineering Controls or evidence of a Release discovered during a site visit.
3. Compliance with Environmental Laws that allow secured creditors to avoid or
significantly limit potential liability.
Effective Date: October 1, 2013 41
SOP 50 55
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: October 1, 2013 42
SOP 50 55
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 SBA 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:
Effective Date: October 1, 2013 43
SOP 50 55
(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).
Effective Date: October 1, 2013 44
SOP 50 55
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. (See Chapter 24 for SBA requirements pertaining to Non-routine
Litigation such as receivership proceedings.)
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 a Secured Creditor
Given the complexity of the applicable Environmental Laws and the risks involved, Lenders
should obtain a legal opinion from an attorney with Environmental Law expertise before
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 a 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 – SBA’s Prior Written Approval
Lenders must obtain SBA’s prior written consent 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 SBA Approval
A written request must be submitted to the appropriate SBA Loan Center.
Effective Date: October 1, 2013 45
SOP 50 55
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 the 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 E.
Effective Date: October 1, 2013 46
SOP 50 55
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 the Person who will take title
qualifies for, 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 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 by Secured Creditor—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: October 1, 2013 50
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Chapter 6.
Servicing Requests
____________________________________________________________________________
A. General Requirements
Frequently after an SBA 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, as long as the Borrower is viable, the goal should be to meet the Borrower’s short
and long term needs without impairing the integrity of the SBA loan program.
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. Ensure that the Servicing Request is in the Proper Format
Borrower requests for modification of loan terms or conditions should be in writing.
3. Research the Applicable Loan Program Requirements
a. Requests Concerning Assumption, or Substitution of Collateral or Obligors
Servicing requests on loans in regular servicing status that involve substitution of
collateral, substitution of Guarantors, or assumptions are subject to the Loan
Program Requirements in effect at the time the loan was made, which are located in
SOP 50 10. This includes, for example, those pertaining to Appraisals,
Environmental Investigations, and eligibility requirements.
b. All Other Servicing Requests
See Chapters 7 through 13 of this SOP to find the applicable Loan Program
Requirements for the Loan Actions most commonly requested.
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4. 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. Servicing Requests Involving Credit Issues
Generally, all Servicing Requests that require a credit analysis (e.g., an increase in
the amount of the 504 Loan or a prior lien) should be supported by the Borrower's:
(1) Current financial statement; and
(2) Federal income tax returns for the last two years.
b. 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;
Note: See the definition of “Appraisal” in Chapter 2 for SBA Loan Program
Requirements regarding Appraisals. Note also, that if a copy of the Third Party
Lender’s appraisal is sought to supplement the Appraisal submitted with the Servicing
Request, pursuant to the terms of the Third Party Lender Agreement, the Third Party
Lender must provide it to the CDC or SBA free of charge.
(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.
5. 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:
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.
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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.
d. Environmental Investigation Report
A Servicing Request must be supported by an Environmental Investigation Report
when required by Paragraph C of Chapter 5.
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.
6. 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 7. If not, the Servicing Request should be denied and more appropriate
action taken. (See, for example, Chapter 14 [Classifying Loans in Liquidation].)
7. Analyze the Collateral
If the Servicing Request will impact the collateral, a thorough analysis of its Recoverable
Value, before and after the requested modification, should be conducted.
8. Check for Problems
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.
9. List Conditions for Approval
a. Compliance with Terms and Conditions of Loan
Approval of a Servicing Request should be conditioned on curing the defaults and
correcting any collateral deficiencies or issues with the Loan Documents identified in
Step 8. For example, the Obligors should be required to reinstate lapsed insurance
coverage, or provide missing Taxpayer Identification Numbers.
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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 8;
(2) Waive defenses to litigation;
(3) Release lender liability claims; or
(4) Provide additional collateral.
c. Written Consent of All Obligors
The written consent to any material change in the terms and conditions of the loan
must be obtained from each Obligor in order to protect the ability to recover from
them in the event of default.
10. Comply with SBA and DOJ Decision Making, Notice and Approval Requirements
a. SBA Requirements
CDCs must comply with the applicable SBA Loan Program Requirements pertaining
to decision-making authority and notice to SBA. (See 13 C.F.R. § 120.536 and
Chapter 3 for more information.
b. DOJ Requirements
SBA Loan Centers must obtain approval from Department of Justice (“DOJ”) and 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 that has
been referred to DOJ.
11. Comply with the Applicable Recordkeeping Requirements
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. How To Obtain SBA Approval of a Proposed Loan Action
If SBA’s prior written approval is required before a Loan Action can be implemented, the
CDC should submit a written request, usually in the form of a letter, to the appropriate SBA
Loan Center in accordance with the guidelines listed below. (See Chapter 3 for a detailed
list of Loan Actions requiring SBA’s prior approval.)
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1. Required Documentation
a. Written Request
Requests for approval of a proposed Loan Action should be in the form of a clearly
and concisely written letter (or other document) based on an internal credit
memorandum. Both the letter and the credit memorandum must be independent of
any document or analysis prepared by a senior lienholder or any other Person with a
conflict of interest. Although SBA reserves the right to request additional information,
the letter should generally include:
(1) A brief description of the proposed Loan Action;
(2) The amount funded, date of funding, current balance and status of the loan;
(3) The current financial condition of the Borrower;
(4) The justification for the proposed Loan Action, i.e., benefit to the Borrower, CDC
and SBA—neither abundance nor lack of collateral alone is sufficient justification
for a Loan Action;
(5) 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;
(6) 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;
(7) A summary of prior servicing experience with the Borrower, i.e., loan
modifications or problems pertinent to the request; and
(8) A list of the Obligors and a statement as to whether their consent has been or will
be obtained for the proposed Loan Action.
b. Credit Memo and Supporting Documents
A credit memo, which must be independent of any document or analysis prepared by
a Person with a conflict of interest such as a senior lienholder, should accompany a
request for approval of a proposed Loan Action. Generally, it is not necessary to
include a copy of the Borrower's financial statement or the Supporting Documents
such as Appraisals, etc., provided that they are adequately analyzed in the credit
memo.
2. Where to Submit Requests
Requests for approval of proposed Loan Actions must be submitted to the appropriate
SBA Loan Center. (See the definition of “SBA Loan Center” in Chapter 2 for contact
information.)
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3. SBA Response Time
SBA should respond to a CDC's request for approval of a proposed Loan Action within
15 business days. (13 C.F.R. § 120.541)
Note: SBA will not provide written approval for a proposed Loan Action that the CDC has
unilateral authority to take.
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 or any other Loan
Document, each impacted Loan Document must be properly modified;
2. Prepare New Loan Documents
Any new Loan Document needed to implement the Loan Action must be properly
prepared and executed; and
3. Record New or Modified Loan Documents
Whenever necessary, reasonable or customary, the modified Loan Documents as well
as any newly prepared Loan Documents must be properly recorded.
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Chapter 7.
Modification of Note
____________________________________________________________________________
A. General Requirements
1. Review and Analysis of Request for Modification
Requests for modification of the repayment terms of the Note should be reviewed,
analyzed and implemented pursuant to the requirements of Chapter 6 and the provisions
of the applicable statutes, regulations and contracts, including the Note and the
Debenture.
2. Debenture Purchase
The terms of the Note may not be modified unless SBA has purchased the Debenture,
(which was sold to an investor to fund the loan), unless the modification involves a
deferment obtained in accordance with the requirements of Chapter 12.
B. Payment Due Date
1. Pre-Debenture Purchase
Pre-Debenture purchase, the date that payments are due under the Note may not be
modified. (See page 2 of SBA Form 1505 [CDC/504 Loan Note], which states that
“Monthly Payments are due on the first business day of each month”.)
2. Post-Debenture Purchase
Post-Debenture purchase, the date that scheduled installment payments are due may be
modified to facilitate a workout agreement provided that the general requirements in
Paragraph A are met. For example, 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.
C. Installment Amount
1. Pre-Debenture Purchase
Pre-Debenture purchase, the installment amount due under the Note may not be
modified unless the modification involves a deferment that meets the requirements set
out in Chapter 12.
2. Post-Debenture Purchase
Post-Debenture purchase, the installment amount due under the Note may be modified
to facilitate a workout agreement if the general requirements in Paragraph A are met and
the new installment amount is sufficient to ensure that the loan balance will be paid in full
no later than ten years after the original maturity date of the loan. (13 C.F.R. § 120.531)
(See Chapter 4 for information regarding when a CDC is authorized to add a post-
Debenture purchase servicing fee to a modified installment amount.)
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D. Interest Rate
1. Pre-Debenture Purchase
Pre-Debenture purchase, the interest rate on a 504 Loan is set by the terms of the
Debenture and may not be modified. (See page 2 of SBA Form 1505 [CDC/504 Loan
Note].)
2. Post-Debenture Purchase
Post-Debenture purchase, the interest rate on a 504 Loan may be modified to facilitate a
workout provided that the general requirements in Paragraph A are met.
E. Maturity Date
1. Pre-Debenture Purchase
Pre-Debenture purchase, the maturity date of a 504 Loan may not be modified.
2. Post-Debenture Purchase
Post-Debenture purchase, provided that the general requirements in Paragraph A are
met, the maturity date of a 504 Loan may be extended up to 10 years beyond the
original maturity date if the extension will aid in the orderly repayment of the loan. (13
C.F.R. § 120.531)
F. Loan Amount
The amount of a 504 Loan may be increased provided that: (1) the general requirements in
Paragraph A above are met; and (2) the increase is in compliance with the general
requirements and restrictions in SOP 50 10 with regard to 504 Loan amounts.
Note: The amount owed on a fully disbursed 504 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 25 for information on Recoverable Expenses and when they
may be added to principal. The amount owed on a fully disbursed 504 Loan (as opposed to the
amount of the loan) may, in some instances, be reduced through a compromise agreement. See
Chapter 23 for information on offers in compromise.
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Chapter 8.
Modification of Collateral Requirements
____________________________________________________________________________
A. Subordination of Lien Position
Note: SBA Loan Program Requirements prohibit any action that confers a Preference on a CDC.
1. General Requirements
The position of a lien securing a 504 Loan may be subordinated (i.e., lowered) when
doing so is consistent with SBA loan servicing goals, i.e., it will help the long or short
term needs of the Borrower without unduly impairing the ability to recover on the loan.
Requests for subordination should be reviewed, analyzed and implemented pursuant to
the requirements of Chapter 6 and the following guidelines:
a. The proceeds from the new loan, or the increase in the amount of the senior loan,
must be eligible for 504 Loan financing. I.e., a 504 Loan may be subordinated if the
new money will be used to improve the Project Property or to acquire long-term fixed
assets that will serve as additional collateral. A 504 Loan may not be subordinated if
the new money will, for example, be used for working capital or personal expenses;
b. The analysis required by Chapter 6 (Borrower Servicing Requests) must include the
reason for the subordination and a description of how the new money will be used;
c. The loan should be Seasoned;
d. The Borrower should have a satisfactory credit history;
e. There should be sufficient equity in the collateral to adequately secure the SBA loan
after the proposed subordination;
f. 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;
g. The subordination should be limited to a specific amount and should not extend to
future advances; and
h. The terms of the transaction must be set out in a properly executed subordination
agreement in which the lender benefiting from the subordination agrees to:
(1) Give SBA the opportunity to cure any default on the lender’s loan by providing
the CDC and SBA with written notice of any default within 30 days of its
occurrence and 60 days prior written notice of the lender’s intent to initiate
collection activity against the common collateral;
(2) Waive all Default Charges on the lender’s loan, (Subordinated funds must not be
used to pay Default Charges owed to the lender.); and
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(3) Not cross-collateral the loan secured by the common collateral with any other
loan held by the lender.
Note: If the subordination impacts an existing Third Party Lender Agreement, the existing
agreement must be modified or replaced to reflect the new terms and conditions.
2. Subordination to Facilitate Refinance of a Senior Loan
In addition to the general requirements in Paragraph A.1, the position of a lien securing
an SBA 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;
Exception—With regard to Third Party Loans, the refinanced amount may also
include up to 100% of the cost of improvements to the collateral that will maintain or
increase its value if an Appraisal of the improved collateral establishes that the loan
to value ratio is ≤ 90%, provided that SBA reserves the right to require an injection by
the Obligors;
c. The subordination will not otherwise adversely affect the priority of the lien securing
the SBA loan. For example, intervening junior lienholders, if any, must not be able to
claim priority over the lien securing the SBA 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 a New Loan
In addition to the general requirements in Paragraph A.1, the position of a lien securing
an SBA loan should not be subordinated to facilitate a new loan unless:
a. The new loan is necessary to satisfy a legitimate need such as paying for
improvements to the collateral that will maintain or increase its value; and
b. All other avenues of obtaining the funds have been exhausted.
Example—When the Borrower has another 504 Project for an addition to, or
renovation of, an existing 504 Project Property, the existing 504 Loan may be
subordinated to the combined original Third Party Loan and the interim construction
loan during the renovation period to facilitate the new 504 Project.
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4. Subordination to Facilitate Assumption of the Loan
The position of the lien securing a 504 Loan must not be subordinated to a loan that
provides funds to an assumptor to acquire the business or assets of an Obligor, unless
the acquisition loan includes funds that will be used to make improvements to the
collateral that will maintain or increase its value, in which case, the lien securing the SBA
loan may be subordinated up to the documented amount spent on the improvements.
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 6 and the following guidelines:
1. The inter-creditor agreement should not adversely impact the position of the lien
securing the SBA 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 SBA loan.
C. Substitution of Collateral
1. General Requirements
Requests to allow a substitution of collateral should be reviewed, analyzed and
implemented pursuant to the requirements of Chapter 6 and the following requirements
and guidelines:
a. The substitution must be needed to support the business operations of the Operating
Company;
b. 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 have a Recoverable Value that is equal to or greater
than the Recoverable Value of the existing collateral based on an appraisal obtained
pursuant to the appraisal requirements in SOP 50 10;
c. If the substitute collateral is commercial real property, adequate due diligence must
be conducted to ensure that the risks of Contamination are minimal as required by
Chapter 5 (Environmental Risk Management);
d. There should be no more than a nominal increase (i.e., 3.5% or less) in the amount
of any proposed senior lien;
e. The Borrower should have a satisfactory credit history;
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f. 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;
g. There should be sufficient equity in the collateral to adequately secure the SBA loan
after the proposed substitution;
h. 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; and
i. 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.
2. Substitution of Residence Held as Collateral
Requests to allow an Obligor to substitute a lien on a new residence in exchange for
releasing the lien on the Obligor's existing residence should be reviewed, analyzed and
implemented pursuant to the general requirements in Paragraph C.1 above and the
following additional requirements:
a. All of the proceeds from the sale of the Obligor's existing residence, other than the
funds needed to pay off senior liens and necessary, reasonable and customary
closing costs, must be used to purchase the new residence or placed in an escrow
account to facilitate the purchase of a new residence, or used to pay down the 504
Loan;
b. The amount of equity in the new residence available to secure the SBA loan must be
the same as or greater than the amount of equity in the existing residence available
to secure the SBA loan;
c. The release of the existing lien, or proceeds thereof, must be done concurrent with
(or after) the recording of the new lien in the required position of priority and should
be done pursuant to an escrow agreement signed by all of the parties involved in the
transaction; and
d. The Obligor must provide the title, hazard and flood insurance required by Chapter 9.
D. Substitution of Guarantor
Requests to allow substitution of a Guarantor should be reviewed, analyzed and
implemented pursuant to the requirements of Chapter 6 and the following guidelines:
1. The financial strength of the proposed substitute Guarantor should be equal to or greater
than the financial strength of the existing Obligor;
2. Neither the release of the existing Guarantor nor the substitution for the proposed
Guarantor should adversely impact the operation of the business; and
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3. 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 6 and the following guidelines and requirements:
1. The loan must be Seasoned;
2. If the release is to facilitate the sale of the collateral, the proceeds from the sale should
be used for business purposes only;
3. The release must not confer a Preference on the Third Party Lender;
4. The Borrower must have the ability to repay the SBA loan in full in accordance with the
terms of the Note;
5. The release should not materially interfere with the operation of the business or
decrease the value of the other collateral securing the loan;
6. The Recoverable Value of the remaining collateral should be sufficient to adequately
secure the SBA loan after the proposed release;
7. The release document(s) must not impair the CDC or SBA's interest in, or ability to
foreclose upon, the remainder of the collateral; and
8. The release must not occur during the pendency of a senior lienholder foreclosure action
(Chapter 13) unless the release is in connection with a short sale approved in
accordance with Chapter 20.
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 6
and the following requirements:
1. General Requirements
a. The amount of consideration received must be approximately equal to or greater
than the Recoverable Value of the collateral, (See Chapter 5 [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.);
b. Release of the lien must not jeopardize the ability to maximize recovery on the loan;
and
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c. The release must not occur during the pendency of a senior lienholder foreclosure
action (Chapter 13) unless the release is in connection with a short sale approved in
accordance with Chapter 20.
2. Partial Release of Project Collateral
The 504 Debenture cannot be partially prepaid. Therefore, the proceeds from a partial
release of Project Property should be applied to:
a. Reduce the balance of any loan with a senior position lien on the collateral for the
504 Loan; or
b. Purchase other fixed assets that will be used to support the Operating Company and
serve as additional collateral for the 504 Loan.
3. Practice Tips
a. Trade Fixtures
If the collateral includes a lien on trade fixtures located on real property collateral,
e.g., gas station canopies and pumps, the real property lien should not be released
unless the personal property collateral has already been liquidated or additional
consideration is received for release of the lien on the trade fixtures.
b. Public Auctions
If a public auction of machinery and equipment is planned, the lien on the most
valuable items should not be released beforehand since it would impair the ability to
attract bidders for the remaining collateral.
G. Release of Guarantor or Co-Borrower
A request for release of a Guarantor or a co-Borrower should be reviewed, analyzed and
implemented pursuant to Chapter 6 and the following requirements:
1. Loans in Regular Servicing Status
a. The loan must be Seasoned;
b. The release must not conflict with the SBA Loan Program Requirements in 13 C.F.R.
Part 120 and SOP 50 10 that require Guaranties from specific Persons as a
condition for SBA’s guaranty of the loan, (e.g., any Person who owns 20 per cent or
more of the small business Borrower); and
c. 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.
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2. Loans in Liquidation Status
a. The release must 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; and
c. The request for release and accompanying documentation should be reviewed,
verified and analyzed pursuant to the requirements of Chapter 20 (Offer in
Compromise).
Note: If the loan is involved in litigation referred to the Department of Justice (“DOJ”),
remember that Obligors cannot be released without prior written approval from DOJ and the
SBA District Counsel responsible for handling the litigation. (Chapter 6)
H. Sale of Operating Company
A request to permit an Eligible Passive Company to sell the Operating Company to an
unaffiliated third party while retaining ownership of the Project Property and not prepaying
the 504 Loan must be processed as an exception to policy (Chapter 1) because such a sale
would result in a loan that would have been ineligible for SBA financing when the 504 Loan
application was received.
I. Release of Condemnation Proceeds
Requests for release of condemnation proceeds should be reviewed, analyzed and
implemented pursuant to the requirements of Chapter 6 and the following guidelines:
1. Payment of Attorney Fees and Costs
Reasonable, necessary and customary attorney fees and costs incurred to obtain fair
compensation for the condemned property may be paid from the condemnation
proceeds.
2. Condemned Property Replaced
When the condemnation proceeds 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;
b. Compliance with the title, hazard and flood insurance requirements set out in
Chapter 9.
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3. Condemned Property Not Replaced
When the condemnation proceeds 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 504 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 Third Party Loan if SBA has not purchased the
Debenture, and to the principal balance of the 504 Loan if SBA has purchased the
Debenture, 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 SBA loan.
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Chapter 9.
Insurance Coverage
____________________________________________________________________________
A. General Requirements
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 insurance policy should be obtained to insure the new lien on
the substitute property. (See Chapter 8 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 SBA loan.
3. Installment Sale of REO
When REO is sold on an installment basis, a mortgagee’s title insurance policy must be
obtained to ensure the purchase money lien on the REO. (See Chapter 22 for
information on term sales of acquired collateral.)
C. Hazard Insurance
1. Modification of Coverage on Existing Collateral
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.
2. Coverage on Substitute or Additional Collateral
When existing collateral is released and substitute collateral taken, the CDC must
ensure that the substitute collateral is adequately insured and that the insurance policies
contain a mortgagee clause, or substantial equivalent, in favor of SBA or the CDC. (See
Chapter 8 for information on substitution of collateral.)
3. Care and Preservation of Collateral and Acquired Collateral
CDCs must take prudent action, on a case-by-case basis, to ensure that all collateral
and acquired collateral with Recoverable Value is adequately insured in order to protect
the ability to recover on the 504 Loan. (See, for example, Chapter 16 with regard to
post-default site visits and Chapter 22 with regard to ownership responsibilities
pertaining to acquired collateral.)
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4. 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 the CDC or SBA, the cost should be treated as a Recoverable Expense.
5. Release of Policy Proceeds
a. General Rule—Collateral Repaired or Replaced
When the CDC or 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.
b. Exception—Controlled Distribution
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.
(1) Use of Escrow Agent
Generally, insurance proceeds, which are required to be used to repair or replace
collateral, should be disbursed pursuant to an escrow agreement approved by
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.
(2) Progress Payments
Rather than use an escrow agent, a CDC may allow the Borrower to open a
federally insured joint savings or custodial account with the CDC; establish a
draw schedule based on stages of construction; present paid invoices and lien
waivers documenting each stage of construction; and request release of the
funds specified in the draw schedule; provided that the CDC verifies that the
previous stage of construction was completed and the material and labor
involved was paid for before authorizing the next draw on the joint account. (The
Borrower should be allowed to retain the interest earned on the funds in the
savings account.)
D. Life Insurance
1. Modification of Requirement
The life insurance requirements in the Loan Documents should not be modified or
terminated unless the reason for requiring the life insurance policy no longer exists.
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2. Use of Escrow Account to Collect Premiums
If an assignment of a life insurance policy is required by the Loan Documents, in order to
ensure that the Borrower pays the premiums, an escrow account may be set up to
collect the funds needed to pay the premiums on the policy. (See SOP 50 10 for SBA
Loan Program Requirements concerning life insurance escrow accounts.)
3. Continuation of Coverage
If an assignment of a life insurance policy is required by the Loan Documents and the
CDC receives notice that the required payments have not been made, the decision
whether or not to continue coverage should be based on prudent lending practices and
made on a case-by-case basis. If coverage is continued, the cost should be treated as a
Recoverable Expense.
4. Release of Policy Proceeds
a. General Rule
The proceeds from the assignment of a life insurance policy should be applied to the
principal balance of the loan without advancing the payment due date.
b. Exceptions
Depending on the circumstances, all or part of the proceeds of a life insurance policy
may be released if, in addition to meeting the requirements for release set out in
Chapter 8 Paragraph E (Release of Lien Without Consideration) or Paragraph F
(Release of Lien for Consideration), the death of the insured will have no significant
impact on the management of the small business Borrower and:
(1) The proceeds are needed for a valid business purpose;
(2) The proceeds are needed to prevent Financial Hardship; or
(3) Based on the strength of the business, there is no reason to anticipate that the
loan will not be repaid in full.
c. Use of an Escrow Account
If the estimated strength of the business is not strong enough to justify release or
weak enough to justify immediate application to the loan balance, the insurance
proceeds may be placed in an escrow account for distribution at a later date after the
CDC has had the opportunity to observe the Borrower’s on-going operations and is
able to make a prudent decision.
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E. Flood Insurance
1. General Rule—Termination or Modification Not Permitted
When an SBA loan is secured by improved real estate, a mobile home 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.
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 10.
Modification of Management Covenants
____________________________________________________________________________
A. General Requirements
Borrowers should comply with the management covenants in the Loan Documents unless
modification is consistent with the loan servicing goals set out in Chapter 1. Requests for
modification should be reviewed, analyzed and implemented pursuant to the requirements
of Chapter 6 and the guidelines set out below.
B. Financial Statements
Loan Document provisions requiring Obligors to submit periodic financial statements, should
not be modified (e.g., temporarily or permanently waived; changed from audited to compiled
or reviewed; or required less frequently), unless a prudent lender would modify them based
on the circumstances. For example, it may be prudent to modify the requirement if:
1. The loan is Seasoned or the requirement would cause Financial Hardship for the
Borrower;
2. The waiver is temporary and limited to one year at a time; and
3. The right to reinstate the requirement is reserved and exercised in the event of default.
C. Restrictions on Compensation, Dividends, Fixed Assets, etc.
Management covenants in the Loan Documents pertaining to matters such as limitations on
compensation, fixed assets, working capital levels, or dividend payments, should not be
modified unless a prudent lender would modify them based on the circumstances. For
example, modification may be prudent if:
1. The loan is Seasoned;
2. The maturity date of the Note has not been extended, and payments have not been
deferred during the 24-month period before the date of the Borrower's request; and
3. Based on an analysis of the Borrower's cash flow for the past three years, the Borrower
will have the necessary cash flow to repay all of its debt including the SBA loan after the
modification.
D. Standby Agreements
1. General Rule
Except as provided in Subsection 2 below with regard to equity injections, a standby
agreement should not be terminated or modified to allow the Borrower to make full or
partial payments to the standby creditor unless a prudent lender would modify or
terminate the standby agreement based on the circumstances. For example,
modification or termination may be prudent if:
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a. The loan is Seasoned;
b. Based on an analysis of the Borrower's cash flow for the past three years, the
Borrower will have the necessary cash flow to repay all of its debt including the SBA
loan after modification or termination; and
c. There is minimal risk that the Borrower will not be able to repay the SBA loan in full
and in a timely manner.
2. Standby Agreement Used as Equity Injection
A standby agreement used in connection with an equity injection required by the Loan
Authorization must not be terminated or modified unless the proposed termination or
modification is permitted by the applicable Loan Program Requirements in SOP 50 10.
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Chapter 11.
Assumption or Sale of Loan
____________________________________________________________________________
A. Assumption
Requests to allow another Person to assume an SBA 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 6. In addition:
1. Unless the assumption is part of a workout or the loan is in liquidation status, the
proposed assumptor must meet the applicable eligibility requirements in SOP 50 10;
2. The proposed assumptor should be the primary owner of the business;
3. The proposed assumptor should have business experience and management skills that
are equal to or better than the Borrower's;
4. The proposed assumptor must have a satisfactory credit history;
5. The proposed assumptor must have the ability to repay the SBA loan in full;
6. No collateral should be released;
7. No collateral should be subordinated excepted as provided in Chapter 8, Paragraph A
with regard to funds that will be used to make improvements to the collateral that will
maintain or increase its value;
8. The proposed assumption must not have a negative impact on the Recoverable Value of
the collateral;
9. The proposed assumption should not have a negative impact on the operation of the
business;
10. 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;
11. Existing Obligors must not be released without SBA’s prior written approval;
12. The terms of the assumption must be set out in a written agreement signed by all of the
parties to the agreement;
13. The assumption agreement must include a "due on sale or death" clause that prohibits
any future assumption of the SBA loan; and
14. 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.
Note: See the most current version of SOP 50 10 with regard to the fee that CDCs may charge
for an assumption.
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B. Sale of Loan in Liquidation Status
A 504 Loan in liquidation status may be sold, provided that in addition to the SBA prior
approval requirements in Chapter 3, the following requirements are also met:
1. SBA has already purchased the Debenture;
2. The sale is to a Person other than the Borrower; and
3. The sale price bears a reasonable relationship to the amount that could be recovered
through enforced collection proceedings.
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Chapter 12.
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 SBA loan.
When used inappropriately, i.e., when the Borrower’s problems are permanent, a deferment
can harm the Borrower, CDC and SBA. Especially if, for example, during the deferment
period, the collateral loses its value and the Obligors deplete all of their resources, including
the money in their retirement accounts and the equity in their homes, in a futile attempt to
turnaround a non-viable business.
Note: 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. (13 C.F.R § 120.530)
C. General Requirements
Prior to granting a deferment, the CDC must obtain, review and analyze the following
documents 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 not only regular payments, but also catch-up 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 its 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 504 Loan is more than 90 calendar days past due and the Borrower’s problems
appear to be permanent or long-term, the loan must be classified in liquidation, the Debenture
purchased, and more appropriate Loan Actions initiated such as liquidation of the collateral,
and if appropriate, compromise with the Obligors. (See Chapters 18-24.)
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2. Current Financial Information
a. Financial Statement
(1) 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;
(2) The Borrower’s last year-end financial statement; and
(3) If the Borrower has any affiliates, a current consolidated financial statement;
b. 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
c. Personal Federal Income Tax Returns
A complete copy of the personal federal income tax returns that 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
Generally, the amount deferred should not exceed six cumulative monthly payments or 20%
of the original loan amount, whichever is less. During the deferment period, the CDC should
monitor the Borrower’s operations (through phone calls, site visits, monthly financial
statement review, etc.,) so that at the end of the deferment period, the CDC can determine
whether an additional deferment is necessary and prudent. Prior to granting an additional
deferment, however, the CDC must have a documented strategy that specifies the
justification for a deferment of more than six months.
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.
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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 4.) Alternatively, interest may be paid during the deferment
period; paid in a lump sum at the end of the deferment period; or deferred to the maturity
date of the Note.
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. Notice to CSA
Unless SBA has purchased the Debenture, the CDC must notify the CSA of any deferment
in order to avoid acceleration of the Note and the need to purchase the Debenture.
H. Catch-up Plan
A plan to repay delinquent or deferred payments should be negotiated whenever a
deferment is granted.
1. Catch-up Period
Generally, the loan should be "caught up," (i.e., all delinquent and deferred payments
paid in full), prior to the maturity date of the loan, and in no case later than ten years
from the effective date of the plan.
2. Payment Terms
A catch-up plan must specify the amount and frequency of the catch-up payments,
which generally should be remitted along with the regular payments. It may not include
a balloon payment at the end of the deferment period, but it may include lump sums due
on other specified dates. (For information on the order in which the funds from catch-up
plan payments should be applied to amounts due on the loan, see Chapter 4.)
I. CDC Monitoring During Deferment and Catch-up Period
During the deferment and catch-up period, the CDC must obtain from the Borrower, review,
and analyze semi-annual financial statements and year-end tax returns. During this period,
the CDC should also monitor the Borrower’s operations by other means, such as phone
calls and site visits, to ensure that the loan is promptly classified in liquidation if it becomes
apparent that the Borrower’s cash flow problem is permanent, i.e., the business is no longer
viable.
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Chapter 13.
Delinquent Secured Senior Loans
____________________________________________________________________________
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 Third
Party Lender or other senior lienholder:
1. Notify the SBA Loan Center
The SBA Loan Center must be promptly notified so that it has sufficient time to collect
the information outlined in Paragraph B (below) and make a well-informed decision with
regard to how to protect the equity available for the 504 Loan.
2. Enforce the Third Party Lender Agreement
The notice and subordination requirements in the Third Party Lender Agreement or other
lienholder agreement must be enforced to mitigate the risk of loss on the loan.
3. Mitigate the Loss to SBA
a. Do Not Release the Lien Securing the 504 Loan
After receipt of notice of a senior lienholder foreclosure sale, even if a “no bid”
position is justified, the lien securing the 504 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 20. (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 504 Loan
Swift, prudent, commercially reasonable action must be taken to prevent elimination
of the lien securing the 504 Loan or dissipation of the equity available to secure it.
4. Monitor Senior Lienholder’s Foreclosure Proceedings
Whenever a senior lienholder initiates foreclosure proceedings, the foreclosure
proceedings, including the sale, must be closely monitored.
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5. Report the Sale
A report describing all of the relevant facts concerning the sale, including those listed
below, should be prepared and promptly (e.g., within seven business days after the sale)
submitted to the SBA Loan Center along with a Liquidation Plan or an Amended
Liquidation Plan (Chapter 14) that addresses how the collateral will be sold if it was
acquired (Chapter 22) or how the loss will be mitigated if it wasn’t (Subparagraphs d-h
below).
a. Sale date;
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. (See Paragraph J below.)
B. Procedure for Developing Best Strategy to Protect Junior Lien Securing 504 Loan
When it is apparent that an Obligor is in default on a loan secured by a senior lien on the
collateral for a 504 Loan, the following steps, when applicable, should be taken to develop a
prudent and commercially reasonable strategy for protecting the equity available for
application to the 504 Loan.
1. Review the Loan Documents
Review the Loan Authorization and other relevant Loan Documents to determine what
priority the lien securing the 504 Loan had at the time the loan was closed. For
example:
a. Real Property Collateral
If the senior lien is on real property collateral, review the mortgage, deed of trust or
other lien instrument, assignment of rents, title insurance policy, as well as the Third
Party Lender Agreement and any other lienholder, inter-creditor, subordination, non-
disturbance or attornment agreement.
b. Personal Property Collateral
If the senior lien is on personal property collateral, review the security agreement,
landlord lien waiver, UCC financing statements, and UCC searches, as well as the
Third Party Lender Agreement and any other lienholder, inter-creditor or
subordination agreement.
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2. Order a Current Lien Search
Order a current title report or UCC search to verify the priority of the lien(s) securing the
504 Loan. Alternatively, at a minimum, review the existing title insurance policy or UCC
search and gather any other information needed to determine whether there could be
any additional liens against the property that could have seniority over the lien securing
the 504 Loan, such as liens for unpaid property taxes.
3. Verify the amount Owed on All Senior Secured Liens
Ascertain the exact amount the Obligor owes on all loans secured by a senior lien on the
collateral and verify that the amount does not include cross-collateralized loans,
advances or Default Charges that were subordinated to the SBA loan pursuant to a
subordination agreement, inter-creditor agreement or other Loan Document.
4. Order an Appraisal
Order an Appraisal to obtain up-to-date information regarding the value of the collateral.
Note: See the definition of "Appraisal" in Chapter 2, which includes a broker’s price opinion,
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 lender with a lien on the same
collateral, and exercise caution if the Appraisal was prepared by a broker with whom the
collateral, if acquired, will be listed for sale.
5. Determine the Recoverable Value of the Collateral
Calculate the Recoverable Value of the collateral encumbered by the senior lien.
6. Estimate Recovery from All Other Sources
Determine the repayment ability of the Obligors (See Chapter 14.) and the Recoverable
Value of any additional collateral.
7. Determine whether the Senior Lienholder Provided Required Notice
If the Third Party Lender or another senior lienholder who signed a lienholder agreement
has initiated a foreclosure action, determine whether they complied with the applicable
notice requirements in the relevant Loan Documents. (For example, the Third Party
Lender Agreement requires the Third Party Lender to provide SBA and the CDC with
written notice of a default on the Third Party Loan within 30 days of the event of default
and at least 60 days prior to foreclosure on common collateral.) If not, take appropriate
action to enforce the SBA and CDC’s rights if the agreed upon time is needed to protect
the equity in the collateral available for the 504 Loan.
8. Judicial Foreclosure—Notify Legal Counsel
If a notice of judicial foreclosure is received, the legal counsel responsible for handling
the litigation should be notified immediately.
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9. Analyze Facts, Review Options and Plan Strategy
Based on an analysis of the information collected in Steps 1-8 above, decide which Loan
Action or combination of Loan Actions is most appropriate under the circumstances.
This commonly includes those listed in Paragraphs C - J below. But, there are
numerous other ways to protect the equity available for a 504 Loan in a junior lien
position including, for example, a workout (Chapter 17), an assumption or negotiated
sale of the 504 Loan to another Person such as a junior lienholder (Chapter 11),
foreclosure of SBA’s liens (Chapters 20 and 21), a voluntary sale of the collateral
(Chapters 20 and 21) or litigation (Chapter 24). Generally, unless the circumstances
require a shorter response time to mitigate the risk of loss, the strategy must be
developed within 30 calendar days of learning of the default on the secured senior loan.
C. Payment Advances to Bring Senior Secured Loan Current
In order to maximize recovery on a 504 Loan, funds may be advanced to keep the payments
on a senior secured loan current if the goal is to:
1. Negotiate a workout and enable an otherwise viable small business Borrower to
continue operating;
2. Work with the Obligor and other lienholders to complete a negotiated sale of the
collateral, (See Chapter 20 [Real Property Liquidation] or Chapter 21 [Personal Property
Liquidation] for information on short sales, and release of lien for consideration.); or
3. Preserve the equity available for application to the 504 Loan and minimize costs by
leaving the senior lien in place and foreclosing the junior lien securing the 504 Loan.
(See Chapter 20 [Real Property Liquidation] or Chapter 21 [Personal Property
Liquidation] for information on lien foreclosure.)
Note: See Chapter 3 for information on how to order a Treasury check to purchase or pay-off a
delinquent senior secured loan or to enter a Protective Bid.
D. Senior Loan Purchase or Pay Off
When gaining control of the liquidation process is necessary to maximize recovery,
especially when doing so would allow an otherwise viable Borrower to retain possession of
its business premises so that it can continue to operate and repay the SBA loan, funds may
be advanced to purchase or pay off a debt secured by a senior lien, particularly if the senior
lienholder offers a discount, and:
1. The risk is justified by an Appraisal and Recoverable Value analysis;
2. The purchase or pay off amount is consistent with any agreement signed by the senior
lienholder regarding the subordination of advances and Default Charges;
3. The Obligors are given written notice of the proposed purchase or pay off and their
increased financial liability on the SBA loan as a result; and
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4. If the Borrower is to retain possession of the collateral: (1) the Borrower has the ability to
make the payments on the adjusted SBA loan balance; and (2) purchasing or paying off
the loan will improve the Borrower's ability to repay the SBA loan.
E. 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 SBA loan in the same action; or
3. Cross-claim for judgment against the Obligors.
Note: If SBA has taken over servicing, SBA 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.
F. Protective Bids
1. When to Enter
A Protective Bid should be entered at a senior lienholder's foreclosure sale if the
Recoverable Value of the property is 10% or more of its Liquidation Value, unless
abandonment is appropriate, (i.e., Recoverable Value of less than $10,000 for real
property and $5,000 for personal property collateral), or a prudent lender would not enter
a Protective Bid based on the circumstances that are not reflected in the Appraisal, but
are documented in the Loan File. (For example, if the collateral has an appraised value
of $100,000, a Liquidation Value of $80,000, and a Recoverable Value of $50,000 [i.e.,
Liquidation value minus the balance owed on senior liens, foreclosure costs, and holding
and resale costs] a Protective Bid should be entered because $50,000 is more than
$8,000 [10% of $80,000].)
2. Protective Bid Amount
a. Maximum Amount
The maximum amount of a Protective Bid should be the lesser of the balance owed
on the 504 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). Generally, an acceptable tolerance range is 10% below or above the
authorized bid amount provided that it does not exceed the maximum bid amount.
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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.
G. “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, (i.e., Recoverable Value
of less than $10,000 for real property and $5,000 for personal property collateral), or the
Recoverable Value of the collateral is less than 10% of its Liquidation Value. A “no bid”
position may also be justified if based on the circumstances, which are not reflected in
the Appraisal but are documented in the Loan File, a prudent lender would not enter a
Protective Bid even though the Recoverable Value of the collateral is 10% or more of its
Liquidation Value.
2. Failure to Conduct an Environmental Investigation
Failure to conduct the Environmental Investigation required by Chapter 5 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.
3. “No Bid” Position Does Not Eliminate the Duty to Maximize Recovery
The fact that a “no bid” position may be appropriate does not necessarily mean that the
collateral has no Recoverable Value; nor does it justify taking, or failing to take, Loan
Actions that are inconsistent with prudent lending practices or the goal of maximizing
recovery on the loan.
a. Pre-foreclosure Sale Methods of Protecting Equity in Collateral
When a “no bid” position will be taken, up until the time of the senior lienholder’s
foreclosure sale, a good faith effort must be made to recover or protect the equity in
the collateral through other methods such as a workout (Chapter 17), negotiated sale
of the loan to another Person such as a junior lienholder (Chapter 11), or a voluntary
sale of the collateral (Chapter 20 [real property] or Chapter 21 [personal property]).
b. Post-foreclosure Sale Methods of Recovering Equity in Collateral
After a senior lienholder’s foreclosure sale has taken place, all remaining
commercially reasonable methods of recovering on the loan must be considered and
exercised including those discussed below, i.e., exercise or release of redemption
rights, recovery of excess proceeds from the foreclosure sale; and prompt
foreclosure of liens on other common collateral (e.g., equipment) that may have
moved up into first-position lien priority after the sale proceeds were applied to the
unsubordinated amount owed to the senior lienholder.
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H. Redemption Rights
Under federal law, SBA (but not a CDC) 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 504 Loan generally stem from SBA’s
status as a junior lienholder (or the CDC’s status as a junior lienholder if the Loan
Documents have been assigned to the CDC). 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 504 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.
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 504 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.
I. 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
Immediately after the sale, ascertain whether there are excess foreclosure sale
proceeds available for distribution to junior lienholders. This includes, for example,
scrutinizing the amount paid or credited to the Third Party Lender or other senior
lienholder; and checking with the trustee (or other Person) who conducted the
foreclosure sale to determine whether surplus funds were generated and if so, where
they were deposited, e.g., with the clerk of the local county court.
2. Collect Subordinated Funds Improperly Held by the Senior Lienholder
If the amount paid (or credited) to the senior lienholder included funds that SBA is
entitled to by virtue of the Third Party Lienholder Agreement (or other subordination,
lienholder or inter-creditor agreement) such as Default Charges or advances that were
subordinated to the 504 Loan, make demand on the senior lienholder and promptly
collect any funds that should have been applied to the 504 Loan but were not due to the
senior lienholder’s failure to comply with the subordination requirements in the applicable
Loan Document.
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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 504 Loan balance by virtue of the
position of the lien securing the 504 Loan.
J. Impact of Senior Lien Foreclosure on Other 504 Loan Collateral
After a senior lienholder foreclosure sale, the lien position on other common collateral
securing the 504 Loan (e.g., equipment) must be promptly checked to determine whether it
has improved as a result of the sale. If so, the collateral must be promptly liquidated in
accordance with the requirements in Chapter 20 (Real Property Liquidation) and Chapter 21
(Personal Property Liquidation). For example, if the proceeds from a Third Party Lender’s
real property lien foreclosure sale were sufficient to pay the Third Party Lender’s loan in full,
the Third Party Lender will be required to release its lien on other common collateral such as
equipment. As a result, if the lien securing the 504 Loan was in second position on the
equipment, it will move up to first position and must be foreclosed as soon as possible to
avoid loss or dissipation in value.
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Chapter 14.
Classifying Loans in Liquidation
____________________________________________________________________________
A good faith effort should be made to help delinquent Borrowers bring their loans current. But,
when a payment default cannot be cured, the Note should be accelerated, demand made on the
Obligors, the loan classified in liquidation, the Debenture purchased, and a Liquidation Plan
prepared and implemented without delay.
A. When Loans Must be Classified in Liquidation
A 504 Loan must be classified in liquidation when the Note is accelerated.
Note: Acceleration is declaring the full amount of a debt due and payable in the event that the
debtor defaults on the terms of an installment payment agreement. Acceleration is permitted in
accordance with an acceleration clause included in the payment agreement. For specific on a
CDC’s right to accelerate, see the Note used to document the 504 Loan (SBA Form 1505).
B. When the Note Must Be Accelerated
The Note must be accelerated whenever there has been an event of default and it is clear to
a prudent lender that the Obligor(s) cannot, or will not, keep the loan current through
regularly scheduled payments. (E.g., if the Borrower is more than three months past due on
a payment and there is no SBA approved deferment or catch-up plan in place, or the
Borrower closes the business and delivers the keys to the CDC, the Note must be
accelerated, the loan must be classified in liquidation, and the CDC must promptly request
that SBA purchase the Debenture.) (13 C.F.R. §120.970(f) and Paragraph C below.)
C. Debenture Purchase
When a 504 Loan is classified in liquidation, the CDC must immediately request that SBA
purchase the Debenture. (See Chapter 15 for more information.)
D. Demand Letters
Note: In the event of a default on a 504 Loan, the Note (SBA Form 1505) gives the holder the
right to accelerate the Note 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.
Unless prohibited by applicable law (e.g., the automatic stay in bankruptcy), when the Note
is accelerated:
1. Demand should be made on all of the Obligors for payment of the entire loan balance;
2. Demand letter(s) should be sent via regular mail as well as certified mail or some other
method that enables the sender to confirm delivery; and
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3. Reasonable efforts should be made to contact any Obligor who fails to respond, either
by telephone or email, to determine their intentions with regard to repaying the loan.
E. Skip Tracing
When a loan is classified in liquidation, a good faith effort must be made to locate and
collect the loan balance from all of the Obligors including those who are missing or difficult
to locate.
F. 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, but, 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;
3. 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);
4. 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);
5. Makes a servicemember's personal assets that were not pledged as collateral unavailable to
satisfy a business obligation (50 USC App. § 596);
6. 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
7. Imposes criminal sanctions on creditors who violate certain provisions of the statute including
those pertaining to mortgage foreclosures.
G. Liquidation Plans
A well drafted Liquidation Plan can help ensure the highest possible recovery on a loan in
the shortest amount of time.
1. When Required
a. Deadline
All CDCs, including ACLs and PCLP CDCs, should prepare a Liquidation Plan within
30 calendar days of Debenture purchase regardless of whether the CDC or SBA
Loan Center is primarily responsible for handling the liquidation.
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b. Workout Negotiations—Not an Exception
Generally, during the first few weeks following liquidation classification and
Debenture purchase, 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 20 and 21) and enforce collection from the
Obligors (Chapters 18, 19 and 24), such as Appraisals, 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 implemented, lien foreclosure
and other enforced collection activities can commence without further delay or loss.
2. Format and Content
A Liquidation Plan for a 504 Loan should have a copy of the demand letter attached to it,
and should be prepared in accordance with the template accessible from
www.sba.gov/for-lenders. As set out in the template, the following factors should be
considered and discussed in a Liquidation Plan:
a. Site Visit Findings
For information on site visits, see Chapter 16. (Non-PCLP CDCs must attach a copy
of their Site Visit Report to the Liquidation Plan.)
b. Feasibility of a Workout
For information on workouts, see Chapter 17.
c. Recoverable Value of the Collateral
For information on how to determine the Recoverable Value of collateral, see the
definition of Recoverable Value in Chapter 2.
d. Available Methods of Liquidation
For information on collateral liquidation, see Chapter 20 with regard to real property
collateral and Chapter 21 with regard to personal property collateral.
e. Routine Litigation
All contemplated Routine Litigation should be included in the Liquidation Plan. For
information on litigation, see Chapter 24.
f. Status of Senior Liens
For information on Third Party Loans or other senior liens, see Chapter 13.
g. CDC's Non-SBA Loans to Obligor
All CDCs must disclose whether they have any non-SBA loans to the same
Obligor(s), and if so, indicate how the liquidation and litigation expenses and
recoveries will be allocated. For information on allocation and approval of expenses
and recoveries, see Chapter 25.
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h. Obligors' Repayment Ability
Rather than wait until after the primary collateral has been liquidated, when it is
apparent that the recovery from the primary collateral will be insufficient to pay the
loan in full, fair but aggressive action, including filing suit to obtain a judgment,
should immediately be initiated against any Obligor with the ability to pay the loan in
whole or in part Generally, to assess the Obligors’ repayment ability, an asset search
should be conducted on each Obligor and reviewed along with each Obligor’s
financial statements, tax returns, credit reports and other relevant financial
documents in order to analyze the following factors with regard to each Obligor:
(1) Recoverable Value of any collateral pledged by the Obligor;
(2) Exemptions available to the Obligor under state and federal law;
(3) Amount that could be recovered from the Obligor’s non-exempt assets that were
not pledged as collateral through enforced collection proceedings, i.e., execution
on a judgment;
(4) Amount of present and potential income that could be obtained through enforced
collection proceedings, e.g., administrative wage garnishment;
(5) Litigative risk, i.e., a real doubt concerning the ability to prevail in court because
of legal issues or factual disputes;
(6) The necessary, reasonable and customary administrative and litigation expenses
that would be incurred through enforced collection;
(7) The time it would take to enforce collection; and
(8) The likelihood that the Obligor’s assets have been or will be concealed or
fraudulently transferred.
Note: It is not necessary to allocate the amount of the debt among the Obligors in
proportion to any agreement among the Obligors (e.g., a partnership agreement) or court
order in a case to which SBA is not a party (e.g., a divorce decree). Also, when using a
credit report and other supplementary data sources to determine an Obligor’s ability to
pay or to decide whether to pursue enforced collection, the supplemental information
should be reviewed in terms of the following questions:
• Does the Obligor have other delinquent accounts? (Are other creditors being paid first?
Can those payments be restructured to free-up funds for application to the 504 Loan?)
• Does the Obligor own any assets that are available to repay the debt, such as equity in
real property, a second car, or a boat? (Can the Obligor sell or get a loan against them
to pay the 504 Loan in whole or in part?)
• Is the Obligor employed? If so, by whom? (Can the Obligor’s wages be garnished?)
• Are there any current accounts that may soon be paid in full? (Will funds be freed-up
for application to the 504 Loan?)
• Does the Obligor have too much debt? (Is bankruptcy likely? Does the Obligor have
hidden income?)
• Has the Obligor filed bankruptcy?
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3. When a Liquidation Plan Must be Submitted to SBA for Approval
a. General Rule
(1) Liquidation Plan
Except as provided below with regard to emergencies, CDCs, including ACLs
must submit a proposed Liquidation Plan to the appropriate SBA Loan Center for
each 504 Loan that was not made under its PCLP authority (13 C.F.R. §
120.540) within 30 business days of SBA’s purchase of the Debenture. A copy of
the CDC’s Site Visit Report must be attached to the proposed Liquidation Plan.
(2) Amended Liquidation Plan
Except as provided below with regard to emergencies, CDCs, including ACLs,
should prepare and submit an amended Liquidation Plan before taking any action
or incurring any expense that materially deviates from its original Liquidation
Plan.
b. Exception—Emergency Situations
A CDC may respond to an emergency (e.g., loss or dissipation of collateral), without
SBA's written approval of a Liquidation Plan or Amended Liquidation Plan, provided
that it:
(1) Makes a good faith effort to obtain SBA's written approval before undertaking the
emergency action;
(2) Submits a written Liquidation Plan or Amended Liquidation Plan to the SBA Loan
Center as soon after the emergency as possible; and
(3) Takes no further liquidation action without SBA's written approval of the
Liquidation Plan or Amended Liquidation Plan. (13 C.F.R. § 120.540(f))
c. SBA Response Time
SBA should respond to a CDC's request for approval of a Liquidation Plan within 15
business days from the date of receipt of the proposed Liquidation Plan. However, if
SBA fails to respond in 15 days, the request cannot be deemed approved. (13 C.F.R
§ 120.541(b))
H. Assignment of Loan Documents
To commence litigation or to take certain liquidation activities e.g., non-judicial lien
foreclosure, the Person taking the action must be the holder of the Note and relevant lien
instruments. Therefore, if a CDC's proposed Liquidation Plan includes activities that require
the CDC to be the holder of the Note and other Loan Documents, the CDC must include a
written request for assignment of all the relevant Loan Documents—not just the Note—with
its proposed Liquidation Plan. The assignment should expressly state that any assignment
is limited and solely for the purpose of carrying out the Liquidation Plan. The request should
include:
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1. A list of the specific Loan Documents that should be reassigned.
2. If the liquidation strategy includes Routine Litigation:
a. The name, phone number and qualifications of the attorney selected by the CDC to
conduct the litigation;
b. Whether there is a risk of adverse precedent; and
c. The estimated legal fees and costs.
3. If the liquidation strategy includes Non-Routine Litigation, a Litigation Plan pursuant to
the requirements of Chapter 24.
I. Payments and Recoveries on Loans in Liquidation Status
See Chapter 4 for information on how to apply payments on loans in liquidation, and
Chapter 22 for information on how to apply recoveries.
J. When Loans Should Be Removed from Liquidation Status
Regardless of whether or not the Debenture has been purchased:
1. Returned to Regular Servicing
504 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
SBA loans should be removed from liquidation status and classified as “paid in full” when
the debt owed on the SBA loan has been satisfied. (Purchase of the Debenture by SBA
should not be confused with payment of the loan by an Obligor or through liquidation
recoveries.)
3. Charged-off
SBA 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 28.
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Chapter 15.
Debenture Purchase
____________________________________________________________________________
A. When CDC Must Request Debenture Purchase
A CDC must promptly request that SBA purchase the Debenture when a 504 Loan is
classified in liquidation. The request must be sent to the appropriate SBA Loan Center and
must include the reason for the Debenture purchase request and an explanation as to why a
deferment or a catch-up plan is not feasible.
B. Impact of Debenture Purchase on 504 Loan
Purchase of the Debenture results in several changes with regard to the 504 Loan including
the following:
1. Limited CSA Services
Post-Debenture purchase, the CSA no longer collects the Borrower's loan payments or
makes payments on the Debenture. It does, however, still provide CDCs with post-
Debenture purchase accounting services on the loan, which can be accessed through
the CSA’s Web site.
2. Existing Fees Eliminated
All Debenture-related fees are eliminated, including CSA fees and CDC servicing fees.
3. New CDC Servicing Fee May be Imposed by Workout Agreement
If the loan was approved on or after October 1, 2009, and the other requirements in
Chapter 4 are met, the CDC may require that the Borrower pay the CDC a servicing fee
as part of the terms of a workout agreement.
4. Prepayment Premium Eliminated
The prepayment penalty is eliminated unless the loan was made under the 503 loan
program, in which case the prepayment penalty is added to the principal balance of the
loan.
5. Loan Modification Possible
Post-Debenture purchase, the terms and conditions of the 504 Loan may be
substantially modified if necessary to maximize recovery on the loan. (See, for example,
Chapter 17 on Workouts.)
6. Remittance of Payments and Recoveries to SBA
Because the CSA is no longer involved after SBA has purchased the Debenture, all loan
payments and liquidation recoveries must be remitted to SBA. (See Paragraph B of
Chapter 4 for information on loan payment administration.)
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7. New Loan Number Assigned
A new SBA Loan number is assigned to the 504 Loan and must be used when
requesting information or approval of proposed Loan Actions.
Note: With regard to the new loan number assigned to a 504 loan after Debenture purchase,
generally, the first seven digits of the original loan number remain the same, the eighth digit
changes to a "5" and the last two digits change in sequential order (up to 10), i.e., "05"
becomes "06" and "10" becomes "00."
C. Referral to Treasury Offset Program
After Debenture purchase, if the 504 Loan is delinquent, SBA will refer all of the Obligors for
inclusion in the Treasury Offset Program unless they have a valid legal defense for not
repaying the loan, such as discharge in bankruptcy, compromise, or the statute of
limitations.
Note: Under the Treasury Offset Program, delinquent debt is collected through administrative
offset of funds due to Obligors from federal and state sources such as tax refunds, wages,
retirement checks and contractor payments. Prior to referring a loan to Treasury, 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.
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Chapter 16.
Site Visits
____________________________________________________________________________
This chapter provides SBA policy and procedures concerning post-default site visits. With
regard to loans in regular servicing status, a site visit should be made whenever warranted by
prudent lending practices. All site visits should be documented by a Site Visit Report, which
should be kept in the Loan File. (See Chapter 3 for site visit reporting requirements.)
A. When Required
Unless the loan is unsecured, or the aggregate Recoverable Value of the personal property
collateral is less than $5,000 and the Recoverable Value of each parcel of real property
collateral is less than $10,000, a site visit must be conducted:
1. Payment Default—within 60 calendar days of an uncured payment default or sooner if
the collateral could be removed, lost or dissipated.
2. Non-payment Default—within 15 calendar days of the occurrence of an adverse event
that caused the loan to be classified in liquidation status or sooner if the collateral could
be removed, lost or dissipated.
B. Preparation
Prior to conducting a site visit, the steps listed below should be taken when they are
applicable and necessary to obtain sufficient information to make prudent lending decisions.
1. Review the Loan Documents
Determine what collateral was required, what collateral was actually taken, and what
priority position the liens had when the loan was closed by reviewing the Loan
Authorization and other relevant Loan Documents, including for example:
a. Personal Property Collateral—The security agreement, landlord lien waiver, UCC
financing statements, and UCC searches, as well as any senior lienholder,
subordination or inter-creditor agreement; and
b. Real Property Collateral—The mortgage or deed of trust, assignment of rents, and
title insurance policy, as well as any senior lienholder, subordination, inter-creditor or
non-disturbance agreement.
2. Obtain a Current Lien Search
Obtain a current title report or UCC search to verify the priority of the lien(s) securing the
SBA loan.
3. Contact the Landlord
If the collateral is located on leased premises, contact the landlord to determine whether
the rent is past due.
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4. Contact Local Taxing Authorities
Contact local taxing authorities to determine whether there are delinquent real or
personal property taxes that have, or will soon have, priority over the lien securing the
SBA loan.
5. Order an Appraisal
a. Personal Property
If the loan is secured and the collateral includes personal property such as
machinery, equipment, furniture, fixtures or inventory, hire an auctioneer or other
expert to prepare a Liquidation Value Appraisal and to assist with the relevant site
visit goals listed below. If the collateral includes unusual personal property that an
auctioneer would not ordinarily have the expertise to appraise, e.g., intellectual
property, order an Appraisal from an expert with the appropriate qualifications.
Note: To expedite the liquidation process, it is often advantageous to have an auctioneer
accompany you on your site visit so that preparations can be made to hold a UCC sale as
soon as it is commercially reasonable to do so.
b. Real Property
If the loan is secured and the collateral includes real property, hire a qualified expert
to prepare an Appraisal.
Note: See the definition of "Appraisal" in 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 lender with a lien on the same collateral, and exercise
caution if the Appraisal was prepared by a broker with whom the collateral, if acquired, will
be listed for sale.
C. Goals
During a post-default site visit, a good faith effort should be made to gather sufficient
information to accomplish the applicable goals listed below.
1. Inspect and Inventory the Collateral
Prepare a comprehensive written inventory that includes a complete and accurate
description of the collateral, including its current condition, photographs, and the serial
numbers of significant items of personal property, i.e., items with a Liquidation Value of
$5,000 or more.
2. Establish the Recoverable Value of the Collateral
Determine the amount of expenses that must be taken into consideration to accurately
calculate the Recoverable Value of the collateral, such as the cost of any necessary care
and preservation measures.
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3. Ascertain Whether Real Property Collateral is Occupied
If the collateral consists of real property, find out whether there are occupants who are
entitled to notice, who will need to be evicted, or who are paying rent that can be
collected and applied to the SBA loan balance.
4. Assess Environmental Risk
Review the Environmental Investigation Report prepared at the time the loan was made,
look for potential environmental problems while inspecting the Borrower’s business
premises, and follow the requirements concerning Environmental Investigations set out
in Chapter 5.
5. Develop a Liquidation Strategy
Begin developing a strategy for liquidating the loan. For example, if there is personal
property collateral that must be liquidated, determine whether the Borrower and landlord
will cooperate so that it can be sold via a public auction held on the Borrower’s business
premises. (See Chapter 21 for information on public UCC sales.)
6. Ascertain Whether a Workout is Feasible
If Obligors who have not filed for bankruptcy protection are present and cooperative,
obtain a copy of the financial records needed to determine whether a workout is feasible.
(See Chapter 17 for information on workouts including how to ascertain whether the
Borrower is a good candidate for a successful workout.)
7. Repossess the Personal Property Collateral
Unless a workout or a judicial foreclosure action is contemplated, make arrangements to
repossess the collateral using self-help methods pursuant to UCC Article 9 if it can be
done without a "breach of the peace. If the collateral cannot be repossessed without a
“breach of the peace;" consult legal counsel about filing a replevin action to obtain a
court order requiring the Obligor to turn-over the collateral.
8. Arrange for Care and Preservation of the Collateral
After acquiring possession or control of the collateral, take prudent and commercially
reasonable measures to care for and preserve it until it can be liquidated. For example:
a. Security and Safekeeping
Make arrangements to keep the collateral safe and secure until it can be liquidated.
For example, depending on the circumstances, it may be necessary to have the
locks changed, hire a caretaker, pay utility bills, or transport personal property
collateral to a secure, temperature-controlled storage facility.
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b. Insurance
Purchase or maintain appropriate insurance coverage, such as hazard or general
public liability insurance pursuant to the requirements in Chapter 9 (Insurance
Coverage).
c. General Maintenance
Arrange for cost-effective repairs, clean-up, etc., to ensure that the foreclosure sale
is commercially reasonable and the collateral sells for the highest possible price.
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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. Because a workout agreement alters the material terms and
conditions of the loan, SBA must have purchased the Debenture before a formal workout
agreement can be executed. Whenever feasible, a good faith effort must be made to
negotiate a workout on a 504 Loan classified in liquidation status.
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.
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 following information, workout negotiations should not be pursued.
1. Financial Statement
a. A current financial statement that should be signed under penalty of perjury and must
show the Borrower’s assets, liabilities, income and expenses, e.g., SBA Form 770
(Financial Statement of Debtor);
a. The Borrower’s last year-end financial statement; and
b. 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 that each Guarantor filed
with the IRS for the past two years or a written explanation as to why a copy is not
available.
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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. Feasibility Test
To determine whether a 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, conduct a site visit if feasible, and ascertain whether the Borrower is:
(1) competent, i.e., has the necessary technical and management skills to turn the business
around; (2) cooperative, i.e., willing to take the necessary action to address the problems
that caused the default; (3) acting in good faith, and (4) financially and operationally viable.
D. Timing
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.
E. 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
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. Correct Loan Document errors;
2. Waive defenses;
3. Release lender liability claims;
4. Provide additional collateral; and
5. Consent to a speedy and inexpensive method of liquidating the loan if the workout fails.
This could include, for example, placing a deed or bill of sale to the collateral in escrow,
signing a confession of judgment, or agreeing to waive the automatic stay and to turn-
over the collateral if the Obligor subsequently files bankruptcy.
F. Options
The elements of a plan to work out the problems on an SBA 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 Obligors' current personal and business financial
statements required by Paragraph B. The most common workout options are listed below.
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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 7
for information on maturity date extensions.)
3. Deferment
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. (See Chapter 12 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 7 for
information on Note modification.
5. Assumption of Loan
Another Person may assume the loan. (See Chapter 11 for information on
assumptions.)
6. Subordination to Working Capital Loan
The priority position of a lien securing the loan may be subordinated to a short-term
working capital loan. (See Chapter 8 for information on subordination to a new loan.)
7. Relief on Secured Senior Loan
A loan secured by a senior lien on the collateral securing the SBA loan may be kept
current, purchased or paid off. (See Chapter 13 for information on senior liens.)
8. Voluntary Sale of Collateral
The Borrower may be allowed to voluntarily sell all or part of the collateral provided that
sale is closely monitored to ensure that it is commercially reasonable and that all of the
net proceeds are applied to the principal balance of the SBA loan or used to facilitate the
workout. (For SBA Loan Program Requirements pertaining to voluntary sale of
collateral, see Chapter 20 with regard to real property collateral and Chapter 21 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. (See Chapter 23 for information on offers in
compromise from going concerns.)
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G. Agreement Provisions
A workout agreement should be in writing and should include:
1. A list of events of default to date;
2. The consideration for entering into the agreement;
3. Confirmation of the collateral for the SBA loan, which should include the priority of each
lien;
4. An acknowledgement that neither SBA nor the CDC is waiving any default, right or
remedy by entering into the workout agreement;
5. The forbearance period;
6. The agreed upon workout option(s) such as those listed in Paragraph F;
7. The order in which the funds from payments made under the workout agreement will be
applied to the amounts owed on the loan;
8. The events that constitute a default under the workout agreement including the dates by
which obligations under the workout agreement must be performed;
9. The consequences of default under the workout agreement, e.g., re-acceleration of the
Note and delivery or recording of any deed, bill of sale, or confession of judgment placed
in escrow;
10. The amount of the reinstated CDC servicing fee, if any, after the loan is returned to
regular servicing status; and
11. The signatures of the CDC and all Obligors on the loan.
H. SBA Approval
1. Non-PCLP CDCs must obtain SBA’s prior written approval before entering into a
workout agreement.
2. PCLP CDCs must obtain SBA’s prior written approval of a workout plan if it includes a
compromise of the principal loan balance or some other Loan Action that requires SBA’s
prior written approval. (See Chapter 3 for information on Loan Actions that require prior
SBA approval.)
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Chapter 18.
Administrative Wage Garnishment
This chapter provides information regarding the collection of 504 Loans in liquidation status
through garnishment of the wages earned by a non-Federal Government employee Obligor.
(See Chapter 19 for information on offsetting the wages of a Federal Government employee
Obligor.)
A. Legal Authority
Wage garnishment is a process whereby an employer withholds money from an employee’s
wages and pays it to the employee’s creditor. Generally, this is done pursuant to a court
order. However, as an agency of the Federal Government, SBA (not a CDC) can garnish
the wages of an Obligor on a 504 Loan classified in liquidation to satisfy the loan without a
court order. This process, known as administrative wage garnishment (“AWG”), is
authorized by the Debt Collection Improvement Act of 1996 (DCIA), 31 U.S.C. § 3720D.
The U.S. Treasury regulations implementing AWG are located in 31 C.F.R. § 285.11. SBA’s
regulations regarding AWG are contained in 13 C.F.R. §140.11, and the forms required to
implement AWG are located on the U.S. Treasury Department’s Web site.
B. When to Initiate
Generally, unless filing suit to obtain a judgment against the Obligor is a more appropriate
method of maximizing recovery on the loan, AWG proceedings should be initiated as soon
as it becomes apparent that a gainfully employed Obligor on a 504 Loan classified in
liquidation status is not willing to make a good faith effort to repay the loan.
Note: SBA may, unilaterally or at the request of a CDC, initiate AWG while the CDC (including an
ACL or PCLP CDC) is conducting other liquidation activities.
C. Requirements
AWG may be used separately or together with other methods of debt collection and does
not preclude compromise. Implementation of AWG is appropriate when all of the following
requirements have been met:
1. The Obligor is an individual as opposed to an entity;
2. The Obligor is not a federal employee, (See Chapter 19 for information on federal salary
offset.);
3. The Obligor’s liability for the loan balance is unlimited or limited to a specified dollar
amount;
4. The debt owed on the loan is legally enforceable;
5. The Obligor has not been involuntarily unemployed within the last twelve months; and
6. The Obligor has failed to pay or make satisfactory arrangements to pay the 504 Loan.
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D. Garnishment Amount
Generally, the amount that may be garnished is the lesser of the following:
1. Up to 15% of the Obligor’s disposable pay; or
2. The amount by which an Obligor’s disposable pay exceeds an amount equivalent to
thirty times the minimum wage. (See 31 U.S.C. 3720D and 31 C.F.R. § 285.11(i) for
more information.)
E. Employee’s Rights
The rights of the Obligor with regard to AWG proceedings are set out in 13 C.F.R. §140.11.
In general, the Obligor has the right to submit a written request to the SBA Loan Center for
the relief outlined below.
1. Pre-Garnishment Order
As set out in the pre-garnishment notice that the Obligor-employee will receive, prior to
the time a garnishment order is issued, the Obligor-employee has the right to:
a. Ask to inspect and copy SBA’s non-privileged records regarding the debt;
b. Request a written statement breaking down the amount of the debt;
c. Request that SBA enter into a written payment agreement to avoid garnishment; and
d. Request a hearing regarding the existence or amount of the debt, or the proposed
repayment schedule including whether it would cause Financial Hardship.
2. Post-Garnishment Order
Once a garnishment order has been issued, the Obligor has the right to request a review
of the amount being withheld based on a “material change in circumstances” resulting in
Financial Hardship.
3. Post-Financial Hardship Ruling
Once the hearing officer has issued a ruling with regard to Financial Hardship, the
Obligor may request a subsequent review of the amount being withheld if the Obligor
believes that there has been a “material change in circumstances” since the ruling was
issued.
F. Modification Based on Financial Hardship
1. Standard of Review
Generally, a garnishment order may be modified based on a finding of Financial
Hardship due to a “material change in circumstances” since the garnishment
proceedings were initiated such as a catastrophic illness.
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2. Burden of Proof
The Obligor has the initial burden of proving by a preponderance of the evidence that a
garnishment order is causing Financial Hardship due to a “material change in
circumstances.”
G. Suspension or Termination
1. When Suspension is Required
a. AWG proceedings should be suspended when doing so is consistent with prudent
lending practices, e.g., if the Obligor has entered into a repayment plan with SBA.
b. AWG proceedings must be suspended upon receipt of notice that the Obligor has
filed a petition in bankruptcy.
2. When Termination is Required
AWG proceedings must be terminated if:
a. The loan has been paid in full;
b. The debt has been discharged in bankruptcy;
c. The Obligor has paid an SBA approved compromise amount in full; or
d. The Obligor is no longer with the employer directed to withhold the Obligor’s wages
and pay them to SBA pursuant to the garnishment order.
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Chapter 19.
Federal Salary Offset
____________________________________________________________________________
This chapter provides information on collecting 504 Loans in liquidation status through
garnishment of the wages or other payments earned by a current or former Federal Government
employee Obligor. (See Chapter 18 for information on how to garnish the wages of a non-
Federal Government employee Obligor.)
A. Legal Authority
If an Obligor on a 504 Loan classified in liquidation status is a current or former federal
employee entitled to payments from the Federal Government, SBA (not a CDC) can initiate
proceedings to deduct payments owed on the 504 Loan from the Obligor's paycheck. This
procedure is known as "salary offset'' and is authorized by 5 U.S.C. § 5514. SBA’s offset
regulations are found at 13 C.F.R. § 140.2 and 13 C.F.R. §140.3.
B. When to Initiate
Generally, federal salary offset proceedings should be initiated as soon as it becomes
apparent that a current or former Federal Government employee Obligor on a 504 Loan
classified in liquidation status is not willing to make a good faith effort to repay the loan.
Note: SBA may, unilaterally or at the request of a CDC, initiate federal salary offset while the
CDC (including an ACL or PCLP CDC) is conducting other liquidation activities.
C. Requirements
Offset may be used separately or together with other methods of debt collection and does
not preclude compromise. Implementation of offset is appropriate when all of the following
requirements have been met:
1. The Obligor is a current or former civilian federal employee, an employee of the U.S.
Postal Service or Postal Rate Commission, or a member of the Uniformed Services or
Reserve of the Uniformed Services, who is receiving or entitled to receive funds from the
Federal Government such as a salary, retirement benefits, training expenses, or a lump
sum payment;
2. The Obligor's 504 Loan is in default;
3. The debt owed on the loan is legally enforceable; and
4. The Obligor has failed to pay or make satisfactory arrangements to pay the loan.
D. Offset Amount
1. Generally, the offset amount should not exceed 15% of the Obligor's disposable pay
each payday unless a deduction of a greater amount is necessary to fully collect the
debt within the Obligor's remaining period of employment or the Obligor has agreed to a
larger percentage in writing.
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2. Once begun, federal salary offset should continue until the full amount of the debt has
been recovered, the debt is otherwise resolved (e.g., through workout or compromise),
or the Obligor's federal employment ceases, whichever occurs first.
E. Employee’s Rights
The rights of the Obligor with regard to federal salary offset proceedings are set out in 13
C.F.R. § 140.3. In general, the Obligor has the right to submit a written request to the SBA
Loan Center for the relief outlined below.
1. Pre-offset
Upon receipt of a Notice of Salary Offset, the Obligor has the right to:
a. Ask to inspect or copy SBA’s records regarding the debt owed on the loan;
b. Request a written statement breaking down the amount of the debt;
c. Request that SBA enter into a written payment agreement to avoid offset; and
d. Unless the amount owed on the loan has been reduced to judgment, request a
hearing conducted by the SBA Office of Hearings and Appeals (“OHA”) in
accordance with the procedures set forth in 13 C.F.R. § 134 to dispute: (1) the
existence or amount of the debt; or (2) the proposed repayment schedule unless it
was established by written agreement between the Obligor and SBA, provided that
the request is received no later than fifteen calendar days after receipt of the notice
of offset. (OHA will generally issue a written opinion no later than 60 days after
receiving the request for a hearing.)
2. Post-offset
Once offset proceedings have been initiated, request a review of the amount of the
salary offset based on Financial Hardship.
F. Modification Based on Financial Hardship
1. Standard of Review
Generally, the amount subject to offset may be modified based on a finding of Financial
Hardship due to a “material change in circumstances” since the offset proceedings were
initiated such as a catastrophic illness.
2. Burden of Proof
The Obligor has the initial burden of proving by a preponderance of the evidence that
offset proceedings are causing Financial Hardship due to a “material change in
circumstances.”
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G. Suspension or Termination
1. When Suspension is Required
a. Offset proceedings should be suspended when doing so is consistent with prudent
lending practices, e.g., if the Obligor has entered into a repayment plan with SBA.
b. Offset proceedings must be suspended upon receipt of notice that the Obligor has
filed a petition in bankruptcy or a timely request for an OHA hearing.
2. When Termination is Required
Offset proceedings must be terminated if:
a. The loan has been paid in full;
b. The debt has been discharged in bankruptcy;
c. The Obligor has paid an SBA approved compromise amount in full; or
d. The Obligor is no longer entitled to payments from the Federal Government.
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Chapter 20.
Real Property Collateral Liquidation
___________________________________________________________________________
A. General Requirements
If an acceptable workout agreement has not been implemented within a reasonable time
after Debenture purchase (e.g. 60 calendar days), all collateral for the loan that has
Recoverable Value should be liquidated. With regard to real property collateral, if the
Recoverable Value of an individual parcel is $10,000 or more, it must 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. Procedure for Selecting Best Method of Liquidation
Real property collateral must be liquidated in a manner that will maximize recovery in the
shortest amount of time. The most appropriate method will depend on the relevant facts,
which can be ascertained by following the steps listed below.
1. Check the Military Service Status of the Property Owner-Obligor
Determine whether the property owner-Obligor is in active military service. If so, consult
legal counsel regarding the implications of the Servicemembers Civil Relief Act prior to
initiating a lien foreclosure action.
2. Determine the Use of the Property
Determine how the property is used because it may trigger special requirements. For
example, if the property is used as an Obligor’s primary residence, the requirements set
forth in Paragraph C.4.b. below must be met before initiating a foreclosure action. If the
property is used for agricultural purposes, state law may require judicial foreclosure and
federal law may provide the Borrower with homestead rights. (For information on farmer
homestead rights, see 13 C.F.R. § 120.550, et seq. and the Consolidated Farm and
Rural Development Act.) Finally, if the property is used to operate a gas station, an oil
company may have special rights with regard to matters such as notice of default, the
right of first refusal, or the ability to control future ownership or use of the property.
3. Review the Loan Documents
Review the Loan Documents to determine whether they impose any restrictions or
requirements with regard to the method of foreclosure that can be used. For example, in
some states a deed of trust may be foreclosed though non-judicial proceedings, while a
mortgage requires judicial foreclosure.
4. Order a Title Report
Order a new title report, or at a minimum, review the existing title insurance policy and
gather any other information needed to identify all liens and other encumbrances against
the property.
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5. Determine the Amount Owed on Senior Liens
With regard to each parcel of real property collateral, determine the amount owed on any
debt secured by a senior lien against the property. Then, deduct those amounts from
the property’s estimated Liquidation Value. If the Recoverable Value still appears to be
$10,000 or more, proceed to Step 6. If not, see Paragraph F below regarding
abandonment.
6. Decide How to Handle Each Title Encumbrance
After deducting the amount secured by senior liens, if the collateral appears to have a
Recoverable Value of $10,000 or more, consider the impact, if any, each encumbrance
would have on the various methods of liquidation and decide how to handle each
encumbrance. For example:
a. Senior Liens
(1) Senior Tax Liens
If there are delinquent real property taxes or assessments secured by a senior
lien against the property, consider the possibility of further erosion of equity due
to late fees and other penalties, and decide whether to pay them.
(2) Senior Non-tax Liens
If there are senior non-tax liens against the property, decide which of the options
for dealing with them listed in Chapter 13 is prudent and commercially
reasonable under the circumstances.
b. Junior Liens
(1) Junior Federal Tax Liens
If there are junior federal tax liens against the property, find out the balance owed
and ask the IRS for a certificate of discharge, or work with the IRS to reach an
amicable resolution as to the amount that should be applied to the tax lien.
(2) All Other Junior Liens
If there are junior liens against the property other than federal tax liens, find out
the balance owed and decide whether to eliminate them through foreclosure or to
negotiate their release for consideration.
c. Leases
If there are tenants leasing the property, determine whether the lease enhances or
diminishes the Liquidation Value and marketability of the property; and whether the
lease would survive or be extinguished by a foreclosure sale.
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Note: Review Subordination, Non-disturbance and Attornment Agreements carefully
because they address lender and tenant rights. Typically, the tenant agrees to
"subordinate" the lease to the lender's mortgage; and in the event of default by the
landlord-Obligor, the lender agrees not to "disturb" the tenant's possession; and the tenant
agrees to "attorn," i.e., recognize the lender or foreclosure sale purchaser as the new
landlord.
d. Assignments of Rents
If the collateral includes an assignment of rents and a tenant is in possession of any
portion of the property, decide whether:
(1) Collecting the rents pending a workout or foreclosure sale is necessary to
maximize recovery;
(2) Collecting the rents would cure the existing default and prevent foreclosure; and
whether
(3) Requesting the court to appoint a receiver to collect the rents could bar a non-
judicial foreclosure action.
e. Covenants, Conditions and Restrictions
If there are other title encumbrances, determine what impact, if any, they will have on
the foreclosure process or Recoverable Value of the property. For example, gas
station property is often encumbered by special notice of default requirements,
purchase options, rights of first refusal, restrictions on how the property can be used,
covenants that require future owners to indemnify a major oil company from liability
associated with Contamination, and covenants that require future owners to install
expensive engineering controls prior to redevelopment.
7. Check Status of Hazard Insurance
If the property is improved, see Chapter 9 for SBA Loan Program Requirements
pertaining to ensuring that all collateral with Recoverable Value is adequately insured.
8. Order an Appraisal
Order an Appraisal to obtain up-to-date information on the market value of the property;
9. Assess Environmental Risks
When required by Chapter 5, conduct an Environmental Investigation to obtain the
information needed to mitigate the risks associated with liquidating Contaminated
collateral.
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10. Check Historic Register Status
If the property could have historical value based on its age, integrity and significance,
determine whether it is listed on, or eligible for, the National Register of Historic Places
by contacting the State Historic Preservation Office where the property is located. If so,
determine whether the historical significance impacts the Recoverable Value of the
collateral.
11. Review Relevant Business Records
When it would be prudent to do so, review the Borrower's books and records showing
the cash flow related to the operation and use of the property, and verify that the
Borrower’s operations were consistent with applicable laws, such as those pertaining to
zoning and land use.
12. Consider Need to Collect Deficiency
If the recovery from liquidating a single parcel of real property collateral will not be
enough to pay the loan in full, consult legal counsel to determine whether use of a
particular method of liquidation, e.g., non-judicial foreclosure or acceptance of a deed in
lieu, would bar collection of the deficiency or foreclosure of any remaining collateral.
13. Estimate Time and Costs Involved
Estimate the time and expense associated with each viable method of liquidation. This
includes: the time and cost associated with pre-liquidation collateral care and
preservation; the liquidation action; and post-liquidation care, preservation and resale if
acquiring title to the collateral is anticipated.
14. Estimate Net Recovery
Using the information collected in Steps 1-13, calculate the net amount that could be
recovered by utilizing each viable method of liquidation (e.g., those discussed in
Paragraphs C – I below) to determine which would yield the highest recovery in the
shortest amount of time.
C. Release of Lien for Consideration
See Chapter 8 for information on release of lien for consideration.
D. 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 Obligor has possession or control of the collateral;
3. All other lienholders have provided their written consent to the sale;
4. A current Appraisal has been obtained;
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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.
5. The Recoverable Value of the collateral has been established;
6. The sale is supervised by the CDC (or SBA if SBA has taken over servicing);
7. The costs of sale are reasonable, necessary and customary;
8. 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
9. All of the net proceeds are applied to the principal balance of the SBA loan.
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 23)
E. Deed in Lieu of Foreclosure
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.
F. Lien Foreclosure
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.
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2. Primary Residences
Unless the Obligor-owner has engaged in fraud, misrepresentation or other financial
misconduct, a good faith effort should be made to reach an agreement covering release
of the lien for consideration and compromise of the Obligor’s liability for the SBA loan
balance prior to initiating a foreclosure action against the Obligor's primary residence.
Documentation showing that a CDC has complied with applicable state or federal laws
requiring mortgage lenders to work with home owners prior to foreclosure will be
considered evidence that a CDC has made a good faith effort to meet the foregoing SBA
Loan Program Requirement. (See Chapter 8 for information on release of liens for
consideration, and Chapter 23 for information on offers in compromise.)
3. Judicial Foreclosure
Judicial foreclosure requires filing a lawsuit.
a. Advantages
(1) Deficiency judgment obtainable; and
(2) Only one action required 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, is available
only if the deed of trust or mortgage securing the loan contains a clause or provision
granting a power of sale. 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
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(2) Judicial action may still be necessary if there are unlawful occupants who need to
be evicted.
G. 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.
H. Appointment of Receiver
1. When Receiverships are Appropriate
A receiver is a Person appointed by the court to preserve and protect the collateral in
connection with, or in lieu of, foreclosure. 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, manage it, collect rents, and take any reasonably necessary action to protect
and preserve its value.
2. Approved Litigation Plan Required
The appointment of a receiver involves Non-routine Litigation. Therefore, CDCs must
submit a proposed Litigation Plan and obtain SBA’s written approval prior to
commencing receivership proceedings. SBA will not approve the appointment of a
receiver to perform basic loan liquidation functions, and will not approve or reimburse
CDCs for expenses related to unauthorized receiverships. (See Chapter 24 for
information on Litigation Plans and Chapter 25 for information on Recoverable
Expenses.)
I. Short Sale Approval
A “short sale” is a sale of real property by the owner in which the proceeds from the sale of
the property fall short of the balance of the debts secured by liens against the property, and
because the owner cannot afford to repay the full amount of the secured debt, the secured
creditors agree to release their liens on the real property for less than the total amount that
would otherwise be due at closing.
1. Review and Analysis
Servicing Requests for short sale approval should be reviewed, analyzed and
implemented in accordance with Chapter 6 (Borrower Servicing Requests).
2. General Rule
A short sale should not be approved unless:
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a. The dollar amount of the sale proceeds to be received and applied against the SBA
loan balance is approximately equal to or greater than the Recoverable Value of the
collateral; and
b. The Obligor-seller will remain liable for the SBA loan balance, or approval of the
short sale is part of a compromise agreement reached in accordance with the
requirements of Chapter 23.
Note: Some states have laws that prohibit lienholders from collecting the deficiency if
they consent to a short sale. Consult legal counsel for case-specific information and
advice. And, follow the requirements set out in Chapter 23 regarding offers in
compromise before approving a request that may eliminate the ability to collect the loan
balance.
3. Supporting Documents
The Supporting Documents that should be obtained and reviewed in order to reach a
prudent decision regarding whether to approve a short sale include the following:
a. Real estate listing agreement;
b. Appraisal;
Note: See the definition of "Appraisal" in Chapter 2 for SBA Loan Program Requirements
pertaining to real property valuation. Given the inherent conflict of interest, never rely
solely on an appraisal prepared for an Obligor or another lender with a lien on the same
collateral, and exercise caution if the appraisal was prepared by a broker who will receive
a commission from the sale proceeds.
c. Real estate purchase and sale agreement, short sale and all other addendums;
d. Current title report;
e. Senior lienholder, subordination, inter-creditor or other agreement with any other
creditor with a lien against the property;
f. Transcript of account, or functional equivalent, for any loan secured by a senior lien;
g. Pre-approval letter from the buyer’s lender; and
h. Draft settlement statement (HUD 1).
4. General Requirements
a. Fair Sales Price
The sales price must be fair and justified by an Appraisal;
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b. Arms-length Transaction
The sale must be an arms-length transaction. This means, for example, that the
purchaser must not be a Close Relative or any Person with a close business or
personal relationship with the Obligor-seller; the Obligor-seller must not have any
expectation of being able to buy or rent back the property after the closing; and the
transaction must be conflict of interest free, (e.g., the real estate broker who
prepared the Appraisal justifying the short sale price must not also be entitled to a
sales commission when the short sale closes.)
c. Consent of All Secured Creditors
All of the Obligor-seller’s creditors with a lien on the property must have consented to
the short sale;
d. No Sale Proceeds to Seller
Because the Obligor-seller has no equity in the property, the seller should not
receive any funds from the sale proceeds;
e. No Subordinated Amounts to Senior Lienholders
The sale proceeds disbursed to senior lienholders, if any, must not include
advances, Default Charges, or any other amount subordinated to the SBA loan by a
senior lienholder, subordination, inter-creditor or other agreement;
f. No Sale Proceeds to Junior Lienholders, Unsecured Creditors or Others
No sale proceeds should be disbursed to junior lienholders other than token
amounts, i.e., $500 or less, if necessary for release of lien; unsecured creditors, and
any other Person who does not have a senior lien against the property except as
provided below with regard to closing costs;
g. No Credits to Buyer
Because short sale property should be sold in "as is” condition, no funds should be
credited to the buyer for repairs or any other purpose;
h. No Unreasonable Closing Costs
Generally, since the Obligor-seller has no equity in the property, the seller’s closing
costs should not be paid from the sale proceeds unless it is necessary under the
circumstances, in which case, the amount of any cost that will be paid from the sale
proceeds, e.g., real estate commissions, must be reasonable and justified under the
circumstances;
Note: Secured creditors, who are asked to accept less than the full amount due to them,
can condition their approval of a short sale. For example, their approval can be
conditioned on increasing the purchase price, reducing usual and customary sale closing
costs such as the amount of commissions paid to realtors, or receiving substitute
collateral for the deficiency.
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i. Arrangement for Payment of Loan Balance Deficiency
Satisfactory arrangements must have been made for payment of the loan balance
that will remain after receipt of the sale proceeds, (i.e., consideration for release of
the lien), unless the release is part of a compromise agreement reached with the
Obligor-seller pursuant to the requirements of Chapter 23.
J. Credit Bids
1. Requirement
A Credit Bid should be entered at all real property lien foreclosure sales initiated to
foreclose a lien securing an SBA loan, whether the sale is judicial or non-judicial.
2. Credit Bid Amount
To determine the amount of a Credit Bid, the following factors must be considered: (a)
Recoverable Value; (b) the SBA loan balance; and (c) need for and ability to collect a
deficiency judgment. The Credit Bid amount should be based on the Recoverable Value
of the collateral, but should not exceed the loan balance. Further, the entire loan
balance should not be bid if doing so would eliminate an otherwise collectible deficiency.
K. 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.
L. Abandonment
The pursuit of recovery on real property collateral may be abandoned if the collateral has no
significant Recoverable Value, i.e., a Recoverable Value of less than $10,000 per parcel.
(See Chapter 5 [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, because the presence of Hazardous Substances may not
significantly impair the market value of the acquired collateral.)
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Chapter 21.
Personal Property Collateral Liquidation
____________________________________________________________________________
A. General Requirements
If an acceptable workout agreement has not been implemented within a reasonable time
after Debenture purchase (e.g. 60 calendar days), all collateral that has a Recoverable
Value should be liquidated. With regard to personal property collateral, if the individual or
aggregate Recoverable Value is $5,000 or more, it must 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 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 (Chapter
16) to inspect and appraise the collateral as soon as the loan is classified in liquidation status.
That way, you can make preliminary UCC sale plans that can be implemented without further
delay if the need arises.
B. Procedure for Selecting Best Method of Liquidation
Personal property collateral must be liquidated in a manner that will maximize recovery in
the shortest amount of time. The most appropriate method will depend on the relevant
facts, which can be ascertained by taking the steps listed below.
1. Check the Military Service Status of Property Owner-Obligor
Determine whether the property owner-Obligor is in active military service. If so, consult
legal counsel regarding the implications of the Servicemember's Civil Relief Act prior to
initiating a lien foreclosure action.
2. Review the Loan Documents
Review the applicable Loan Documents to begin the process of determining what
personal property is available for liquidation, how the liens on that property can be
foreclosed, and how much money can be recovered by liquidating it. For example,
review the Loan Authorization, security agreements, and lien searches, as well as any
deposit account control agreement, assignment, marine mortgage, certificate of title,
landlord lien waiver, Third Party Lender Agreement, and any other lienholder,
subordination, or inter-creditor agreement.
Note: The law under which a lien was created dictates how it can be foreclosed. For
example, if the collateral consists of a lien on equipment or inventory created under Article 9
of the Uniform Commercial Code (“UCC”), the lien can be foreclosed by conducting a
foreclosure sale pursuant to UCC Article 9 ("UCC sale"). On the other hand, if the collateral
consists of a common law assignment of a life insurance policy or a marine mortgage, the
UCC does not apply and the lien must be foreclosed according to the applicable state or
federal law.
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3. Order a Lien Search
Verify the priority of the liens securing the 504 Loan by conducting a new lien search.
For example, order a current UCC lien search, or follow the steps below to search for
liens against special types of property, such as:
a. Motor Vehicles and Small Boats
Check for security interests noted on the certificate of title.
b. Airplanes
Order a title search, (usually through an airplane title service company), from the
Federal Aviation Administration Registry in Oklahoma City, Oklahoma, and if the
plane is subject to the Cape Town Convention, the international registry in Ireland.
c. Documented Vessels
Order an abstract of title, (usually through a marine title service company), from the
U.S. Coast Guard National Vessel Documentation Center in West Virginia.
d. Tax Liens
Contact the appropriate government entity (generally the county) to determine, and
continue to monitor, whether there are liens for delinquent taxes that have priority
over the lien securing the 504 Loan and decide whether they should be paid. If there
are junior IRS liens against the property, ask the IRS for a certificate of discharge or
reach an amicable resolution as to the amount of funds that should be applied to
each IRS tax lien.
4. Determine the Amount Owed on Senior Liens
With regard to each type of personal property collateral, determine the amount owed
(including unsubordinated Default Charges) on any debt secured by a senior lien against
the property, and deduct that amount from the property’s estimated Liquidation Value. If
it still appears that the property will have an individual or aggregate Recoverable Value
of $5,000 or more, proceed to Step 5. If not, see Paragraph E below regarding
abandonment.
5. Review the Relevant Business Records
If the collateral consists of inventory or accounts, review the Borrower's books and
records to determine whether there are accounts receivable that can be collected or
inventory that can be returned for cash or credit. If so, see Paragraph C.5 below for
information on collecting accounts receivable.
6. Check Status of Hazard Insurance
See Chapter 9 for SBA Loan Program Requirements regarding the need to adequately
insure collateral with Recoverable Value.
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7. Order an Appraisal
Order an Appraisal to obtain up-to-date information on the Liquidation Value of the
collateral.
8. Assess the Environmental Risk
If there are Hazardous Substances at the Borrower's business premises, follow prudent
lending practices in order to minimize the risk and maximize the recovery on the loan.
(See, for example, Practice Tip #4 at the end of Paragraph C.3 below regarding the sale
of used chemicals, batteries and tires.) If the collateral includes equipment associated
with a gas station or dry cleaner, comply with the requirements in Chapter 5
(Environmental Risk Management).
9. Calculate the Time and Costs Involved
Calculate the time and costs associated with each viable method of liquidation. This
includes: repossession or replevin; pre-liquidation collateral care and preservation; the
foreclosure action; and post-foreclosure care, preservation and resale if acquiring title to
the collateral is anticipated. For example, a CDC that intends to initiate a marine
mortgage foreclosure action should take into account the costs associated with having
the vessel arrested, appointment of a custodian, litigation, acquiring the vessel at the
U.S. Marshal’s sale, and holding and reselling it.
10. Estimate the Net Recovery
Using the information collected in Steps 1-9, calculate the net amount that could be
recovered by utilizing each viable method of liquidation (e.g., those discussed in
Paragraphs C – J below.) to determine which would yield the highest recovery in the
shortest amount of time.
C. Release of Lien for Consideration
See Chapter 8 for information on release of lien for consideration.
D. 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 an SBA loan provided that:
1. A voluntary sale would maximize recovery on the loan;
2. The Obligor has possession or control of the collateral;
3. All other lienholders have provided their written consent to the sale;
4. An Appraisal has been obtained;
5. The Recoverable Value of the collateral has been established;
6. The sale is supervised by the CDC (or SBA if SBA has taken over servicing);
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7. The costs of sale are reasonable, necessary and customary;
8. The lien securing the 504 Loan is only released in exchange for cash in an amount equal
to or greater than the Recoverable Value of the collateral; and
9. All of the net proceeds are applied to the principal balance of the SBA loan.
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 23)
E. UCC Sale
Liens on business assets such as 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.
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2. Requirements
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 SBA 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.)
3. Practice Tips
a. How to Choose an Auction Company
When choosing an auction company, consider the following:
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(1) Is it bonded? Does it have adequate insurance coverage, and the necessary
licenses, including a dealer’s license if you have titled motor vehicles to sell?
(2) Is it knowledgeable about the type of collateral you have to sell?
(3) Does it have experience attracting the appropriate customers for the type of
property involved?
(4) Does it have a good reputation in your area? Check its references.
(5) If it is not possible to hold the auction on the Borrower’s business premises, does
the company have a facility where the sale can be held?
(6) Can the auction company perform all of the duties associated with the auction?
For example, can it handle the pre-sale preparation and inspection, the
advertising, removal, and clean-up? And, most importantly, can it provide you
with accurate records concerning all aspects of the sale?
(7) Is the proposed fee arrangement reasonable, necessary and customary? When
possible, request and compare proposals from several companies. Scrutinize
the costs, particularly the advertising budget. Be suspicious of an unusually low
advertising budget. Adequate advertising is essential for a successful auction. If
you decide to pay the company on a commission basis, try to make sure that it
will not also charge a buyer’s premium, i.e., a percentage of the final bid amount
(generally 10% – 20%) that is added on to the price like a sales tax and goes
directly to the auction company as additional compensation.
Note: A buyer’s premium can affect your net recovery because not as many people
will attend the auction, and those who do will bid lower because they know they will
have to pay an extra 10-20% on top of the applicable sales tax.
b. Leased Equipment
If the UCC search reveals that a valuable piece of equipment is leased, find out the
residual amount owed on the lease and pay it off if doing so would (1) allow the
equipment to be included in the UCC sale; (2) attract more potential buyers to the
sale; and (3) maximize recovery on the loan.
c. Purchase Money Security Interests
If the UCC search reveals that another creditor has a purchase money security
interest in a valuable piece of equipment, (i.e., the Borrower used another creditor's
money to purchase the equipment and granted that creditor a security interest in it),
consider inviting that creditor to participate in the UCC sale if doing so would (1)
attract more potential buyers to the sale; (2) reduce the costs of sale (because they
can be prorated and shared with the other creditor); and (3) maximize recovery on
the loan.
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d. Used Chemicals, Batteries and Tires
If the collateral includes Hazardous Substances such as used chemicals, batteries or
tires, ascertain whether there is a market for it. If so, encourage the Borrower to sell
it and apply the net proceeds to the principal loan balance. (See Chapter 8 for
information on release of liens for consideration. See the EPA’s Website for a list of
companies that purchase reusable hazardous waste.)
F. Judicial Foreclosure
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.
G. Collection of Accounts Receivable
When an SBA 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 CDC
In order to protect the right to a deficiency judgment, when it appears that further
collection efforts by the CDC would be futile, the Obligors should be provided with
written notice of the CDC’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.
3. Set-off of Deposit Account
When a 504 Loan is secured by a lien on a deposit account, on the occurrence of an
event of default the CDC should, in compliance with UCC § 9-607 and the terms of any
applicable control agreement, ensure that the cash in the deposit account is applied to
the 504 Loan balance.
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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 504 Loan and a deficiency exists after all of the other collateral has been liquidated, the
policy should be surrendered to the insurance company for the cash value and the proceeds
applied to the principal balance of the 504 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 made by the CDC or SBA should be treated as
Recoverable Expenses. (See Chapter 25 for information on 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 C.3 above for information on UCC sales.
See Chapter 20 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)
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. Credit Bids
1. Non-judicial Foreclosure Sales
Non-judicial personal property lien foreclosure sales, e.g., UCC sales, must be
aggressively advertised in order to obtain the highest price and to avoid acquiring title.
Generally, unless the collateral has a high estimated Recoverable Value, (e.g., state of
the art digital printing equipment), it is not advisable to enter a Credit Bid or to establish
a minimum bid or a reserve amount because doing so could have a chilling effect on the
bidding.
2. Judicial Foreclosure Sale
A Credit Bid must be entered when a personal property lien securing an SBA loan is
judicially foreclosed. To determine the amount of a Credit Bid the following factors must
be considered: (a) Recoverable Value; (b) 504 Loan balance; and (c) need for and
ability to collect a deficiency judgment. The Credit Bid amount should be based on the
Recoverable Value of the collateral, but should not exceed the loan balance. Further,
the entire loan balance should not be bid if doing so would eliminate an otherwise
collectible deficiency.
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L. Abandonment
The pursuit of recovery on personal property collateral may be abandoned if the collateral
has no significant Recoverable Value, i.e., the individual or aggregate Recoverable Value is
less than $5,000. The decision and justification for abandoning collateral, including the
basis for the Recoverable Value estimate, must be documented in the Loan File. (See
Chapter 5 [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, because the presence of Hazardous Substances may not
significantly impair the market value of the acquired collateral.)
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Chapter 22.
Acquired Collateral
___________________________________________________________________________
A. Overview
Certain methods of liquidation may result in acquisition of real property collateral (“Real
Estate Owned” or “REO”) or personal property collateral. When collateral is acquired, it
should be liquidated in a manner that will maximize recovery in the shortest amount of time.
B. Title to Collateral
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 and CDC employees, as well as their Close Relatives and Associates must not,
directly or indirectly, bid on, purchase or otherwise acquire title to collateral.
4. CDCs that anticipate reselling the collateral, if acquired, within 120 calendar days,
should take title in their own name.
5. CDCs that do not anticipate reselling the collateral, if acquired, within 120 calendar days
should consult the SBA Loan Center about taking title in SBA's name to take advantage
of SBA’s property tax exemption status.
6. Title to collateral must not be taken in SBA's name without obtaining SBA's prior written
approval. (13 C.F.R. § 120.536(a)(4))
7. 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."
8. CDCs must not take title to Contaminated collateral in their own name—or SBA's
name—without SBA's prior written approval. (13 C.F.R. § 120.536(a)(5))
9. 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 intrical part of the value of the real property such as a
special use manufacturing plant and the equipment needed to operate it).
C. Ownership Responsibilities
Upon acquiring title to real or personal property collateral, the following actions should be
taken:
1. Possession and Control
a. Take possession of the acquired collateral;
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b. 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
c. Begin eviction proceedings if anyone is unlawfully occupying REO and will not leave
voluntarily.
2. Inventory
Inventory and photograph all acquired personal property, including 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
Monitor and pay taxes and assessments to avoid liens, interest accrual, and penalties.
5. Care and Preservation
a. Take reasonable steps to prevent deterioration, such as arranging for utility services
and essential repairs and maintenance.
b. When title to collateral is taken in SBA’s name, but the CDC is responsible for its
care and preservation, the CDC may request a limited power of attorney from SBA to
take actions related to the care and preservation of the acquired collateral—but not
the sale, transfer, assignment, lease or other permanent or temporary disposition of
it.
c. If the property has historic significance, consult legal counsel and the SBA Loan
Center to ensure compliance with Section 106 of the National Historic Preservation
Act of 1966.
6. Insurance
See Chapter 9 for SBA Loan Program Requirements pertaining to insurance coverage
on acquired collateral.
D. Expense Reimbursement
SBA will reimburse CDCs for reasonable, necessary and customary expenses related to
acquired collateral. Requests for reimbursement of such expenses must be submitted to
SBA in accordance with the procedures set out in Chapter 25 with regard to Recoverable
Expenses.
E. Timeframe for Disposal
Acquired collateral should be disposed of within 12 months of acquisition.
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F. 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 on the loan in the shortest amount
of time.
2. Bidding or Acquisition by SBA or CDC Employees
SBA and CDC employees, as well as their Close Relatives Associates must not, directly
or indirectly, bid on, purchase or otherwise take title to acquired collateral.
3. 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 on the loan in the shortest
amount of time.
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 on the loan in the shortest amount of time.
4. Sales Price
The sales price for acquired collateral should be based on an Appraisal. (See the
definition of “Appraisal" in Chapter 2 for SBA requirements pertaining to appraisals. See
Chapter 5 [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.)
5. 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 not inconsistent with this SOP;
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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, SBA or the CDC.
6. 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 SBA loan unless it is necessary to maximize recovery on the loan 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 the SBA loan program.
7. Purchase Offers
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 the form of a cashier’s check for at least 5% of the purchase price;
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.
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8. 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 on the loan.
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) Obtain hazard insurance coverage for the replacement value of the asset(s)
being sold that includes a mortgagee clause or equivalent in favor of the CDC (or
SBA if SBA has taken over servicing), and any other type of insurance coverage
required by statute, e.g., flood insurance, or prudent lending practices.
9. 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. Thereafter, any surplus must be remitted to the
SBA Loan Center along with a written explanation for the profit and a recommendation
based on the applicable law, regarding how the surplus funds should be distributed, e.g.,
retained by SBA, paid into the registry of the court, or distributed to junior lienholders.
G. Lease
Generally, acquired collateral should not be leased. However, if it has not sold after a
reasonable amount of time (e.g., one year), acquired collateral may be leased if doing so is
necessary to maximize recovery on the loan, provided that:
1. A comprehensive public foreclosure sale of the collateral was held;
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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 the SBA loan program; and
7. The leased property is inspected at least semi-annually and the inspection findings
included in the CDC's quarterly status report on the loan.
H. 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 23.
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 504 Loan. Submitting the offer does
not ensure that it will be accepted. Rather, it begins a process of evaluation and
verification by the CDC and 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 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 with one Obligor as the basis for the
compromise amount 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,
SBA and the CDC 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. Business Closed and Collateral Liquidated
a. Compromise with an Obligor is appropriate after the business has been closed and
all of the collateral has been liquidated. However, if the only remaining collateral is a
lien on the personal residence of the Obligor making the offer in compromise,
compromise negotiations may proceed provided that the Obligor is willing to pay an
additional amount as consideration for release of the lien. (Chapter 20)
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b. 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 on-
going enforced collection efforts.
2. Going Concern
Compromise with a going concern is only appropriate when the viability of the business
concern is at stake and acceptance of the offer will not harm the integrity of the SBA
loan program. (See Paragraph D below for detailed information on 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 6-17 for information on tools that can be used to help resolve temporary cash
flow problems such as re-amortization, deferment, or a workout.)
C. General Requirements
The general requirements for compromise of a debt owed on an SBA loan are as follows:
1. The loan must be classified in liquidation status;
2. The Person making the offer must not currently be in bankruptcy;
3. The full amount owed on the loan cannot be recovered because:
a. The Obligor is unable to pay it in a reasonable time;
b. It cannot be collected through enforced collection proceedings within a reasonable
amount of time;
c. The cost of collection does not justify enforced collection of it;
d. There is significant litigative risk, i.e., a real doubt concerning the ability to prevail in
court because of legal issues or factual disputes; or
e. Given the Obligor’s special circumstances, (e.g., illness), paying it would cause
Financial Hardship.
4. The Obligor has not engaged in fraud, misrepresentation or other misconduct in
connection with the SBA loan;
Note: Whenever there is a concern that an Obligor may have engaged in fraud or other
irregular activity in connection with an SBA loan, (e.g., made false statements or submitted
false documents), the matter must be reported to the Office of the Inspector General.
(Chapter 27). Prudent action under the circumstances may also include consulting legal
counsel to determine whether action under Title 31, Chapter 38, Administrative Remedies for
False Claims and Statements (31 U.S.C. § 3801-3812) is appropriate. (Managing Federal
Receivables, Chapter 7, page 14)
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5. Collection of the loan balance is not barred by a valid legal defense such as discharge in
bankruptcy or the statute of limitations; and
6. The compromise amount bears a reasonable relationship to the amount that could be
recovered in a reasonable amount of time through enforced collection proceedings and
is sufficient to protect the integrity of the SBA loan program.
Note: Obligors do not have a “right to compromise” the amount owed on their SBA loan. To
protect the integrity of the SBA loan program, Obligors should be referred to Treasury for further
collection efforts rather than be allowed to compromise for an amount that is nominal relative to
their loan balance. (31 C.F.R. § 902.2(e))
D. Compromise with a Going Concern
In addition to the general requirements in Paragraph C above, the following requirements
apply to compromise offers from going concerns:
1. The compromise must be necessary to avoid closure of a small business, i.e., the
business must not be able to continue operating under its current debt structure and all
other options for remaining viable must have been exhausted including, for example, the
sale of non-essential assets and the closure of non-profitable locations;
2. The Borrower must pass the Feasibility Test for a successful workout set forth in
Chapter 17;
3. The compromise must be part of an overall debt restructuring plan that involves all of the
Borrower’s creditors;
4. The specific details regarding the Borrower’s secured and unsecured debt and debt
reduction arrangement with each of its creditors must be set out in a written agreement
signed by all of the Borrower’s creditors; and
5. The Borrower’s proposed treatment of the SBA loan must be fair and equitable in
comparison to the treatment to be received by the Borrower’s other creditors. This
includes, for example, the percentage of debt to be forgiven, whether collateral is
provided or retained if the compromise amount is to be paid in installments, and whether
other lenders are allowed to participate in an appreciation sharing agreement.
E. Offer and Supporting Documents
Unless the basis for compromise is litigative risk, each Obligor submitting an offer in
compromise must submit the following documents:
1. Written Offer
A signed written offer that should refer to the penalties under 18 U.S.C. § 1001 for false
statements, identify the source of the funds for the offer, and explain any special
circumstances that the Obligor would like taken into consideration, such as an illness
that is causing Financial Hardship, e.g., SBA Form 1150 (Offer in Compromise);
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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:
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; and
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.
F. 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.
1. Corroborating Evidence
Independent financial information must be obtained to determine whether the financial
information submitted by the Obligor is complete and accurate. At a minimum, this
should include a current credit report. (31 C.F.R. § 902.2)
2. Adequacy of Financial Disclosure
At a minimum, a current credit report, as well as the financial information submitted by
the Obligor in the past (e.g., the personal financial statement submitted with the loan
application) must be compared to the financial information the Obligor submitted in
support of the offer in compromise. Any major discrepancies must be investigated and
explained. For example, concerns about the accuracy of tax returns submitted with the
offer in compromise should be investigated by ordering and comparing IRS transcripts
for the same tax years. All efforts to establish the validity of the Obligor's current
financial information should be documented in the Loan File.
3. Amount Recoverable Through Enforced Collection
An analysis must be performed to determine the amount that could be recovered from
the Obligor in a reasonable amount of time through enforced collection proceedings. It
should, for example, take the following factors into consideration:
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a. Recoverable Value of any collateral pledged by the Obligor that has not already been
liquidated, such as the Obligor’s personal residence;
b. Exemptions available under state and federal law;
c. Amount that could be recovered from the Obligor’s non-exempt assets that were not
pledged as collateral, e.g., by obtaining a judgment and executing on it;
d. Amount of present and potential income that could be obtained through, for example,
garnishment or offset;
e. Litigative risk, i.e., a real doubt concerning the ability of the CDC or SBA to prove its
case in court because of legal issues or factual disputes;
f. The necessary, reasonable and customary administrative and litigation expenses
that would be incurred through enforced collection;
g. The time it would take to enforce collection; and
h. The possibility that assets have been or will be concealed or fraudulently transferred.
4. Adequacy of Proposed Compromise Amount
a. Standard of Review
The compromise amount must bear a reasonable relationship to the amount that
could be recovered in a reasonable amount of time through enforced collection
proceedings and must be sufficient to protect the integrity of the SBA loan program.
Note: Obligors do not have a “right” to compromise the amount they owe on their SBA
loan. In this regard 31 C.F.R. § 902.2(e) states: “…agencies should consider whether
continued collection of the debt, regardless of cost, is necessary to further an enforcement
principle, such as the Government’s willingness to pursue aggressively defaulting and
uncooperative debtors.”
b. Minimum Amount
Generally, the compromise amount should be more than $5,000.
c. Hardship Exception
The compromise amount may be $5,000 or less if a larger amount would cause
Financial Hardship. (See Chapter 2 for the definition of “Financial Hardship”.)
d. Obligor’s Cooperativeness
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 504 Loan.
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G. 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, a Wrap-up Report should be submitted so that the loan can be charged off
and referred to Treasury for offset and other enforced collection efforts. (See Chapter
25 for more information.)
Note: Unacceptable offers and counter-offers should not be forwarded to SBA. See
Paragraph I below for information on when offers in compromise must be submitted for SBA’s
prior written approval.
H. Payment Terms and Conditions
1. Cash Compromise—Preferred
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 not be payable in installments unless installment
payments are necessary in order 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
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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 any deed or bill of
sale to the collateral securing the promissory note.
I. Obtaining SBA Approval
CDCs must obtain SBA’s prior written approval before entering into a compromise
agreement that will result in less than full payment of the outstanding principal balance of
the loan. (13 C.F.R. § 120.536(a)(3)) Requests for approval should be submitted to the
appropriate SBA Loan Center utilizing the format set out in the Offer in Compromise Tab
System, which is accessible from http://www.sba.gov/for-lenders
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”).
J. Completing the Compromise Process
After a compromise has been approved by all of the necessary parties, the following actions
should be taken:
1. Prepare and obtain the necessary signatures on a mutual release that is effective when
the compromise amount is paid in full (i.e., upon payment of the compromise amount,
SBA and the Lender will release the Obligor from further non-tax liability on the loan and
the Obligor will release SBA and the Lender from all claims and causes of action arising
from the loan);
2. Collect the compromise amount; or if the compromise agreement involves installment
payments, set up a separate accounting record for the promissory note, properly perfect
the lien on any asset offered to secure payment of the promissory note, and reference
the note receivable number that SBA will assign to the promissory note account rather
than the parent loan number when remitting payments to the Denver Finance Center;
3. Promptly apply the compromise amount to the principal loan balance;
4. Release the appropriate Loan Documents after verifying that the entire compromise
amount has been received; and
5. If there is no legal remedy to collect the loan balance (e.g., from another Obligor) after
the compromise amount is received, submit a Wrap-up Report so that the remaining
loan balance can be charged-off.
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Chapter 24.
Litigation
____________________________________________________________________________
This chapter provides guidance with regard to litigation activities and expenses on 504 Loans.
(See Chapter 3 regarding CDC litigation responsibility and authority. See Chapter 14
[Classifying Loans in Liquidation] regarding requests for assignment of the Loan Documents.)
A. When Litigation is Appropriate
Litigation activities on a 504 Loan should commence as soon as there is sufficient reason to
conclude that:
1. Defensive action is necessary to protect the collateral or ability to collect from an
Obligor; or
2. Full or partial recovery of the debt can best be achieved through affirmative litigation
against an Obligor or to foreclose a lien on collateral.
B. General Requirements
Litigation on a 504 Loan should be:
1. Cost effective;
a. Attorney Fees and Costs—Must be necessary, reasonable and customary. (See
Paragraph E below for more information.)
b. Due Diligence—Adequate due diligence should be conducted prior to taking legal
action to collect a 504 Loan to ensure that the contemplated action will be cost-
effective.
c. Alternative—If the contemplated legal action will not be cost-effective, a Wrap-up
Report should be submitted after the collateral has been liquidated so that the loan
can be referred to Treasury for enforced collection. (PCLP CDCs may be entitled to
a pro-rata share of the net amount recovered by Treasury. For more information,
see Chapter 26.)
Note: Litigation expenses that exceed the recovery on affirmative litigation undertaken
without an SBA pre-approved Litigation Plan are presumed to be unreasonable. See
Paragraph F for more information.
2. Diligently pursued and resolved in a timely manner. For example, if Non-routine
Litigation is contemplated, suit should be filed within 30 calendar days of SBA approval
of the CDC’s Litigation Plan; and while settlement is encouraged, defendant-Obligors
should not be given open-ended time frames to make, accept, reject, or counter
settlement offers.
3. Conducted in the name of the Person responsible for the litigation, i.e., CDCs are not
authorized to conduct litigation in SBA's name;
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4. Conducted solely by the Person responsible for handling the litigation, i.e., CDCs must
not take any action in litigation proceedings handled by SBA, including filing a proof of
claim without SBA's prior written approval;
5. Consistent with the terms of any senior lienholder agreement, i.e., whenever the
litigation is in response to an action initiated by a senior lienholder, legal counsel must
enforce the pre-litigation notice and subordination requirements in the lienholder
agreements, if any, executed by the senior lienholder in order to protect SBA's equity in
the collateral and to provide sufficient time to negotiate a workout whenever feasible.
C. Legal Counsel Hired by CDCs
Any attorney selected by a CDC to perform litigation on a 504 Loan must possess the
following minimum qualifications:
1. A valid license to practice law in the state where the litigation will be conducted;
2. Expertise in debt collection and bankruptcy law;
3. If complex litigation is necessary, specialized legal expertise and substantial experience
conducting the type of proceedings required based on the circumstances of the loan,
(e.g., an attorney hired to have a receiver appointed to operate or sell a gas station must
have expertise not only in debt collection and bankruptcy law, but also environmental
and receivership law and must have prior experience handling gas station receivership
cases);
4. Adequate legal malpractice insurance coverage (i.e., at least $1,000,000/$1,000,000);
and
5. No conflict of interest with SBA, the CDC, an Obligor, senior lienholder, junior lienholder,
landlord, competing creditor or any other Person involved in the issues pertaining to the
SBA loan.
D. Litigation Plans
1. Purpose
A Litigation Plan should be prepared prior to taking any material legal action on a 504
Loan because when properly prepared, a Litigation Plan helps ensure that the litigation
is cost-effective, necessary, reasonable and customary. It also expedites SBA’s review
of requests for approval or reimbursement of litigation expenses.
2. Format and Content
A template for preparing a Litigation Plan for a 504 Loan is accessible from
www.sba.gov/for-lenders. Documentation establishing that the proposed attorney meets
the requirements of Paragraph B above and a copy of the engagement letter should be
attached to the proposed plan. The plan should also include the justification for, and the
estimated cost of, any expense that is presumed to be unreasonable, such as those
associated with travel, hiring multiple law firms, or appointing a receiver to perform
routine liquidation activities. (See Paragraph F.3 below.)
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3. When a Litigation Plan Must be Submitted to SBA
a. General Rule
(1) Litigation Plan
Except as provided below with regard to emergencies, all CDCs, including PCLP
CDCs, must submit a Litigation Plan for SBA’s written approval prior to initiating
Non-routine Litigation. (13 C.F.R. § 120.540(c)) CDCs are not required to
submit a Litigation Plan to SBA prior to initiating Routine Litigation. However, all
CDCs must submit a Litigation Plan if a material change arises during the course
of Routine Litigation that causes it to be transformed into Non-routine Litigation,
e.g., the legal fees exceed $10,000 in the aggregate. (13 C.F.R. § 120.540(c))
Note: CDCs should include Routine Litigation in the Liquidation Plans they are
required to submit to SBA for approval. (See Chapter 14.)
(2) Amended Litigation Plan
All CDCs must submit an amended Litigation Plan to SBA for approval before
taking any legal action or incurring any expense that materially deviates from
their original Litigation Plan. (13 C.F.R. § 120.540(e)) Material changes are
those that, for example, cause approved legal fees to increase by more than
15%.
b. Exception—Emergency Situations
A CDC may take legal action to respond to an emergency without SBA's written
approval of a Litigation Plan or amended Litigation Plan, provided that the CDC:
(1) Makes a good faith effort to obtain SBA's written approval before undertaking the
emergency action;
(2) Submits a written Litigation or amended Litigation Plan to SBA as soon after the
emergency as possible; and
(3) Takes no further litigation action without SBA's written approval of the Plan or
amended Plan. (13 C.F.R. § 120.540(f))
4. How to Obtain SBA Approval
A request for approval of a proposed Litigation Plan or amended Litigation Plan must be
submitted to the appropriate SBA Loan Center.
5. SBA Response Time—No Implied Consent
Generally, SBA will respond to a request for approval of a proposed Litigation Plan or
amended Litigation Plan within 15 business days of receipt of the request. However, if a
response is not received within 15 business days, SBA's consent cannot be implied. (13
C.F.R § 120.541)
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6. Appeal of Loan Center Decision
See Chapter 3 for information on how to appeal the final decision of an SBA Loan
Center Director or designee regarding approval of a proposed Litigation Plan.
Note: Once an SBA loan has been referred to DOJ, DOJ—not SBA—has final approval
authority. This includes issues pertaining to litigation strategy, credit matters, settlement and
compromise.
E. Documentation
1. General Requirement
All Routine and Non-routine Litigation activities and decisions must be justified and
documented. The documentation, including pleadings and all Supporting Documents,
such as letters, financial statements, credit reports, Appraisals, title reports and UCC lien
searches, must be kept in the Loan File.
2. Routine Litigation
Unless specifically requested, CDCs are not required to provide copies of pleadings or
other documents pertaining to Routine Litigation to the SBA Loan Center except as
required by Chapter 25 (Expenses and Recoveries) to support requests for approval or
reimbursement of Recoverable Expenses.
3. Non-routine Litigation
To enable SBA to effectively monitor Non-routine Litigation conducted by CDCs—and to
expedite the review of requests for approval or reimbursement of litigation expenses— at
the time a significant pleading or other document is created or received, (e.g.,
complaints and answers, motions and opposing pleadings, orders and judgments,
bankruptcy plans, discharge orders, and Supporting Documents such as letters, financial
statements, credit reports, Appraisals, and lien searches), a copy should be submitted to
the SBA Loan Center, which will provide a copy to the SBA District Counsel responsible
for monitoring the litigation.
F. Attorney Fees and Costs
1. Recoverable Expenses
To be treated as a Recoverable Expense, attorney fees and costs must be: (a) incurred
to collect the balance due under the Note, to enforce the terms of the Loan Documents,
or to preserve or dispose of collateral; and (b) necessary, reasonable and customary for
the community in which the litigation proceedings were conducted.
2. Non-recoverable Expenses
Examples of attorney fees and costs that are Non-recoverable Expenses include, for
example, those related to:
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a. Overhead, including for example, conflict of interest determinations, file set up,
calendaring, and billing;
b. Performance of routine loan servicing or liquidation duties such as the preparation of
a Liquidation Plan or a Protective Bid analysis;
c. Assertion of a claim, cross claim, counterclaim, or third-party claim against SBA by a
CDC;
d. Rectifying a CDC error(s) that would justify a demand for reimbursement by SBA
under Chapter 26 (Reimbursable Loss on 504 Loans);
e. Defense of an action brought by SBA against a CDC;
f. Defense of a claim by an Obligor or other Person seeking damages based on a
CDC's alleged wrongful action unless SBA expressly directed the CDC to take the
alleged wrongful action;
g. Services rendered by CDC’s in-house counsel;
h. Services pertaining to litigation handled by SBA legal counsel that were not pre-
authorized in writing by SBA; or
i. Any action, which in SBA’s opinion, was for the sole benefit of the CDC.
3. Expenses Presumed to be Unreasonable and Non-Recoverable
Litigation expenses related to any of the following categories are presumed to be
unreasonable—and therefore Non-Recoverable—unless the CDC provides justification
for incurring the expense, which in SBA’s opinion, is sufficient to rebut the presumption:
a. Generic, i.e., non-itemized, bills for attorney fees or costs;
b. Services billed at an hourly rate that is excessive given the lack of need for special
expertise or experience to perform the task, e.g., $500 per hour to prepare a
creditor’s claim or other pleading commonly prepared by a paralegal;
c. Intra-law firm communications and billing by more than one person for the same
activity;
d. Inter-law firm communications and billing by more than one law firm for the same
activity when the justification for using more than one law firm was not included in a
Litigation Plan that was pre-approved by SBA;
e. Attorney fees and costs associated with travel that were not justified and itemized in
a Litigation Plan that was pre-approved by SBA;
Note: CDCs are expected to hire local legal counsel. SBA recognizes, however, that in
unusual circumstances, hiring counsel from another geographic area may be necessary,
reasonable and customary. If so, the justification and estimated travel expenses should
be included in a Litigation Plan submitted for SBA approval pursuant to Paragraph C.
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f. The appointment of a receiver to perform routine liquidation activities; and
g. Attorney fees and costs that exceed the recovery obtained in affirmative litigation
undertaken without an SBA approved Litigation Plan.
4. SBA Approval of Attorney Fees
All attorney fees and costs incurred in connection with either Routine Litigation or Non-
routine Litigation that a CDC seeks to recoup as a Recoverable Expense must be
approved by SBA, even if the estimated attorney fees and costs were listed in an SBA
approved Litigation Plan.
5. How to Obtain SBA Approval of Attorney Fees
Requests for approval of attorney fees and costs (along with the required Supporting
Documents) should be submitted to the appropriate SBA Loan Center pursuant to the
procedure set out in Chapter 25 (Expenses and Recoveries).
G. Suit for Judgment on Note or Guaranty
1. When Suit Should be Filed
Suit based on the Note or Guaranty should be filed to obtain a judgment against an
Obligor when that Obligor:
a. Does not have a valid legal defense (e.g., discharge in bankruptcy);
b. Has the ability to pay the SBA loan in full or substantial part;
c. Is unwilling to pay the loan or to engage in good faith compromise negotiations; and
d. Litigation would be a cost-effective method of collecting the loan balance.
2. Alternative—Referral to Treasury for Enforced Collection
When litigation will not be pursued, once the collateral has been liquidated, the loan
should be charged-off so that SBA can refer it to Treasury for enforced collection. (See
Chapter 28 for information on enforced collection by Treasury. See Chapter 14 or
Chapter 23 for information on how to access an Obligor’s repayment ability and net
worth for enforced collection purposes. See Chapter 27 for information on how to report
fraud and abuse to the SBA Office of the Inspector General.)
H. Judicial Foreclosure and Deficiency Judgment
Although non-judicial foreclosure is generally preferable, judicial foreclosure may be
required by state law or more appropriate under certain circumstances, for example, when
the proceeds of a non-judicial foreclosure sale will not be sufficient to pay the loan in full and
a deficiency judgment will be needed to collect the balance from the Obligors.
Note: Deficiency represents that portion of a loan that remains outstanding after collateral has
been liquidated (converted to cash) and applied to the outstanding balance.
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I. Settlement Offers
Offers to settle ongoing litigation should be reviewed, analyzed and processed pursuant to
the requirements in Chapter 23 (Offer in Compromise).
J. Bankruptcy Proceedings
Note: For general information about federal bankruptcy laws and the bankruptcy process, see
Bankruptcy Basics on the United States Courts Web site.
1. Impact of Automatic Stay
The moment a bankruptcy petition is filed, the automatic stay, (a statutory court order),
prohibits creditors from pursuing further collection action against a debtor while the
debtor’s bankruptcy is pending. Therefore, upon learning that a bankruptcy petition has
been filed with respect to an Obligor, (the "debtor" in the bankruptcy proceedings and as
used in this Paragraph), legal counsel should be consulted regarding the impact of the
bankruptcy filing on any pending or contemplated collection activities. Unless legal
counsel determines that the automatic stay, which is imposed at the time a bankruptcy
petition is filed, has been lifted or is no longer in effect, collection activity against the
debtor must stop immediately. (11 U.S.C. § 362)
2. Suspension of Collection Activity
Upon receipt of notice of a bankruptcy involving an Obligor (including "no asset" Chapter
7 bankruptcies), the Person receiving the notice must immediately notify SBA so that
any on-going administrative wage garnishment, off-set, or other enforced collection
proceedings can be suspended, and appropriate action can be taken by SBA legal
counsel. Generally, the notice should be sent to the SBA Loan Center. However, if the
bankruptcy notice concerns a loan that has been charged-off and referred to Treasury,
the notice should immediately be sent to the SBA Treasury Offset Division in
Birmingham, Alabama, so that the loan can be recalled from Treasury. The notice,
which must include the Borrower's name and the SBA loan number, should be faxed or
emailed to:
Supervisory Loan Specialist
Treasury Offset Division
Fax: 202-481-0592
Email: BirminghamTOPS@sba.gov
Phone: 1-800-736-6048 Extension 7705
3. Litigation Requirements
If an Obligor files for bankruptcy protection, at a minimum, the following actions should
be taken when necessary to protect the ability to recover on the 504 Loan:
a. File a proof of claim;
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b. Review the debtor's Statement of Financial Affairs and schedules and compare them
with the financial documents the debtor provided to SBA and the CDC to determine if
there are any material discrepancies with regard to the debtor's alleged assets,
liabilities, income or expenses;
c. Report suspected fraud to the Office of the Inspector General (Chapter 27) and the
appropriate Office of the U.S. Trustee;
d. Monitor the bankruptcy proceedings;
e. Represent the interests of SBA and the CDC at all hearings where the outcome may
adversely affect the ability to collect the 504 Loan balance;
f. File a motion for relief from the automatic stay when necessary to pursue enforced
collection proceedings against the collateral;
g. File an objection to discharge of the debt owed on the 504 Loan if there is reason to
believe that the debtor obtained the loan through fraud, misrepresentation or
omission of a material fact, or fraudulently transferred or converted collateral;
h. File a motion to revoke the debtor's discharge if there is reason to believe that it was
obtained through fraud or other acts of impropriety;
i. Obtain the bankruptcy court's approval of a reaffirmation agreement if the debtor is
willing and able to continue paying on the 504 Loan;
j. Review proposed plans and disclosure statements and file an objection when
necessary;
k. Cast a vote to accept or reject proposed plans based on an analysis of the relevant
facts;
Note: SBA's prior written approval is required before a PCLP CDC compromises the
principal balance of a 504 Loan or a non-PCLP CDC compromises any portion of a 504
Loan. (13 C.F.R § 120.536(a)(3)) Therefore, if a proposed bankruptcy plan calls for the
reduction of the loan balance, the CDC handling the litigation may need to obtain SBA's
written approval before voting in favor of the plan, but not before voting against it -
regardless of whether there are additional Obligors who will remain responsible for the
entire loan balance.
l. Resume collection efforts immediately if the bankruptcy case is dismissed and the
504 Loan is still in default; and
m. Take any other action that may be necessary and appropriate under the
circumstances.
Note: An approved bankruptcy plan only affects the liability of the plan debtor. All other
Obligors remain liable for the entire loan balance.
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K. Probate Proceedings
In addition to collecting the proceeds from any life insurance policy assigned as collateral, if
an Obligor dies, at a minimum, the following actions should be taken when necessary to
protect the ability to recover on the 504 Loan:
1. File a creditor's claim in the probate proceedings within the time prescribed by the
applicable law;
Note: 31 U.S.C. § 3713(a)(1)(B) gives priority to claims of the United States filed against the
estate of an Obligor.
2. Review the inventory of the decedent's estate and compare it with the financial
documents the decedent provided to SBA and the CDC to determine if there are any
material discrepancies;
3. Report suspected fraud to the SBA Office of the Inspector General (Chapter 27);
4. Monitor the probate proceedings;
5. Represent SBA and the CDC’s interests at all hearings where the outcome may
adversely affect the ability to collect the 505 Loan balance; and
6. Take any other action that is necessary and appropriate under the circumstances.
L. Enforcement of Judgments
After a judgment has been obtained against an Obligor (the “judgment debtor”):
1. Registration
The judgment, or an abstract thereof, should be recorded in any state or other
jurisdictional unit (e.g., territory or foreign country) where the judgment debtor resides or
has assets that can be seized and sold to satisfy the judgment;
2. Execution
The judgment debtor’s non-exempt assets should be executed on within 90 calendar
days of the judgment date; and
3. Assignment to SBA
The judgment should be assigned to SBA if the only, or most cost-effective, way to
collect it is to utilize a remedy that is available to SBA—but not the CDC—under the
Federal Debt Collection Procedures Act.
M. Application of Litigation Recoveries
Funds recovered through litigation should be applied in the following order:
1. Recoverable Expenses;
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2. Principal loan balance; and
3. Accrued interest.
Note: When litigation is handled by SBA legal counsel in their capacity as a Special Assistant
U.S. Attorney or by the local U.S. Attorney's Office, DOJ is authorized to collect and retain a 10%
surcharge pursuant to Section 3011 of the Federal Debt Collection Procedures Act.
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Chapter 25.
Expenses and Recoveries
____________________________________________________________________________
This chapter covers expenses related to collecting sums due under the Note, enforcing the
terms of the Loan Documents, and preserving or disposing of collateral. (See Chapter 22 for
information regarding expenses related to acquired collateral.)
A. Classification of Expenses
Expenses are classified by SBA as either Recoverable Expenses, which can be recouped,
or Non-recoverable Expenses, which cannot be recouped. (See Paragraphs C and D
below.) When reviewing CDC requests for expense approval or reimbursement, SBA may
determine that an expense is 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, for example:
a. Any expense that is not related to collection of amounts due under the Note, to
enforce the terms of the Loan Documents, or preservation or disposal of the
collateral for the loan;
b. Any fee or cost, or portion thereof, that is not necessary, reasonable or customary;
c. CDC overhead costs that should be absorbed as a cost of doing business, e.g.,
telephone calls, photocopying, mileage, meals, etc.;
d. Fees and out-of-pocket costs (e.g., late fees and NSF charges) that SBA allows
CDCs to collect if the loan is current, but does not guaranty (Chapter 4);
e. Fees and costs incurred by a CDC to have an independent contractor perform
routine loan servicing or liquidation duties such as the preparation of a demand
letter, Liquidation Plan, Purchase Package, or Protective Bid analysis, or the review
of an Appraisal or Environmental Investigation Report; unless the contract and
contractor were preapproved by SBA in writing (Chapter 3);
f. Funds associated with “sharing” an appraisal ordered by another lender, Obligor, or
other Person. (See the definition of “Appraisal” in Chapter 2 for SBA Loan Program
Requirements pertaining to Appraisals.);
g. Expenses related to actions, which in SBA’s opinion, were taken for the exclusive
benefit of the CDC;
h. Expenses associated with a claim by an Obligor or other Person seeking damages
based on a CDC's alleged wrongful action unless SBA expressly directed the CDC to
take the alleged wrongful action; and
i. The attorney fees and costs listed in Chapter 24 as Non-recoverable Expenses.
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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, 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
(1) Attorney fees; and
(2) Costs such as court filing 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. Recoveries
1. Application of Recoveries
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:
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a. Recoverable Expenses incurred in the liquidation process;
b. Principal balance of the loan; and
c. Accrued interest.
2. Remittance of Recoveries to SBA
The net proceeds of any recovery on a 504 Loan should be remitted to SBA within 15
business days of receipt. If the recoveries are not remitted in a timely manner, the SBA
Loan Center may charge interest on the late amount and refer the matter to the SBA
Office of Credit Risk Management.
C. Payment of Non-recoverable Expenses Incurred by CDCs
CDCs must pay their own Non-recoverable Expenses. SBA will not pay, reimburse or
approve, in whole or in part, Non-recoverable Expenses incurred by CDCs.
D. Recoupment of Recoverable Expenses Incurred by CDCs
Note: The Prompt Payment Act, which requires federal agencies to pay interest and penalties on
late payments for contracted expenses, does not apply to payments to CDCs for Recoverable
Expenses. See SOP 20 17 and Subpart 32.9 of the Federal Acquisition Regulation for further
information.
1. General Requirement—SBA Approval
Any cost, fee or other amount that a CDC seeks to treat as a Recoverable Expense
must be reviewed and approved by SBA pursuant to Paragraph E below.
2. Recoupment Methods
Recoverable Expenses incurred by a CDC should be paid by the CDC and recouped by
one of the following methods:
a. Deduction from Recoveries
Recoverable Expenses may be deducted from recoveries on the loan.
b. Reimbursement by SBA
CDCs may ask SBA to reimburse them for Recoverable Expenses that were not paid
through deduction from recoveries.
E. SBA Review and Approval
Any cost, fee or other amount that a CDC seeks to treat as a Recoverable Expense must be
reviewed and approved by SBA regardless of whether the CDC is seeking reimbursement or
has already deducted the expense from recoveries. Requests for approval must be
submitted to SBA in accordance with the following requirements:
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1. Where to Submit Requests
Requests must be submitted to the appropriate SBA Loan Center.
2. Preferred Format
To expedite the review process, CDCs should organize and submit their requests in the
format recommended by the appropriate SBA Loan Center.
3. When Requests May be Submitted
To prevent backups and expedite the review process, requests for reimbursement or for
approval of Recoverable Expenses deducted from recoveries may only be submitted at
the following times:
a. When Recoverable Expenses Total $5,000 or More Per Loan
(1) Requests involving Recoverable Expenses totaling $5,000 or more per loan may
be submitted at any time after Debenture purchase.
(2) A request involving a Recoverable Expense that is less than $5,000 must be
compiled with other expense requests involving the same loan, and can only be
submitted when the aggregate amount totals $5,000 or more, or at the time the
Wrap-up Report on the loan is submitted, whichever occurs first.
b. Submission of Wrap-up Report
All outstanding requests for SBA reimbursement of Recoverable Expenses or
approval of expenses deducted from recoveries must be submitted with the CDC’s
Wrap-up Report on the loan.
4. Multiple Loans—Allocation of Expenses
When a request involves multiple loans to the same Borrower (whether SBA loans or
non-SBA loans):
a. If the expense is related to collateral, the expense (as well as any recovery) must be
allocated to the loans according to the priority of the lien securing each loan; and
b. If the expense is not related to collateral, the expense (as well as any recovery) must
be pro-rated and allocated among the loans to which it relates.
5. Contents of Recoverable Expense Request Packages
Requests should include the following items as applicable:
a. CDC Contact Information
CDC's name, address, e-mail address, phone and fax numbers, and Tax
Identification Number.
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b. Borrower's Name and SBA Loan Number
c. Summary of Expenses
Multiple invoices must be grouped by the categories set out in Paragraph A.2 of this
chapter and summarized in a cover sheet that includes: (1) the date each service
was performed; (2) the number of each invoice; (3) the subtotal for each category;
and (4) the grand total of all categories.
d. Itemized Invoices
A paper or electronic copy of each invoice must be provided and include: (1) the
date of the invoice; (2) a thorough description of the goods or services provided; (3)
the date the goods were provided or the services were performed; (4) the amount
charged for each service or product provided; (5) the total amount due; and (6) if the
invoice is for services billed on an hourly basis, the name, title, hourly billing rate and
time spent by each individual who performed services covered by the invoice.
e. Supporting Documents
Recoverable Expense request packages must include a copy of all of the Supporting
Documents pertaining to the invoices (e.g., a copy of the Site Visit Report if the
invoice is for a site visit) unless they have already been provided to SBA. For
example, with regard to litigation expenses, the Recoverable Expense request
package must include a copy of the SBA approved Litigation Plan, pleadings and
other documents required by Chapter 24 unless they have already been provided to
SBA.
6. Denied Expense Approval Requests
CDCs must reimburse SBA for the amount of any expense denied by SBA that the CDC
has already deducted from recoveries.
Note: For information on how to appeal the final decision of an SBA Loan Center Director or
designee with regard to approval of liquidation or litigation expenses, see Chapter 3.
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Chapter 26.
Reimbursable Loss on 504 Loans
A. All 504 Loans
Generally, if a CDC defaults on a Debenture sold to fund a 504 Loan and SBA is required to
purchase the Debenture, SBA limits its recovery to the payments made on the 504 Loan, the
amount recovered through liquidation, and if the loan was funded by a PCLP Debenture, the
percentage of the loss that the PCLP CDC is required to reimburse SBA. However, if SBA
discovers fraud, negligence or misrepresentation by the CDC, the CDC must reimburse SBA
for the entire amount of the Debenture. (13 C.F.R. § 120.938(b))
1. Referral to Office of Credit Risk Management
When SBA has reason to suspect that a CDC has engaged in fraud, negligence or
misrepresentation with regard to a 504 Loan, SBA will refer the matter to the Office of
Credit Risk Management, which with assistance from the Office of Litigation, will take
appropriate action against the CDC.
2. Referral to Office of the Inspector General
In addition to referring the matter to the Office of Credit Risk Management, if SBA
discovers fraud or misrepresentation, it will refer the matter to the Office of the Inspector
General pursuant to the procedures set out in Chapter 27.
B. PCLP 504 Loans
1. PCLP CDC Reimbursement Requirement
Unless a higher percentage is required by the applicable Loan Program Requirements, a
PCLP CDC must reimburse SBA for ten percent of any loss suffered by SBA as a result
of a default on a 504 Loan funded by a PCLP Debenture. (13 C.F.R. § 120.847(a)) The
PCLP CDC may use its Loan Loss Reserve Fund ("LLRF") for this purpose, but it must
replenish the LLRF within 30 days of the withdrawal if the withdrawal causes the PCLP
CDC to have insufficient funds to cover its exposure on all of the remaining PCLP
Debentures in its portfolio.
2. Calculation of PCLP CDC's Reimbursement Obligation
The amount of SBA's loss and the PCLP CDC's reimbursement obligation is calculated
by adding together the amount of principal and interest owed by the Borrower
immediately after SBA purchased the Debenture and any Recoverable Expense paid by
SBA; deducting from that total the amount of any recovery SBA received after
purchasing the Debenture (SBA’s loss); and multiplying the dollar amount of SBA's loss
by ten percent (CDC’s reimbursement obligation) unless the CDC's agreement with SBA
specifies that the CDC’s reimbursement obligation will be calculated by multiplying
SBA’s loss by 15 percent, in which case, the reimbursement obligation amount would be
15 percent of SBA's loss—not ten percent.
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Transfer Funds from LLRF
3717.
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3. CDC Notification of Reimbursement Obligation
Within 90 calendar days of charging-off the balance of a PCLP 504 Loan, the SBA Loan
Center will send the PCLP CDC a letter that sets out:
a. The amount of the PCLP CDC's reimbursement obligation;
b. The deadline for payment, i.e., within 30 calendar days of the date of the letter;
c. How the reimbursement amount was calculated, (Generally, a copy of the transcript
of account and Supporting Documents utilized by the SBA Loan Center to calculate
the amount should be included.); and
d. The PCLP CDC's appeal rights pursuant to 13 C.F.R. § 120.847(h)(2).
4. Appeal Process
The final decision of an SBA Loan Center Director or designee regarding the calculation
of SBA's loss and the PCLP CDC's reimbursement obligation may be appealed to the
Director of the Office of Financial Program Operations (designee of the Director of the
Office of Financial Assistance), who will consult with the Director of the Office of Credit
Risk Management, provided that: (1) the PCLP CDC reimbursed SBA for ten percent of
any loss amount that is not in dispute within 30 days of the date of SBA's notification
letter; and provided further that (2) the appeal: (a) is in writing; (b) includes a copy of the
notification letter and Supporting Documents; (c) states the reason why the calculations
are believed to be incorrect; and (d) is submitted within 30 calendar days of the date of
the notification letter. (13 C.F.R. § 120.847(h)(2))
5. Payment Deadline
The PCLP CDC must reimburse SBA no later than 30 calendar days after SBA notifies it
of its reimbursement obligation; or, if the PCLP CDC filed a timely appeal, no later than
30 calendar days after issuance of a final decision on the appeal.
(13 C.F.R. § 120.847(h)(1))
6. Consequences if PCLP CDC Fails to Reimburse SBA
a. Interest and Penalties
Delinquent PCLP reimbursement payments accrue interest and are subject to a
monetary penalty of up to six percent as well as processing and handling fees as
authorized by 31 U.S.C.
b.
If the PCLP CDC fails to satisfy its entire reimbursement obligation within 30
calendar days of the notification letter or issuance of the final decision on the PCLP
CDC's appeal, the SBA Loan Center may transfer funds in the PCLP CDC's Loan
Loss Reserve Fund (“LLRF”) to SBA to cover the PCLP CDC's reimbursement
obligation. (13 C.F.R. § 120.847(i))
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c. Issue Demand for Payment
If the PCLP CDC's LLRF does not contain sufficient funds to reimburse SBA, the
SBA Loan Center may send the PCLP CDC a written demand for payment of the
difference between the amount obtained from the LLRF and the amount still owed on
the reimbursement obligation, and the PCLP CDC must pay this amount within 30
calendar days after the date of the demand. (13 C.F.R. § 120.847(i))
7. Post-Reimbursement Recovery on PCLP 504 Loans
If there are recoveries that reduce the amount of SBA's loss after a PCLP CDC has paid
its reimbursement amount in full, and provided that the PCLP CDC is otherwise in good
standing with SBA, SBA will share the net recovery with the PCLP CDC on a pro-rata
basis, i.e., the PCLP CDC will receive ten percent of the net recovery, unless the CDC's
agreement with SBA specifies that SBA's loss will be calculated by multiplying by 15
percent, in which case the CDC’s share will be 15 percent of the net recovery—not ten
percent.
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Chapter 27.
Inspector General Referrals
____________________________________________________________________________
A. Duty to Report Irregularities
All SBA officials, CDCs 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"). (13 C.F.R. § 120.197)
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 a business;
g. Using false Social Security Numbers;
h. Creating false work histories;
i. Submitting altered tax returns; or
j. Providing fraudulent standby agreements.
2. Loan Closing Fraud
False documents submitted by a loan applicant with regard to a loan closing requirement
(e.g., equity injection), for example:
a. False gift letter or affidavit;
b. False promissory note and standby agreement; or
c. False bank statement and cashier’s check.
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3. Loan Agent Fraud
Actions by Agents who orchestrate, facilitate or otherwise support any of the illegal acts
committed by loan applicants, CDCs, 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 504
Loan.
7. CDC Misconduct
Misconduct by a CDC, an Associate of a CDC, an employee of the CDC, or a Close
Relative of an employee, such as soliciting or accepting a bribe in connection with
making, closing, servicing, or liquidating a 504 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.)
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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?
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 28.
Charge-off and Wrap-up 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.
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; (2) liquidation of the collateral; (3) compromise; and (4)
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. Wrap-up Report
The submission of a Wrap-up Report indicates that no further collection action will be
pursued, and that the loan is ready for charge-off.
1. When Required
For each 504 Loan classified in liquidation status, a Wrap-up Report must be prepared
and submitted to the appropriate SBA Loan Center within 90 calendar days of
completing all reasonable and cost-effective recovery efforts or upon receipt of a request
from the SBA Loan Center, whichever occurs first.
2. Consequences of Failure to Submit a Timely Wrap-up Report
If a CDC fails to submit a Wrap-up Report within the timeframe specified in
Subparagraph 1 above, in order to comply with the Debt Collection Improvement Act of
1996, SBA will charge-off the loan balance, refer the loan to Treasury if appropriate, and
with regard to PCLP 504 Loans, bill the PCLP CDC for its share of the loss.
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Note: If a CDC is unable or unwilling to liquidate its 504 Loan portfolio according to SBA
Loan Program Requirements, the matter will be referred to the SBA Office of Credit Risk
Management to initiate enforcement action pursuant to 13 C.F.R. § 120.1400 and
13 C.F.R. § 120.1500. (See SOP 50 53 for additional information regarding SBA’s credit risk
management policy and procedures.)
3. Contents
A template for drafting a Wrap-up Report is accessible from http://www.sba.gov/for-
lenders. It should include the information listed below.
a. Identifying Information
(1) SBA loan number, Borrower’s name, and principal loan balance; and
(2) CDC’s name, contact person’s name, phone number and email address.
b. Status of Obligors
A discussion of the status of each Obligor required by the Loan Authorization that
includes, when applicable, the following information and Supporting Documents:
(1) Each Obligor’s name, address and Taxpayer Identification Number (Employer
Identification Number or Social Security number), whether they are still liable for
the loan balance, and if not, the reason why, e.g., compromise or discharge in
bankruptcy;
(2) A copy of the demand letter sent to each Obligor—or an explanation for its
absence (e.g., bankruptcy filing);
(3) A description of the efforts made to locate any missing Obligor(s);
(4) A description of any efforts made to obtain an offer in compromise from each
Obligor still liable for the loan balance; and
(5) An estimate of the potential recovery from each remaining Obligor based on a
current asset search, credit report, or other credible Supporting Document(s).
Note: See Chapter 14 (Classifying Loans in Liquidation) and Chapter 23 (Offer in
Compromise) for information on how to analyze an Obligor’s repayment ability.
c. Status of Collateral
A discussion of the status of the collateral required by the Loan Authorization that
includes, when applicable, the following information and Supporting Documents:
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(1) List of how, when and by whom (e.g., CDC or Third Party Lender) each
significant item or category of collateral (i.e., real property with a Recoverable
Value of $10,000 or more per parcel, and personal property with an aggregate or
individual Recoverable Value of $5,000 or more) was liquidated, the ultimate
disposition of the collateral (e.g., sold to a third party or purchased by the Third
Party Lender at foreclosure sale), and the amount recovered;
(2) List of any remaining collateral;
(3) Justification for abandoning any remaining collateral, and a description of the
efforts made to compromise with the owner-Obligor if it includes a lien on a
personal residence;
(4) Summary section of any post-default Appraisal;
(5) With regard to commercial real property collateral, the summary section of any
post-default Environmental Investigation Report or an explanation for why an
Environmental Investigation was not required under Chapter 5; and
(6) Description of the efforts to liquidate any life insurance policy with a cash-
surrender value.
d. Status of Liquidation and Litigation Activities
A statement indicating whether there are any liquidation or litigation activities,
which are on-going or planned for the immediate future, (e.g., collection of
payments under a workout agreement or plans to execute on a judgment).
e. Site Visit Report
A copy of the post-default Site Visit Report, previously approved site visit waiver, or
an explanation for why a site visit was not required under Chapter 16.
f. Recoveries
If not previously reported to SBA, a list of all recoveries that includes: the source,
amount and date of the recovery; an accounting of how the recovery was applied to
the loan balance; a copy of any relevant Supporting Documents; and an explanation
for why the recoveries were not reported and submitted to SBA within 15 business
days of receipt as required by Chapter 25 (Expenses and Recoveries).
g. Expenses
(1) A list of all expenses incurred to liquidate the loan; and
(2) A request for approval or reimbursement of any Recoverable Expense that has
not already been reviewed and approved by SBA. The request must be
accompanied by the Supporting Documents required by Chapter 25 (Expenses
and Recoveries).
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h. Recommendation
A recommendation regarding whether:
(1) The loan balance should be charged-off;
(2) Any remaining collateral or acquired collateral should be abandoned;
(3) The loan should be referred to Treasury for further collection efforts; and whether
(4) The loan should be referred to the Office of the Inspector General ("OIG") to
investigate any suspected fraud or abuse. (See Chapter 27 for information on
OIG Referrals.)
C. 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. (See Chapter 15 for information regarding referral for inclusion in the
Treasury Offset Program at the time the Debenture is purchased.)
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.
2. Distribution of Post-Referral Recoveries
With regard to PCLP 504 Loans, SBA shares the net amount recovered on the loan after
referral to Treasury with the PCLP CDC on a pro-rata basis provided that the CDC has
paid its reimbursement obligation in full and is otherwise in good standing with SBA.
(See Chapter 26 for more information.)
3. Post-Referral Servicing
a. Exclusive Authority of Treasury Department
After charge-off and referral of a 504 Loan to Treasury, the Loan File should be
retained by the Person originally responsible for liquidating the loan. But, except as
provided below with regard to subsequent bankruptcy filings, no one other than
Treasury can take any further servicing or liquidation action on the loan. This
exclusion applies to both SBA and the CDC.
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b. Notice of Bankruptcy Filing or Other Litigation
Upon receiving notice of a bankruptcy filing or other litigation concerning a 504 Loan
referred to Treasury, the Person receiving the notice must immediately notify the
SBA Treasury Offset Division in Birmingham, Alabama, so that the loan can be
recalled from Treasury and SBA legal counsel can take appropriate action in
response to the litigation. The notice, which must include the Borrower's name and
the SBA loan number, should be faxed or emailed to:
Supervisory Loan Specialist
Treasury Offset Division
Fax: 202-481-0592
Email: BirminghamTOPS@sba.gov
Phone: 1-800-736-6048 Extension 7705
Note: Regardless of whether the loan was originally serviced by the CDC, after the loan
has been referred to Treasury, all subsequent litigation is managed by SBA legal counsel –
who may recommend that the loan be referred back to the CDC to handle the litigation
under SBA legal counsel’s supervision. (Chapter 3)
D. IRS Notification of Cancelled Debt
1. When IRS Form 1099-C Required
IRS Form 1099-C (Cancellation of Debt) must be filed with the IRS and mailed to the
Borrower—but not the Guarantors—whenever the principal owed on an SBA loan is
$600 or more; and the loan balance has become uncollectible (e.g., as the result of a
compromise).
2. Responsibility for Issuing IRS Form 1099-C
The SBA Denver Finance Center is responsible for providing the Borrower and the IRS
with IRS Form 1099-C for the cancelled portion of an SBA loan.
3. When IRS Form 1099-C Issued
a. Compromised debt should be reported the calendar year after the compromise
amount was paid in full;
b. Debt discharged in bankruptcy should be reported the calendar year after the
discharge; and
c. Charged-off debt that is not related to compromise or bankruptcy should be reported
the calendar year after:
(1) The event occurred that rendered the debt uncollectible such as the date the
statute of limitations for collecting the debt expired, or
(2) The date Treasury completed its collection efforts.
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E. Credit Bureau Reporting
SBA is responsible for reporting all charged-off 504 Loans, including PCLP CDCs’ share of
the loss, to the appropriate credit bureaus and Federal Government delinquent debtor
databases, e.g., Credit Alert Interactive Voice Response System ("CAIVRS") and Debt
Check.
Note: CAIVRS is a HUD-maintained computer information system that enables lenders to learn if
an applicant has previously defaulted on a federally-assisted loan from the USDA, SBA,
Department of Education, HUD or VA. Debt Check is a Treasury Department Financial
Management Service program that allows agencies and outside lenders to obtain information
regarding whether applicants for federal loans, loan insurance, or loan guarantees owe delinquent
child support or delinquent non-tax debt to the Federal Government.
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