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SBA SOP 50 57 4
7(a) LOAN
SERVICING and LIQUIDATION
Office of Capital Access
Small Business Administration
U.S. Small Business Administration
Standard Operating Procedure Summary
S.O.P. Number: SOP 50 57 Edition: 4 Series: N/A
SOP Version This Replaces: 50 57 3.1
Purpose: Update SBA policy and procedures for 7(a) loan servicing and liquidation.
Key Pages Affected in this Version: All
Stakeholders Affected: All SBA employees and SBA Lenders
Originating Office: Office of Capital Access
Authorized By: Thomas Kimsey, Associate Administrator Capital Access
Effective Date: November 1, 2025
Effective Date: November 1, 2025 2
Table of Contents
Standard Operating Procedure Summary ............................................................................................ 2
Chapter 1. Introduction ....................................................................................................................... 11
A. Purpose........................................................................................................................................ 11
B. Authority..................................................................................................................................... 11
C. General Policy and Goals .......................................................................................................... 11
D. Performance Standards ............................................................................................................. 11
E. Exceptions to Policy ................................................................................................................... 12
Chapter 2. Definitions .......................................................................................................................... 13
A. General Terms ............................................................................................................................ 13
B. Environmental Terms ................................................................................................................ 24
Chapter 3. Lender Responsibility and Authority .............................................................................. 25
A. Servicing and Liquidation ......................................................................................................... 25
B. Litigation ..................................................................................................................................... 25
C. Decision-Making ........................................................................................................................ 26
D. Recordkeeping ............................................................................................................................ 30
E. Loan Monitoring ........................................................................................................................ 32
F. Lender Reporting Requirements .............................................................................................. 34
G. SBA Take Over of Servicing or Liquidation ........................................................................... 37
H. Enforcement Action by OCRM ................................................................................................ 37
I. Lenders Annual Service Fee ..................................................................................................... 37
Chapter 4. Loan Payment Administration ........................................................................................ 38
A. Collection and Application of Loan Payments ........................................................................ 38
B. Post-Guaranty Purchase Servicing Fee on SBA Portion of Interest Payments ................... 40
Effective Date: November 1, 2025 3
C. Remittance of Borrower Loan Payments ................................................................................ 40
D. Prepayment ................................................................................................................................. 41
E. Paid in Full Loans ...................................................................................................................... 42
F. Reinstatement of Guaranty on Loan Mistakenly Coded "PIF" ............................................ 42
Chapter 5. Environmental Risk Management ................................................................................... 43
A. Overview ..................................................................................................................................... 43
B. General Requirements ............................................................................................................... 43
C. When an Environmental Investigation is Required ............................................................... 44
D. Environmental Investigation Process for Loans in Regular Servicing Status ..................... 45
E. Environmental Investigation Process for Loans in Liquidation Status ................................ 45
F. Environmental Investigation Reports ...................................................................................... 47
G. Remedial Action by Secured Creditor ..................................................................................... 48
H. Taking Title to Property or Control of a Business with Environmental Risks .................... 48
Chapter 6. Servicing Requests ............................................................................................................ 53
A. General Requirements ............................................................................................................... 53
B. Review and Analysis .................................................................................................................. 53
C. How To Obtain SBA Approval for a Proposed Loan Action................................................. 56
D. Implementing Loan Actions ...................................................................................................... 58
Chapter 7. Modification of Note ......................................................................................................... 59
A. General Requirements ............................................................................................................... 59
B. Payment Due Date...................................................................................................................... 60
C. Change from Revolving to Non-revolving Loan ..................................................................... 60
D. Installment Amount ................................................................................................................... 60
E. Interest Rate ............................................................................................................................... 60
F. Maturity Date Extensions.......................................................................................................... 60
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G. Loan Amount Increases ............................................................................................................. 61
Chapter 8. Modification of Collateral ................................................................................................ 62
A. Subordination of Lien Position ................................................................................................. 62
B. Inter-creditor Agreements ........................................................................................................ 63
C. Substitution of Collateral .......................................................................................................... 63
D. Substitution of Guarantor or Assumption of Personal Guaranty ......................................... 65
E. Borrower Business Ownership Change ................................................................................... 66
F. Leasing Real Property Acquired with 7(a) Loan Proceeds .................................................... 66
G. Release of Lien without Consideration .................................................................................... 66
H. Release of Lien for Consideration ............................................................................................ 67
I. Release of Guarantor or Co-Borrower .................................................................................... 67
J. Release of Condemnation Proceeds .......................................................................................... 68
Chapter 9. Insurance Coverage .......................................................................................................... 70
A. General Requirements ............................................................................................................... 70
B. Mortgagee’s Title Insurance ..................................................................................................... 70
C. Hazard Insurance....................................................................................................................... 70
D. Life Insurance............................................................................................................................. 71
E. Flood Insurance.......................................................................................................................... 73
Chapter 10. Modification of Management Covenants ...................................................................... 74
A. General Requirements ............................................................................................................... 74
B. Financial Statements .................................................................................................................. 74
C. Restrictions on Compensation, Dividends, Fixed Assets, etc. ................................................ 74
D. Standby Agreements .................................................................................................................. 74
Chapter 11. Assumption, Assignment or Sale of Loan ..................................................................... 76
A. Assumption ................................................................................................................................. 76
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B. Assignment of Lender's Interest in a 7(a) Loan ...................................................................... 77
C. SBA Loan Transfers .................................................................................................................. 77
D. Sale of SBA Loan in Liquidation Status .................................................................................. 77
Chapter 12. Deferments ...................................................................................................................... 79
A. Overview ..................................................................................................................................... 79
B. General Rule ............................................................................................................................... 79
C. General Requirement—Temporary Cash Flow Problem ...................................................... 79
D. Deferred Period .......................................................................................................................... 79
E. Payments during a Deferment Period ...................................................................................... 80
Chapter 13. Delinquent Secured Senior Loans ................................................................................. 81
A. General Requirements ............................................................................................................... 81
B. Developing Best Strategy to Protect a Junior Lien Securing a 7(a) Loan ............................ 81
C. Lender Options........................................................................................................................... 82
Chapter 14. Special Purpose Loans and Temporary PPP Loan Program .................................... 87
A. Overview ..................................................................................................................................... 87
B. CAPLines Loan Program (CAPLines)..................................................................................... 87
C. International Trade Loan Program (IT) ................................................................................. 90
D. Export Working Capital Loan Program (EWCP) .................................................................. 91
E. Export Express Loan Program (Export Express)................................................................. 101
F. Paycheck Protection Program (PPP) Loans .......................................................................... 102
Chapter 15. Classifying Loans in Liquidation ................................................................................. 109
A. When Lenders Must Classify Loans in Liquidation Status ................................................. 109
B. When Lenders Should Accelerate an SBA Loan Note ......................................................... 109
C. Repurchase from Secondary Market ..................................................................................... 109
D. Demand Letters ........................................................................................................................ 110
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E. Skip Tracing ............................................................................................................................. 110
F. Obligors in Active Military Service ........................................................................................ 110
G. Lender Liquidation Plans........................................................................................................ 111
H. Lender Application of Payments and Recoveries for Loans in Liquidation Status .......... 114
I. When Lenders Should Remove a Loan from Liquidation Status ....................................... 114
Chapter 16. Site Visits ....................................................................................................................... 115
A. When Lender Site Visits Are Required ................................................................................. 115
B. Lender Preparation for Site Visits ......................................................................................... 115
C. Lender Site Visit Objectives .................................................................................................... 116
Chapter 17. Workouts....................................................................................................................... 119
A. Lender Workout Overview ..................................................................................................... 119
B. Required Financial Information ............................................................................................. 119
C. Workout Feasibility Test ......................................................................................................... 120
D. Workout Timing....................................................................................................................... 120
E. Workout Requirement—New Consideration from Obligors .............................................. 120
F. Workout Options ..................................................................................................................... 121
G. Workout Agreement Provisions ............................................................................................. 122
H. SBA Approval of Lender Workout Plans .............................................................................. 122
Chapter 18. Real Property Collateral Liquidation ........................................................................ 124
A. General Requirements ............................................................................................................. 124
B. Procedure for Selecting Best Method of Liquidation ........................................................... 124
C. Liquidation Methods ............................................................................................................... 128
D. Credit Bids ................................................................................................................................ 135
E. Eviction Proceedings ................................................................................................................ 135
F. Abandonment ........................................................................................................................... 135
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Chapter 19. Personal Property Collateral Liquidation .................................................................. 136
A. General Requirements ............................................................................................................. 136
B. Procedure for Selecting Best Method of Liquidation ........................................................... 136
C. Liquidation Methods ............................................................................................................... 138
D. Credit Bids ................................................................................................................................ 144
E. Abandonment ........................................................................................................................... 144
Chapter 20. Acquired Collateral....................................................................................................... 145
A. General Requirements ............................................................................................................. 145
B. Acquiring Title to Collateral ................................................................................................... 145
C. Ownership Responsibilities ..................................................................................................... 145
D. Expenses .................................................................................................................................... 147
E. Timeframe for Disposal ........................................................................................................... 148
F. Sale ............................................................................................................................................ 148
G. Lease .......................................................................................................................................... 151
H. Abandonment ........................................................................................................................... 151
Chapter 21. Offer in Compromise .................................................................................................... 152
A. Offer in Compromise Overview ............................................................................................. 152
B. When Compromise is Appropriate ........................................................................................ 152
C. General Compromise Requirements ...................................................................................... 153
D. Compromise with a Going Concern Business ....................................................................... 154
E. Compromise Offer and Supporting Documents ................................................................... 154
F. Review and Analysis of Offer in Compromise ...................................................................... 155
G. Inadequate Compromise Offers ............................................................................................. 157
H. Compromise Payment Terms and Conditions ...................................................................... 158
I. Obtaining SBA Approval of Compromise Actions ............................................................... 158
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J. Completing the Compromise Process .................................................................................... 159
Chapter 22. Litigation ....................................................................................................................... 160
A. General Requirements ............................................................................................................. 160
B. Legal Counsel Hired by Lenders ............................................................................................ 160
C. Litigation Plans ........................................................................................................................ 161
D. Debt Collection Litigation Expenses ...................................................................................... 163
E. Particular Litigation Activities ............................................................................................... 165
F. Application of Litigation Recoveries ...................................................................................... 169
G. Litigation Plan Documentation & Updates ........................................................................... 170
H. SBA Takeover of Lender-Serviced Litigation (13 C.F.R. §120.540(d)) .............................. 170
I. Reimbursement Requests for Debt Collection Litigation Expenses.................................... 171
Chapter 23. Expenses and Recoveries .............................................................................................. 172
A. Classification of Expenses ....................................................................................................... 172
B. Liquidation Recoveries ............................................................................................................ 174
C. Non-Recoverable Expenses Incurred by Lenders ................................................................. 175
D. Reimbursement of Recoverable Expenses Incurred by Lenders ........................................ 175
E. SBA Review and Approval...................................................................................................... 175
Chapter 24. Loan Guaranty Purchase Requests ............................................................................. 178
A. SBA Guaranty Purchase Overview ........................................................................................ 178
B. Interest SBA Pays on Guaranteed Portion of Loan .............................................................. 178
C. Lender Annual Service Fee Collection. .................................................................................. 179
D. Guaranty Purchase Requirements ......................................................................................... 180
E. Prudent Liquidation Deadline for Lender Resolution of an SBA Purchased Loan .......... 182
F. Extensions to the Prudent Liquidation Deadline .................................................................. 183
G. Lender Consequences for Failure to Comply with Prudent Liquidation Deadline ........... 184
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H. Practice Tips for Submitting Complete Purchase Packages ................................................ 184
Chapter 25. Denial of Liability on 7(a) Loan Guaranty ................................................................. 186
A. When SBA May Deny Liability on a 7(a) Loan Guaranty ................................................... 186
B. Losses Attributable to Lender Actions or Inactions ............................................................. 186
C. SBA Guaranty Repairs ............................................................................................................ 187
D. Partial Denial of Liability ........................................................................................................ 188
E. Full Denial of Liability............................................................................................................. 188
F. Voluntary Termination of SBA Guaranty ............................................................................. 188
G. Examples of When a Repair or a Full or Partial Denial of Liability is Justified ............... 189
Chapter 26. Inspector General Referrals ......................................................................................... 196
A. Duty to Report Irregularities .................................................................................................. 196
B. Irregularities Requiring Referral ........................................................................................... 196
C. Referral Methods ..................................................................................................................... 197
D. Required Referral Information .............................................................................................. 197
E. Post-referral Responsibility .................................................................................................... 198
Chapter 27. Lender Wrap-up and SBA Status Change ................................................................. 199
A. General Requirements ............................................................................................................. 199
B. Lender Wrap-up Report ......................................................................................................... 199
C. SBA Loan Status Change ........................................................................................................ 200
D. Assignment of Loan Documents and Referral to Treasury for Further Collection .......... 201
E. Credit Reporting ...................................................................................................................... 203
F. Reporting Cancelled Debt to IRS ........................................................................................... 203
Effective Date: November 1, 2025 10
SOP 50 57 4 Chapter 1
Introduction
Chapter 1. Introduction
A. Purpose
This SOP sets forth the standard operating policies and procedures of the Small Business
Administration (“SBA”) that apply to the administration of 7(a) Loans that have been fully
disbursed and are in "regular servicing”, "liquidation", “SBA Uncollectible” or “charge off”
status.
Because Paycheck Protection Program (PPP) Loans are 7(a) loans, this SOP applies to the
servicing and liquidation of PPP Loans to the extent that it is not superseded by or in conflict
with PPP-specific requirements.
Note: SBA term Loans are considered fully disbursed when the Loan has been closed and
the final Loan disbursement has been made.
SBA revolving lines of credit are considered fully disbursed when the Loan has been closed
and the initial Loan disbursement has been made.
All 7(a) Loans move from "regular servicing” to "liquidation” status if there is a default on
the Note and the Lender classifies the Loan as “in liquidation” pursuant to Chapter 15 of
this SOP.
B. Authority
The policy and procedures set out in this SOP are based on Section 7(a) of the Small Business
Act (15 U.S.C. § 631 et seq.), Part 120 of Title 13 of the Code of Federal Regulations
(“CFR”), the Debt Collection Improvement Act of 1996 (“DCIA”), Public Law 104-134
(1996), as revised, and the Federal Debt Collection Procedures Act of 1990, 28 U.S.C. 3001,
et seq.
C. General Policy and Goals
Lenders must advise Borrowers of their obligation to repay their 7(a) Loan(s) in accordance
with the terms specified in the 7(a) Loan Note. However, when Loan servicing and
liquidation actions are necessary, Lenders 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
1. Lenders must service and liquidate their 7(a) Loans in a commercially reasonable manner
that is free of conflicts of interest and Preferences and consistent with the Loan
Authorization/E-Tran Terms and Conditions, Prudent Servicing and/or Prudent
Liquidation practices (including the Prudent Liquidation Deadline defined in Chapter 2
of this SOP), and the SBA Loan Program Requirements in effect at the time a Loan
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SOP 50 57 4 Chapter 1
Introduction
Action is taken. (13 C.F.R. § 120.535) Lenders must also service and liquidate their 7(a)
Loans no less diligently than they do for their portfolio of non-SBA loans. Lenders that
do not maintain a non-SBA loan portfolio must adhere to the same prudent lending
standards for loan servicing followed by commercial lenders on loans without a
government guarantee. (13 C.F.R. § 120.535)
2. Nationally-chartered and state-chartered Lenders (i.e., Lenders regulated by federal or
state agencies such as the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, the National Credit Union Administration, the Farm Credit
Administration or a state banking regulator) that have a non-SBA commercial loan
portfolio may use their own loan servicing and liquidation procedures provided that their
procedures: (a) are acceptable to their regulators; (b) meet or exceed those used for their
similarly-sized non-SBA guaranteed commercial loans; and (c) are not inconsistent with
SBA Loan Program Requirements including those associated with the use of the word
“must” in this SOP.
E. Exceptions to Policy
SBA will treat any contemplated Loan Action, as defined in Chapter 2 below, that is in
conflict with the use of the word “must” in this SOP as an exception to policy. An exception
to policy is only appropriate when the policy set forth in this SOP does not adequately address
the unique circumstances regarding a particular Loan, and the exception, if granted, would
not contravene an applicable statute or regulation. Lenders may use this procedure only in
situations where a minor deviation from standard policy is necessary for the specific
situation. SBA will consider exceptions to policy on a case-by-case basis and SBA’s decision
will only apply to the specific request.
Lenders must submit all requests for an exception to policy in writing to the appropriate SBA
Loan Center, prior to taking the proposed Loan Action. SBA Loan Centers will review each
request to either resolve or refer it, along with a written recommendation, to the Director of
the Office of Financial Program Operations (“OFPO”) and the Director of the Office of
Financial Assistance (“OFA”) for joint review and written determination.
For Export Working Capital Program (EWCP) and International Trade Loan Program (IT)
Loans, the D/OFPO and D/OFA will consult with the Director of International Trade
Finance (D/ITF). For Export Express Loan Program Loans, the D/OFPO and D/OFA will
consult with the D/ITF and obtain the concurrence of the Director of the Office of Credit
Risk Management (D/OCRM).
Lenders must not take the proposed exception to policy Loan Action without SBA’s
prior written approval. SBA’s failure to respond to a request for an exception to policy
does not constitute approval of the request.
Effective Date: November 1, 2025 12
SOP 50 57 4 Chapter 2
Definitions
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. 7(a) Loan or Loan means a loan that was made under Section 7(a) of the Small Business
Act.
2. Agency means the U.S. Small Business Administration.
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 Lender by conducting business with SBA. (13 C.F.R. § 103.1(a))
4. Appraisal means, for 7(a) Loan servicing and liquidation purposes, an expert's written
opinion as to the value of specific property prepared specifically for the Lender and
SBA’s use with regard to a particular 7(a) Loan, (Lender must not use an appraisal that
was ordered or prepared on behalf of the Borrower/Guarantor.) which is obtained in
accordance with all the following requirements1:
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 following minimum
qualifications:
(1) Education and Experience
Has the specific education, 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 all applicable government licensing, certification and bonding
requirements;
(3) Independent
Has no actual, apparent or potential conflict of interest with SBA, the Lender or
Obligors; and has no financial interest in the property to be appraised, provided,
however, that when it is commercially reasonable, the Person who appraised the
collateral may also sell it as long as the sale is widely advertised and otherwise
consistent with applicable law. (For example, an auctioneer hired to appraise
personal property collateral may also sell it via a public auction, provided that the
sale is widely advertised and otherwise consistent with Article 9 of the Uniform
Commercial Code [“UCC”].)
1
See SOP 50 10 for SBA Loan Program Requirements pertaining to appraisals for Loan origination purposes.
Effective Date: November 1, 2025 13
SOP 50 57 4 Chapter 2
Definitions
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 in effect at the
time the Loan Action is taken.
(b) A real property Appraisal should comply with the Uniform Standards of
Professional Appraisal Practice (USPAP) whenever required by prudent
lending practices, such as to support Loan Actions involving the release of
liens for consideration, Protective Bids, or deeds in lieu of foreclosure,
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 sufficient equity to secure the 7(a) Loan; and
(c) In all other cases (where SBA Loan Program Requirements and prudent
lending practices do not require an appraisal in compliance with USPAP),
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
7(a) 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 in
effect at the time the Loan Action is taken;
(b) A personal property Appraisal should comply with USPAP 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
artwork; and
(c) In all other cases (i.e., when neither SBA Loan Program Requirements nor
prudent lending practices require an appraisal in compliance with USPAP),
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 the value of the property, including an opinion as
to the individual value of any item of personal property valued at $10,000 or
more at the time the Loan was made;
Effective Date: November 1, 2025 14
SOP 50 57 4 Chapter 2
Definitions
(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
$10,000 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 Lender 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 Lender relies on it to make a decision
affecting a 7(a) Loan.
5. Associate of a Small Business means an officer, director, owner of more than 20 percent
of the equity, or Key Employee of the small business; an entity in which one or more
individuals referred to in the previous clause owns or controls at least 20 percent; and an
individual or entity in control of, or controlled by, the small business, except a Small
Business Investment Company licensed by SBA. (13 C.F.R. §120.10)
6. Associate of a Lender means an officer, director, Key Employee, or holder of 20 percent
or more of the value of the Lender's stock or debt instruments, or an Agent (13 C.F.R.
§103.1) involved in the Loan process, or any entity in which one or more individuals
referred to in the previous clause, or a Close Relative of any such individual owns or
controls at least 20 percent. (13 C.F.R. §120.10)
7. Borrower means the obligor of an SBA business loan. (13 C.F.R. §120.10)
8. Close Relative means a spouse, parent, child or sibling, or the spouse of a parent, child
or sibling. (13 C.F.R. §120.10)
9. CLP means Certified Lenders Program.
10. Computer Tracking System means the electronic method used by SBA or a Lender to
create and maintain a chronological record of the significant activities on a 7(a) Loan,
such as Loan Actions and the substance of telephone calls, meetings, or letters regarding
Effective Date: November 1, 2025 15
SOP 50 57 4 Chapter 2
Definitions
the Loan.
11. 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.
12. Debt Collection Litigation Expenses means the legal fees and expenses associated with
actions conducted by a Lender’s outside legal counsel related to matters of adjudication
before a local, state or federal court, which are subject to the $10,000 threshold for
determining Non-Routine Litigation in accordance with 13 CFR §120.540(c). Debt
Collection Litigation Expenses do not include the legal fees and expenses associated with
a Lender’s non-judicial execution of the rights and responsibilities under the 7(a) Loan
Documents, including the development of Loan modification agreements, forbearance
and Loan workout agreements, non-judicial foreclosures, and other liquidation actions
that are not subject to the $10,000 threshold for determining Non-Routine Litigation.
Payment of any legal fees or expenses, whether or not they are Debt Collection Litigation
Expenses, is subject to the requirements of 13 C.F.R. § 120.542.
13. Default means any event, including when a Borrower fails to make a payment when due,
listed in the SBA Form 147 “Note” or other Loan Documents.
14. Default Charges means all monetary amounts payable as the result of a default on a
senior secured creditor’s loan, such as prepayment penalties, late fees and interest paid
at an escalated rate.
15. Denial of Liability means a determination made by SBA pursuant to 13 C.F.R. §120.520
and 13 C.F.R. §120.524 that it is not obligated to purchase the guaranteed portion of the
7(a) Loan. SBA may deny liability for the full amount of the guaranteed portion of the
Loan or any part thereof.
16. E-Tran Terms and Conditions: The digital loan guaranty authorization request by the
Lender to SBA to authorize the Lender to make the loan with an SBA guaranty under the
terms and conditions submitted in E-Tran.
17. Early Default. For SBA guaranty purchase reviews, Early Default means any of the
following events of Default that occur either: (a) within 18 months of the initial
disbursement of the Loan, or (b) within 18 months of the final disbursement if the final
disbursement occurs more than six months after the initial disbursement, unless the
Borrower cures the Default and makes scheduled Loan payments without default for 12
months following the 18-month period:
a. Borrower failure to make a scheduled payment of principal and interest on a 7(a)
Loan when due. For Loans that require annual payments of principal and interest, an
Early Default occurs if a Borrower fails to make either of the first two annual
payments when due. In such cases, a Borrower may cure an Early Default by making
the first two annual payments within 60 days of the date they were due and the third
annual payment on or before the date it is due;
Effective Date: November 1, 2025 16
SOP 50 57 4 Chapter 2
Definitions
b. Borrower use of collateral sale proceeds rather than cash flow from business
operations to fund a scheduled Loan payment;
c. Lender deferment or Borrower curing of defaulted payments equal to more than three
consecutive scheduled payments of principal and interest; or
d. Any other event of Default that requires a Lender to classify a Loan in liquidation
status, e.g., bankruptcy.
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. FTA means the entity that acts as SBA's fiscal and transfer agent. (13 C.F.R.
§120.600(d))
20. Good Faith means whether capitalized or not, an honest and sincere intention to fulfill
one's obligations in the conduct or transaction concerned.
21. Guarantor, including Supplemental Guarantor as defined in SOP 50 10, means a
Person who executed a Guaranty as security for a Note executed by a Borrower.
22. Guaranty means an unconditional promise to pay the debt owed on a Note if the
Borrower fails to pay it. SBA requires Guarantors to execute an SBA Form 148
(Unconditional Guarantee), SBA Form 148 L (Unconditional Limited Guarantee) or
Lender’s own form in accordance with the requirements of the version of the SOP 50 10
in effect at the time the Guaranty is entered into.
23. Including, whether capitalized or not, means "including but not limited to," i.e., the list
is exemplary and not exhaustive.
24. Key Employee means any Person hired by a business to manage its day-to-day
operations, including, the hiring and firing of employees and the expenditure of money.
25. Lender or 7(a) Lender means an institution that has executed a Loan Guaranty
Agreement (Deferred Participation) with SBA under the guaranteed loan program. (13
C.F.R. §120.10)
26. Liquidation Plan means a Lender's written plan outlining the actions it intends to take
to recover on a specific 7(a) loan. The plan must include information outlined in the
template accessible from www.sba.gov/for-lenders.
27. 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
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SOP 50 57 4 Chapter 2
Definitions
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 publicly-traded stock should be based on official
stock exchange prices.
28. Litigation Plan and any amendments to the Litigation Plan are a Lender's written plan
outlining the litigation proceedings it intends to initiate or otherwise participate in to
maximize recovery for a specific 7(a) Loan. The Litigation Plan 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 22 of this SOP. Litigation Plans
should also include information such as the qualifications of the attorney the Lender
intends to hire, a copy of the engagement letter, and justification for any estimated
expenses listed in Chapter 22, Paragraph D of this SOP that SBA may otherwise presume
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.
29. Loan Action means an activity or decision regarding a specific 7(a) Loan including a
decision to engage or not to engage in a particular activity, such as a decision not to enter
a Protective Bid at a senior lienholder's foreclosure sale.
30. Loan Action Record means the paper or electronic document used to memorialize the
activity or 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 7(a) Loan number; the Lender’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 regulation or SOP
provision that provides authority for the proposed Loan Action.
31. Loan Authorization means SBA's written agreement, including subsequent
modifications thereto, which sets out the terms and conditions under which SBA will
guarantee a Loan. For 7(a) Loans approved after August 1, 2023, Loan Authorization
means the electronic record of the terms and conditions of the Loan in E-Tran. (See the
definition above for “E-Tran Terms and Conditions.)
32. Loan Documents means the Loan Authorization/E-Tran Terms and Conditions, Note,
Guaranty, Supporting Documentation, Loan Action Record, lien instruments, and all
other agreements and documents related to a 7(a) Loan.
33. Loan File, whether capitalized or not, means the electronic files and paper documents
Effective Date: November 1, 2025 18
SOP 50 57 4 Chapter 2
Definitions
dedicated exclusively to storing electronic copies and hard copies of all of the Loan
Documents pertaining to a specific 7(a) Loan. Lenders must retain all Loan Documents
in their original form as set forth in SOP 50 10.
34. Loan Program Requirements or SBA Loan Program Requirements are requirements
imposed upon Lenders by statute; SBA and applicable government-wide regulations; any
agreement the Lender has executed with SBA or to which the Lender is subject; SBA
SOPs; Federal Register Notices; and official SBA notices and forms applicable to the
7(a) Loan program; as such requirements are issued and revised by SBA from time to
time. (13 C.F.R.§120.10) (See 13 C.F.R. §120.180 for information on compliance with
SBA Loan Program Requirements, including what SBA Loan Program Requirements
govern on a specific action.)
35. Material Loss means: with regard to real or personal property collateral—a single loss
or the aggregate amount of multiple losses totaling $10,000 or more.
36. Must, whether capitalized or not, means that the action is mandatory.
37. Non-Recoverable Expense means a cost associated with an internal Lender function that
is not reimbursable by SBA nor recuperable from the Borrower by adding it to the
principal balance of the Note, because 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 in the
geographic area where the expense was incurred; or (c) incurred in accordance with
prudent lending practices or SBA Loan Program Requirements.
38. Non-Routine Litigation means: (a) all litigation where factual or legal issues are in
dispute and require resolution through adjudication; (b) any litigation where Debt
Collection Litigation Expenses are estimated to exceed $10,000 in the aggregate, even if
a Lender deducts such fees from Recoverable Expenses; (c) any litigation involving a
Loan where a Lender has an actual or potential conflict of interest with SBA; or (d) any
litigation involving a 7(a) Loan where the Lender has made a separate loan to the same
Borrower that is not a 7(a) loan. (13 C.F.R. §120.540(c)(1)
39. Note means the promissory note (e.g., SBA Form 147) or Lender’s own form in
accordance with the requirements of the version of the SOP 50 10 in effect at the time
the Note is entered into.
40. Obligor means any Person with direct liability for repaying a 7(a) Loan, such as the
Borrower, an assumptor, and every Person with contingent liability, such as a Guarantor.
41. 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.
42. Person means any individual, corporation, partnership, association, unit of government,
or other legal entity, however organized. (13 C.F.R. §120.10)
43. Pilot Loan Program means any program designated by SBA as a pilot Loan program at
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SOP 50 57 4 Chapter 2
Definitions
the time that the Loan is approved by SBA. (13 C.F.R. §120.3)
44. Preference means any arrangement giving a Lender a preferred position compared to
SBA relating to the making, servicing, or liquidation of a business loan with respect to
such things as repayment, collateral, guarantees, control, maintenance of a compensating
balance, purchase of a Certificate of deposit or acceptance of a separate or companion
loan, without SBA’s consent, e.g., a Lender would receive a Preference if it released the
collateral for a 7(a) Loan in order to use it as security for a non-SBA loan to the same
Borrower and Lender failed to get SBA’s prior approval for such action.) (13 C.F.R.
§120.10)
45. Prudent Liquidation and Prudent Liquidation Deadline mean Lenders must liquidate
and conduct debt collection litigation for 7(a) Loans in their portfolio no less diligently
than they do for their non-SBA portfolio; in a prompt, cost-effective and commercially
reasonable manner consistent with prudent lending standards, in accordance with Loan
Program Requirements, and, if applicable, an SBA-approved Liquidation or Litigation
Plan, or any amendments to such a plan. Lenders that do not maintain a non-SBA loan
portfolio must adhere to the same prudent lending standards followed by commercial
lenders that liquidate loans without a government guarantee. They must also operate in
accordance with Loan Program Requirements and with any SBA approval of either a
Liquidation or Litigation Plan, or any amendment to such a plan. (13 C.F.R. §120.535(b))
Prudent Liquidation Deadline means that a Lender submits a Wrap-Up Report for a 7(a)
Loan, acceptable to SBA, no more than 24 months after the date SBA purchases its
guaranty, unless SBA grants a written extension of that timeframe based on extenuating
circumstances. (See Chapter 24, Paragraph F of this SOP for additional guidance on
extensions to the Prudent Liquidation Deadline).
46. Prudent Servicing means Lenders must service 7(a) Loans in their portfolio no less
diligently than they do for their non-SBA portfolio, in a commercially reasonable manner
that is consistent with prudent lending standards, and in accordance with Loan Program
Requirements. Lenders that do not maintain a non-SBA loan portfolio must adhere to the
same prudent lending standards for loan servicing followed by commercial lenders on
loans without an SBA guaranty. (13 C.F.R. §120.535(a))
47. 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.
48. Purchase, whether capitalized or not, when used in conjunction with SBA's 7(a) Loan
guaranty ("guaranty purchase") refers to SBA's purchase of the SBA guaranteed portion
of a 7(a) Loan.
49. Real Estate Owned ("REO") means real property collateral acquired by a Lender or
SBA.
50. Recoverable Expense means an SBA-approved, necessary, reasonable and customary
cost in the geographic area where the expense was incurred to 1) collect amounts due
under the Note, 2) enforce the terms of the Loan Documents, or 3) preserve or dispose of
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SOP 50 57 4 Chapter 2
Definitions
collateral, which according to the terms of the Note can be recouped by adding it to the
principal balance of the Loan.
51. 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 Lender or SBA is likely to acquire the collateral at a
foreclosure sale (e.g., real property), the expenses associated with the care, preservation
and resale of the acquired collateral.
52. Repair means an agreement between SBA and a 7(a) Lender regarding a specific dollar
amount that SBA will deduct from the amount that SBA pays on the SBA guaranty for a
7(a) Loan, to compensate SBA for an actual or anticipated loss on the Loan caused by
the Lender’s actions or inactions. A Repair does not reduce the SBA 7(a) Loan guaranty
percentage or SBA’s pro-rata share of expenses or recoveries.
53. Routine Litigation means uncontested litigation, such as non-adversarial matters in
bankruptcy and undisputed foreclosure actions, in which estimated Debt Collection
Litigation Expenses do not exceed $10,000 in the aggregate. (13 C.F.R. §120.540(c)(2))
54. SBA Legal Counsel means SBA Associate General Counsel for Litigation, SBA Area
Counsel, SBA District Counsel or SBA Center Counsel.
55. SBA Loan Center means the following SBA facilities:
a. SBA 7(a) Loan Guaranty Processing Center (“LGPC”)
Address 6501 Sylvan Road, Suite 122, Citrus Heights, CA 95601
Phone Number (800) 475-2435
Website http://www.sba.gov/CitrusHeightsLGPC
Email mailto:7aloanmod@sba.gov
Loan Type and All term loans not yet fully disbursed and undisbursed revolving
Status line of credit loans.
b. SBA Commercial Loan Service Center (“CLSC”)
Address 801 R Street, Suite 101, Fresno, CA 93721
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SOP 50 57 4 Chapter 2
Definitions
Phone Number (800) 347-0922
Website http://www.sba.gov/FresnoCLSC
Email Servicing:…………………………fsc.servicing@sba.gov
Express Purchase………………. fsc.purchasing@sba.gov
Post-Servicing:………………..fsc.postservicing@sba.gov
Fax Numbers Servicing ..............................................(202) 481-0483
Express Purchase ................................ (202) 481-0663
Post-Servicing .....................................(202) 481-1756
Loan Type and (1) All fully disbursed 7(a) Loans classified in regular
Status servicing status, including partially disbursed revolving lines
of credit;
(2) Loans in Liquidation status:
All 7(a) Express Loans, Export Express Loans and Pilot Loan
Programs Loans (including Patriot Express, Community
Express and Community Advantage) prior to submission of
the UPP (as defined below).
c. National Guaranty Purchase Center ("NGPC")
Address 13221 Woodland Park Road, 6th Floor, Herndon, VA 20171
Phone Numbers (703) 487-9283
(877) 488-4364
Website National Guaranty Purchase Center (Herndon, VA) (sba.gov)
Email General inquiries: ……………………..loanresolution@sba.gov
Loans sold on secondary market: ..secondarymarketliq@sba.gov
Loans not sold on secondary market: …..sbapurchase@sba.gov
Wrap-up Reports and CPC packages:…. sbachargeoff@sba.gov
Litigation:…………………………..….. sbalitigation@sba.gov
Semi Annual Reports:…… NGPCSemiannualReports@sba.gov
2 Year Exceptions:…………. NGPC.2YearExceptions@sba.gov
Loan Accounting:…………..… NGPCloanaccounting@sba.gov
Customer Service:…………….. ngpccustomerservice@sba.gov
Effective Date: November 1, 2025 22
SOP 50 57 4 Chapter 2
Definitions
Fax Numbers General ................................................(202) 481-4674
Loan Type and Loans Classified in Liquidation Status:
Status
Standard 7(a), Small 7(a), CLP or PLP, Seasonal CAPLines,
Contract CAPLines, Builders CAPLines, Working Capital
CAPLines, Export Working Capital Program (EWCP),
International Trade Loan Program (IT), USCAIP Guaranty
(NAFTA), Working Capital Pilot, Export Import
Harmonization Small/Rural Lender Advantage, Dealer Floor
Plan
d. U. S. Export Assistance Centers (“USEAC”)
Geographic Coverage: SBA Regions 1-10
Loan Type, Status and Contact Information: All revolving and non-revolving Export
Working Capital Program (EWCP), Export Express Loan Program (Export Express)
and International Trade Loan Program (IT) Loans in regular servicing status. Lenders
may contact the SBA Export Finance Manager serving the geographic market where
the Borrower is located for guidance regarding the servicing and/or liquidation of
these types of 7(a) Loans; however, final approval authority for all servicing and
liquidation actions pertaining to these types of Loans rests with the CLSC and NGPC,
according to the Loan type guidance provided in the Paragraph above.
56. SBA Uncollectible is a new loan status implemented by SBA as of July 2025. A fully
liquidated 7(a) loan will be placed in SBA Uncollectible status if any of the obligors or
guarantors associated with the loan can be referred to Treasury. After a loan is placed in
SBA Uncollectible status, any payments on the loan will be applied first to interest and
then to principal to be in alignment with Treasury procedures.
57. 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:
a. Made all scheduled Loan payments;
b. Did not fund a scheduled Loan payment from the sale of collateral;
c. Did not have more than three consecutive scheduled full payments deferred; and
d. Did not experience an event of Default that required the Loan to be classified in
liquidation.
58. Servicing Request means a Loan Action requested by a Lender that requires prior SBA
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SOP 50 57 4 Chapter 2
Definitions
approval, regardless of whether it is simple or more complex such as the Loan Actions
covered in Chapters 7 through 12 of this SOP (e.g., subordination of lien position).
59. Should, whether capitalized or not, means that the action is recommended but not
required.
60. Site Visit Report means the paper or electronic record documenting the Lender’s
findings and conclusions after visiting or contracting a third party to visit the Borrower’s
business premises. A post-Default Site Visit Report should cover, for example, the
Lenders 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.
61. Supporting Document or “Supporting Documentation” means the original, or a
complete, legally enforceable (if relevant) and accurate executed copy (i.e., it must
contain all the required signatures and include all exhibits and/or addenda 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.
62. Treasury means the U.S. Department of the Treasury Bureau of the Fiscal Service.
63. Universal Purchase Package (“UPP”) is the set of documents prepared and submitted
by a 7(a) Lender to support the Lender’s request for SBA to honor its guaranty by
purchasing the SBA guaranteed portion of a Loan.
64. Wrap-up Report refers to the documentation, whether or not it is titled “Wrap-up
Report,” that a Lender must provide in electronic format to the SBA Loan Center within
30 calendar days after all Prudent Liquidation actions are completed, for review and
approval by SBA. It includes the information outlined in the template accessible from
http://www.sba.gov/for- lenders. See Chapter 27 of this SOP for additional guidance on
Wrap-up Reports.
B. Environmental Terms
Definitions of the environmental terms used in this SOP, which are capitalized when they
appear, are located in the Appendix section of SOP 50 10.
Effective Date: November 1, 2025 24
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
Chapter 3. Lender Responsibility and Authority
A. Servicing and Liquidation
7(a) Lenders must service and liquidate:
1. All the 7(a) Loans in their portfolio both before and after SBA purchases the guaranteed
portion of the Loan.
2. The entire debt owed on each 7(a) Loan—not just the Lender's portion—regardless of
the guaranteed percentage or whether the guaranty has been purchased.
Note: Pursuant to the Secondary Market Improvements Act of 1984, in addition
to facilitating the sale of 7(a) Loans to secondary market investors and keeping
track of current and prior registered holders ("investors"), whenever a Lender
sells a 7(a) Loan on the secondary market, the FTA is responsible for:
a. Tracking loan payment histories;
b. Collecting payments from Lenders on Loans sold to investors (Lenders are
permitted to make one payment each month to cover all of the Loans they
have sold);
c. Resolving SBA Form 1502 reporting discrepancies with Lenders;
d. Remitting payments to investors (FTA sends one check or wire to the
investor that includes an accounting of the funds for all Loans held by that
investor);
e. Forwarding all Servicing Requests from a Lender to the investor and
forwarding the response back to the Lender;
f. Notifying SBA of delinquent Loans;
g. Processing all borrower prepayments;
h. Forwarding all SBA fee remittances to SBA’s Denver Finance Center; and
i. Handling SBA and Lender repurchases from investors.
B. Litigation
Lenders are responsible for conducting all litigation needed to ensure recovery on all the 7(a)
Loans in their portfolios except those Loans that have been referred to Treasury pursuant to
Chapter 27 of this SOP and those Loans for which SBA has taken over servicing.
After a Loan has been referred to Treasury or if SBA has taken over servicing, SBA has sole
authority to conduct any litigation that may become necessary. For Loans referred to
Treasury, Lenders must immediately notify the SBA Treasury Offset Division (via fax 202-
Effective Date: November 1, 2025 25
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
481-5706 or by email to BirminghamTOPS@sba.gov) of any litigation they become aware
of or any litigation notices they receive, including bankruptcy filings, so that the Loan may
be recalled from Treasury and appropriate action taken by SBA District Counsel. (See
Chapter 22 of this SOP for information on litigation, including when SBA District Counsel’s
prior written approval of a Lender’s Litigation Plan is required.) For Loans that SBA has
taken over servicing, Lenders must immediately notify the appropriate SBA Loan Center of
any litigation of which they become aware, including any litigation notices or bankruptcy
filings they receive, so SBA may take appropriate action.
C. Decision-Making
1. Lender Authority
Lenders have unilateral authority to take all routine actions to service and liquidate all
the 7(a) Loans in their portfolio, except as provided in Subparagraphs 2 and 3 below and
provided that the actions are consistent with the performance standards set out in
Chapter 1 of this SOP. This authority is subject to SBA’s right to take over the
servicing or liquidation of any Loan as provided in Paragraph G of this Chapter.
2. Unilateral Actions
Lenders must notify the appropriate SBA Loan Center in writing or via E-Tran when
they take substantive unilateral Loan Actions. For a specific list of unilateral actions and
information on how to notify SBA, see the most recent version of the 7(a) Lenders
Servicing and Liquidation Matrix. Unilateral actions are conditioned by whether the
Loan guaranty has been sold on the Secondary Market. Pursuant to SBA Form 1086,
or its successor form, changes made to the terms and conditions of a sold Note, and the
financial payment amounts due other than the single unilateral deferment option, require
the prior written consent of the Registered Holder.
3. Loan Actions That Require SBA’s Prior Written Approval
Lenders must obtain SBA’s prior written approval before taking any Loan Action that
involves a/an:
a. Exception to policy;
b. Preference (13 CFR §120.10);
c. Conflict of interest: real, apparent or potential;
d. Sale or lease of collateral or acquired collateral to the Lender, an Associate of the
Lender, an employee of the Lender, or a Close Relative of an employee of the
Lender;
e. Sale or lease of collateral or acquired collateral to an Obligor or a Close Relative
or Associate of an Obligor for a 7(a) Loan in liquidation status;
f. Release of a co-Borrower or Guarantor, except for limited guaranties taken to
Effective Date: November 1, 2025 26
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
secure an owner's interest in collateral and limited guaranties when the purpose of
that guaranty is to provide a guaranty as a result of a partial change of ownership
in accordance with Chapter 8, Paragraph D of this SOP. (See Chapter 11 of this
SOP for additional guidance on the release of Obligors in Loan assumption
transactions.);
g. Compromise in lieu of full payment of the principal balance of a 7(a) Loan,
including actions that legally extinguish the deficiency balance of a Loan, such as
a deed in lieu of foreclosure, or other foreclosure action, etc.;
h. Assumption of a 7(a) Loan with the release of an Obligor for Loans that are in
payment Default or liquidation only. (See Chapter 11 of this SOP for additional
guidance.);
i. Extraordinary servicing fee (13 CFR §120.221);
j. Determination that a Loan prepayment is involuntary, in connection with a subsidy
recoupment fee (13 CFR §120.223);
k. Liquidation Plan and any amendments to a Liquidation Plan for a CLP Loan (See
Chapter 2 of this SOP for the definition of CLP);
l. Failure to comply with prudent liquidation deadline;
m. Litigation Plan and any amendments to an approved Litigation Plan if fees increase
by more than 15% for Non-Routine Litigation;
n. Acquisition of title to any property in SBA’s name;
o. Acquisition of title to Contaminated property in SBA’s name or the Lender’s name;
p. Operation or control of a business that handles Hazardous Substances;
q. Operation or control of a business located on Contaminated Property;
r. Increase in SBA’s guaranty percentage:
s. Increase or decrease in the Loan amount:
(1) For non-delegated Loans, Lenders must submit requests to the appropriate SBA
Loan Center to have a Loan amount increased or decreased;
(2) For delegated Loans, Lenders must obtain approval for increases or decreases
in the Loan amount directly in E-Tran;
t. Reinstatement of SBA’s Loan guaranty;
Effective Date: November 1, 2025 27
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
u. Extend the final disbursement date beyond 48 months from Loan approval date;
v. Emergency purchase of the Loan from the secondary market; or
w. Transfer or sale of more than 90 percent of the outstanding principal balance of a
Loan;
x. Change in the ownership of a Borrower, including a change in percentage of
ownership, for 12 months after final disbursement on any Loan.
As previously mentioned, Lender Loan Actions are conditioned by whether the
guaranteed portion of the Loan has been sold on the Secondary Market. Pursuant to
SBA Form 1086, or its successor form, changes to the terms and conditions of the sold
Note other than the single unilateral deferment option, require the prior written consent
of the Registered Holder. This written request must be sent to the FTA.
4. Where to Send Notices and Requests for SBA Approval
a. Prior to Final Loan Disbursement
Lenders must send notices and requests for SBA’s prior approval pertaining to
Loans that have been approved, but are not fully disbursed, to the LGPC in Citrus
Heights, CA. For EWCP Loans, Lenders may send post-approval/pre-
disbursement notices and requests to the Export Finance Manager at the appropriate
USEAC, who will review the request and forward a recommendation to the LGPC
for approval.
(1) Transfer of SBA Guaranty Between Participating SBA Lenders
(a) To transfer an SBA guaranteed Loan to another participating SBA Lender
prior to final disbursement, Lenders must submit a Servicing Request
including a detailed explanation and supporting documentation to the
LGPC. After final disbursement, Lenders must submit all Loan transfer
requests to the CLSC.
(b) To transfer more than one SBA guaranteed Loan to another participating
Lender prior to final disbursement, Lenders must submit a Servicing
Request including a detailed explanation and supporting documentation to
the LGPC. LGPC will forward the request to the D/OFA for a decision. See
Chapter 11, Paragraph C of this SOP for additional guidance on how to
transfer a 7(a) Loan portfolio.
b. After Final Loan Disbursement
For Loans that are fully disbursed, Lenders must send Servicing Requests for any
Loan Action that requires SBA’s prior written approval to the CLSC or the NGPC.
The CLSC/NGPC will consult with the appropriate USEAC or SBA Legal Counsel
as needed. (See definition of “SBA Loan Center” in Chapter 2 of this SOP for
guidance on where to send requests by Loan type, location and status.)
Effective Date: November 1, 2025 28
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
c. Revolving Line of Credit Loans
For revolving lines of credit that have had at least one disbursement, Lenders must
send Servicing Requests to the CLSC or the NGPC. The CLSC or NGPC will
consult with the appropriate USEAC as needed. (See definition of “SBA Loan
Center” in Chapter 2 of this SOP for guidance on where to send requests by Loan
type, location and status.)
5. Requests for Reconsideration
For Lender Loan Actions that require SBA’s prior approval, Lenders may submit
requests for reconsideration of an SBA Loan Center or SBA District Counsel decision
regarding a proposed Loan Action, within thirty (30) calendar days of the date of the
decision, and only if relevant new facts are provided. Lenders must include new
information and/or facts to support all reconsideration requests. Lenders must prepare
and submit requests for reconsideration in accordance with the procedures that applied to
the original request. When a Loan Action involves a Litigation Plan or Debt Collection
Litigation Expenses, Lenders are limited to one request for reconsideration and SBA
District Counsel or Center Counsel will review and decide the request. After the first
request for reconsideration, Lenders must follow the appeal procedures set out in
Subparagraph 6.b. below.
6. Appeal of Decision
a. Liquidation—Liquidation Plan, Loan Action or Expense
Lenders may appeal the decision of an SBA Loan Center Director or designee
regarding a Liquidation Plan, liquidation Loan Action (e.g., compromise) or
liquidation expense, which is not related to litigation or environmental risk
management, to the Director of OFPO, who will consult with the SBA Associate
General Counsel for Litigation. The Lender’s appeal must: (1) be in writing; (2)
include a copy of the decision and Supporting Documents; (3) state the reason(s)
why the Lender believes the decision is incorrect; and (4) be submitted within 30
calendar days of the date of the decision. (13 C.F.R. §120.542(d))
b. Litigation—Litigation Plan, Debt Collection Litigation Expenses and other
Legal Expenses
Lenders may appeal the decision of an SBA Center or District Counsel regarding a
Litigation Plan or Debt Collection Litigation Expenses and other legal expenses to
the SBA Area Counsel who will consult with the SBA Associate General Counsel
for Litigation and the Director of OFPO and issue a final agency decision. The
Lender’s appeal must (1) be in writing; (2) include a copy of the original and
reconsideration decisions and Supporting Documents; (3) include a statement and
analysis of why the Lender believes the underlying decision is in error; and (4) be
submitted within 30 calendar days of the date of the original or reconsideration
decision, whichever is most recent. (13 C.F.R. §120.542(e)) Lenders should submit
such requests to the appropriate SBA Loan Center for tracking purposes.
Effective Date: November 1, 2025 29
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
c. Environmental Risk Management—Denial of Request Regarding Contaminated
Property
Lenders may appeal the 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, to the Associate General Counsel for Litigation who will
consult with the Director of OFPO, provided that the appeal: (1) is in writing; (2)
includes a copy of the original decision and Supporting Documents; (3) states the
reason(s) why the Lender believes the decision is incorrect; and (4) is submitted
within 30 calendar days of the date of the original decision.
D. Recordkeeping
1. General Requirements
Lenders must document all servicing and liquidation Loan Action decisions, including
the justification for the decisions, in the Lender’s Loan File or Computer Tracking
System.
2. Loan Action Records and Supporting Documents
Lenders must keep dated Loan Action Records in their Loan File, along with Supporting
Documents, such as Appraisals, credit reports, Environmental Investigation Reports and
any other document relied upon before taking the action memorialized in the Loan Action
Record, including, for example, a copy of the Servicing and Liquidation Actions 7(a)
Lender Matrix.
3. Correspondence
Lenders must keep dated copies of all paper and electronic correspondence concerning a
7(a) Loan in their Loan File.
4. Telephone Conferences and Meetings
Lenders must keep detailed information concerning telephone calls and face-to-face
meetings, i.e., date, time, place, Persons in attendance, substance of conversation, etc., in
their Loan File or in a Computer Tracking System.
5. Loan File Retention
a. General Rule
Lenders must retain the original Note; personal guaranty(ies); security/collateral
documents such as mortgages, deeds of trust and/or security agreements; 7(a) Loan
applications (SBA Form 1919 or any other application documents); SBA Form(s)
159; and any SBA Environmental Indemnification Agreements in their Loan File.
Lenders must retain hard-copy records of Loan Documents requiring original
signatures, unless the original signature was made electronically in accordance with
applicable standards governing electronic signatures. (See applicable appendices in
Effective Date: November 1, 2025 30
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
SOP 50 10 for guidance on electronic signature standards and record retention
requirements.)
Federally-regulated 7(a) Lenders must also comply with their federal financial
institution regulatory agency requirements governing how long to retain Loan
Documents.
SBA small business lending companies (SBLC) and non-federally regulated SBA
Lenders must retain their Loan Files for at least six years following the final
disposition of each 7(a) Loan (i.e., after the Loan has been paid in full or charged- off
by SBA). (13 C.F.R. §120.461)
Upon request by SBA, Lenders must make 7(a) Loan information available to SBA
in a timely manner. Pursuant to 13 C.F.R. §120.1010, Lenders must allow SBA’s
authorized representatives, including representatives authorized by the SBA Office
of the Inspector General, during normal business hours, access to their Loan Files to
review, inspect, and copy all records and documents relating to SBA guaranteed
Loans, or as requested for SBA Lender oversight.
b. Exception—Litigation Hold
If litigation involving a 7(a) Loan is reasonably anticipated, Lenders must preserve
all potentially relevant information regarding the Loan, including electronic
information. Lenders must preserve electronically stored information in its originally
created or "native" format, along with the related metadata as instructed by SBA
Legal Counsel. Upon request by SBA, Lenders must make electronically stored
information available to SBA in a timely manner. This preservation of information
requirement supersedes the general rule above and means that Lenders must suspend
all routine documentation retention and destruction policies and place a “litigation
hold” on the Loan File, the Computer Tracking System where electronic information
is stored, and on all other relevant documents and data to ensure that such documents
and data are preserved until SBA Legal Counsel provides written notice that retention
is no longer required.
c. Paycheck Protection Program (PPP)-Lender Records Retention Requirements
Effective August 24, 2024, an interim final rule was published in the Federal Register
(89 FR 68090) that lengthens the required PPP Loan records retention for Lenders
that made PPP loans to ten years. This rule matches the legislation that extended the
statute of limitations for criminal charges and civil enforcement actions for alleged
PPP borrower fraud to ten years after the offense.
These records include PPP loan applications that were withdrawn, approved, denied
or cancelled, and all other PPP lender loan records for PPP loans with an outstanding
balance, PPP loans that have been forgiven, and PPP loans that are in repayment or
have been paid in full by the borrower as of the effective date of this rule.
Effective Date: November 1, 2025 31
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
Note: Reasonable anticipation of litigation arises when an organization is on
notice of a credible probability that it will become involved in litigation,
seriously contemplates initiating litigation, or when it takes specific actions
to commence litigation.
E. Loan Monitoring
After a Loan has closed, changes often occur that can impact the ability to administer or
collect the Loan. For example, a Borrower’s name change, relocation, or consolidation with
another entity; a deterioration in the Borrower’s financial condition; and changes that could
affect the value of collateral such as a failure to pay real estate taxes that can become a senior
lien on the collateral. Lenders are responsible for monitoring each 7(a) Loan in their portfolio
and for mitigating the risk of loss associated with any change in accordance with Prudent
Servicing and Prudent Liquidation actions. For example:
1. Name, Address or Legal Structure Changes
In addition to notifying SBA and updating the Loan File and 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 7(a) Loan, Lenders
must take appropriate corrective actions immediately. For example, Lenders should file
a UCC 3 financing statement to reflect a name change and preserve the priority of
personal property liens; if a Borrower changes its legal structure, Lenders should require
the new entity to formally assume the 7(a) Loan; and if an Obligor dies, in addition to
collecting the proceeds from any life insurance policy pledged as collateral for the Loan,
Lenders should take any legal action necessary to protect the ability to collect the balance
owed on the Loan.
2. Borrower's Creditworthiness
a. Lenders should monitor the Borrower's creditworthiness, i.e., financial and
operational condition, through the use of tools such as periodic submission of
financial statements, contact with the Borrower via phone or site visits, and/or review
of relevant financial data from sources such as credit reports, credit scores and tax
returns.
b. If the Loan Documents require the Borrower to submit financial statements, Prudent
Servicing practices require Lenders to request and, if provided, review and analyze
the financial statements in a timely manner. If financial statements are not provided,
Lenders must demonstrate their use of an alternative method to monitor the
Borrower’s financial condition.
c. If the financial information provided by the Borrower raises concerns, Lenders should
ask the Borrower to provide an executed copy of IRS Form 4506-C or Form 8821, to
obtain and compare the IRS transcript of the Borrower’s most recent federal income
tax return to the questionable information.
Effective Date: November 1, 2025 32
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
d. With the exception of SBA Express and Export Express Loans, SBA does not permit
Lenders to charge a Default interest rate on 7(a) Loans. However, Lenders may
charge a separate extraordinary servicing fee for past due financial statements if
consistent with those fees the Lender charges on its similarly-sized, non-SBA
guaranteed commercial loans (see SOP 50 10 at the time of loan approval for
additional guidance on the default interest rate policy for SBA Express and Export
Express Loans and permissible fees on 7(a) Loans). Lenders may require Borrowers
to submit past due financial statements as a condition for considering any future
servicing requests made by the Borrower. (See Chapter 15 of this SOP for guidance
on when a Lender may accelerate a 7(a) Loan Note and commence liquidation
actions, and Chapter 17 of this SOP for additional guidance on Loan workouts.)
Note: If an Obligor files for bankruptcy protection, Lenders must take
appropriate action to protect the legal ability to collect the 7(a) Loan. See Chapter
22 (Litigation) of this SOP for guidance and information on bankruptcy
proceedings.
3. UCC Filings
Lenders must monitor all UCC filings for 7(a) Loans and prepare and timely file any
document needed to maintain the perfection and priority of the lien securing a 7(a) Loan.
This includes, for example, the filing of a UCC-3 financing statement to continue an
existing financing statement.
4. Taxes and Assessments
Lenders must monitor secured 7(a) Loans to ensure that all taxes and assessments, which
if unpaid could become senior liens against the collateral for the 7(a) Loan, 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. Lenders should consult their legal
counsel for case specific information and advice.
5. Insurance
Lenders must monitor all 7(a) Loans to ensure that all required insurance coverage
remains in force throughout the term of the Loan. See Chapter 9 of this SOP for guidance
on force placing insurance coverage if the Borrower has allowed the policy to lapse.
6. Loans Secured by Senior Liens on 7(a) Loan Collateral
Lenders must monitor the loan(s) secured by senior liens on the collateral that secures an
7(a) Loan, to ensure that the lien securing the 7(a) Loan is legally preserved and that the
equity in the property that secures the 7(a) Loan is protected from dissipation due to
default or other charges imposed by the senior lienholder. See Chapter 13 of this SOP for
additional guidance.
Effective Date: November 1, 2025 33
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
F. Lender Reporting Requirements
1. Monthly 1502 Report—Pre-guaranty Purchase Loans
Lenders must include all 7(a) Loans in regular servicing status and all pre-guaranty
purchase 7(a) Loans in liquidation status on the Lender's SBA Form 1502 report, and
submit the report to SBA monthly through the FTA. (Additional information on reporting
is available at FTA Wiki (sba.gov).
Note: Lenders must not report 7(a) Loans as “paid in full” when they transfer an SBA
Loan to another Lender or when the balance for a revolving SBA Loan on which the
Borrower intends to continue receiving draws, is paid to zero. When an SBA Loan
is reported as "paid in full," it is automatically deleted from SBA’s Computer
Tracking System and the guaranty is cancelled. Lenders who erroneously report a
Loan as "paid in full" may submit a written request for reinstatement of the SBA
guaranty pursuant to the requirements set out in Chapter 4 of this SOP.
2. Reports to Credit Reporting Agencies
In accordance with the Debt Collection Improvement Act of 1996, Lenders are required
to report information to an appropriate credit reporting agency whenever they extend
credit via a 7(a) Loan and must continue to report information pertaining to 7(a) Loan
servicing and liquidation activity throughout the life of the Loan. (See Chapter 27 of this
SOP for additional information regarding credit reporting requirements for Loans with
the status of SBA Uncollectible or charged off.)
a. Lenders are required to report 7(a) Loan Borrowers only. Reporting of Guarantors is
not required. Appendix 3 of the Guide to the Federal Credit Bureau Program
(“GFCBP”) lists the designated credit reporting agencies for commercial accounts.
Note: The GFCBP requires reporting on a quarterly basis, but states "more
frequent updates may be provided as necessary to maintain the integrity and
accuracy of the information being reported." (GFCBP - Reporting
Commercial Account Information - page 3-1).
b. Lenders are required to provide information necessary to establish the identity of the
Borrower such as:
• Name, address, and taxpayer identification number;
• The amount, status, and history of the debt; and
• The agency or program under which the debt arose.
Effective Date: November 1, 2025 34
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
Note: Credit reporting agencies may maintain additional data elements.
Lenders should contact the individual credit reporting agencies for applicable
data reporting requirements.
c. Credit Reporting References:
• Debt Collection Improvement Act of 1996
• Federal Claims Collection Standards (FCCS), 31 C.F.R. 900-904
• OMB Circular A-129
• Treasurys Managing Federal Receivables (MFR)
• Guide to the Federal Credit Bureau Reporting
• 31 U.S.C. § 3711(e)(4)
3. SBA Guaranty Purchased Loans
a. Reporting Requirements
(1) Immediate: Lenders must submit a written Loan status report to the appropriate
SBA Loan Center within 15 business days after receiving notice that SBA has
purchased the guaranteed portion of the Loan from the secondary market. (13
C.F.R. §120.520)
(2) Periodic: For all SBA guaranty purchased Loans (including from the secondary
market and directly from the Lender), Lenders must submit a written Loan status
report to the appropriate SBA Loan Center every six months, beginning six
months from the date of guaranty purchase, until the Loan is paid in full or the
Lender submits a Wrap-up Report acceptable to SBA. (See Chapter 24,
Paragraph E of this SOP for guidance on Prudent Liquidation Deadlines and other
requirements for SBA guaranty purchased Loans).
(3) The Lender’s status report for each Loan must include, at a minimum, a
discussion of the following:
(a) Borrower status;
(b) Obligors;
(c) Collateral;
(d) REO and acquired personal property collateral;
(e) Workout or restructuring negotiations;
Effective Date: November 1, 2025 35
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
(f) Recoveries and expenses incurred;
(g) Liquidation activities and litigation proceedings;
(h) Issues preventing a more timely resolution of the SBA 7(a) Loan, and;
(i) Timeline for when a Lender expects to complete its Loan servicing and/or
Loan liquidation actions.
b. Failure to Comply—Referral to OCRM
SBA Loan Service Centers may refer Lenders that fail to provide timely and
sufficient written status reports to the SBA Office of Credit Risk Management
(OCRM) for appropriate action.
4. SBA Approved Litigation Plans
a. Amendments to Litigation Plans
Lenders must submit an amendment to a Litigation Plan to address any material
changes arising during the course of the litigation that were not addressed in the
original plan or an amended plan. Lenders must obtain SBA's written approval of the
amended Litigation Plan prior to taking any further litigation action. (See Chapter 22,
Paragraph C of this SOP for additional guidance on Litigation Plans and amendments
to Litigation Plans.)
5. Site Visit Report
Lenders should prepare a Site Visit Report after every visit to the Borrower’s business
premises, regardless of whether the Loan is in regular servicing or liquidation status, and
keep a copy of the report in their Loan File. All Lenders must prepare a post-Default Site
Visit Report within 60-days of a payment Default on an 7(a) Loan, or sooner if there is a
risk that collateral could be removed, lost or dissipated.
With regard to Loans processed under CLP, Lenders must include a Site Visit Report
with the proposed Liquidation Plan they submit to the appropriate SBA Loan Center for
review and approval.
With regard to all other 7(a) Loans, Lenders must include a Site Visit Report with their
Wrap-up Report, unless it was previously submitted with the Universal Purchase
Package. Lenders that do not conduct a site visit must document their reasons for why a
site visit was neither necessary nor prudent, keep a copy of this action in their Loan File,
and include it in their final Wrap-up Report. (See Chapter 16 of this SOP for additional
guidance on site visits.)
6. Wrap-up Report
Lenders must prepare and submit a Wrap-up Report in electronic form to the appropriate
SBA Loan Center for review and approval within 30 calendar days after Prudent
Liquidation actions are completed, or immediately upon receipt of a request from SBA -
whichever occurs first. After SBA approves the Lender’s Wrap-up Report and the Lender
Effective Date: November 1, 2025 36
SOP 50 57 4 Chapter 3
Lender Responsibility and Authority
assigns the Loan Documents to SBA, SBA will change the status of the Loan to SBA
Uncollectible and refer the eligible Obligors for all legally collectible Loan balances to
Treasury for further collection actions or charge off the Loan if no remaining eligible
Obligors can be referred to Treasury (e.g. bankruptcy or decedent).
Lenders must also comply with SBA’s Prudent Liquidation Deadline as defined in
Chapter 2 of this SOP. This requires Lenders to prepare and submit a Wrap-up Report,
acceptable to SBA, to the appropriate SBA Loan Center no more than 24 months after
the date SBA purchases its guaranty, unless SBA grants a written extension of that
timeframe based on extenuating circumstances. (See Chapter 24, Paragraphs E and F,
and Chapter 27, Paragraph B of this SOP for more information on the Prudent
Liquidation Deadline.)
G. SBA Take Over of Servicing or Liquidation
SBA may, in its sole discretion, take over the servicing and/or liquidation, including
litigation, for any 7(a) Loan. If SBA elects to do so, the Lender must assign the Loan
Documents to SBA within 30 calendar days from receiving notice of SBA’s election and
provide any assistance requested by SBA. SBA may use contractors to perform servicing or
liquidation actions. (13 C.F.R. § 120.535(d))
H. Enforcement Action by OCRM
OCRM may impose or take informal enforcement actions against a Lender pursuant to
13C.F.R. §120.1300, or formal enforcement actions against a Lender pursuant to 13
C.F.R.§120.1400, based on a Lender’s servicing and/or liquidation actions or inactions. (See
also SOP 50 53, 13 C.F.R. §120.1500 and 13 C.F.R. §120.1600 for information on SBA's
credit risk management policy and procedures.
I. Lenders Annual Service Fee
The on-going SBA guaranty fee (Lenders Annual Service Fee) Lenders must pay to SBA is
based on the outstanding principal balance of the Loan prior to guaranty purchase. See SOP
50 10 at the time of loan approval for additional guidance.
• The fee is due from the time of initial disbursement until the loan is Paid in Full, the
guaranty is voluntary terminated by the Lender or SBA purchases the guaranty.
• The service fee cannot be charged to the Borrower
• SBA may institute a late fee charge for delinquent payments of the Lenders Annual
Service Fee to cover administrative costs associated with collecting delinquent fees.
Effective Date: November 1, 2025 37
SOP 50 57 4 Chapter 4
Loan Payment Administration
Chapter 4. Loan Payment Administration
This chapter provides SBA policy and procedures with regard to collecting and processing Loan
payments. (See Chapter 23 of this SOP for information regarding recoveries for Loans in
liquidation.)
A. Collection and Application of Loan Payments
Lenders are responsible for collecting scheduled loan payments and crediting the payments
to the proper account, unless SBA has taken over the servicing of the Loan.
1. Payments on Loans in Regular Servicing Status
Unless the terms of the Note specify otherwise, Lenders must apply funds received for
payments on 7(a) Loans in regular servicing status in the following order:
a. Accrued Interest
Lenders must apply funds received for each installment payment first to pay interest
that has accrued to the day the Lender receives the payment;
b. Principal
After the accrued interest has been paid, Lenders must apply the funds received for
each installment payment to the principal balance of the Loan, to bring the principal
current;
c. SBA Permitted Loan Fees
After the accrued interest is paid and the principal balance has been brought current,
Lenders may apply any excess funds received to SBA permitted fees, such as late
fees.
Note: For information on SBA permitted Loan fees, such as late payment fees,
extraordinary servicing fees, assumption fees, subsidy recoupment fees, and
fees for overdraft and out-of-pocket expenses, see SOP 50 10 at the time of loan
approval. Lenders may not pass the cost of the 7(a) Lender’s Annual Service
Fee (also known as the “SBA on-going guaranty fee”) to the Borrower. See SOP
50 10 at the time of approval for additional information on the 7(a) Lender’s
Annual Service Fee and how it is paid.
d. Additional Principal
Lenders must apply any funds remaining from payments on Loans in regular
servicing status after the accrued interest has been paid, the principal balance has
been brought current, and the SBA permitted Loan fees have been deducted, to
reduce the principal balance of the Loan. The application of additional principal
payments to the Loan balance will not advance the next payment due date.
Effective Date: November 1, 2025 38
SOP 50 57 4 Chapter 4
Loan Payment Administration
2. Borrower Payments on Loans in Liquidation Status
a. Overview
After acceleration and demand due to Default (followed by classification of the
Loan in liquidation status in accordance with Chapter 15 of this SOP), the Borrower
no longer has a legal right to make payments on the Loan. As a result, Borrower
payments (as opposed to collateral liquidation recoveries) for Loans in liquidation
status are generally rare. In cases where the Borrower is financially able to resume
making regularly scheduled payments and executes a written agreement that
provides for the resumption of regular payments, Lenders should remove the Loan
from liquidation status and return it to regular servicing.
Lenders must submit a copy of any executed workout or modification agreement to
the appropriate SBA Loan Center along with their request to change the status of
the Loan back to regular servicing. (See Chapter 15 of this SOP for information
on returning Loans classified in liquidation to regular servicing status, and Chapter
23 of this SOP for guidance on how to apply recoveries.)
b. Impact on Liquidation Plan
Before accepting any borrower payment (other than payment in full) for a Loan in
liquidation status, Lenders must determine whether accepting the payment could
cure the Default and curtail plans for liquidating the Loan. For more information,
Lenders should consult with their legal counsel.
c. Application of Borrower Payment Proceeds
Unless the terms of a workout agreement or some other legally binding document
(e.g., a court approved bankruptcy plan or workout agreement) specifies otherwise,
Lenders must apply funds received from borrower payments for Loans in
liquidation status in the following order:
(1) Principal
Lenders must apply funds received from payments for Loans in liquidation status
to the principal balance of the Loan until it is paid in full;
(2) Accrued Interest
After the principal balance of the Loan is paid in full, Lenders must apply funds
from payments received for Loans in liquidation status to accrued interest;
(3) SBA Permitted Loan Fees
After the principal balance and accrued interest of the Loan is paid in full,
Lenders may apply funds from payments received for Loans in liquidation
status to SBA permitted Loan fees.
Effective Date: November 1, 2025 39
SOP 50 57 4 Chapter 4
Loan Payment Administration
3. Borrower Payments on Loans in SBA Uncollectible Status
After a Loan is placed in SBA Uncollectible status, borrower payments will be applied
first to interest and then to principal.
B. Post-Guaranty Purchase Servicing Fee on SBA Portion of Interest Payments
After SBA has purchased its guaranty, Lenders who collect Loan payments that include
interest may deduct a servicing fee prior to remitting SBA's share of the payment to SBA,
provided that the fee is:
1. Deducted from the interest portion of the payment, (Lenders may not deduct servicing
fees from recoveries or principal only payments.);
2. Based on SBA's percentage of participation in the Loan and the number of days of interest
collected; and
3. Reflected on the remittance form that Lenders submit to SBA using payment code 172
in http://www.pay.gov/.
Note: For information on other SBA permitted Loan fees such as late payment fees,
extraordinary servicing fees, assumption fees, subsidy recoupment fees, and fees for
overdraft and other out-of-pocket expenses, see the SOP 50 10 at the time of loan
approval. SBA does not guarantee nor pay Lender Loan fees. Therefore, Lenders
must not add Loan fees to the transcript of account submitted with a guaranty
purchase request.
C. Remittance of Borrower Loan Payments
1. Before Guaranty Purchase—To Investor
If the guaranteed portion of the Loan has been sold on the secondary market, the Lender
must remit the guaranteed portion of regular Loan payments, along with SBA Form 1502,
to the FTA for distribution to the investor by the third day of the next month. (See Section
3.2 of SBA Form 1086). The remittance amount will exclude the retention of a minimum
of 1.0 percent for those Loans sold on the SBA secondary market for a premium (see
Section 1.5 of SBA Form 1086 for additional guidance). This adjustment is a reduction
of the reported interest collected for the benefit of the investor.
Note: SBA permitted Loan fees belong to the Lender and are not shared with the
secondary market investor.
2. After Guaranty Purchase—To SBA
Regardless of whether the Loan was sold on the secondary market, Lenders must remit
SBA's share of any post-guaranty purchase Loan payment using payment code 172 in
www.pay.gov within 15 business days of receipt.
Effective Date: November 1, 2025 40
SOP 50 57 4 Chapter 4
Loan Payment Administration
D. Prepayment
Prepayment is defined as a payment of principal in excess of the amount due according to
the Loan amortization schedule. The “prepayment amount” does not include accrued
interest.
1. Loans Not Sold on Secondary Market
Borrowers may, at any time, prepay an 7(a) Loan that was not sold in the secondary
market. The prepayment may, however, be subject to an SBA subsidy recoupment fee as
provided in Subparagraph D.4 below.
2. Loans Sold on the Secondary Market
Borrowers may, at any time, prepay a 7(a) Loan sold in the secondary market. If the
prepayment amount is greater than 20 percent of the unpaid principal balance of the Loan,
the Lender must provide written notice to the FTA pursuant to the terms of the SBA Form
1086 executed at the time the guaranteed portion of the Loan was sold.
Refer to SBA Form 1086 for guidance on the notification process. The prepayment may
also be subject to an SBA subsidy recoupment fee as provided in Subparagraph D.4
below.
3. No Lender Prepayment Penalty
Lenders may not impose a penalty or charge a fee for full or partial prepayment of an
7(a) Loan. (13 C.F.R. §120.221)
4. SBA Subsidy Recoupment Fee
SBA requires Borrowers to pay a subsidy recoupment fee for voluntary full or partial
prepayment of 7(a) Loans with an original maturity of 15 years or more in accordance
with the conditions and requirements set forth in 13 C.F.R. §120.223. The subsidy
recoupment fee is paid to the FTA and is due at the time the prepayment is remitted. If
the Lender advances funds to pay the subsidy recoupment fee on behalf of the Borrower,
the Lender must recover such funds from the Borrower without seeking reimbursement
of the advanced funds from SBA after guaranty purchase (See SOP 50 10 at the time of
loan approval for information regarding subsidy recoupment fees.).
Note: SBA has no statutory authority to waive a subsidy recoupment fee. However,
pursuant to SOP 50 10, if a Lender believes that the prepayment of a Loan is
involuntary, the Lender may submit a request, supported by the Lender’s analysis,
to the appropriate SBA Loan Center for a prepayment determination. The SBA Loan
Center will review the request and submit its recommendation to the Director of the
Office of Financial Program Operations (D/OFPO), or designee, and the Director of
the Office of Financial Assistance (D/OFA), or designee, for a joint determination
as to whether the prepayment is voluntary or involuntary.
Effective Date: November 1, 2025 41
SOP 50 57 4 Chapter 4
Loan Payment Administration
E. Paid in Full Loans
Paid in full (“PIF”) means payment of the total amount owed on the Loan, including
principal, interest, and any applicable subsidy recoupment fee or Recoverable Expense.
When the guaranteed portion of a Loan is sold on the secondary market and the Loan is paid
in full prior to maturity, Lenders must follow the prepayment guidance provided in
Subparagraph D.2 above. Lenders must not report such Loans as paid in full on an SBA
Form 1502 until the FTA verifies and receives the final payoff amount. Lenders may cancel
the Note and release any remaining collateral after the FTA verifies that the Loan is PIF.
(See Chapter 21 of this SOP for guidance on when SBA may treat a Loan as “paid in full”
after an offer in compromise has been accepted and approved by SBA.)
Note: Many states impose significant penalties on creditors who fail to release
collateral in accordance with state law. Lenders should consult their legal counsel for
state-specific release requirements.
F. Reinstatement of Guaranty on Loan Mistakenly Coded "PIF"
1. General Rule
SBA may, in its sole discretion, reinstate the guaranty for a 7(a) Loan that a Lender
erroneously reported as paid in full on SBA Form 1502.
2. Procedure
To reinstate the SBA guaranty on a Loan mistakenly reported as PIF, the Lender must
submit a written request for reinstatement to the appropriate SBA Loan Center. The
Lender’s request must include a reasonable explanation for the mistake; a certification
that the Lender has paid all relevant guaranty fees; confirmation that the Lender has not
released any Obligors without SBA's prior written approval; and a copy of the lender’s
transcript of account reflecting the balance of the Loan for reinstatement.
Effective Date: November 1, 2025 42
SOP 50 57 4 Chapter 5
Environmental Risk Management
Chapter 5. Environmental Risk Management
This chapter sets out SBA policy and procedures for managing environmental risks associated
with 7(a) 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/or 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 the Environmental Definitions Appendix of SOP 50 10, the most
current version of which is accessible in the SOP section of SBA’s website. 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 Prudent Liquidation of a 7(a) Loan with respect to environmental risk
management 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
3. Compliance with Environmental Laws that allow secured creditors to avoid or
significantly limit potential liability.
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Note: Many Environmental Laws provide secured creditors with a “safe harbor”
from liability as an owner or operator. Two of the most important Environmental
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) holds indicia of ownership
primarily to protect its security interest; (2) takes no action that could be construed
as “participating in the management” of the Borrower’s facility; and (3) attempts
to divest itself of the 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. Lenders should consult their legal counsel for
Loan-specific information.
Note: Certain changes in the Borrower’s financial condition could signify an
increase in environmental risk including regulatory fines discovered while
reviewing financial statements. Certain activities could signify an increase in
environmental risk including failure to maintain Engineering Controls or evidence
of a Release discovered during a site visit.
C. When an Environmental Investigation is Required
Lenders must conduct an Environmental Investigation 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, Lenders must conduct an Environmental Investigation 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
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7. Abandoning REO or acquired personal property collateral based on unsubstantiated
allegations of Contamination.
D. Environmental Investigation Process for Loans in Regular Servicing Status
Lenders should conduct Environmental Investigations in support of Loan Actions for 7(a)
Loans in regular servicing status, e.g., substitution of collateral, in accordance with the
guidance provided in SOP 50 10.
E. Environmental Investigation Process for Loans in Liquidation Status
Lenders should conduct Environmental Investigations in support of Loan Actions for 7(a)
Loans in liquidation status, e.g., acquiring Property at a foreclosure sale, as follows:
1. Scope of investigation
The amount of Lender due diligence must be prudent based on Loan specific
circumstances such as the Property’s appraised value, amount owed on senior liens, 7(a)
Loan balance, activities conducted at the Property, results of previous Environmental
Investigations, access to the Property, and the cost and time involved.
2. Use of Environmental Professionals
Lenders must ensure that Environmental Investigations on Loans in liquidation status are
conducted by an Environmental Professional in accordance with the Environmental
Protection Agency’s Standards and Practices for All Appropriate Inquiries (AAI); except
for the Environmental Questionnaire (“EQ”) portion of an Environmental Investigation,
which consists of an EQ and a Records Search with Risk Assessment (“RSRA”).
3. Reliance Letter Requirement
Environmental Investigation Reports must include a Reliance Letter, unless the
Environmental Investigation consists of an EQ and RSRA. The Lender must affix a copy
of the Reliance Letter to the Environmental Investigation Report. (See Reliance Letter
Appendix to SOP 50 10 for the Reliance Letter template.)
4. General Procedure
For Properties with sufficient Recoverable Value, Lenders must take the following steps
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, Lenders must begin with
a Phase I ESA. Generally, the risk should be considered high if, for example, there are
underground storage tanks (USTs) at the Property, a NAICS Code for a past or present
use of the Property is on the List of Environmentally Sensitive Industries in the NAICS
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Code Appendix of 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 unit 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, Lenders may 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, Lenders must 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 sufficient Recoverable Value:
(1) Lenders should conduct a Phase I ESA if a Transaction Screen or EQ and RSRA
shows anything other than a “low risk” of Contamination;
(2) Lenders should conduct inquiries regarding environmental problems beyond the
scope of a Phase I ESA (e.g. asbestos), if the problem could have a material effect
on the Recoverable Value of the Property;
(3) Lenders should conduct a Phase II ESA if it is necessary to determine the nature
and extent of Contamination identified by a Phase I ESA; and
(4) Lenders should obtain a Remediation estimate if Remediation is recommended in
a Phase II ESA Report. An Environmental Professional must prepare the
Remediation estimate.
Note: See ASTM E2137-22 (Standard Guide for Estimating Monetary Costs and
Liabilities for Environmental Matters) for additional guidance on Remediation
estimates.
Step 3. Additional Requirements for Gas Stations, Commercial Fueling Facility
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
such as chlorinated and/or petroleum-based solvents, and there is sufficient
Recoverable Value, the Lender’s Environmental Investigation should also include:
(1) A Phase II ESA conducted by an independent Environmental Professional with
at least three years of full-time relevant experience, who holds a current
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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, commercial fueling facility, 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 Control of a Business That Uses Hazardous
Substances
(1) Environmental Regulatory Compliance Audit
Generally, Lenders should conduct an environmental regulatory compliance audit
prior to taking over the operation of a business that handles Hazardous Substances.
Lenders should conduct the audit in substantial compliance with ASTM E2107-
20 (Standard Practice for Environmental Regulatory Compliance Audits).
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 effect
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 18 of this SOP for guidance on when the appointment of a receiver
is appropriate and the cost/benefit analysis that is required. See also Chapter 22
of this SOP for guidance 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 Lenders must keep in their Loan File. An Environmental
Investigation Report should be less than 180 calendar days old when a Lender relies on it to
evaluate a Loan Action.
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G. Remedial Action by 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 Property or Control of a Business with Environmental Risks
1. When Appropriate
Lenders should not acquire title to Contaminated Property and/or take control of
businesses that use Hazardous Substances or are located on Contaminated Property,
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
Lenders must submit a written Servicing Request to the appropriate SBA Loan Center,
which must consult with the Associate General Counsel for Litigation, or designee,
before SBA may agree to allow the Lender or SBA to take title to Contaminated Property
or take control of a business that uses Hazardous Substances. (See Chapter 6 of this SOP
for additional guidance on the submission of Lender Servicing Requests.)
4. Request Format
The Lender’s Servicing Request, which must be accompanied by appropriate Supporting
Documents, must include a thorough analysis of all relevant factors, to determine whether
a prudent lender would take the proposed action despite the risks. Such factors and
Supporting Documents generally include:
a. Appraised Value of the Collateral Lender Proposes to Acquire
Lenders must provide a copy of the post-Default appraisal of the Property.
b. Liquidation Value of Collateral Lender Proposes to Acquire
Lenders must provide an estimated Liquidation Value for the Property they propose
to acquire, including the basis for their estimate.
c. SBA Loan Balance
Lenders must provide a transcript of account or other credible evidence of the
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outstanding 7(a) Loan balance.
d. Amount Owed on Senior Liens
Lenders must provide a list of senior liens against the Property that secures the 7(a)
Loan, including landlord liens and tax liens, and the amount owed on each,
supported by a copy of:
(1) Schedule B of the post-Default title report;
(2) A current UCC lien search if the Service Request includes personal property
collateral or taking over the operation of a business;
(3) Any senior lienholder agreement, landlord lien waiver, subordination
agreement and/or other Loan Documents that establish the priority of the
liens against the Property; and
(4) Transcripts of account to support compliance with any provisions in the
foregoing documents that require a senior lienholder to subordinate any
portion of the senior loan to the 7(a) Loan (e.g., Default Charges).
e. Foreclosure Costs
Lenders must 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
Lenders must provide a summary of the nature and extent of the Contamination
supported by copies of the Environmental Investigation Report(s) required by
Paragraph E of this Chapter.
g. Clean-up Costs and Liability
Lenders must indicate whether Remediation is required or on-going, and:
(1) If Remediation is not required, Lenders must attach a copy of the “no further
action” letter, closure letter, or functional equivalent from the responsible
Governmental Entity.
(2) If Remediation is recommended—Lenders must 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 Persons responsible for the 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—Lenders must attach a copy of any document
that shows the progress of the project and the financial resources of the Person
conducting the cleanup to complete the project.
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h. Secured Creditor Liability Exemptions
Lenders must provide a list of the applicable liability exemptions to which the
Person who will take title will qualify, 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 of foreclosure while administering an SBA Loan
program is considered an "involuntary acquisition."
i. Mitigating Factors
Lenders must submit a list of 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) An SBA Environmental Indemnification Agreement (see Appendix to SOP
50 10) executed by a Person with sufficient financial resources to cover the
cost of Remediation;
(2) An Escrow Account established to cover the cost of a Remediation plan
approved by the responsible Governmental Entity;
(3) A Solvent Government Cleanup Fund that has unconditionally agreed to
cover the cost of Remediation; or
(4) Lender Liability Environmental Insurance is in place to cover the cost of
Remediation after title is acquired.
j. Tort Liability
Lenders must 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
Lenders must review Schedule B of the post-Default title report and indicate
whether there is any recorded covenant, deed restriction or other exception to title
that could have a negative impact on the Property’s Recoverable Value. These
restrictions could include 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.
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l. Alternative Methods of Recovery
Lenders must 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 a release of lien for consideration, a sale of the Note and assignment of the
lien to the purchaser, or the appointment of a receiver to operate the business until
enough money is recovered to pay-off the Loan or the collateral is sold.
m. Acquired Collateral Divestiture Plan
Lenders must provide a plan for disposing of any Property it proposes to acquire,
including all holding and resale costs, and the anticipated difficulty in finding a
buyer for the Property. This assessment should include, for example, answers to
questions such as 1) have any third parties expressed an interest in purchasing the
Property?, and 2) is the Property currently listed for sale by the owner, and 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, 40C.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. Loan Specific Relevant Facts
Lenders must list and discuss any other Loan-specific relevant facts. For example:
(1) Remediation by Secured Creditor—Does the Lender anticipate incurring
additional costs to Remediate the Property prior to listing it for sale? If so,
Lenders must attach a copy of the legal opinion recommended in Paragraph
G of this Chapter, provide a Remediation cost estimate, and indicate how the
costs will be paid;
(2) Receivership Proceedings—The appointment of a receiver to operate the
business or sell the Property is considered Non-Routine litigation for which
Lenders must submit a Litigation Plan and receive prior written approval
from SBA District Counsel before commencing any receivership
proceedings. The Lender’s Litigation Plan must explain how the appointment
of a receiver will maximize recovery or minimize losses before the business
is sold, or the collateral is liquidated (see Chapter 18 of this SOP for
additional guidance on when a receivership is appropriate and the
requirement to provide a cost/benefit analysis to support the appointment of
a receiver). The cost-benefit analysis must include an Environmental
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Professional’s assessment of the costs to clean the Property, in addition to all
other projected income and expenses associated with operating the business,
which supports the cost effectiveness of holding and selling rather than
abandoning the Property. The Litigation Plan must also describe the prior
experience and qualifications of the proposed receiver and include an
estimate of all legal fees and costs associated with the proposed receivership
(see Chapter 22 of this SOP for additional guidance regarding Non-Routine
Litigation). Lenders may not proceed with Property remediation without prior
written approval from SBA District Counsel.
(3) Emptying and Closing USTs—If there are USTs at the Property and a
receiver is not appointed, Lenders must 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
Lenders must estimate the Recoverable Value of taking the proposed Servicing
Action based on an analysis of factors “a” through “n” above.
p. Lender Appeal of Denied Servicing Request
Lenders may appeal the 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, to the Associate General Counsel for Litigation who will
consult with the Director of OFPO, provided that the appeal: (1) is in writing; (2)
includes a copy of the original decision and Supporting Documents; (3) states the
reason(s) why the Lender believes the decision is incorrect; and (4) is submitted
within 30 calendar days of the date of the original decision.
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Servicing Requests
Chapter 6. Servicing Requests
A. General Requirements
Frequently after a 7(a) Loan has been disbursed, circumstances change that can give rise to
Borrower requests for Loan Actions. These Loan Actions can lead to Lender Servicing
Requests that range anywhere from a simple request to change a Borrower’s mailing address
to a complicated request involving the exchange or substitution of collateral.
Regardless of the level of complexity, Lenders must review, analyze and act upon all Loan
Actions in accordance with Prudent Servicing and Prudent Liquidation practices. As long as
the Borrower is financially viable, when responding to a Borrower’s request for a Loan
Action, Lenders should strive to meet the Borrower’s short-term and long-term needs without
impairing the integrity of the 7(a) Loan program, i.e., preserving the Borrower’s ability to
repay the 7(a) Loan over time.
B. Review and Analysis
Generally, Lenders should not modify Loan Documents unless there has been a material
change in the Borrower's circumstances since the Loan was made. The Supporting
Documents and level of analysis required for SBA to make an informed decision regarding
whether to approve or deny a Servicing Request, and under what conditions, will vary
depending on the circumstances. In all cases, Lenders must justify and document their
decision 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. Lenders should follow the relevant
steps listed below to ensure that each Servicing Request is properly reviewed and analyzed.
1. Document Receipt of the Servicing Request
Lenders must enter all Loan Actions into their Computer Tracking System and/or Loan
File.
2. Ensure that the Servicing Request is in the Proper Format
Lenders should require Borrowers to submit all requests to modify the terms and/or
conditions of a 7(a) Loan, in writing.
3. Research the Applicable Loan Program Requirements
a. Requests Concerning Assumptions, or Substitution of Collateral or Obligors
For assumptions and the substitution of collateral or Obligors, Lenders must comply
with the Loan Program Requirements of SOP 50 10 in effect at the time the action
takes place, in accordance with 13 C.F.R. §120.180. (Also see Chapters 8 & 11 of
this SOP)
b. All Other Servicing Requests
Lenders may refer to Chapters 7 through 12 of this SOP for guidance on developing
Servicing Requests for some of the more common Loan Actions.
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4. Determine Whether the Servicing Request is Properly Supported
Lenders should ensure that all Servicing Requests include the Supporting Documents
that a prudent lender would need to make an informed decision. For example:
a. Servicing Requests Involving Credit Issues
Generally, Lenders should ensure that all Loan Actions that require a credit analysis
(e.g., an increase in the amount of the 7(a) Loan or prior lien) are supported by the
Borrower's:
(1) Current financial statement; and
(2) Most recent two years of federal income tax returns.
b. Servicing Requests Involving Collateral
In addition to the financial documents listed above, Lenders should ensure that Loan
Actions involving collateral (e.g., subordination, substitution or release of lien) are
also supported by a current:
(1) Appraisal of the relevant collateral;
(2) Lien search, i.e., a title report if the action involves real property collateral,
or a UCC search if the action involves business personal property collateral;
and
(3) Transcript of account or other credible evidence of the balance owed on any
senior liens.
5. Obtain Additional Supporting Documents When Necessary
Lenders should obtain any additional Supporting Documentation needed to properly
analyze and approve their Servicing Request. For example:
a. Credit Report
Generally, Lenders should order a new credit report to verify the financial
information submitted in support of the proposed Loan Action.
b. Obligor Financial Statements and Tax Returns
Lenders should require all Obligors, including the Borrower and all Guarantors, to
provide current financial statements and federal income tax returns for the most
recent two years when a complete analysis of each Obligor’s repayment ability is
necessary.
c. Refinance or Purchase and Sale Documents
Lenders must obtain an executed copy of all the relevant documents, (e.g., purchase
and sale agreement, escrow instructions, estimated closing statement (HUD-1), seller
carry-back note, etc.) if their Servicing Request involves the sale or refinance of
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collateral.
d. Environmental Investigation Report
Lenders should obtain an Environmental Investigation Report when required by
Chapter 5 Paragraph C of this SOP.
e. Evidence of Authority to Take Proposed Action
Lenders should obtain and provide proper evidence to establish that each Person
whose signature is necessary has 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
Lenders must analyze the Borrower's financial statements to determine whether the
Borrower is financially viable, i.e., will be able to repay the Loan if the request is
approved. If the Borrower is viable, Lenders should proceed to Step 7. If not, Lenders
should deny the requested Loan Action and take more appropriate actions. (See Chapter
15 of this SOP for guidance on classifying Loans into liquidation status.)
7. Analyze the Collateral
If the Servicing Request will impact the collateral, Lenders should conduct a thorough
analysis of the Recoverable Value of the collateral before and after the requested Loan
Action.
8. Check for Problems
Lenders should review the existing Loan Documents and their Computer Tracking
System to: (1) ensure that all Loan Actions are 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
Lenders should condition their approval of every Loan Action upon the Borrower
curing any Default identified in Step 8 above. For example, Lenders should require
Borrowers to reinstate lapsed insurance coverage and/or provide any past due
financial statements prior to approving any Loan Action.
b. Adequate Consideration
Lenders must ensure that Borrowers provide consideration (i.e., something of value),
before or at the same time the Borrower receives the benefit of a proposed requested
Loan Action, to make the change in the Loan Documents legally binding. For
example, as consideration for granting a Loan Action, Lenders could require
Borrowers to:
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(1) Fix errors in the Loan Documents identified in Step 8 above;
(2) Waive defenses to litigation;
(3) Release lender liability claims; or
(4) Provide additional collateral.
Note: All contracts must be supported by valid consideration, which can
take the form of money, physical objects, services, promised actions,
abstaining from a future action, etc. For example, adequate consideration
for a routine Loan Action such as a temporary payment deferment can
include requiring the Borrower to provide updated financial information.
c. Written Consent of All Obligors
Lenders must obtain the written consent to any material change in the terms and
conditions of the Loan from each Obligor, to protect the legal ability to recover from
them in the event of Default.
10. Comply with SBA Decision Making, Notice and Approval Requirements
Unless the Lender has unilateral authority to take the requested Loan Action and no
notice to SBA is required, Lenders must comply with applicable SBA Loan Program
Requirements pertaining to decision making authority and notice to SBA. (See Chapter
3 of this SOP for additional guidance on Lender responsibility and authority). Unless
prior SBA approval and/or notice to SBA is required, Lenders should not notify the SBA
Loan Center regarding their routine Loan Actions.
11. Comply with the Applicable Recordkeeping Requirements
In accordance with Chapter 3 of this SOP, Lenders must note and/or enter SBA’s response
to all Servicing Requests in the Lender’s Computer Tracking System and/or Loan File;
keep a copy of the Loan Action Record and Supporting Documents in the Lender’s Loan
File; and enter the substance of any telephone calls and/or face-to-face meetings regarding
the Servicing Request in the Lender’s Loan File and/or entered into the Lender’s Computer
Tracking System.
Note: Best Practice: Lenders should consider placing a copy of the Servicing and
Liquidation Actions 7(a) Lender Matrix in effect at the time the Loan Action is taken,
and that was relied on, in their Loan File.
C. How To Obtain SBA Approval for a Proposed Loan Action
If SBA’s prior written approval is required before a Lender may take a Loan Action (see
Chapter 3 of this SOP for a detailed list of such actions), Lenders must submit a written
Servicing Request to the appropriate SBA Loan Center in accordance with the guidelines
listed below.
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SOP 50 57 4 Chapter 6
Servicing Requests
1. Required Documentation
a. Letter Outlining Request
Lenders should submit all Servicing Requests that require prior written SBA approval
in a clearly and concisely drafted letter or electronic mail submission based on the
Lender’s internal credit memorandum. Lender Servicing Requests must not
exclusively rely on any document or analysis prepared by a Person with a conflict of
interest, such as a senior lienholder. Although SBA reserves the right to request
additional information, all Lender Servicing Requests should include:
(1) A brief description of the proposed Loan Action;
(2) Justification for the proposed Loan Action, i.e., benefit to the Borrower,
Lender and SBA—neither abundance nor lack of collateral alone is sufficient
justification for a Loan Action;
(3) The amount funded, date of funding, current balance and status of the 7(a)
Loan;
(4) The current financial condition of the Borrower and other Obligors, as
needed;
(5) If the proposed Loan Action increases the risk of loss on the 7(a) Loan,
Lenders should include any mitigating factors that may increase the value of
the 7(a) Loan collateral or improve the performance of the Borrower's
business; If the proposed Loan Action will impact the collateral, Lenders
must include 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;
(6) A summary of the Lender’s prior servicing experience with the Borrower, i.e.,
7(a) Loan and non-SBA loan modifications or problems pertinent to the
request;
(7) If the written consent of the FTA on behalf of the registered holder is required,
whether the Lender has or will obtain it; and
(8) A list of all the Obligors associated with the Servicing Request and a
statement from the Lender as to whether they have or will obtain consent
from all the Obligors for the proposed Loan Action.
b. Credit Memo and Supporting Documents
Lenders should include 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,
with every Servicing Request they submit to SBA for approval. Generally, Lenders
do not need to include a copy of the Borrower's financial statements or other
Supporting Documents such as Appraisals, etc., if the Lender has adequately
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analyzed the Supporting Documents in their credit memo, subject to SBA’s request
for additional information as needed.
2. Where to Submit Servicing Requests
Lenders must submit all Servicing Requests to the appropriate SBA Loan Center. Prior
to final disbursement of a 7(a) Loan, Lenders should submit Servicing Requests to the
LGPC in Citrus Heights, CA, or for EWCP Loans, the appropriate USEAC. After final
disbursement, Lenders should submit Servicing Requests for all Loans in regular
servicing status to the CLSC and the CLSC will consult with the appropriate USEAC as
needed. For SBA Express, Export Express, Community Advantage and any Pilot
Program Loan in liquidation status, Lenders should submit Servicing Requests to the
CLSC. Servicing requests for all other Loans in liquidation should be submitted to
NGPC. (See definition of “SBA Loan Center” in Chapter 2 of this SOP for additional
guidance on where to send Servicing Requests.)
3. SBA Response Time
SBA will attempt to respond to a Lender's request for approval of a Servicing Request
within 15 business days from the date that SBA received the request, (13
C.F.R.§120.541), or sooner if possible. SBA’s failure to provide a response to a Lender’s
Servicing Request within 15 business days does not imply that SBA has approved the
Servicing Request.
Note: SBA will not provide written approval for proposed Loan Actions that fall
within the Lender’s unilateral authority.
D. Implementing Loan Actions
Lenders must implement Loan Actions in accordance with Prudent Servicing and/or Prudent
Liquidation practices. For example, Lenders may need to:
1. Modify Existing Loan Documents
If the approved Loan Action modifies the terms and conditions of the Note or any other
Loan Document, Lenders must modify each impacted Loan Document;
2. Prepare New Loan Documents
Lenders must properly prepare and ensure proper execution of any new Loan Document
needed to implement an approved Loan Action; and
3. Record New or Modified Loan Documents
Whenever necessary, reasonable and/or customary, Lenders must properly record
modified Loan Documents, as well as any new Loan Documents, in the public record.
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Chapter 7. Modification of Note
A. General Requirements
1. Review and Analysis of Requests to Modify a 7(a) Loan Note
Lenders should review, analyze and implement Borrower requests to modify the terms of
a 7(a) Loan Note pursuant to the requirements of Chapter 6 of this SOP, the provisions
of applicable statutes, regulations and contracts (e.g., 7(a) Loan Note and SBA Form
1086 (Secondary Participation Guaranty Agreement)), and Chapter 7 of this SOP.
2. Secondary Market Purchase or Investor Consent
a. General Rule
With regard to 7(a) Loans sold on the secondary market, the Secondary Participation
Guaranty Agreement (SBA Form 1086) prohibits any change to the repayment terms
of the Note unless SBA or the Lender has repurchased the SBA guaranteed portion
of the Loan or the Lender has obtained the written consent of the secondary market
investor—unless the modification involves a one-time deferment that does not exceed
a continuous period of three monthly installments. (See Chapter 12 of this SOP for
guidance on payment deferments.)
b. Alternative—Emergency Repurchase from Investor
Generally, a Lender may only repurchase a 7(a) Loan from the secondary market
investor on a "willing buyer-willing seller" basis. However, pursuant to SBA Form
1086, if the viability of the Borrower is at stake and the Lender is unable to obtain
investor consent to restructuring the repayment terms of the Loan, the Lender may
request authority from SBA to repurchase the Loan from the investor by submitting
a written request along with the following documents to the appropriate SBA Loan
Center:
(1) Current financial statements of Borrower;
(2) A written decline from the investor to the Lender's specific request; a written
statement from the FTA indicating that the investor failed to respond within
30 calendar days; or the FTA's written statement that the guaranteed interest
is part of a pool;
(3) A statement that the proposed change in repayment terms is solely for the
benefit of the Borrower; and
(4) A certification by the Lender that it will make the requested change if SBA
approves the repurchase.
Note: Generally, if the Loan is held in a secondary market pool rather than by an
individual investor, the FTA may approve Note modifications as long as the interest
rate is not altered. Lenders are encouraged to propose modifications that will
enable Borrowers to remain viable.
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B. Payment Due Date
Lenders may modify the date that regularly scheduled installment payments are due, to
facilitate a Borrower's ability to repay the Loan or comply with the terms of a workout
agreement, provided that the general requirements in Paragraph A of this Chapter are met.
For example, Lenders may change the payment basis from monthly to quarterly or annual, if
such a change is justified based on the seasonal or cyclical nature of the Borrower's revenue
stream. Changes to the frequency of installment payments is not permitted if the SBA
guaranteed portion of the Loan was sold on the secondary market.
C. Change from Revolving to Non-revolving Loan
Lenders may change a 7(a) Loan from revolving to non-revolving to facilitate repayment or
the orderly liquidation of the Loan, provided that the general requirements in Paragraph A of
this Chapter are met.
D. Installment Amount
Lenders may modify the installment amount due under a Note to ensure that the Loan balance
is properly amortized over the remaining life of the Loan, to help a viable Borrower meet long
or short-term goals, and/or to facilitate a workout, provided that the general requirements in
Paragraph A of this Chapter are met. (See also Chapter 12 (deferments) and Chapter 17
(workouts) of this SOP for additional guidance.)
E. Interest Rate
Lenders may modify the interest rate on a Note to help a viable Borrower meet long or short-
term goals or to facilitate recovery for a Loan in liquidation status, provided that the general
requirements in Paragraph A of this Chapter are met. For example, Lenders may modify the
interest rate as part of a workout agreement designed to achieve the highest possible recovery
in the shortest period of time.
F. Maturity Date Extensions
1. Extension of Maturity Date
Subject to the general requirements in Paragraph A of this Chapter, Lenders may extend
the maturity date of a Note for up to 10 years beyond the original maturity date if:
a. The extension is requested before the 7(a) Loan guaranty expires, i.e., less than 180
days after the original maturity date (13 C.F.R. §120.524(a)(8)); and
b. The extension will aid in the orderly repayment of the Loan. (13 C.F.R
§120.531).
2. Additional Guaranty Fee
a. Loans in Regular Servicing Status
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Pursuant to SOP 50 10 in effect at the time the Loan was approved, Lenders must pay
an additional guaranty fee, which Lenders may pass on to the Borrower, when the
maturity of a short-term 7(a) Loan is extended beyond 12 months (see SOP 50 10 for
additional guidance on SBA guaranty fees associated with the extension of maturity
dates for EWCP Loans). No additional guaranty fees are required for short-term
Loans that are extended beyond their original 12-month maturity date when SBA
determines that the extension is needed to ensure the orderly repayment of the Loan,
and no new funds are disbursed. The amount of the additional guaranty fee is based
on SOP 50 10 in effect at the time the Loan was approved. Lenders should include
evidence of the payment of any additional guaranty fee with their notice of maturity
date extension, as required by Chapter 3 of this SOP.
Note: Pursuant to SOP 50 10, Lenders must pay an additional guaranty fee in
connection with the extension of the maturity date for a loan with an original maturity
term of 12-months or less, or any increase to the original Loan amount, within 30
days from the date of the maturity date extension or Loan increase, to avoid a
cancelation of SBA’s guaranty.
b. Loans in Liquidation Status
Lenders are not required to pay an additional guaranty fee if a maturity date is
extended to aid in the orderly liquidation of the Loan and no additional funds are
disbursed.
G. Loan Amount Increases
Lenders may increase the amount of a 7(a) Loan in regular servicing status provided that: (1)
the general requirements in Paragraph A of this Chapter are met; (2) the general requirements
in SOP 50 10 in effect when the Loan was approved with regard to Loan increases are met;
and (3) the additional guaranty fee required by SOP 50 10 in effect at the time the Loan was
approved is paid. Lenders must pay the additional guaranty fee within 30 days from the date
the Loan is increased to avoid cancellation of the SBA guaranty.
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Chapter 8. Modification of Collateral
A. Subordination of Lien Position
1. General Requirements
Lenders may subordinate the position of a lien securing an 7(a) Loan when doing so is
consistent with Prudent Servicing, i.e., it will help the long or short-term needs of the
Borrower without unduly impairing the ability to recover payment on the Loan. Lenders
must review, analyze and implement subordination requests pursuant to the requirements
of Chapter 6 of this SOP and the following guidelines:
a. The Borrower must have a satisfactory credit history;
b. The Borrower must have the ability to repay all of the outstanding obligations after
the proposed subordination;
c. The subordination must be a specific amount and must not extend to future advances;
d. There should be sufficient equity in the collateral to adequately secure the 7(a) Loan
after the proposed subordination; and
e. The terms of the subordination must be set out in a document signed by all the parties
to the agreement.
Note: SBA Loan Program Requirements prohibit any action that confers a Preference
onto a Lender without SBA’s prior written approval. ( See 13 CFR
§120.10 for definition of Preference.) For example, a Lender would receive a Preference
if it subordinated the lien securing an existing 7(a) Loan to a lien securing a new non-
SBA loan or a new 7(a) Loan with a lower guaranty percentage that the Lender made to
the same Borrower. A Lender would also receive a Preference if it renewed or increased
the amount owed on a non-SBA loan or an 7(a) Loan with a lower guaranty percentage
if the lien securing an existing 7(a) Loan was previously subordinated to the loan the
Lender renewed or increased.
2. Subordination to Facilitate the Refinancing of a Senior Loan
In addition to the general requirements in Subparagraph A.1 above, Lenders should not
subordinate the position of a lien securing an 7(a) Loan to facilitate the refinancing 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 senior lien except for necessary,
reasonable and customary closing costs;
c. No proceeds from the refinanced senior loan may go to the Borrower for any reason
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other than necessary, reasonable and customary closing costs; and
d. The subordination will not adversely affect the priority of the lien securing the 7(a)
Loan.
Note: When analyzing a request for subordination to facilitate the refinancing of a senior
loan, Lenders may not have to perform a complete financial analysis if the Borrower has
been making timely payments and the refinancing provides more favorable terms for the
Borrower.
3. Subordination to Facilitate a New Loan
In addition to the general requirements in Subparagraph A.1 above, Lenders should not
subordinate the position of a lien securing an 7(a) Loan 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.
4. Subordination to Facilitate Assumption of a 7(a) Loan
Lenders must not subordinate the lien securing a 7(a) Loan to a lien that secures a loan
that provides funds to an assumptor of the 7(a) Loan to acquire the business or assets of
SBA Loan Borrower. However, if the acquisition loan includes funds that the assumptor
will use to make improvements to the collateral that will maintain or increase the value
of the collateral, Lenders may subordinate the lien securing the 7(a) Loan up to the
documented amount of funds spent to improve the value of the collateral.
B. Inter-creditor Agreements
Lenders should review, analyze and implement requests for the execution of an inter-creditor
agreement involving a 7(a) Loan, (i.e., a written 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) pursuant to the requirements of Chapter 6 of this SOP and the
following guidelines:
1. The inter-creditor agreement should not adversely impact the position of the lien securing
the 7(a) Loan;
2. The delineated rights and responsibilities regarding loan servicing responsibilities and
the remedies in the event of Default, should be consistent with Prudent Servicing
practices; and
3. Entering into the inter-creditor agreement should not adversely impact the ability to
recover payment on the 7(a) Loan.
C. Substitution of Collateral
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1. General Requirements
Lenders should review, analyze and implement requests to substitute the collateral for a
7(a) Loan pursuant to Chapter 6 of this SOP and the following guidelines:
a. 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 that meets the appraisal requirements set out in SOP 50 10 in effect at
the time the Loan Action is taken, in accordance with 13 C.F.R. §120.180;
b. If the substitute collateral is commercial real property, Lenders must conduct
adequate due diligence to ensure that the risks of Contamination are minimal, as
required by Chapter 5 (Environmental Risk Management) of this SOP;
c. When no additional credit is extended to the Borrower, there should be no more
than a nominal increase in the amount of any proposed senior lien - to cover the
closing costs associated with the substitution of collateral transaction;
d. The Borrower should have a satisfactory credit history;
e. The Borrower's current financial statement should reflect that the Borrower has
the ability to pay all of its obligations that will remain outstanding after the
substitution;
f. There should be sufficient equity in the collateral to secure the 7(a) Loan after the
proposed substitution;
g. The release and substitution must not impair the ability to foreclose upon the
remaining collateral or collect the Loan balance from the Obligors; and
h. The release of the existing lien(s) or proceeds thereof must be 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 the parties involved in the
transaction.
2. Substitution of Residence Held as Collateral
Lenders should review, analyze and implement requests to substitute a lien on a new
residence of an Obligor in exchange for releasing the lien on the Obligor's existing
residence pursuant to the general requirements in Subparagraph C.1 above and the
following guidelines:
a. The Obligor must use all the proceeds from the sale of their existing residence,
other than the funds needed to pay off senior liens and necessary, reasonable and
customary closing costs, to purchase a new residence, place the funds in an escrow
account for the purchase of a new residence, or pay down the 7(a) Loan;
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b. The dollar amount of equity available in the new residence to secure the 7(a) Loan
must be equal to or greater than the dollar amount of equity in the existing
residence;
c. The release of the existing lien, or proceeds thereof, must be concurrent with the
recording of the lien on the new residence in the required position of priority, and
should be done pursuant to an escrow agreement signed by all the parties involved
in the transaction; and
d. The Obligor must provide the title, hazard and/or flood insurance as required by
Chapter 9 of this SOP.
D. Substitution of Guarantor or Assumption of Personal Guaranty
Lenders must not release Guarantors without SBA’s prior written approval, except for
limited guaranties taken to secure an owner's interest in collateral, and limited guaranties
when the purpose of that guaranty is to provide a guaranty as a result of a partial change of
ownership. The limited guaranty given as a result of a partial change of ownership must not
be released until the later of (1) a period of at least 2 years after final disbursement or (2)
until the loan has been current (making payments in accordance with the terms of the note
and not on deferral) for 12 consecutive months.
In Loan assumption and assumption of personal guaranty transactions, Lenders may release
a guarantor from their guaranty without prior SBA approval when the purpose of that
guaranty is to provide a guaranty as a result of an assumption. However, the guarantor must
not be released until the later of (1) a period of at least 2 years after final disbursement or (2)
until the loan has been current (making payments in accordance with the terms of the note
and not on deferral) for 12 consecutive months. In Loan assumption and assumption of
personal guaranty transactions, on loans that are in payment Default or liquidation, Lenders
must obtain SBA’s prior written approval to release an existing Obligor (see Chapter 11 of
this SOP for additional guidance). Lenders should review, analyze and implement requests
to substitute a Guarantor pursuant to the requirements of Chapter 6 and Chapter 3 of this SOP
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 Guarantor; and
2. Substituting the proposed Guarantor and releasing the existing Guarantor should not
adversely impact the operation of the business. Lenders may condition the substitution
of a Guarantor upon retention of the original Guarantor for a transitional period (e.g.,
two years), during which time the Lender may not release the original Guarantor if
there is a material adverse change in the financial condition of the business. (See
Subparagraph I of this Chapter for additional guidance on the release of a Guarantor
or co-Borrower.)
3. New Obligors must meet citizenship requirements in SOP 50 10 in effect at the time
of the loan action.
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E. Borrower Business Ownership Change
Any change in the ownership of a Borrower’s business (including a change in the percentage
of ownership) for 12 months after final disbursement on any 7(a) Loan requires SBA’s prior
written approval.
1. Lenders must submit a Servicing Request for SBA’s prior written approval to the
appropriate SBA Loan Center. All Servicing Requests must include the reason(s) for the
Borrower’s business ownership change, details regarding the requested Loan Action and
the Lender’s recommendation for Loan Action. The SBA Loan Center will review each
request and make a determination after:
a. Verification that the proposed changes to the ownership of the Borrower’s
business complies with limitations on the maximum amount of SBA guaranteed
Loans to a Borrower, including affiliates; and
b. Verification that there is no active delinquency on an obligation to or no prior loss
to the Government caused by the new owner(s), or any business owned, operated
and/or controlled by the new owner(s).
c. New Obligors must meet citizenship requirements in SOP 50 10 in effect at the
time of the loan action.
F. Leasing Real Property Acquired with 7(a) Loan Proceeds
If at any time during the term of an 7(a) Loan, the Borrower (or, if the Borrower is an EPC,
the Operating Company) leases the real property that was acquired with the 7(a) Loan
proceeds to a third party, in violation of 13 C.F.R. §120.131, SBA may require appropriate
action including accelerating the Note and making demand for payment in full (see SOP 50
10 in effect at the time of the loan action for additional guidance on the determination of
occupancy requirements). In addition, SBA’s review of any future application for SBA
financial assistance submitted on behalf of the Borrower, the Operating Company (if
applicable), and any Associate(s) will take into consideration any prior failure to comply
with SBA Loan Program Requirements, including occupancy requirements, in connection
with an outstanding 7(a) Loan.
G. Release of Lien without Consideration
Lenders must review, analyze and approve or decline requests for the release of liens on real
or personal property collateral without consideration before the Loan has been paid in full
pursuant to Chapter 6 of this SOP and the following guidelines:
1. Borrower should use any proceeds from the release of collateral for business purposes
only;
2. Borrower must have the ability to repay the 7(a) Loan in full;
3. The release must not materially interfere with the operation of the business or decrease
the value of the other collateral securing the 7(a) Loan;
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4. The Recoverable Value of the remaining collateral should be sufficient to adequately
secure the 7(a) Loan after the proposed release; and
5. The release document(s) must not impair the Lender or SBA's interest in, or ability to
foreclose upon, the remaining collateral.
H. Release of Lien for Consideration
Lenders must review, analyze and approve or decline requests for the release of liens on real
or personal property collateral for consideration pursuant to Chapter 6 of this SOP and the
following guidelines:
1. General Requirements
a. The amount of consideration received must be equal to or greater than the
Recoverable Value of the collateral or the outstanding balance of the 7(a) Loan,
whichever is less. (See Chapter 5 [Environmental Risk Management] of this SOP
with regard to the due diligence that Lenders must perform if the collateral is alleged
to be worth substantially less than its estimated Recoverable Value due to the alleged
presence of Contamination.); and
b. Release of the lien must not jeopardize the ability to maximize recovery on the 7(a)
Loan.
2. 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, Lenders should not release the real property lien
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, Lenders should not release
the lien on the most valuable items prior to the auction since it may impair the ability
to attract bidders for the remaining collateral.
I. Release of Guarantor or Co-Borrower
Lenders must not release Guarantors or co-Borrowers without SBA’s prior written approval,
except for limited guaranties taken to secure a property owner's interest in collateral for a 7(a)
Loan and limited guaranties when the purpose of that guaranty is to provide a guaranty as a
result of a partial change of ownership. (see Paragraph D of this Chapter for guidance on the
release of Obligors in Loan assumption and personal guaranty assumption transactions).
Lenders must review, analyze and approve or decline requests for the release of a Guarantor
or a co-Borrower pursuant to Chapter 6 of this SOP and the following guidelines:
1. Loans in Regular Servicing Status
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a. The loan must be Seasoned;
b. The release must not conflict with SBA Loan Program Requirements in 13 C.F.R.
Part 120 and SOP 50 10 in effect at the time the Loan Action is taken, which require
Guaranties from specific Persons as a condition for SBA’s guaranty of the Loan, (e.g.,
any Person who owns 20 percent or more of the small business Borrower);
c. The release must not jeopardize the ability to maximize recovery on the 7(a) Loan,
shift the risk of loss to SBA, or otherwise harm the integrity of the SBA Loan
program; and
d. Guarantor or co-Borrower obligations may be limited to the amount of funds they
receive in exchange for divesting their interests in the Borrower's business, subject to
prior written SBA approval in accordance with the compromise authority granted in
13 C.F.R 120.536(a)(3). Lenders must review, verify and analyze all release requests
and accompanying documentation pursuant to the substitution of Guarantor guidance
provided in Paragraph D of this Chapter for operating businesses, or the offer in
compromise guidance provided in Chapter 21 (Offer in Compromise) of this SOP for
Loans in liquidation.
2. Loans in Liquidation Status
a. The release must not jeopardize the ability to maximize recovery on the 7(a) Loan or
harm the integrity of the SBA Loan program;
b. Lenders must condition the release on SBA approval and receipt of consideration in
an amount equal to or greater than the amount that could be collected through legally
enforced collection proceedings against the Guarantor or co-Borrower requesting the
release;
c. The Guarantor or co-Borrower requesting the release must provide the same
documentation that is required for an offer in compromise; and
d. Lenders must review, verify and analyze the offer and financial documentation
provided by the Guarantor or co-Borrower requesting the release pursuant to the
requirements of Chapter 21 (Offer in Compromise) of this SOP.
J. Release of Condemnation Proceeds
Lenders must review, analyze and implement requests for the release of condemnation
proceeds pursuant to the requirements of Chapter 6 of this SOP, the general guidance
provided in Paragraph E (Release of Lien Without Consideration) or Paragraph F (Release
of Lien for Consideration) of this Chapter, and the following guidelines:
1. Condemned Property Replaced
When condemnation proceeds will be used to replace the condemned property, Lenders
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should release the proceeds pursuant to an escrow agreement approved by Lender’s legal
counsel that conditions the release of funds upon:
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 of this SOP.
2. Condemned Property Not Replaced
When the condemnation proceeds will not be used to replace the condemned property:
a. Condemnation Proceeds of $5,000 or less:
If the condemnation proceeds are relatively insignificant, i.e., $5,000 or less, and the
release will not adversely affect the ability to recover payment on the 7(a) Loan,
Lenders may release the proceeds directly to the Borrower.
b. Condemnation Proceeds of more than $5,000:
If the condemnation proceeds are more than $5,000, Lenders should apply the
proceeds to the principal balance of the 7(a) Loan, provided that Lenders may release
up to $5,000 directly to the Borrower if the release will not adversely affect the ability
to recover payment on the 7(a) Loan. The application of condemnation proceeds to
an 7(a) Loan is not considered a voluntary Loan prepayment. Therefore, a subsidy
recoupment fee is not required.
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SOP 50 57 4 Chapter 9
Insurance Coverage
Chapter 9. Insurance Coverage
A. General Requirements
Lenders must document all decisions regarding insurance, including justification for their
decisions, in a Loan Action Record and retain the documented decisions in their Loan File.
B. Mortgagee’s Title Insurance
1. Substitute Collateral
When existing real property collateral is released and substitute real property collateral is
taken, Lenders should obtain a mortgagee’s title insurance policy to insure the new lien
on the substitute property. (See Chapter 8 of this SOP for guidance on the substitution
of collateral.)
2. Additional Collateral
When real property collateral is taken as additional collateral, the need for a mortgagee’s
title insurance policy will vary depending on circumstances including the amount of
equity available in the property to secure the 7(a) Loan.
3. Installment Sale of REO
When REO is sold on an installment basis, Lenders must obtain a mortgagee’s title
insurance policy to insure the title relative to the new lien on the REO. (See Chapter 20
of this SOP for guidance on term sales for acquired collateral.)
C. Hazard Insurance
1. Modification of Coverage on Existing Collateral
Lenders should not terminate or reduce the hazard insurance requirements for collateral
as set out in the Loan Authorization/E-Tran Terms and Conditions unless the insured
assets have been sold or have significantly decreased in value. See SOP 50 10 for
additional guidance on hazard insurance requirements at the time of Loan origination.
2. Coverage on Substitute or Additional Collateral
When existing collateral is released and substitute collateral is taken to secure an 7(a)
Loan, the Lender must ensure that the substitute collateral is adequately insured and that
the insurance policies contain a mortgagee clause (or substantial equivalent) in favor of
the Lender. (See Chapter 6 of this SOP for guidance on how to review and analyze
Servicing Requests and Chapter 8 of this SOP for guidance on the substitution of
collateral.)
3. Care and Preservation of Collateral and Acquired Collateral
Lenders must ensure that all collateral and acquired collateral with Recoverable Value is
adequately insured, in order to protect the Recoverable Value for the 7(a) Loan. (See
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Insurance Coverage
Chapter 16 of this SOP for post-Default site visits and Chapter 20 of this SOP for
ownership responsibilities pertaining to acquired collateral.)
4. Forced Placement
If the Loan Documents require hazard insurance and the Obligor has allowed the
insurance coverage to lapse, Lenders should force-place insurance based on Prudent
Servicing practices on a case-by-case basis. The cost of insurance that is forced-placed
by a Lender is a Recoverable Expense.
5. Release of Hazard Insurance Policy Proceeds
a. General Rule—Collateral Repaired or Replaced
When the Lender or SBA is named as a loss payee on a hazard insurance policy,
Lenders should not release insurance proceeds without Supporting Documentation to
verify that the insured property has been adequately repaired and/or replaced and that
any construction or repair-related liens against the property are released.
b. Exception—Controlled Distribution
If a request to release insurance proceeds is not accompanied by Supporting
Documentation to verify that the insured property has been adequately repaired
and/or replaced, Lenders should control and monitor the disbursement of the proceeds
as follows, instead of endorsing and delivering the insurance check to the Borrower:
(1) Use of Escrow Agent
Lenders may disburse insurance proceeds pursuant to an escrow agreement
approved by the Lender’s legal counsel. An escrow company, the first
lienholder or an impartial third party such as an attorney or architect may serve
as the escrow agent.
(2) Progress Payments
Lenders may allow Borrowers to 1) open a federally-insured joint savings or
custodial account with the Lender, 2) establish a draw schedule based on the
stages of construction, 3) present paid invoices and lien waivers to document
each stage of construction, and 4) request the release of funds specified in the
draw schedule; provided that the Lender 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 or custodial account. (Lenders
should allow Borrowers to retain any interest earned on the funds in the
account.)
D. Life Insurance
1. Modification of Requirement
Lenders should not modify or terminate the life insurance requirements in the Loan
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Insurance Coverage
Documents unless the reason for requiring the life insurance policy no longer exists.
2. Use of Escrow Account to Collect Premiums
If the assignment of a life insurance policy is required by the Loan Documents, in order
to ensure that the policy premiums are paid, Lenders may set up an escrow account to
collect the funds needed to pay the premiums. (See SOP 50 10 in effect when the Loan
was approved for SBA Loan Program Requirements concerning escrow accounts for
commercial real estate taxes and insurance.)
3. Continuation of Coverage
If an assignment of life insurance is required by the Loan Documents and the Lender
receives a notice that the Borrower has not made the required policy payments, the
Lender should base its decision to continue the insurance coverage on Prudent Servicing
practices on a case-by-case basis. The Lender’s cost to continue the coverage is a
Recoverable Expense.
4. Release of Life Insurance Policy Proceeds
a. General Rule
Lenders should apply the proceeds from an assigned life insurance policy to the
principal balance of the Loan. (Application of life insurance proceeds is not
considered a voluntary Loan prepayment for subsidy recoupment fee determination
purposes.)
b. Exceptions
Depending on the circumstances, Lenders may release all or part of the proceeds of
a life insurance policy 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) of this SOP, the death of the insured has no
significant impact on the future management of the Borrower’s business and:
(1) The proceeds are needed for a valid business purpose; or
(2) The proceeds are needed to prevent a Financial Hardship; and
(3) There is a reasonable and prudent expectation that the Borrower will repay
the 7(a) Loan in full based on the financial strength of the business.
c. Use of an Escrow Account
If the financial strength of the Borrower’s business is insufficient to justify releasing
the insurance proceeds to the Borrower, or weak enough to support applying the
proceeds to the Loan balance, Lenders may place the insurance proceeds in an escrow
account for distribution after the Lender has had the opportunity to observe the
Borrower’s on-going business operations and is able to make a prudent decision.
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Insurance Coverage
E. Flood Insurance
1. General Rule—Termination or Modification Not Permitted
When a 7(a) 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. (SBA flood insurance
requirements are based on the Standard Flood Hazard Determination, FEMA Form 086-
0-32 or its successor. See the National Flood Insurance Reform Act of 1994 and SOP 50
10 for more information and guidance on SBA flood insurance requirements.) This
requirement pertains to substitute collateral as well as the original collateral for the Loan.
2. Events Triggering Flood Insurance Review
Lenders should review the need for flood insurance, as well as the adequacy of any
existing flood insurance coverage, whenever a Borrower makes a Servicing Request.
3. Forced Placement
If at any time during the life of a Loan, real or personal property collateral located in a
SFHA is not covered by an adequate amount of flood insurance, the Lender must instruct
the Borrower to obtain adequate flood insurance. If the Borrower fails to do so within 45
calendar days, the Lender must purchase flood insurance on the Borrower’s behalf and
at the Borrower’s expense. This cost is treated as a Recoverable Expense. The Lender
should also decline all Borrower Servicing Requests until the Borrower complies 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 and no private insurance is
available, the Lender must document the reasons why the property is no longer covered
by flood insurance and maintain this documentation in its Loan File. Lenders may not
provide SBA financial assistance (including increases, renewals, or extensions) to
acquire or construct property located in an SFHA unless the community in which such
property is located participates in the NFIP or is otherwise covered by private insurance
that is equivalent to NFIP.
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SOP 50 57 4 Chapter 10
Modification of Management Covenants
Chapter 10. Modification of Management Covenants
A. General Requirements
Lenders should ensure that Borrowers comply with the management covenants in the SBA
Loan Documents, unless modification is consistent with the Prudent Servicing practices and
the Lender performance guidelines set out in Chapter 1 of this SOP. Lenders must review,
analyze and implement Borrower requests to modify Loan Documents pursuant to the
guidance provided in Chapter 6 of this SOP and the guidelines set out below.
B. Financial Statements
Lenders should not modify Loan Document provisions that require Obligors to submit
periodic financial statements (e.g., temporarily or permanently waive; change from audited
to compiled or reviewed; or require less frequently), unless a lender exercising Prudent
Servicing practices would do so based on the circumstances. For example, it may be prudent
to modify financial statement submission requirements if:
1. The 7(a) Loan is Seasoned and the existing requirements would cause a 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.
Lenders should not modify management covenants in the Loan Documents pertaining to
matters such as limitations on compensation, fixed assets, working capital levels, or dividend
payments unless such modifications are supported by Prudent Servicing practices. For
example, it may be prudent to modify these requirements if:
1. The Loan is Seasoned;
2. The Lender has not extended the maturity date of the 7(a) Loan Note nor deferred Loan
payments during the 24-month period prior to the date of the Borrower's request; and
3. Based on the Lender’s analysis of the Borrower's cash flow for the past 24-months, the
Lender has a prudent basis to conclude that the Borrower has the ability to repay all its
debts in full, including the 7(a) Loan, if the modification is approved.
D. Standby Agreements
1. General Rule
Except as provided in Subparagraph D.2. below with regard to equity injections, Lenders
should not terminate nor modify a standby agreement required by the Loan Documents,
to allow a Borrower to make full or partial payments to the standby creditor, unless
Prudent Servicing practices would support doing so. For example, it may be prudent for
a Lender to modify standby agreement requirements if:
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Modification of Management Covenants
a. The loan is Seasoned;
b. Based on the Lender’s analysis of the Borrower's cash flow for the past three years,
a prudent Lender would conclude that the Borrower has the financial ability to repay
all its debt, including the 7(a) Loan, if the standby agreement is modified or
terminated; and
c. A prudent lender would conclude that there is a minimal risk that the Borrower will
be unable to repay the 7(a) Loan in full over the term of the Loan.
2. Standby Agreement Used as Equity Injection
When an SBA Loan Authorization/E-Tran Terms and Conditions requires the use of a
standby agreement for equity injection purposes, e.g., in changes of business ownership
situations, Lenders must not terminate or modify the standby agreement unless the
proposed termination or modification is permitted by the applicable Loan Program
Requirements in SOP 50 10 in effect when the Loan was approved.
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SOP 50 57 4 Chapter 11
Assumption, Assignment or Sale of Loan
Chapter 11. Assumption, Assignment or Sale of Loan
A. Assumption
Lenders should review, analyze and implement Borrower requests to allow another Person
to assume a 7(a) Loan (i.e., take over the Borrower's legal obligations and benefits under the
Loan Documents) pursuant to the guidance and requirements provided in Chapter 6 of this
SOP and the following:
1. Unless the assumption is part of a workout or the Loan is in liquidation status, Lenders
must ensure that the proposed assumptor satisfies the 7(a) Loan eligibility requirements
set out in SOP 50 10 in effect at the time the assumption Loan Action is approved;
2. Lenders must ensure that the proposed assumptor will be the primary owner of the
business;
3. Lenders should ensure that the proposed assumptor has business experience and
management skills that are equal to or better than the Borrower's;
4. Lenders must ensure that the proposed assumptor has a satisfactory credit history;
5. Lenders must ensure that the proposed assumptor has the ability to repay the 7(a) Loan
in full;
6. Lenders should not release any collateral in conjunction with the proposed assumption;
7. Lenders should not subordinate any collateral, except as provided in Chapter 8 Paragraph
A of this SOP with regard to funds the assumptor will use to maintain or increase the
value of the collateral;
8. Lenders must ensure that the proposed assumption will not negatively impact the
operation of the business;
9. Lenders must ensure that the proposed assumption will not negatively impact the
Recoverable Value of the collateral;
10. Lenders should ensure that the existing collateral is adequate to secure the Loan. If the
existing collateral is inadequate, and whenever possible, Lenders should condition their
approval of the proposed assumption on the provision of additional collateral from the
existing Obligor(s) or assumptor;
11. Lenders must not release existing Obligors without SBA’s prior written approval for
Loans that are in payment Default or liquidation (see Chapter 8, Paragraphs D and I of
this SOP for guarantor substitution and release requirements, and Chapter 21 of this SOP
for OIC requirements);
12. Lenders must ensure that the terms of the assumption are set out in a written agreement
signed by all the parties to the agreement;
13. Lenders must ensure that the terms of the assumption agreement include a "due on sale
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Assumption, Assignment or Sale of Loan
or death" clause that prohibits any future assumption of the 7(a) Loan; and
14. Lenders must ensure that the terms of the assumption agreement do not include a real estate
contract, i.e., the seller may not retain title to the property until an agreed upon amount of
funds is paid.
15. New Obligors must meet citizenship requirements in SOP 50 10 in effect at the time of the
loan action.
Note: See the most current version of SOP 50 10 with regard to the fee that Lenders may
charge for an assumption. (See Chapter 8, Paragraph D of this SOP for guidance on the
assumption of personal guaranties.)
B. Assignment of Lender's Interest in a 7(a) Loan
Lenders may assign their interest in a 7(a) Loan to another 7(a) Lender. (For additional
information see 13 C.F.R. §120.430 et seq.) Lenders may assign individual 7(a) Loans to
another 7(a) Lender pursuant to a transfer of participation agreement, provided the original
and acquiring Lenders obtain SBA's prior written approval. To transfer a 7(a) Loan to
another participating SBA Lender, Lenders must submit a Servicing Request, including a
detailed explanation and supporting documentation, to the CLSC.
C. SBA Loan Transfers
Lenders may assign a portion of or its entire 7(a) Loan portfolio to another 7(a) Lender
provided that the Lender provides SBA with a copy of the purchase, sale and assignment
documents, any other documentation SBA requires, and obtains SBA’s prior written approval.
(See current version of SOP 50 56 for additional guidance on the transfer of an 7(a) Loan
portfolio.)
Note: SBA does not charge a Loan assignment fee, nor does it require or prohibit the
assigning Lender from negotiating with the assignee Lender to pay an assignment fee.
D. Sale of SBA Loan in Liquidation Status
Lenders may sell a 7(a) Loan in liquidation status, provided that:
1. The sale is to a Person other than the Borrower;
2. The sale price bears a reasonable relationship to the amount that could be recovered
through enforced collection proceedings;
3. The Lender obtains SBA's prior written approval if the sale involves a compromise of
the principal balance owed to SBA on the Loan, and/or the Lender proposes to sell the
Loan to a Guarantor, Close Relative of the Borrower, or an Associate of the small
business;
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4. SBA or the Lender has purchased the guaranteed portion of the Loan if it was sold on the
secondary market;
5. The Lender proposing to sell the Loan has submitted a complete Universal Purchase
Package to SBA and SBA has completed its guaranty purchase review process, and
6. The Lender shares the Loan sale proceeds with SBA based on SBA’s participation
interest in the Loan after guaranty purchase.
Note: For information regarding the sale of 7(a) Loans in the secondary market, see
sections 5 (f), (g) and (h) of the Small Business Act (15 U.S.C. 634); 13 C.F.R. §120
Subpart F; and SBA Form 1086 (Secondary Participation Guaranty Agreement).
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SOP 50 57 4 Chapter 12
Deferments
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 Loan. When used
inappropriately, i.e., when the Borrower’s problems are permanent, a deferment can harm
the Borrower, Lender and/or SBA. Especially if, for example, during the deferment period,
the collateral loses its value or the Obligors deplete all 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, Lenders may defer (i.e., postpone without
accelerating the Note or transferring the Loan into liquidation status) any delinquent
payments, as well as full or partial future monthly payments for a 7(a) Loan, for a stated
period of time. (13 C.F.R. §120.530) Generally, interest will continue to accrue during the
deferment period. (See Subparagraph D.3 of this Chapter for guidance on how Lenders may
collect and apply accrued interest.)
C. General Requirement—Temporary Cash Flow Problem
1. Lenders should review and analyze the Borrower’s financial information in accordance
with Prudent Servicing practices, to ensure that the Borrower’s cash flow problems are
temporary and that the Borrower is financially viable.
2. When a 7(a) Loan is more than 60 calendar days past due and the Borrower’s problems
appear to be permanent or long-term, Lenders should not grant a deferment. Instead,
Lenders should transfer the Loan into liquidation status and pursue more appropriate
Loan Actions such as workout, liquidation of collateral and/or compromise with the
Obligors. (See Chapters 17-21 of this SOP.)
D. Deferred Period
1. Loan Not Sold in Secondary Market
For 7(a) Loans that Lenders have not sold in the secondary market, Lenders may grant
payment deferments of up to six consecutive months. During the deferment period,
Lenders 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
Lender is able to determine whether an additional deferment is necessary and consistent
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with Prudent Servicing practices. Prior to granting an additional payment deferment,
Lenders must prepare and document a Loan repayment strategy to justify a deferment of
more than six months. Generally, deferments should not exceed six cumulative monthly
payments, or 20 percent of the original Loan amount, whichever is less.
2. Loan Sold in Secondary Market
For 7(a) Loans that Lenders have sold in the secondary market, Lenders may grant only
one payment deferment of up to three consecutive months without the prior written
consent of the investor. Lenders must immediately notify the FTA and the appropriate
SBA Loan Center in writing if they defer any payments for Loans sold in the secondary
market. Any additional payment deferment requires the prior written consent of the
investor. (See Section 3.8 of Secondary Participation Guaranty Agreement [SBA Form
1086]).
3. Interest Accrual
Generally, interest will continue to accrue during a deferment period, and Lenders may
collect the accrued interest in one of the following ways:
a. Lenders may allow Borrowers to pay accrued interest during the deferment period;
b. Lenders may allow Borrowers to pay the accrued interest in a lump sum at the end of
the deferment period;
c. After the deferment period, Lenders may increase the Loan payments for a period of
time to allow the Borrower to catch up to the original amortization schedule;
d. If a Lender allows the Borrower to resume making the same pre-deferment regular
payments after the deferment period ends, the Lender must apply the payments to
accrued interest first and then to principal, and extend the original Loan maturity date
for up to 10 years to ensure the orderly repayment of the Loan (See Chapter 4 of this
SOP for guidance on the application of payments for Loans in regular servicing
status, and Chapter 7 of this SOP for guidance on maturity date extensions.);
e. Lenders may not capitalize or add accrued interest to the principal balance of the
Loan.
E. Payments during a Deferment Period
Payments during a deferment period are not mandatory, but are preferred since even a small
payment, such as $1.00, will keep the Borrower in the habit of making payments and will also
keep the Borrower’s pre-authorized debit method of payment active.
Note: If the delinquent Borrower is on active duty, Lenders should consult with their 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.
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SOP 50 57 4 Chapter 13
Delinquent Secured Senior Loans
Chapter 13. Delinquent Secured Senior Loans
A. General Requirements
Lenders must take prudent and commercially reasonable actions to prevent 1) the elimination
of a lien securing a 7(a) Loan through a foreclosure action initiated by a senior lienholder, or
2) dissipation of the equity available to secure a 7(a) Loan due to the imposition of Default
Charges.
B. Developing Best Strategy to Protect a Junior Lien Securing a 7(a) Loan
When it is apparent that an Obligor is in default on a loan secured by a senior lien on the
collateral for a 7(a) Loan, Lenders should take the following steps to develop a prudent and
commercially reasonable strategy to protect the equity available for the 7(a) Loan.
1. Review the Loan Documents
Lenders should begin the process by reviewing the Loan Documents to determine the
priority of the lien securing the 7(a) Loan at the time the Loan was approved and closed.
For example:
a. Real Property Collateral
For senior liens on real property collateral, Lenders should review the mortgage, deed
of trust or other lien instrument, assignment of rents and title insurance policy, as well
as any senior lienholder, inter-creditor, subordination, non-disturbance and/or
attornment agreements.
b. Personal Property Collateral
For senior liens is on personal property collateral, Lenders should review the security
agreement, landlord lien waiver, UCC financing statements and UCC searches, as
well as any senior lienholder, subordination and/or inter-creditor agreements.
2. Order a Current Lien Search
Lenders should order a current title report or UCC search to verify the priority of the
lien(s) securing the 7(a) Loan. Or, at a minimum, Lenders should review the existing title
insurance policy or UCC search and gather any other information needed to determine
whether there are any additional liens against the property that could have seniority over
the lien securing the 7(a) Loan, such as liens for unpaid property taxes.
3. Verify the amount Owed on All Senior Liens
Lenders should ascertain the exact amount owed on all senior liens and verify that the
amount does not include advances or Default Charges that were subordinated to the 7(a)
Loan pursuant to a subordination agreement, inter-creditor agreement or other Loan
Document.
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4. Order an Appraisal
Lenders should order an Appraisal to obtain current information regarding the value of
the collateral.
Note: See the definition of "Appraisal" in Chapter 2 of this SOP, which includes a broker’s
price opinion, for SBA requirements pertaining to appraisals. Given the inherent conflict
of interest, Lenders must 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 that will list the collateral, if acquired, for sale.
5. Determine the Recoverable Value of the Collateral
Lenders should calculate the Recoverable Value of the collateral encumbered by the
senior lien.
6. Estimate Recovery from All Other Sources
Lenders should determine the repayment ability of all the Obligors for the 7(a) Loan (see
Chapter 15 of this SOP for guidance on evaluating the financial condition of Obligors)
and the Recoverable Value of any additional collateral.
7. Determine Whether the Senior Lienholder Provided Required Notice
If a senior lienholder, who signed a lienholder agreement, has initiated a foreclosure
action, Lenders must determine whether the senior lienholder complied with all the
applicable notice requirements in the relevant Loan Documents. (For example, some
senior lienholder agreements require the senior lender to provide written notice of: (1) a
default on the senior lender's loan within 30 days of the event of default; and (2) intent
to foreclose its lien on the collateral at least 60 days prior to initiating the foreclosure
action.)
8. Judicial Foreclosure—Notify SBA District Counsel
If a notice of judicial foreclosure is received, Lenders must immediately notify the
appropriate SBA Loan Center for assignment of the action to the SBA District Counsel
responsible for monitoring the litigation.
9. Analyze Facts, Review Options and Plan Strategy
Based on an analysis of the information collected in Steps 1-8 above, Lenders must
decide which Loan Action or combination of Loan Actions, such as those listed in
Paragraph C below, is most appropriate under the circumstances.
C. Lender Options
Generally, the strategy used to protect the equity available for a 7(a) Loan in a junior lien
position includes one or more of the Loan Actions listed below.
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1. Bring the Senior Loan Current
To maximize recovery on a 7(a) Loan, Lenders may advance funds to keep the payments
on a senior secured loan current if the goal is to:
a. Facilitate a Workout
Lenders may negotiate a workout plan to enable a viable Borrower to continue
operating their business;
b. Negotiate a Sale of the Collateral
Lenders should work with the Obligor and other lienholders to complete a negotiated
sale of the collateral (see Chapter 18 [Real Property Collateral Liquidation] or
Chapter 19 [Personal Property Collateral Liquidation] of this SOP for guidance on
short sales and the release of liens for consideration); or
c. Foreclose the Lien Securing the SBA Loan
To preserve the equity in the property that secures the 7(a) Loan and minimize costs
by leaving the senior lien in place, Lenders may foreclose the junior lien securing the
7(a) Loan. (See Chapter 18 [Real Property Collateral Liquidation] or Chapter 19
[Personal Property Collateral Liquidation] of this SOP for guidance on lien
foreclosure.)
2. Purchase or Pay Off the Senior Loan
When gaining control of the liquidation process is necessary to maximize recovery,
especially when doing so would enable an otherwise viable Borrower to retain possession
of its business premises so that it can continue to operate and repay the 7(a) Loan, Lenders
may advance funds to purchase or pay off a debt secured by a senior lien, particularly if
the senior lienholder offers a discount, and:
a. The risk is justified by an Appraisal and Recoverable Value analysis;
b. The purchase or pay off amount is consistent with any agreement signed by the senior
lienholder regarding the subordination of advances and Default Charges;
c. The Obligors are given written notice of the proposed purchase or pay off and their
increased financial liability on the 7(a) Loan as a result; and
d. If the Borrower is to retain possession of the collateral: (1) the Borrower has the
ability to make the payments on the adjusted 7(a) Loan balance; and (2) purchasing
or paying off the senior lienholder loan will improve the Borrower's ability to repay
the 7(a) Loan.
3. Wait for Senior Lienholder to Start Foreclosure Proceedings
a. Respond to Complaint for Judicial Foreclosure
If a senior lienholder initiates a judicial foreclosure action, Lenders must immediately
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Delinquent Secured Senior Loans
notify the appropriate SBA Loan Center for assignment of the action to the SBA
District Counsel responsible for monitoring the litigation. In addition to, or in lieu of,
any of the other options listed in this chapter, SBA District Counsel may advise the
Lender to:
(1) File a disclaimer or an answer;
(2) Foreclose the lien securing the 7(a) Loan in the same action; or
(3) Cross-claim for judgment against the Obligors.
Note: If SBA has taken over the servicing for the Loan, SBA District Counsel is
responsible for managing the litigation in coordination with the local U.S.
Attorney's Office, which has final decision-making authority regarding litigation
strategy, credit matters and settlements.
b. Enter a Protective Bid
(1) When to Enter
Lenders should enter a Protective Bid at a senior lienholder's foreclosure sale
if the Recoverable Value of the property is equal to or greater than 10 percent
of the Liquidation Value of the property, unless abandonment is appropriate
(i.e., Recoverable Value of less than $10,000 for real or personal property, or
a prudent lender would not enter a Protective Bid based on 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] Lenders should enter a Protective Bid because $50,000 is
more than $8,000 [10 percent of $80,000].)
(2) Protective Bid Amount
(a) Maximum Amount
The maximum amount of a Protective Bid is the lesser of the balance
owed on the 7(a) Loan or the Recoverable Value of the collateral.
(b) Tolerance Range
Lenders should include a "tolerance range” in their Protective Bid amount
(i.e., a specific percent of the authorized bid amount by which the Lender
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 percent above or below the authorized
bid amount.
(c) Impact on Ability to Collect Deficiency
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Delinquent Secured Senior Loans
Because state laws vary, Lenders should consult their legal counsel prior
to entering a Protective Bid in order to ascertain the impact, if any, that
the Protective Bid amount may have on the ability to collect the deficiency
balance of the Loan, if any, after the bid amount is entered into the public
records and applied to the Loan. Lenders should consult with the trustee,
court and/or other appropriate party regarding the proper payee for a
protective bid check.
c. Take a No Bid Position
(1) When Appropriate
Lenders should not enter a Protective Bid at a senior lienholder foreclosure
sale if abandoning the collateral is appropriate (i.e., Recoverable Value of less
than $10,000 for real or personal property), or the Recoverable Value of the
collateral is less than 10 percent of its Liquidation Value. Lenders may also
justify a no bid position if circumstances not reflected in the Appraisal, but
documented in the Loan File, would cause a prudent lender not to enter a
Protective Bid, even though the Recoverable Value of the collateral is equal to
or greater than 10 percent of the Liquidation Value of the collateral.
(2) Failure to Conduct an Environmental Investigation
A Lender’s failure to conduct an Environmental Investigation required by
Chapter 5 of this SOP is not an acceptable reason for taking a "no bid" position
at a senior lienholder foreclosure sale, when there is equity in the collateral
that a prudent Lender would protect. In emergency situations, Lenders must
exercise prudent judgment and conduct the best possible due diligence under
the circumstances, to avoid an unnecessary loss.
d. Exercise Right of Redemption
(1) Background
Under federal law, as an Agency of the federal government, SBA (but not 7(a)
Lenders) has one year from the date of a judicial foreclosure sale to redeem,
i.e., buy back, a foreclosed property (28 U.S.C. § 2410(c)). Under state law,
SBA and the 7(a) Lender's redemption rights generally stem from their status
as a junior lienholder. Junior lienholder redemption rights vary by state.
Lenders should consult their legal counsel for case specific information and
advice.
(2) General Rule
Lenders should exercise the redemption rights for a 7(a) Loan whenever it is
prudent and commercially reasonable to do so. For example, it may be
appropriate for Lenders to exercise redemption rights when a property sells for
less than expected at a senior lienholder foreclosure sale.
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e. Release Right of Redemption for Consideration
If redemption rights are available under federal or state law, but redeeming the
foreclosed property is not prudent or commercially reasonable, after the senior
lienholder foreclosure sale is confirmed, Lenders may release the redemption rights
associated with the 7(a) Loan upon receipt of cash in an amount approximately equal
to 50 percent of the property's Recoverable Value.
f. Collect Excess Proceeds from Foreclosure Sale
(1) Requirement
When the collateral for a 7(a) Loan is not acquired via a Protective Bid at a
senior lienholder foreclosure sale, Lenders must take all necessary, reasonable
and customary actions to ascertain whether there are any excess foreclosure
sale proceeds available for distribution to the junior lienholders. Lenders must
collect all of the funds to which the Lender and/or SBA are entitled and apply
them to the 7(a) Loan in accordance with the guidance provided in Chapter 23
(Expenses and Recoveries) of this SOP.
(2) Practice Tip—Default Charges
When ascertaining whether funds are available for application to a 7(a) Loan
after a senior lienholder foreclosure sale, Lenders must make certain that all
Default Charges (and advances, if any) were subordinated to the 7(a) Loan as
required by any relevant subordination, lienholder and/or inter-creditor
agreement.
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Chapter 14. Special Purpose Loans and Temporary PPP Loan Program
A. Overview
This chapter provides servicing and liquidation guidance for Loans made under the following
7(a) Loan programs: CAPLines Loan Program (CAPlines), International Trade Loan
Program (ITL), Export Working Capital Loan Program (EWCP) and Export Express Loan
Program (Export Express). Guidance related to the making of special purpose Loans through
final disbursement, and in some cases, the monitoring of such Loans (e.g., CAPLines and
EWCP Loans) is covered in SOP 50 10 and the 7(a) Working Capital Pilot Program Guide.
This chapter sets forth the Loan Program Requirements related to the servicing and
liquidation of special purpose Loans. In addition, Lenders must adhere to the Prudent
Servicing and Prudent Liquidation guidance provided in this SOP.
This chapter also provides servicing and liquidation guidance for loans made under the
Paycheck Protection Program, a temporary 7(a) Loan program authorized under Sections
7(a)(36), 7(a)(37) and 7A of the Small Business Act.
B. CAPLines Loan Program (CAPLines)
CAPLines include Seasonal CAPLines, Contract CAPLines, Builders CAPLines and
Working Capital CAPLines. A brief description of the disbursement and repayment
guidelines for each type of CAPLine is provided below. (See SOP 50 10 for additional
guidance and resources for CAPLines.)
1. Seasonal CAPLines
Lenders may make Seasonal CAPLines to finance seasonal increases in a Borrower’s
accounts receivable and inventory (or in some cases the associated labor cost increases).
See SOP 50 10 for additional Seasonal CAPLines eligibility requirements.
a. Disbursement and Repayment
(1) Disbursements for Seasonal CAPLines occur continually throughout the
Borrower’s seasonal business build-up period, when the cash requirements for
labor, materials and the support of accounts receivable exceed actual cash
receipts. The final disbursement of a Seasonal CAPLine should be made in time
for the funds to be utilized in the business and converted to cash that must be
used to pay off the Seasonal CAPLine balance at the beginning of the required
30 day clean up period, or CAPLine maturity.
(2) Repayment of the principal balance of a Seasonal CAPLine must occur as soon
as the cash from seasonal sales is received by the Borrower. Interest accrues on
the outstanding balance of a Seasonal CAPLine and Borrowers are generally
required to pay interest monthly.
b. Borrowing Base Certificate (BBC)
Lenders may use BBCs to monitor a Borrower’s seasonal activity. If the Lender does
so, Borrowers must submit the BBC to the Lender no less frequently than monthly.
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2. Contract CAPLines
Lenders may make Contract CAPLines to finance the costs associated with specific
contract(s). See SOP 50 10 for additional Contract CAPLines eligibility requirements.
a. Disbursement and Repayment
Disbursements are generally made as each contract progresses, instead of in a lump
sum disbursement to cover all costs. Lenders may make a single disbursement for
contract performance periods of 30 days or less. Borrowers may also use Contract
CAPLine proceeds to acquire the materials needed for a contract up front, to take
advantage of volume and/or prompt payment discounts.
Contract CAPLines generally require an assignment and direct payment of the
contract proceeds to the Lender. When such an assignment is in place, the Lender
receives all the payments the Borrower would normally receive as performance
progresses. Lenders must apply all such payments received first to interest due on the
CAPLine, with the remainder to the principal balance of the CAPLine until it is paid
in full.
3. Builders CAPLines
SBA may make or guarantee CAPLines to finance the activities of small general
contractors to construct or rehabilitate residential or commercial property for resale. The
Builders CAPLines program provides an exception, under specified conditions, to the
general rule against financing investment property. “Construct” and “rehabilitate” mean
work done on-site to the structure, utility connections and/or landscaping of real property.
(13 C.F.R. §120.391)
Borrowers must use the proceeds of a Builders CAPLine solely for direct expenses
related to the construction and/or “substantial” renovation costs of a specific eligible
project (residential or commercial buildings for resale), including labor, supplies,
materials, equipment rental, direct fees (building permits, interim disbursement
inspection fees, etc.), utility connections (above or below ground), construction of septic
tanks, and landscaping. (“Substantial” means rehabilitation expenses of more than one-
third of the purchase price or fair market value at the time of application.)
a. Disbursement and Repayment
The repayment of all Builders CAPLines funds disbursed for any individual project
must occur within 36 months after completion of each individual project or at the
time of sale, whichever is less. A single principal payment is acceptable. Interest
payments must be made at least semi-annually and from the applicant’s own
resources, not from CAPLine proceeds.
Final lien waivers must be obtained from the Borrower/contractor and all
subcontractors, material men, and any independent workers involved in the
construction, prior to final disbursement of the Builders CAPLine proceeds. No
disbursement of Builders CAPLine proceeds may occur after maturity of the master
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Note.
4. Working Capital CAPLines
Borrowers must use the proceeds of Working Capital CAPLines for short-term working
capital or operating needs only including domestic-to-foreign exports, foreign-to-foreign
exports and indirect exports. Borrowers must not use Working Capital CAPLine proceeds
to pay delinquent withholding taxes or similar funds held in trust (e.g., state or local sales
taxes), or for floor planning. If Working Capital CAPLine proceeds are used to acquire
fixed assets, Lenders must refinance the portion of the Working Capital CAPLine used
to acquire the fixed asset into an appropriate term loan facility no later than 90 days after
Lender discovers that the Working Capital CAPLine was used to finance a fixed asset.
a. Disbursement and Repayment
Lenders have the option to disburse the proceeds of a Working Capital CAPLine
based on a BBC, or a 1:1 collateral ratio. If the Lender uses a BBC, repayments will
come from cash sales and accounts receivable collections. These proceeds must pay
down the CAPLine as they are collected, with availability to re-advance on the
CAPLine if the Borrower is conforming to the maximum amount of the BBC. If the
Lender uses the 1:1 collateral ratio requirement, proceeds from cash sales and
receivable collections must pay down the CAPLine as collected, consistent with
Borrowers operating cash cycle.
b. Monitoring
The minimum monitoring requirements for Working Capital CAPLines are as
follows:
(1) Monthly - Review of BBC; aging of accounts receivable/payable and inventory
listing (if advanced against);
(2) Quarterly - Review Borrower prepared financial statements; and
(3) Annually - Review Borrower’s management information system, legal
elements, Loan Documents, NAICS status, and cash flow related financial
statements; and reassess exam, monitoring and funds control requirements.
c. Level of Funds Control
The level of funds control for a Working Capital CAPLine, whether a BBC is used
or not, is determined by the Lender’s banking relationship with the Borrower.
(1) If the Lender has the Borrower’s deposit accounts, the Lender is not required to
utilize cash collateral accounts or other types of controlled accounts, but must
follow its established procedures for its similarly-sized, non-SBA guaranteed
commercial lines of credit, to monitor payments received.
(2) If the Lender does not have the Borrower’s deposit accounts, the Lender must
utilize some form of controlled account as follows:
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(a) Lenders may direct Borrowers to require their customers to send
remittances via joint payee checks made payable to both the Lender and
Borrower, to the Lender; or
(b) Lenders may establish a lock box (a bank account under Lender’s control
where Borrower’s customers remit payments for accounts receivable).
d. Final Disbursement
The final disbursement for a Working Capital CAPLine must occur far enough in
advance of maturity to provide sufficient time for the Borrower to convert the assets
financed with the CAPLine back to the cash needed to make the final payment owed
at maturity. The date of the final disbursement must be established in the Loan
Authorization/E-Tran Terms and Conditions and should reflect the time required to
permit an orderly repayment of the CAPLine by the maturity date. Disbursements
after the last cash cycle has begun, but before maturity, require SBA’s prior written
approval. However, if maturity coincides with the scheduled annual review of the
CAPLine (including an annual review conducted by the Lender coincidental with the
maturity of the CAPLine), the Lender may advance on the CAPLine up to the date of
maturity in conjunction with the Lender's annual review and in accordance with the
Lender's policies and procedures for its similarly-sized non-SBA guaranteed
commercial lines of credit. No advances may be made after the Working Capital
CAPLine maturity date.
e. Unpaid Working Capital CAPLine Balances at Maturity
When a balance exists on a Working Capital CAPLine at maturity, Lenders should
consider the following actions:
(1) Enforce final collection;
(2) Renew the CAPLine without SBA’s guaranty;
(3) Renew the CAPLine with an SBA approved guaranty (a new application is
required when the term to maturity for the original CAPLine reaches 10
years);
(4) Convert the outstanding balance on the CAPLine to a term Loan, in
accordance with the guidance provided in Chapter 7, Paragraph F of this SOP.
In such cases, SBA’s guaranty would remain in place with no new advances
allowed on the Loan; and /or
(5) Commence liquidation actions. (See Chapter 19, Paragraph C.5 of this SOP
for guidance on the collection of accounts receivable.)
C. International Trade Loan Program (IT)
Under the IT Loan Program (“IT,” “IT Program,” “IT Loan(s),” and “IT Loan Program”),
SBA guarantees term Loans to small businesses that export or are developing new export
markets. SBA also guarantees term Loans to improve the competitive position of small
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businesses adversely affected by import competition. (See SOP 50 10 for additional
guidance, resources and requirements for IT Loans.)
The primary contacts for Lenders and Borrowers participating in the IT Program are Export
Finance Managers (“EFM”), who are SBA employees working at a United States Export
Assistance Center (“USEAC”). EFMs are SBA’s nationwide network of international trade
finance specialists serving regional territories and are typically based in a multi-agency
USEAC.
Questions regarding the unique servicing and liquidation aspects of IT Loans may be directed
to the appropriate EFM for assistance, with final authority for all Servicing Actions resting
with the appropriate SBA Loan Center. (See: SOP 50 10 for additional guidance, resources
and requirements.)
1. IT Loan Export Compliance
An IT Loan may not be made to a business that directly or indirectly exports to a foreign
country listed as a prohibited country (as identified by Note #7 in the Ex-Im Bank
Country Limitation Schedule).
2. ITL Loan Monitoring
The IT Loan Program has unique eligibility and collateral requirements that must be
addressed at the time of Loan approval and documented in the Loan File. SBA requires
Lenders to obtain information from the Borrower pertaining to their use of Loan proceeds
and its projected impact on the Borrower’s export sales, and to retain documentation for
this in the Lender’s Loan File.
When an IT Loan is used to finance indirect exports (see SOP 50 10 for definition of
indirect exports), Borrowers must provide documentation to the Lender (typically in the
form of a letter, invoice, order, or contract) to support that the Borrower’s domestic
customers are, in fact, exporting their goods or services.
If the criteria are met for refinancing, the Lender must obtain documentation to verify
that the new IT Loan will be used for export development activities.
Lenders must disburse IT Loan proceeds in accordance with the Loan Authorization/E-
Tran Terms and Conditions. Failure to do so may cause SBA to deny liability under its
guaranty.
(See Chapters 24 and 25 of this SOP for additional guidance on the SBA guaranty
purchase review process and denial of liability on an SBA guaranty.)
D. Export Working Capital Loan Program (EWCP)
Under the EWCP program, SBA guarantees short-term working capital Loans made by
participating Lenders to small business exporters. There are three (3) specific types of EWCP
Loans:
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• Single Transaction-Specific Loans;
• Transaction Based-Revolving Lines of Credit; and
• Asset Based Loans (“ABL”).
(See: SOP 50 10 for additional guidance, resources and requirements for EWCP Loans.)
1. Processing Methods
a. EWCP Loan Processing Under Non-Delegated Authority
Lenders with delegated PLP-EWCP authority may and all Lenders without PLP-
EWCP delegated authority must submit their application for an SBA guaranty, along
with supporting documentation, to SBA for prior approval. SBA makes the final
determination as to the eligibility and creditworthiness of the applicant, including
approving the uses of proceeds, the adequacy of collateral pledged, the structure of
the Loan, and any equity injection required from the applicant.
b. EWCP Loan Processing Under Delegated PLP-EWCP Authority
When a Lender submits an application for an EWCP Loan guaranty under their
delegated PLP-EWCP authority, SBA does not review the Lender’s determination of
eligibility, analysis of the credit, or structure of the Loan or line of credit prior to
issuing a Loan number. PLP-EWCP Lenders must analyze eligibility and credit
worthiness in accordance with SBA Loan Program Requirements and properly
document their file. The PLP-EWCP Lender’s analysis is subject to SBA’s review
and determination of adequacy when the Lender requests SBA to purchase its
guaranty or when SBA is conducting lender oversight actions.
2. EWCP Loan Post-Approval/Pre-Disbursement Requests for Changes
Lenders must submit all post-approval/pre-disbursement requests for changes to an
EWCP Loan to the appropriate EFM, unless the change is within the Lender’s delegated
PLP- EWCP authority.
EFMs are the primary contacts for Lenders and Borrowers participating in the EWCP
program. Due to the unique servicing and liquidation aspects of EWCP Loans, Servicing
Requests requiring SBA approval may be directed to the local EFM for additional
assistance. The EFM will review the Servicing Request and submit it to the appropriate
SBA Loan Center for final approval.
3. Prohibited Uses of EWCP Loan Proceeds
EWCP Loan proceeds may not be used to:
a. Support a Borrower’s domestic sales of goods or services, except for indirect exports;
b. Acquire fixed assets or capital goods for use in the Borrower’s business;
c. Acquire, equip, and/or rent commercial space overseas;
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d. Finance pre-shipment or purchase order financing under a transaction-specific or
transaction-based revolving EWCP facility for foreign-to-foreign export transactions;
or
e. Finance professional export marketing advice or services, foreign business travel,
participation in trade shows or support staff in overseas offices; except to the extent
it relates directly to the transaction that is financed with an EWCP Loan.
4. EWCP Export Compliance
Lenders must monitor the export transactions of EWCP Loan Borrowers as follows:
a. Certifications
(1) EWCP Loan Borrowers must certify that appropriate tax withholding deposits
for payroll advances have been made and that no Loan proceeds have been or
will be used to pay delinquent withholding taxes or other similar trust funds
(state sales tax, etc.). The Lender may include this certification as part of its
BBC reporting package.
(2) Borrowers must provide a copy of a valid export license for each different
product they export and for each different country to which they export their
products or provide a letter stating that a valid export license is not required,
including the authority by which this statement is made. Borrowers may
provide these items with their BBC reporting package.
b. Foreign Risk Mitigation
(1) Prohibited Countries and Parties
Lenders must review:
(a) The Ex-Im Bank Country Limitation Schedule (Ex-Im Schedule) to
ensure that none of the Borrower’s export sales or transactions that are
financed with an EWCP Loan are to businesses located in prohibited
countries (identified as Note #7 on the Ex-Im Schedule); and
(b) The Department of Treasury OFAC sanctions lists
(sanctionssearch.ofac.treas.gov/) to ensure that none of the Borrower’s
export transactions financed with an EWCP Loan are to prohibited parties.
i. For federally-regulated Lenders, compliance with the procedures
required by the Lender’s Federal Financial Institution Regulator will
constitute compliance with the above referenced OFAC
requirement.
ii. For SBA Supervised Lenders, the Lender must check the OFAC
sanctions lists prior to the first disbursement of funds on each
specific export transaction.
(2) EWCP Loan Advances
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On an asset-based revolving line of credit where advances are made against a
borrowing base of foreign receivables and/or export-related inventory, the
maximum advance rates are 90 percent on eligible foreign receivables and 75
percent on eligible export-related inventory located within the United States.
Control accounts may be required at the discretion of the LGPC for non-
delegated loans, or the PLP-EWCP Lender for loans processed under their
delegated authority.
At a minimum, the Borrower must submit a BBC to the Lender at least
monthly, or as frequently as the Lender customarily requires for its Borrowers
on similarly-sized, non-SBA guaranteed loans if more often than monthly,
along with an aging of foreign accounts receivable and listing of export-related
inventory, as appropriate. If the borrowing base shows the Borrower is over-
advanced, the Lender must immediately require the Borrower to make a
payment to reduce the Loan balance so it is within the borrowing base formula.
Advance rates on foreign purchase orders/contracts or foreign accounts
receivable when sold on open account (no credit insurance or letter of credit
to mitigate the foreign risk) may not exceed 80 percent.
(3) Borrower Accounts Receivable
Borrower payment terms must be consistent with prudent lending practices.
See SOP 50 10 for additional guidance regarding typical terms of sale.
5. Additional Guidance for Specific Types of EWCP Loans
EWCP Loans are self-liquidating Loans with the conversion of export-related trading
assets to cash as the primary source of repayment. Lenders must ensure that EWCP Loans
are secured by no less than a first security interest in all the working assets associated
with the financed transactions. This includes export inventory and receivables,
assignment of credit insurance, letters of credit proceeds, and contract proceeds, as
applicable. Lenders must also ensure that all collateral is located in the United States, its
territories, or possessions.
a. Asset Based EWCP Loans
LGPC, or PLP-EWCP Lenders for Loans processed under delegated authority, may
require an assignment of contract proceeds for an EWCP asset based line of credit.
(1) Documentation Requirements for Asset Based EWCP Loans
(a) Copy of letter of credit and/or copy of buyer’s order/contract, if applicable.
(b) Export credit insurance-related material (e.g., policy, application, buyer
credit limit), if applicable.
(c) Copy of export license(s), if required.
(d) Aging of accounts receivable and accounts payable, and inventory reports
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(dated within 180 days of Loan application or Loan review).
(e) Cash flow projection statement with monthly (quarterly is an option for
asset- based Loans) sales projections for the lesser of 12 months or the term
of the Loan, highlighting the export transaction(s) the Borrower expects to
finance. Borrowers may limit their cash flow projections to the proposed
export transaction(s) or base them on their anticipated export cash cycle,
and must show their ability to complete the projected export transaction(s)
and repay the EWCP Loan.
(f) If indirect exporting is financed, a letter, invoice, order, contract, or other
documentation from the Borrower’s customer certifying that they will sell
the goods/services purchased from the Borrower to a foreign buyer.
(2) Lender Responsibilities
At the applicable frequency, Lenders must verify the Borrower’s BBC for
accuracy, confirm the export working assets that are eligible for financing along
with the appropriate advance rate for each asset type, and establish the
maximum level of financing available relative to the outstanding balance of the
EWCP Loan. This must be done in accordance with the provisions of the EWCP
Loan Authorization/E-Tran Terms and Conditions.
(3) Adding a New Foreign Customer to a Borrowing Base
If the EWCP Loan Authorization/E-Tran Terms and Conditions does not
expressly authorize, or specifies that prior SBA approval is required for 1) the
financing of goods or services sold to a particular customer, 2) the use of an
alternative risk mitigation strategy or foreign currency, or 3) the provision of
new export sales terms, the Lender must prepare a Servicing Request in
accordance with the guidance provided in Chapter 6 of this SOP before
including the working assets of the proposed transaction(s) in the BBC. Such
EWCP Servicing Requests may be submitted to the local EFM, who will
evaluate and submit it to the appropriate SBA Loan Center for final approval.
Lenders with PLP-EWCP authority may proceed with Loan Actions without
prior SBA approval, except for those actions that require prior SBA approval
(see Chapter 3 of this SOP for additional guidance on PLP Lender responsibility
and authority).
(4) Disbursement
When the BBC indicates that financing is available under the EWCP Loan,
disbursements up to the maximum amount indicated in the BBC may be made
to the Borrower, in accordance with the Lender’s usual practices for its similarly
sized non-SBA loans.
(5) Managing Export Sales Proceeds
The EWCP Loan Authorization/E-Tran Terms and Conditions will indicate
whether a control account is required to collect the Borrower’s export accounts
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receivable, to allow the Lender to apply the proceeds to the principal balance of
the Loan. If a control account is not required, Borrowers would have to submit
their export sales proceeds or other sources of funds to the Lender for
application to the EWCP Loan balance since subsequent advances are based on
the availability under the Loan borrowing base. Under the conditions described
in the next paragraph, Lenders may allow Borrowers to retain such proceeds as
needed, provided that the EWCP Loan is within its borrowing base limits.
(6) Control Accounts and Over Advances (Out-of-Margin)
The LGPC for non-delegated loans, or the PLP-EWCP Lender for delegated
loans, determines if a control account is required for an EWCP Loan based on
their credit analysis. Normally, Lenders must apply 100 percent of the foreign
accounts receivable collection proceeds to the EWCP Loan balance and require
the Borrower to request additional advances as needed based on a BBC.
Another option is for the Lender to allow the Borrower to maintain a balance
within the Borrower’s borrowing base limits and retain foreign accounts
receivable collection proceeds that are not immediately applied to the EWCP
Loan balance. This option is available only to Borrowers that are:
(a) In business for two years or more; and
(b) Have financial records satisfactory to SBA for non-delegated Lender Loans
or the PLP-EWCP Lender for delegated Loans, and the ability to provide a
current aging reports for foreign accounts receivable.
In deciding whether to permit a Borrower to retain their foreign accounts
receivable collection proceeds, PLP-EWCP Lenders must follow their
policies and procedures for their similarly-sized, non-SBA guaranteed
loans.
EWCP Loan Borrowers must submit a BBC to the Lender at least monthly,
or as frequently as the Lender requires for its similarly-sized non-SBA
guaranteed loans, along with an aging report for the Borrower’s foreign
accounts receivable and a listing of the Borrower’s export-related inventory,
as appropriate.
Lenders must review the Borrower’s BBC(s) to ensure that the EWCP Loan
is not over-advanced according to the collateral requirements in the BBC.
If the BBC indicates that the Loan is over-advanced, the Lender must
immediately require the Borrower to make a payment to reduce the Loan
balance to achieve compliance with the BBC. If an EWCP Loan cannot be
brought back into compliance with the borrowing base formula within 60
days, or a payment plan is not otherwise established, the EWCP Loan must
be serviced as a payment Default in accordance with the guidance provided
by Chapter 15 of this SOP. Out-of-margin advance amounts remain eligible
for SBA guaranty purchase, provided that the amount of the advance was
within the Borrower’s borrowing base at the time it was advanced.
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b. Transaction Based EWCP Loans
(1) Setting Up Financing for Export Transactions
(a) Borrower Documentation. Lenders must obtain a copy of all the export
purchase orders and contracts a Borrower chooses to finance, along with
a transaction budget indicating the projected cost of fulfilling each
transaction, which may include overhead costs.
(b) Lender Underwriting Responsibility. Lenders must review the
proposed transactions and refer to the Loan Authorization/E-Tran Terms
and Conditions to determine the appropriate level and manner of
financing, and document the Loan File accordingly.
(c) Lender Collateral Responsibilities. Lenders must ensure that all
appropriate collateral requirements, as set forth in the EWCP Loan
Authorization/E-Tran Terms and Conditions, are satisfied. These include:
• Establishing a control account.
• Obtaining an assignment of proceeds for each purchase order or
contract that is financed. Written acknowledgement of the
assignment by the foreign customer is not required.
(d) Unforeseen Transactions. If the EWCP Loan Authorization/E-Tran
Terms and Conditions does not expressly authorize or if it requires prior
SBA approval to finance a particular transaction, the Lender must prepare
a Servicing Request in accordance with the guidance provided in Chapter
6 of this SOP before disbursing any funds for the proposed transaction.
EWCP loan Servicing Requests may be submitted to the local EFM who
will evaluate the request and submit it to the appropriate SBA Loan Center
for final approval.
(2) Transaction Monitoring
(a) Frequency of Monitoring. Lenders must perform the required and
recurring EWCP Loan Actions listed below at least monthly. However, if
a Lender customarily performs these actions more frequently for their
similarly-sized, non-SBA guaranteed loans, they must perform them as
frequently for their EWCP Loans as well. Lenders are responsible for
setting the applicable schedule of deadlines for Borrower submission of
the required financial information and documentation described below.
(b) Borrower Documentation. Lenders must obtain from Borrowers a
current status report in a format acceptable to the Lender for all of the
Borrower’s EWCP Loan export transactions, including a current aging of
any associated accounts receivable. If the Borrower fails to provide the
required financial information in a timely matter, the Lender, as provided
in the Loan Authorization/E-Tran Terms and Conditions, should not make
any further advances on the Loan. Lenders may contact the local EFM to
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review EWCP Loan servicing alternatives. If 30 days after the submission
deadline the Lender is still unable to obtain the required financial
information, the Loan should be serviced as a payment Default in
accordance with the guidance provided in Chapter 15 of this SOP.
(c) Lender Responsibility. Lenders must confirm that each export
transaction financed with an EWCP Loan conforms to the authorized
advance rates and remains in good standing with regard to required
payments.
(d) Disbursement. Lenders must ensure that EWCP Loan Borrowers submit
a separate request for each transaction identifying the transaction
customer, the amount of funding requested, cumulative past draws for the
transaction, and the expected shipment and payment dates for the
transacted items. If the Lender’s transaction review indicates that
financing is available under the EWCP Loan, the Lender may make
disbursements up to the maximum project budget amount in accordance
with the Lender’s normal practices.
(e) Out-of-Margin Transactions and Cost Overruns. If the Lender’s
transaction review indicates that the Borrower can no longer complete the
transaction as planned, the Lender must immediately work with the
Borrower to address the situation. Lenders may consult with the local
EFM for guidance, as needed. If the Borrower cannot bring the EWCP
Loan back to within its budget and margins within 60 days, and an
alternative plan is not otherwise established, the Lender must service the
Loan as a payment Default in accordance with the guidance provided in
Chapter 15 of this SOP.
(f) Managing Transaction Proceeds. A control account is required for
transaction based EWCP Loans to track the proceeds of foreign accounts
receivable as they are paid by foreign customers. Lenders must ensure that
transaction proceeds are applied to the EWCP Loan balance, either in their
entirety or as a percentage of the proceeds, in an amount that is at least
sufficient to pay off the initial advance for the transaction.
c. EWCP Loans Used for Stand-By Letters of Credit (SBL/C)
EWCP Loan proceeds may be used to secure stand-by letters of credit (SBL/C) issued
to support a Borrower’s export transactions.
(1) Lender Credit Analysis for EWCP Loans Used for SBL/C
The Lender’s credit analysis for EWCP Loans used to support an SBL/C must
document the Borrower’s history and ability to satisfy obligations that require
an SBL/C, such as those involving bids, advanced payment, performance
bonds, supplier advances, and warranty guarantees and/or bonds.
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(2) EWCP Loan Disbursements for SBL/C Draws
All SBL/C secured by an EWCP Loan must expire before the EWCP Loan
maturity date, unless SBA provides prior written consent. If the Lender
receives SBA’s prior written consent to use EWCP Loan proceeds to fund a
draw on an SBL/C issued prior to the EWCP Loan maturity date, such
disbursement will be covered by the SBA guaranty.
(3) SBL/C Interest Payments
Lenders must document in their Loan File whether they will require the
Borrower to make interest payments on an SBL/C, and if so, the amounts,
frequency, and conditions under which such payments must be made.
(4) Collateral For EWCP Loans That Secure SBL/C
SBA requires additional collateral for EWCP Loans used to support the
issuance of an SBL/C. In such situations, Borrowers must deposit cash into an
account held by the Lender in an amount equal to 25 percent of the SBL/C. This
deposit must remain in the account held by the Lender for the entire term of the
SBL/C.
SBA (for non-delegated EWCP Loans) or a PLP-EWCP Lender may allow
export inventory, foreign accounts receivable or other acceptable collateral to
replace the required cash deposit. However, for ABLs, the ABL borrowing base
must support at least 25 percent of the total of all SBL/C issued under the EWCP
Loan.
The EWCP Loan Authorization/E-Tran Terms and Conditions boilerplate also
contains specific provisions related to SBL/C collateral requirements, and all
Lenders must document their justification for collateral decisions in their Loan
File.
(5) EWCP Loan Maturities - Generally
The term of an EWCP Loan term must be the shortest possible term based on
the proposed use of Loan proceeds and the Borrower’s ability to repay. The
maximum maturity for an EWCP loan is 36 months. The maturity date is set in
terms of the number of months from either the date of the Note or the date of
initial disbursement, to the date when final payment is due. If the Loan is not
reissued, or extended, all outstanding amounts are due and payable on that day.
SBA’s guaranty remains in effect for disbursements made through the maturity
date, subject to the terms and conditions of the Loan Documents.
SBL/C(s) funded by an EWCP Loan must expire prior to the maturity date of
the EWCP Loan, unless SBA provides prior written approval to issue an SBL/C
that expires after the maturity date of the EWCP Loan. EWCP Loan
disbursements made after an EWCP Loan maturity date are not covered by
SBA’s guaranty, unless the disbursement(s) fund draw(s) against an SBL/C that
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SBA approved prior to the maturity date of the EWCP Loan.
d. Maturities For Specific Types of EWCP Loans
(1) Single transaction-specific EWCP Loans are either non-revolving Loans or
revolving lines of credit that support a specifically identified, single export
transaction. The LGPC (for non-delegated EWCP Loans) or PLP-EWCP
Lenders may approve a maturity of up to 36 months to correspond with the
length of the transaction cycle. When the EWCP Loan term exceeds 12 months,
PLP-EWCP Lenders must include justification for a longer maturity in their
credit memorandum, and non-delegated Lenders must include justification in
the application they submit to the EFM for review.
(2) Transaction based revolving lines of credit may support multiple export
transactions or a single, specifically identified export transaction on a
continuous basis during the term of the EWCP Loan. While the term of a
revolving line of credit typically does not exceed 12 months, LGPC (for non-
delegated Lenders) or PLP-EWCP Lenders may allow an initial EWCP Loan
term of up to 36 months, with annual renewals.
(3) Asset based EWCP Loans (ABL) are revolving lines of credit based on a
monthly BBC that reports the level of assets (normally accounts receivable and
inventory) available to support the EWCP Loan amount. The term of an ABL
is typically 12 months. Reissued ABLs are new 7(a) Loans that require an
additional SBA guaranty fee when the Loan is reissued. However, ABLs may
have a term of up to 36-months with annual renewals. In such cases, non-
delegated Lenders must provide updated Borrower financial statements to SBA
annually and delegated Lenders must retain the results of their annual EWCP
Loan renewal actions in their Loan File.
6. Miscellaneous EWCP Loan Servicing Actions
a. EWCP Loan Increases
Lenders may increase the original EWCP Loan amount by submitting a Servicing
Request in accordance with the guidance provided in Chapter 6 of this SOP. Lenders
must underwrite EWCP Loan increases according to the requirements of SOP 50 10
in effect at the time of loan approval. Servicing Requests may be submitted to the
local EFM for review and submission to the appropriate SBA Loan Center for final
approval. Lenders must pay an additional SBA guaranty fee for the Loan increase
based on the fee structure in effect at the time the Loan was originally approved.
b. Extraordinary Servicing Fees
Lenders may charge extraordinary servicing fees and set the interval of the fees in a
manner that is reasonable and prudent based on the level of extraordinary effort
required, in accordance with the guidance provided in SOP 50 10 in effect at loan
approval. Such fees must not be higher than the fees charged by the Lender on
similarly-sized, non-SBA guaranteed commercial lines of credit. A Servicing
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Request for extraordinary fees that were not included in the original EWCP Loan
approval may be submitted to the local EFM for review and submission to the
appropriate SBA Loan Center for final approval.
7. Troubled EWCP Loans
a. EFM Point of Contact
Local EFMs are available to assist Lenders with servicing issues related to EWCP
Loans. EFMs can assist Lenders in assembling the documentation needed to
complete Servicing Requests and Universal Purchase Packages.
b. Site Visits
Lenders must conduct site visits in accordance with the guidance provided in Chapter
16 of this SOP.
c. Liquidation of Foreign Accounts Receivable Collateral
When an EWCP Loan is not performing as agreed and collateral includes foreign
accounts receivable, Lenders must make demand for payment on the Borrower’s
foreign accounts receivable. Lenders must also pursue collections from any domestic
risk mitigation sources such as export credit insurance or international letters of
credit. When all cost effective domestic-based efforts to collect foreign accounts
receivable are exhausted, Lenders are not required to enforce collection from the
Borrower’s customers outside of the United States. After documenting the Loan File
for their actions, Lenders may treat the outstanding balances of foreign accounts
receivable as uncollectable with no Recoverable Value.
E. Export Express Loan Program (Export Express)
The Export Express Loan Program guarantees revolving lines of credit or term Loans of
$500,000 or less to support small businesses that want to develop the export side of their
business. It offers many of the streamlined features of the SBA Express Loan Program while
providing a higher guaranty percentage to mitigate international credit risk.
Export Express Loans are generally subject to the same Loan processing, closing, servicing,
and liquidation requirements (including maturity terms, interest rates, and fees) as SBA
Express Loans. (See SOP 50 10 for additional information and guidance on Export Express
Loans).
• Lenders must submit applications for Export Express Loans to SBA via E-Tran and
retain all required documentation in their Loan File. Lenders must also prepare and sign
the Loan Authorization/E-Tran Terms and Conditions on behalf of SBA.
1. Export Compliance
Export Express Borrowers are required to comply with all U.S. export regulations. When
an Export Express Loan finances specific export transactions (including indirect exports)
Lenders must determine if the Borrower is authorized to conduct business with the parties
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and the country(ies) to which their goods or services will be shipped.
Lenders must check the Ex-Im Bank’s Country Limitation Schedule and the Department
of Treasury Office of Foreign Assets Control (OFAC) Sanctions Lists to ensure that none
of the borrower’s export transactions are conducted with prohibited parties located in
prohibited countries.
a. Federally-regulated Lender compliance with the procedures required by the Lender’s
Federal Financial Institution Regulator satisfies the above referenced OFAC
requirement.
b. SBA supervised Lenders must check the OFAC sanctions lists prior to first
disbursement of funds for each of an Export Express Loan Borrower’s specific export
transactions. Lenders may not make Export Express Loans to Borrowers that directly
or indirectly export their goods or services to a foreign country listed as a prohibited
country (designated as Note #7 on the Country Limitation Schedule) or if the
transaction would be prohibited under any of the sanctions programs administered by
OFAC.
2. Export Development Activity Financing
Borrowers must use Export Express Loan proceeds for an export development activity
as defined in SOP 50 10 in effect at the time of loan approval, which includes obtaining
an SBL/C when required as a bid bond, performance bond, or advance payment
guarantee. For Export Express Loans over $50,000, Lenders must, to the maximum
extent practicable, follow the written collateral policies and procedures it has established
for its similarly-sized, non-SBA guaranteed commercial loans. For Export Express Loans
over $50,000 that are used to support the issuance of an SBL/C, Lenders must require
cash collateral that is equal to or greater than 25 percent of the SBL/C amount.
3. Lender Verification and Reporting Responsibilities
Lenders must obtain documentation to verify that any new Export Express Loan will be
used exclusively for export development activities. Lenders must report the full amount
of Export Express Loan principal and interest on SBA Form 1502.
F. Paycheck Protection Program (PPP) Loans
1. PPP Loan Servicing Responsibilities
a. Lenders must service PPP loans until they are fully forgiven or paid in full, or in the
event of a Default or other qualifying event (as set forth in the promissory note,
including business closure), until SBA purchases the guaranty and changes the loan
status to SBA Uncollectible or charge off the Loan. Lenders should work with the
borrower to seek forgiveness at the end of the borrower’s Loan forgiveness covered
period or, in the event of a Default or other qualifying event, to request guaranty
purchase in accordance with the procedures outlined below. Lenders must work with
borrowers that do not receive full forgiveness to achieve repayment of the remaining
balance of the Loan, even if SBA has purchased the guaranty.
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2. PPP Loan Servicing Actions
Lenders must:
a. Keep an accurate record for each PPP Loan under its direct control;
b. Document all Loan modifications including changes of ownership. Borrowers may
not receive PPP Loan forgiveness if the Loan details are incorrect in E-Tran;
c. Issue a decision to SBA in accordance with PPP Loan Program Requirements when
the borrower submits a forgiveness application. In the event a borrower does not
submit an application for forgiveness within 10 months of the end of the covered
period, the Lender must communicate with the borrower to determine the status of
the business (e.g., whether the business is open, closed, in bankruptcy, etc.) and notify
the borrower of the date the first payment on the Loan is due. Lenders must document
communication attempts and results in their Loan File;
d. Collect and apply all PPP Loan and forgiveness payments;
e. If a borrower does not submit a forgiveness application within 10 months of the end
of the covered period, or if the PPP Loan is partially forgiven or forgiveness of the
Loan is denied in full, the Borrower must make payments in accordance with the
terms of the Note and the Lender must continue servicing the Loan until it is paid in
full or SBA changes the loan status to SBA Uncollectible or charges off the Loan
after guaranty purchase.
Additionally, Lenders must:
Submit separate monthly SBA Form 1502 reports that include the Loan status
information for their PPP Loans, regardless of whether the Borrower made a payment
in the current month or the Loan is in deferment, until the Loan is paid in full, fully
forgiven, or, if applicable, until SBA purchases the guaranty for the Loan;
a. Report the principal and interest reduction from the SBA forgiveness remittance
and any Loan payments received from the Borrower on SBA Form 1502, before
the Lender submits a guaranty purchase request. (See Subparagraph F.4 and F.6
of this Chapter for guidance on when a Lender may submit a guaranty purchase
request for a PPP Loan)
b. Take reasonable steps to monitor PPP Loan Borrowers that remain in repayment
status, to ensure that the Borrower’s business continues to operate and that
payments are made on the Loan. Lenders are not required to obtain updated
financial information annually, or at any other interval, because repayment
analysis was not required when the PPP loan was made.
Available PPP Loan servicing actions:
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a. Loan Maturity Extensions.
(1) Lenders may extend the maturity date for a PPP Loan for an additional 10
years beyond the original maturity date, to aid in the orderly repayment of
the Loan. Such maturity date extensions must occur prior to the expiration
of SBA’s Loan guaranty, which occurs 180 days after the later of the
original maturity date or Lender’s completion of liquidation actions. For
PPP loans, SBA considers a pending Lender request to SBA for a
forgiveness payment or a pending 7(a) Loan review decision to fall within
the liquidation action extension period, since the Lender is waiting to
receive funds from SBA to pay the PPP Loan in full or in part.
b. Collateral and Personal Guaranties.
(1) PPP Loan Program Requirements do not allow Lenders to take any
additional collateral or require any personal guaranties when extending the
maturity of a PPP Loan or making other Loan modifications.
c. Interest Rate Modifications and Loan Fees.
(1) Lenders are not allowed to charge an interest rate higher than one percent
fixed on a PPP loan.
(2) Lenders are not permitted to charge a default interest rate or charge a
separate servicing fee for PPP Loans.
d. PPP Loan Workouts.
Lenders have unilateral authority to negotiate with borrowers to enter into a
workout agreement for repayment of the outstanding balance of a PPP Loan,
regardless of whether SBA has purchased the guaranty. If the Lender receives
any post-guaranty purchase payments from the Borrower, the Lender must send
the full payments to SBA via Pay.Gov (https://www.pay.gov/) using the payment
code 172. When submitting the payment, Lenders should select “Paycheck
Protection Program (PPP)” from the four choices listed under the type of
payment. This will allow SBA to receive 100% of the payment and apply it to the
Loan.
e. If the borrower for a PPP Loan becomes more than 60 days past due, the Lender
should make demand for payment in full and submit a request for guaranty
purchase through the PPP Loan platform;
f. For PPP Loans that are not fully forgiven, Lenders must remit the full amount of
any post-guaranty purchase payments or recoveries the Lender receives for the
PPP Loan to SBA via Pay.gov (https://www.pay.gov/) using payment code 172.
3. PPP Borrower Bankruptcy Filing
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PPP borrowers that file for bankruptcy protection after Loan disbursement are eligible to
apply for forgiveness if the Loan funds have been used for eligible payroll and nonpayroll
purposes during the covered period. If the Loan is not fully forgiven and the borrower
files for bankruptcy protection other than a Chapter 7 case, Lenders must provide SBA
with a notice of the bankruptcy filing, file a proof of claim, and continue to monitor the
bankruptcy case. Because PPP Loans are unsecured, SBA does not expect Lenders to
take action in such bankruptcy proceedings beyond filing a proof of claim. SBA considers
the filing of a proof of claim as a nominal administrative action prior to requesting SBA
to purchase its guaranty, and SBA will not reimburse Lenders for the administrative costs
associated with the filing of a proof of claim.
After SBA has purchased its guaranty for a PPP Loan, Lenders must send any subsequent
payments or recoveries received from the bankruptcy action to SBA via Pay.Gov
(https://www.pay.gov/) using the payment code 172. SBA does not anticipate a need for
Lenders to incur expenses related to litigating PPP Loans; however, SBA will honor
Litigation Plans with prior SBA approval. SBA will generally not approve Litigation
Plans unless SBA determines that there is a reasonable expectation for recovery in excess
of legal expenses.
4. When Lenders May Submit PPP Loan Guaranty Purchase Requests With SBA
Status Change
Lenders may submit requests to simultaneously purchase the SBA guaranty and status
change to SBA Uncollectible or charge off of the PPP Loan when a Borrower:
a. Is 60 days or more past due on scheduled Loan payments and the Default is not cured;
b. Has permanently closed its business and does not plan to submit a forgiveness
application;
c. Has filed for Chapter 7 bankruptcy protection;
d. Has filed for Chapter 11, 12 or 13 bankruptcy protection, once a period of at least 60
days has elapsed from the end of the PPP Loan deferment period, or any time after
an order is entered confirming a bankruptcy reorganization plan if the plan does not
provide for full payment of the PPP Loan balance; or
e. In the case of self-employed individuals, sole proprietors, single-member LLCs, or
independent contractors, the owner is deceased.
5. When Lenders May Submit PPP Loan Guaranty Purchase Requests Without SBA
Status Change
a. A Borrower or any owner of 20 percent or more of the Borrower has been indicted
for or convicted of a felony related to the PPP Loan;
b. A Borrower has filed an appeal of a final loan review decision with the SBA Office
of Hearings and Appeals (OHA) in accordance with PPP Loan Program
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Requirements. Lenders may request guaranty purchase 60 days after the Borrower
has filed its appeal with OHA;
c. The Lender has filed a Suspicious Activity Report (SAR) with respect to the PPP
Loan; or
d. The Lender’s request for a forgiveness payment or a PPP Loan forgiveness review
has been pending with SBA for more than 12 months. In this circumstance, the
Lender should contact SBA through the PPP Loan platform to coordinate the
submission of a guaranty purchase request. If SBA purchases the guaranty while a
Lender requests for a forgiveness payment or a PPP Loan forgiveness review decision
has been pending with SBA for more than 12 months, and SBA determines that the
Borrower is eligible for Loan forgiveness in any amount, SBA will not remit a
forgiveness payment to the Lender. Instead, SBA will apply the approved forgiveness
amount to the PPP Loan to reduce the amount owed by the Borrower.
e. See Chapter 27 of this SOP for additional guidance on the submission of Wrap-up
Reports.
6. PPP Loan Guaranty Purchase Process
a. Lenders must submit requests for SBA guaranty purchase for individual PPP Loans
through the PPP Loan platform.
b. Lenders may request a status change to charge off if no Obligors are eligible for
referral to Treasury, for example if the Obligor(s) is in bankruptcy or deceased, or the
loan has been compromised, or the statute of limitations has expired. For all other
Loans the status change request should be SBA Uncollectible.
c. Guaranty purchase requests must be made by the Lender that owns the Loan at the
time of purchase, i.e., the Lender of record in the PPP platform/E- Tran.
d. For changes in Borrower ownership, Lenders must provide details related to the sale
of the business including purchaser information. Lenders must also provide any
assumption agreement(s) or other documentation related to the change of ownership,
as applicable.
e. Lenders have the option to request SBA to purchase the guaranty for a first draw PPP
Loan, second draw PPP Loan, or both PPP Loans made to the same Borrower, if
applicable. The PPP platform automatically ties a first draw PPP Loan to a second
draw PPP Loan made to the same Borrower if both Loans were made by the same
Lender. SBA encourages Lenders to simultaneously request guaranty purchase for
both PPP loans, if applicable.
f. SBA will pay accrued interest (that has not been paid either by the borrower or SBA)
through the payment deferment period, plus up to a maximum of 120 days of
additional interest due to payment Default, at the time of guaranty purchase.
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g. In addition to submitting all the required documentation associated with a PPP Loan,
including a certified copy of the signed Note and any modifications to the Note,
Lenders must also submit an executed SBA Assignment with every guaranty
purchase request for a PPP Loan, for referral of the Loan to Treasury after the status
change to SBA Uncollectible or charge off.
h. SBA will remit guaranty purchase payments to the ACH account where the Lender
directed SBA to remit forgiveness payments (to the current Lender of record in the
PPP Loan platform/E-Tran).
i. SBA is released from liability on its guaranty if a Lender fails to submit a request for
SBA to purchase its guaranty within the later of 180 days after the maturity date of
the PPP Loan or completion of the Lenders liquidation actions, including pending
Lender requests for an SBA forgiveness payment or pending SBA final Loan review
decisions.
j. After SBA guaranty purchase and status change to SBA Uncollectible, SBA will refer
the PPP Loan and all remaining Obligors to Treasury for further collection. Loans
with the status change to charge off, will not be referred to Treasury because further
collection is barred by a valid legal defense such as compromise, discharge in
bankruptcy or the statute of limitations or the Obligor is deceased.
7. Borrower Forgiveness Requests Received After Lender Guaranty Purchase Request
Lenders are encouraged to work with Borrowers to process forgiveness applications
before requesting guaranty purchase. If a Borrower submits a PPP Loan forgiveness
application/request to the Lender after the Lender has submitted its guaranty purchase
request to SBA, the Lender must submit its PPP Loan forgiveness decision to SBA in
accordance with the following PPP Loan Program Requirements:
a. If SBA has not yet completed its guaranty purchase, the Lender must immediately
withdraw its guaranty purchase request in the PPP Loan platform. SBA will then
complete its review of the Lender’s forgiveness decision prior to reviewing the
Lender’s guaranty purchase request.
b. If SBA has completed its guaranty purchase, the Lender must comply with the PPP
Loan forgiveness rules in effect when the Borrower submitted its forgiveness request
to the Lender and submit the Lender’s forgiveness decision to SBA. If the Borrower
is eligible for PPP Loan forgiveness in any amount, SBA will not remit a forgiveness
payment to the Lender. In such cases, SBA will apply the approved forgiveness
amount (if any) to the outstanding balance of the Loan.
c. SBA expects Lenders to accept and make a decision on any PPP Loan forgiveness
application submitted by a Borrower within five years from the date that SBA issued
the PPP Loan number to the Lender. To the extent that any PPP Loan Borrower has
received an extension of its maturity date for a period longer than five years, that
Borrower must submit its Loan forgiveness application on or before five years from
the date that SBA issued the PPP Loan number to the Lender. SBA is imposing this
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five-year PPP Loan forgiveness deadline because extensions of maturity beyond five
years for PPP Loans are allowed only to aid in the orderly repayment of the Loan.
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Chapter 15. Classifying Loans in Liquidation
Lenders should make a good faith effort to help delinquent Borrowers bring their 7(a) Loans
current. However, when a Borrower is unable to cure a payment Default, Lenders should
accelerate the Note, make formal demand on all the Obligors, classify the Loan in liquidation
status, make arrangements for SBA or the Lender to re-purchase the SBA-guaranteed portion of
the Loan from the secondary market (if applicable), and prepare and implement a Liquidation
Plan without further delay.
A. When Lenders Must Classify Loans in Liquidation Status
Lenders must classify 7(a) Loans in liquidation status when they accelerate the Note or receive
a notice that the Borrower has filed for bankruptcy protection.
B. When Lenders Should Accelerate an SBA Loan Note
Note: Lenders do not have a legal right to accelerate, make demand, or liquidate the
collateral unless there has been a Default on the Note. (For specific information on the
Lender’s rights in the event of Default, see the Note used to document the Loan, e.g.
SBA Form 147.)
1. Lenders with Non-SBA Loan Portfolio
Lenders with a non-SBA guaranteed loan portfolio may decide whether to accelerate the
Note based on their own policies and procedures for their similarly-sized non-SBA
guaranteed commercial loans.
Note: Unless SBA has agreed otherwise in writing, the Borrower must be in Default
on a payment for more than 60 calendar days before the Lender may request guaranty
purchase. A Lender may not request guaranty purchase based solely on a non-
payment Default such as failure to provide financial statements in a timely manner.
See 13C.F.R. § 120.520, SOP 50 10 and Chapter 24 of this SOP for additional
information and guidance on SBA guaranty purchase requirements.
2. Lenders without Non-SBA Loan Portfolios
Lenders without a non-SBA guaranteed loan portfolio should accelerate the 7(a) Loan
Note whenever there has been an event of Default on the Note 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., the Borrower closes the business and delivers the keys to the
Lender or is more than 60 calendar days late on a payment that cannot be cured through
an SBA-approved deferment or workout plan.)
C. Repurchase from Secondary Market
At the time the Note is accelerated and the Loan is classified in liquidation, if the Loan was
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sold on the secondary market, the Lender must immediately either repurchase the SBA
guaranteed portion or request that SBA purchase it.
D. Demand Letters
1. Whenever the Note is accelerated, unless prohibited by applicable law (e.g., the
automatic stay in bankruptcy), Lenders should make demand on all Obligors for
immediate payment of the entire balance of the Loan.
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.
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.
Note: In the event of a Default on a 7(a) Loan that utilizes SBA Form 147 (Note), the
Note 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. What is more, if litigation is necessary, most courts expect to see an
acceleration and demand letter as part of the evidence offered by the creditor to prove
its case.
E. Skip Tracing
When a Loan is classified in liquidation, a good faith effort must be made to locate and
commence collection actions against all 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 on active duty, any action taken
must be in compliance with 50 U.S.C. Ch. 50: Service Members Civil Relief Act ("SCRA"),
50 U.S.C. §§ 3901-4043.
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. Lenders should consult their legal counsel or SBA's Office of Veterans
Business Development for additional guidance, but simply stated SCRA:
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Continued Note:
1. Places limitations on foreclosures and interest rates;
2. Requires creditors to forgive interest in excess of 6 percent on certain pre-
service debts (50 U.S.C. §3937);
3. Protects Servicemembers from default judgments if they fail to appear at trial
or respond to a lawsuit because of their military service (50 U.S.C. §3931);
4. Authorizes the court to stay lien foreclosure actions or adjust the
Servicemember’s obligation to preserve the interests of all parties (50 U.S.C
§3958);
5. Makes a Servicemember’s personal assets that were not pledged as collateral
unavailable to satisfy a business obligation (50 U.S.C. §4026);
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 U.S.C. §3919); and
7. Imposes criminal sanctions on creditors who violate certain provisions of the
statute including those pertaining to mortgage and lien foreclosures (50 U.S.C.
§§ 3953 and 3958).
G. Lender Liquidation Plans
All Lenders should prepare a Liquidation Plan prior to taking any material action to liquidate
a Loan. When properly prepared, a Liquidation Plan helps ensure that the Loan is liquidated
in a timely, prudent and cost-effective manner that maximizes recovery in the shortest
amount of time.
1. Format and Content
A Liquidation Plan for a 7(a) 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
See Chapter 16 of this SOP for guidance on site visits. (A Liquidation Plan for a CLP
Loan must include a copy of the Lender’s Site Visit Report.)
b. Feasibility of a Workout
See Chapter 17 of this SOP for guidance on Loan workouts.
c. Recoverable Value of the Collateral
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See the definition of “Recoverable Value” in Chapter 2 of this SOP for guidance on
how to determine the Recoverable Value of collateral.
d. Available Methods of Liquidation
See Chapter 18 (Real Property Collateral Liquidation) and Chapter 19 (Personal
Property Collateral Liquidation) of this SOP for guidance on collateral liquidation.
e. Litigation
See Chapter 2 and Chapter 22 of this SOP for guidance on Routine Litigation and
Non-Routine Litigation. With regard to CLP Loans, Lenders should include Routine
Litigation in the Liquidation Plans they are required to submit to SBA for prior
written approval.
f. Status of Senior Liens
See Chapter 13 of this SOP for guidance on the handling of senior liens.
g. Obligors' Repayment Ability
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 (see Subparagraph
G.1.c. above.);
(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, e.g.,
obtaining a judgment and executing on it;
(4) Amount of present and potential income that could be obtained through
enforced collection proceedings, e.g., administrative wage garnishment after
referral to Treasury (see Chapter 27 of this SOP);
(5) Litigative risk, i.e., the likelihood of not prevailing 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.
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h. Lender's Non-SBA Loans to Obligor
The Liquidation Plan must disclose whether the Lender has any non-SBA loans to
the same Obligor(s), and if so, indicate how the liquidation and litigation expenses
and recoveries will be allocated. See Chapter 23 of this SOP for guidance on the
allocation and approval of expenses and recoveries.
2. When Lenders Must Submit a Liquidation Plan to SBA for Approval
a. General Rule—Loans Made Under CLP Authority
(1) Liquidation Plan
Except as provided below with regard to emergencies, Lenders must submit a
proposed Liquidation Plan to the appropriate SBA Loan Center for each CLP
Loan classified in liquidation status (13 C.F.R. §120.540) within 30 business
days of completing the site visit required by Chapter 16 of this SOP. A copy of
the Lender’s Site Visit Report must be attached to the proposed Liquidation
Plan. Lenders should include Routine Litigation in the Liquidation Plans they
are required to submit to SBA for prior written approval.
(2) Amended Liquidation Plan
Except as provided below with regard to emergencies, Lenders must prepare
and submit an amended Liquidation Plan before taking any action or incurring
any expense that materially deviates from its original Liquidation Plan for a
CLP Loan.
b. Exception—Emergency Situations
A Lender may respond to an emergency (e.g., loss or dissipation of collateral),
without SBA's prior written approval of a Liquidation Plan or amended Liquidation
Plan for a CLP Loan, 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 prior written approval of
the Liquidation Plan or amended Liquidation Plan. (13 C.F.R. §120.540(f))
c. SBA Response Time
If SBA does not respond to a Lender's request for approval of a Liquidation Plan for
a CLP Loan within ten business days from the date on which the request is made, the
request is deemed approved. (13 C.F.R. §120.541(c))
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H. Lender Application of Payments and Recoveries for Loans in Liquidation Status
See Chapter 4 of this SOP for guidance on how to apply payments received for Loans in
liquidation. See Chapter 23 of this SOP for guidance on how to apply liquidation recoveries.
I. When Lenders Should Remove a Loan from Liquidation Status
Lenders should remove Loans from liquidation status for one of the following three reasons:
1. Loan Returned to Regular Servicing
Lenders should return 7(a) Loans to regular servicing status when the borrower has
agreed to the resumption of regular payments pursuant to a workout agreement,
bankruptcy plan, reaffirmation agreement, assumption, or other written agreement that
provides for resumption of regular payments that will pay the Loan balance in full. After
guaranty purchase, the appropriate SBA Loan Center must approve the return of any
Loan to regular servicing status.
2. Loan Paid in Full
Lenders should remove an 7(a) Loan from liquidation status and classify it as “paid in
full” when the debt owed on the Loan is paid in full. (Lenders should not confuse the
repurchase of SBA’s guaranteed portion of a Loan from a secondary market investor with
satisfaction of the debt by payment(s) from an Obligor or the application of collateral
liquidation proceeds.) After guaranty purchase, Lenders should request a payoff
confirmation from the appropriate SBA Loan Center before classifying a Loan as “paid
in full”. SBA may cancel an SBA guaranty and code the Loan as Paid if Full if a Lender
notifies SBA that they are voluntarily terminating the SBA guaranty for any reason.
3. Loan Status Change by SBA
SBA removes a Loan from liquidation status and classifies it as “SBA Uncollectible” or
“charged off” when SBA completes its review and approves an acceptable Lender Wrap-
up Report for the Loan. (See Chapter 27 of this SOP for additional information on Wrap-
up Reports.)
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Site Visits
Chapter 16. Site Visits
This chapter provides SBA policy and procedures concerning post-Default site visits. If not
required by Loan Program Requirements, Lenders should conduct a site visit whenever
warranted by Prudent Servicing practices. Lenders should document all site visits and keep a
copy of their site visit report in their Loan File. (See Chapter 3 of this SOP for site visit reporting
requirements.)
A. When Lender Site Visits Are Required
In the following circumstances, unless the Loan is unsecured, or the aggregate Recoverable
Value of the real or personal property collateral is less than $10,000, Lenders must conduct
a site visit within the following time frames:
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 causes the Loan to be classified in liquidation status, or sooner if the collateral could
be removed, lost or dissipated.
3. EWCP Loans – physical site visits may be waived for EWCP Loans secured only by
foreign accounts receivable, with the written concurrence of the SBA Export Finance
Manager at the appropriate USEAC. Lenders must coordinate site visits in accordance
with the guidance provided in this Chapter for all other collateral.
B. Lender Preparation for Site Visits
Prior to conducting a site visit, Lenders should take the steps listed below 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/E-Tran Terms and Conditions 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 and/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
and/or non-disturbance agreement.
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2. Obtain a Current Lien Search
Obtain a current title report or UCC search to verify the priority of the lien(s) securing
the 7(a) Loan.
3. Contact the Landlord
If the collateral is located on leased premises, contact the landlord to determine whether
the rent is past due.
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 7(a) 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 and/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 entity with the appropriate qualifications.
b. Real Property
If the Loan is secured and the collateral includes real property, hire a qualified
appraiser to conduct an Appraisal of the property.
Note: See the definition of "Appraisal" in Chapter 2 of this SOP for SBA requirements
pertaining to appraisals.
C. Lender Site Visit Objectives
During a post-Default site visit, Lenders should make a good faith effort 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
$10,000 or more.
2. Establish the Recoverable Value of the Collateral
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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.
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, and/or who are paying rent that can be
collected and applied against the 7(a) 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 of this SOP.
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 19 of this SOP for guidance on conducting 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 of this SOP for guidance 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 possible,
without creating a "breach of the peace.” If a Lender cannot repossess the collateral
without a “breach of the peace," the Lender should consult their 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, and/or transport personal property
collateral to a secure, temperature-controlled storage facility pending a foreclosure
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sale.
b. Insurance
Purchase or maintain appropriate insurance coverage, such as for hazard or general
public liability, pursuant to the requirements in Chapter 9 (Insurance Coverage) of
this SOP.
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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Workouts
Chapter 17. Workouts
A. Lender Workout Overview
The term “workout” refers to the Loan collection and negotiation process as well as the final
plan agreed upon by a Lender and Borrower to “workout” or resolve the problems and/or
issues involving the Borrower’s delinquent obligations on an 7(a) Loan. Generally, a
workout agreement materially restructures the terms and conditions of a Borrower’s
delinquent 7(a) Loan in order to: avoid the need for actions such as foreclosure or
bankruptcy; enable the Borrower to cure Defaults and improve repayment ability; and enable
the Lender to maximize recovery on the Loan. Because a workout agreement materially
alters the terms and conditions of the Loan, the Loan will need to be purchased from the
secondary market investor before a formal workout agreement is executed. Whenever
feasible, Lenders must make a good faith effort to negotiate a workout on a 7(a) Loan that is
seriously delinquent or classified in liquidation.
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 to making Prudent Servicing decisions regarding
the feasibility and structure of an 7(a) Loan workout agreement. Lenders should not pursue
workout negotiations if the Obligors are unwilling to provide the following basic
information:
1. Financial Statements
a. A current financial statement signed under penalty of perjury showing the assets,
liabilities, income and expenses, e.g., SBA Form 770 (Financial Statement of Debtor)
of all Obligors.
b. The Borrower’s last year-end financial statements including accounts receivable
aging and debt schedules; and
c. Affiliates—If the Borrower and/or Guarantors have any affiliates, a current financial
statement for each affiliate;
2. Business Federal Income Tax Returns
A complete copy of the Borrower and each affiliate’s business federal income tax returns
that were filed with the IRS for the most recent two years, or a written explanation as to
why a copy is not available; and
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3. Personal Federal Income Tax Returns
A complete copy of the personal federal income tax returns that each Obligor filed with
the IRS for the most recent two years, or a written explanation as to why a copy is not
available.
Note: Obtaining current financial statements at this stage is critical. Not only are they
needed to make Prudent Servicing 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 liquidation proceedings
become necessary.
C. Workout Feasibility Test
To determine whether a Borrower is a good candidate for the workout process, in addition to
reviewing the existing Loan Documents, Lenders should review the new financial
information required by Paragraph B above, conduct a site visit or document the file as to
why a site visit is not 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
and 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. Workout Timing
If a workout is feasible, Lenders should begin negotiations immediately in order to put a final
workout plan 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 Lender should move forward with its
plan for enforced debt collection.
E. Workout Requirement—New Consideration from Obligors
Obligors must provide consideration (i.e., something of value) to the Lender before or at the
same time the Obligors receive the benefit of a workout agreement, to make the agreement
legally binding. For example, in exchange for an agreement to forbear or restructure a Loan,
Lenders should generally require Obligors 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 for bankruptcy protection.
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F. Workout Options
The elements of a plan to work out the problems of an 7(a) Loan will vary depending on the
circumstances. Lenders must document their final decisions and the justification for them in
their Loan File. Lenders should support their decisions with a credit memo that includes a
cash flow and collateral liquidation analysis based on the Obligors' financial information
specified in Paragraph B of this Chapter. The most common workout options are listed
below.
1. Forbearance
Lenders may postpone liquidation actions for a stated period of time, to allow the
Borrower or Obligors to improve their financial ability to perform under a proposed
workout plan.
2. Reinstate or Extend Maturity Date
If the Lender has accelerated the Note, the Lender may reinstate or extend the maturity
date of the Note. (See Chapter 7 of this SOP for guidance on maturity date extensions.)
3. Loan Payment Deferment
Lenders may defer delinquent and future payments of principal and/or interest for a stated
period of time to enable the Borrower to overcome a temporary cash flow problem. (See
Chapter 12 of this SOP for guidance on deferments.)
4. Modification of Note Repayment Terms
Lenders may modify the repayment terms of the Note (e.g., reduce the payment amount
and/or interest rate or extend the maturity date). See Chapter 7 of this SOP for guidance
on Note modifications.
5. Assumption of Loan
Another Person may assume the Loan. (See Chapter 11 of this SOP for additional
guidance on Loan assumptions.)
6. Subordination to Working Capital Loan
Lenders may subordinate the lien securing a 7(a) Loan to a short-term working capital
loan. (See Chapter 8 of this SOP for guidance on subordinations.)
7. Relief For Secured Senior Loan
Lenders may advance funds to keep a loan secured by a senior lien on the collateral for
a 7(a) Loan current, or purchase or pay off the senior loan. (See Chapter 13 of this SOP
for additional guidance on the handling of delinquent senior liens.)
8. Voluntary Sale of Collateral
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Lenders may allow the Obligors to sell all or part of the collateral securing a 7(a) Loan;
provided that the sale is closely monitored to ensure that it is commercially reasonable,
and all net proceeds from the sale are applied to the principal balance of the 7(a) Loan or
used to facilitate the workout plan. See Chapter 18 (Real Property Collateral Liquidation)
and Chapter 19 (Personal Property Collateral Liquidation) of this SOP for guidance on
the voluntary sale of collateral.
Note: Lenders must follow SBA’s offer in compromise procedures to reduce the
principal and/or accrued interest owed on an 7(a) Loan. (See Chapter 21 of this SOP
for additional guidance, including offers in compromise from going concern
businesses.)
G. Workout Agreement Provisions
Lenders must ensure that all workout agreements are in writing and include the following, as
applicable:
1. A list of the Borrower’s events of Default to date;
2. The consideration given for entering into the agreement;
3. Confirmation of the collateral for the 7(a) Loan, including the priority of each lien against
the property;
4. An acknowledgement that neither SBA nor the Lender 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 above;
7. The events that constitute a default under the workout agreement including the dates by
which the Lender and Obligor(s) must perform the obligations stated in the workout
agreement;
8. 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; and
9. The signatures of the Lender and all Obligors for the workout agreement. Lenders must
provide SBA with a fully executed workout agreement with any request to extend SBA’s
Prudent Liquidation Deadline after guaranty purchase (see Chapter 24 Paragraph F of
this SOP for additional guidance).
H. SBA Approval of Lender Workout Plans
SBA’s prior written approval of a workout plan is not required unless the plan includes a
compromise of the principal loan balance or some other Loan Action that requires SBA’s
prior written approval. (See Chapter 3 of this SOP for a list of Loan Actions that require
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SBA’s prior written approval.)
Note: A workout is not an exception to policy.
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Real Property Collateral Liquidation
Chapter 18. Real Property Collateral Liquidation
A. General Requirements
Lenders should liquidate all collateral for an 7(a) Loan that has Recoverable Value. Lenders
must liquidate real property collateral that has an individual parcel or aggregate Recoverable
Value of $10,000 or more unless doing so would create a Financial Hardship (see Chapter 2
of this SOP for the definition of Financial Hardship). The most common methods of
liquidating real property collateral are discussed below.
B. Procedure for Selecting Best Method of Liquidation
Lenders must liquidate real property collateral in a manner that will maximize recovery for
the Loan in the shortest amount of time. Numerous factors influence which liquidation
method is most appropriate. These factors include the following:
1. Military Service Status of Property Owner-Obligor
Lenders must determine whether the property owner-Obligor is in active military service.
If so, the Lender must consult with its legal counsel regarding the implications of the
Servicemembers Civil Relief Act prior to initiating a lien foreclosure action.
2. Use of the Property
How the property is used may trigger special requirements. For example, if the property
is used as an Obligor’s primary residence, the requirements set forth in Subparagraph
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. See 13 C.F.R. §120 550 et seq. and the
Consolidated Farm and Rural Development Act for additional information on farmer
homestead rights. Finally, while SOP 50 10 Loan origination policy generally prohibits
restrictive covenants, if the property is used to operate a gas station, a major oil company
may have special rights with regard to notice of Default, the right of first refusal, and/or
the ability to control future ownership and/or use of the property. Therefore, Lenders
must review all title reports before taking any specific action.
3. Loan Document Review
Lenders must review the Loan Documents to determine which methods of liquidation
are available. For example, a mortgage must be judicially foreclosed in most states, while
a deed of trust may be foreclosed through either judicial or non-judicial proceedings.
4. Title Report
Lenders should 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. Amount Owed on Senior Liens
Lenders must determine the amount owed, including unsubordinated advances and
Default Charges, on any debt secured by a senior lien against the property, and deduct
that amount from the property’s estimated Recoverable Value. If it still appears that the
property will have a Recoverable Value of $10,000 or more, proceed to step 6. If not, see
Paragraph F of this Chapter regarding abandonment.
6. Title Encumbrances
After deducting the amount of debt secured by senior liens, if the collateral still has
Recoverable Value of $10,000 or more, Lenders must consider the impact, if any, that
each encumbrance would have on the various methods of liquidation and decide how to
handle each encumbrance. For example:
a. Senior Tax Liens
Consider the possibility of further erosion of equity due to late fees and other
penalties, then decide whether to pay delinquent real property taxes or assessments
secured by a senior lien.
b. 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 of this SOP is prudent and commercially
reasonable under the circumstances.
c. Junior Non-tax 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.
d. Junior 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 regarding the amount to apply to the tax lien.
e. Leases
If tenants are leasing the property, determine whether: (1) the lease enhances or
diminishes the Liquidation Value and marketability of the property; (2) a foreclosure
sale will extinguish the lease or whether it will survive and bind the purchaser to the
lease terms; and (3) a Borrower or operating company has leased space to any
business that the Borrower or operating company knows is engaged in any activity
that is illegal under federal, state or local law, or any activity that can reasonably be
determined to support or facilitate an activity that is illegal under federal, state or
local law (such as a marijuana dispensary). If a Borrower or operating company has
leased space to such a business, the Lender must notify the appropriate SBA Loan
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Center as soon as the Lender becomes aware of the lease and advises of the action(s)
the Lender intends to take.
Note: Review subordination, non-disturbance and attornment agreements carefully
since 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. Lenders should consult with their legal counsel for assistance with
review of such agreements.
f. 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
(3) Requesting the court to appoint a receiver to collect the rents could bar a non-
judicial foreclosure action.
g. 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. Hazard Insurance Status
If the property is improved, see Chapter 9 of this SOP for SBA Loan Program
Requirements pertaining to ensuring that all collateral with Recoverable Value is
adequately insured.
8. Appraisal Update
Lenders must order an updated Appraisal to determine the current market value of the
Note: See the definition of "Appraisal" in Chapter 2 of this SOP for SBA guidance
pertaining to Appraisals. Given the inherent conflict of interest, do not rely on an
Appraisal prepared solely 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.
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property;
9. Environmental Risks
When required by Chapter 5 of this SOP, Lenders must conduct an Environmental
Investigation to obtain the information needed to mitigate the risks associated with
liquidating Contaminated collateral.
10. Historic Register Status
If the property could have historical value based on its age, integrity and significance,
Lenders must determine whether it is listed on the National Register of Historic Places
(NRHP). If so, Lenders must determine whether the historic significance of the property
impacts the Recoverable Value of the collateral. If the property is not listed on the NRHP
but may have historic significance such that it may be eligible to be listed on the NRHP,
or is part of an historic district recognized by the NRHP, Lenders should complete further
due diligence by contacting the State Historic Preservation Office (SHPO) where the
property is located to determine the actual historic significance of the property. After
consultation with the SHPO, Lenders must determine if the historic significance impacts
the Recoverable Value of the collateral.
11. Borrower Business Records Review
When it would be prudent to do so, Lenders must review the Borrower's books and records
showing the cash flow related to the operation and use of the property, and verify that the
property and its use do not violate any applicable laws such as those pertaining to zoning
and land use.
12. Anticipated Deficiency Balance of 7(a) Loan
If the recovery from liquidating a single parcel of real property collateral is not enough to
pay the 7(a) Loan in full, Lenders must consult their legal counsel to determine whether
use of a particular method of liquidation, e.g., non-judicial foreclosure or acceptance of
a deed in lieu of foreclosure, would bar collection of the deficiency or foreclosure of any
remaining collateral. Any collateral liquidation action that legally extinguishes a
projected deficiency balance requires SBA's prior written approval. (See Ch. 21 (Offer in
Compromise) of this SOP for additional guidance.)
13. Estimated Liquidation Time and Cost
Lenders must 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. Estimated Net Recovery
Using the information collected in Steps 1-13 above, Lenders should calculate the net
amount that could be recovered by utilizing each viable method of liquidation listed in
Subparagraph C. below, to determine which method will yield the highest possible
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recovery in the shortest period of time.
C. Liquidation Methods
1. Release of Lien for Consideration
See Chapter 8 of this SOP for guidance on the release of liens for consideration.
2. Voluntary Sale of Collateral by Obligor
Lenders may allow an Obligor to conduct a voluntary sale of all or part of the real
property collateral securing an SBA 7(a) Loan provided that:
a. A voluntary sale would maximize recovery on the Loan;
b. The Obligor has possession or control of the collateral;
c. All other lienholders have provided their written consent to the sale;
d. A current Appraisal has been obtained;
Note: See Chapter 2 of this SOP for additional guidance pertaining to "Appraisals”.
Given the inherent conflict of interest, do not rely on an Appraisal prepared solely
for an Obligor or another creditor 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.
e. The Lender has established the Recoverable Value of the collateral;
f. The Lender supervises the sale (or SBA supervises the sale if SBA has taken over
servicing);
g. The costs of sale are reasonable, necessary and customary;
h. The lien securing the 7(a) Loan is only released in exchange for cash in an amount
equal to or greater than the Recoverable Value of the collateral; and
i. All the net proceeds are applied to the principal balance of the 7(a) Loan.
Note: When analyzing whether a proposed compromise amount is adequate, SBA
may consider the extent to which the Obligor's cooperation during the liquidation
process increased the overall recovery for the Loan. (See Chapter 21, Paragraph F of
this SOP for further guidance.)
3. Deed in Lieu of Foreclosure
Real property collateral may be liquidated by accepting a deed in lieu of foreclosure (i.e.,
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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 of
foreclosure must be accompanied by a written agreement executed by all the Obligors
regarding the amount to be applied to the Loan balance once title has been transferred.
Although this procedure may save time and money, it has inherent risks. For example,
accepting a deed in lieu of foreclosure could eliminate the right to collect any deficiency
balance on the Loan. 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 of foreclosure, Lenders should
obtain the advice and assistance of their legal counsel before undertaking this method of
liquidation. Lender approval and acceptance of a deed in lieu of foreclosure action that
extinguishes the legal obligation of any of the Obligors for the deficiency balance of an
7(a) Loan must be undertaken in accordance with the offer in compromise guidance
provided in Chapter 21 of this SOP.
Note: In addition to a foreclosure title policy, trustee sale guarantee, or a litigation
guarantee, most title insurance companies also offer deed in lieu of foreclosure services
that may include a new title commitment report, review of title issues, recording of the
deed in lieu of foreclosure documents, and issuance of a title policy to the Person that
acquires the property from the Lender after the Lender acquires the property via a deed
in lieu of foreclosure action.
4. Lien Foreclosure
a. General
Foreclosure is a legal action taken to acquire title to the property that secures an 7(a)
Loan. Since the state laws pertaining to the foreclosure of mortgages, deeds of trust,
and other types of real property liens vary by state, Lenders should consult their legal
counsel to determine which type of foreclosure action is most appropriate with regard
to a particular Loan. The two primary methods of real property lien foreclosure are
judicial and non-judicial foreclosure.
b. Primary Residences
Unless the Obligor-owner has engaged in fraud, misrepresentation or other financial
misconduct, Lenders should make good faith efforts to reach an agreement to release
the lien on an Obligor’s residence for consideration and compromise the remaining
balance of the 7(a) Loan prior to initiating a foreclosure action against an Obligor's
primary residence. Documentation showing Lender compliance with applicable state
or federal laws requiring mortgage lenders to work with homeowners prior to
foreclosure is considered evidence that a Lender has made a good faith effort to meet
this SBA Loan Program Requirement. (See Chapter 21 of this SOP for guidance on
offers in compromise.)
c. Judicial Foreclosure
Judicial foreclosure requires the filing of a civil legal action against the owner of a
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property that secures a 7(a) Loan.
(1) Advantages
(a) Deficiency judgment obtainable; and
(b) Only one action required to foreclose liens and obtain judgment on the
Note and Guaranties.
(2) Disadvantages
(a) Higher costs and fees than non-judicial foreclosure;
(b) More time-consuming than non-judicial foreclosure; and
(c) The mortgagor and junior lienholders usually have statutory redemption
rights.
d. 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 applicable state statutory provisions
governing non-judicial foreclosure is mandatory. Lenders must obtain SBA’s prior
written approval for any collateral liquidation action that legally extinguishes a
projected deficiency balance for an 7(a) Loan. See Ch. 21 (Offer in Compromise) of
this SOP for additional guidance.
(1) Advantages
(a) Fees and costs are generally lower than judicial foreclosure;
(b) Takes less time than judicial foreclosure; and
(c) The mortgagor and junior lienholders usually do not have statutory
redemption rights.
(2) Disadvantages
(a) Lenders may be unable to obtain a deficiency judgment for the 7(a) Loan
(Lenders should consult their legal counsel for guidance), and
(b) Lenders may need to conduct additional legal actions to evict unlawful
occupants of the property.
5. Collection of Rents
If the Loan Documents include an assignment of rents and tenants are paying rent to an
Obligor, Lenders should consult their legal counsel regarding applicable state law for the
collection of rents pending a foreclosure action. In some cases, Lenders may collect rents
by sending a letter to the tenants. In other cases, Lenders may need to appoint a receiver.
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6. Appointment of Receiver
A receiver is a Person appointed by the court to preserve and protect the collateral in
connection with, or in lieu of, foreclosure. The laws governing receiverships are available
in both federal and state law. Generally, the court will authorize the receiver to take
possession of the property, manage it, collect rents, take any reasonably necessary action
to protect and preserve its value, and liquidate the property. The remedy of a receivership
is often provided in the Loan Documents. State law may also provide separate statutory
grounds for the appointment of a receiver.
a. When Receiverships are Appropriate
The appointment of a receiver is an extraordinary remedy that Lenders should utilize
only when there are no other more viable recovery options. Lenders should use
receiverships only when it is necessary to operate a business to maximize recovery
and/or minimize losses, before the business is sold and/or the collateral is liquidated.
(1) Circumstances where SBA may approve the appointment of a receiver include:
(a) When keeping the business operating as a going concern will enhance the
sale price of the collateral or the business itself. If the business is operating
as a franchise, Lenders must check with the franchisor to determine if they
may temporarily operate during the process of trying to sell the business
to a new franchisee. Generally, the appointment of a receiver is
considered an event of default in the franchise agreement.
(b) For certain types of businesses where required licensure or similar
restrictions prevent the Lender or SBA from temporarily operating the
business, in order to sell it as a going concern and/or sell the collateral
directly. Examples include assisted living facilities and businesses with
live animals as collateral.
(2) Circumstances where SBA may not approve the appointment of a receiver
include:
(a) When the Lender is unable to demonstrate that appointing a receiver will
result in a potential net recovery that exceeds the recovery the Lender
could obtain by liquidating the collateral directly;
(b) When analysis of the information provided by the Lender shows that it
would not be cost-effective to appoint a receiver;
(c) When operating the business by a receiver would expose the Lender and
SBA to a high risk of liability for environmental contamination (e.g., gas
station, dry cleaner, or metal plating facility, etc.).
(d) When the Lender does not have a presence in the area where the business
operates, and it appears that the Lender is hiring a receiver as a substitute
for liquidating the collateral directly; and
(e) When the proposed receiver does not have staff with experience in
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liquidating the types of assets involved in the business and/or is otherwise
unqualified to operate the business.
b. SBA Approval Required
(1) Litigation Plan Required
The appointment of a receiver involves Non-Routine Litigation. Therefore,
Lenders must submit a proposed Litigation Plan to the appropriate SBA Loan
Center for written approval by SBA District Counsel 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
Lenders for expenses related to receiverships that were not approved in writing
and in advance by SBA District Counsel. (See Chapter 22 of this SOP for
guidance on Litigation Plans and Chapter 23 of this SOP for guidance on
Recoverable Expenses.)
(2) Cost Benefit Analysis Required
Prior to seeking SBA approval to appoint a Receiver, Lenders must conduct a
cost/benefit analysis demonstrating how the use of a receiver will maximize
recovery. Lenders must submit a copy of their cost/benefit analysis and all
relevant supporting documentation with their request for SBA approval to
appoint a receiver. The Lender’s cost/benefit analysis must discuss and analyze
all environmental issues, when applicable.
7. Short Sale Approval
A “short sale” is a sale of real property by the owner in which the proceeds from the sale
fall short of the amount owed on the debts secured by the liens on the property. Because
the owner cannot afford to repay the full amount of the secured debt, the secured creditors
agree to release their liens on the property for less than the total amount that would
otherwise be due at closing.
a. Review and Analysis
Lenders should review, analyze and implement Borrower requests for short sales
in accordance with the guidance provided in Chapter 6 of this SOP and below.
b. General Rule
Lenders should not recommend and/or approve a short sale unless:
(1) The net sale proceeds to be received and applied to the 7(a) Loan balance is
equal to or greater than the Recoverable Value of the collateral; and
(2) The Obligor-seller will remain liable for the 7(a) Loan balance, or approval
of the short sale is part of a compromise agreement reached in accordance
with the guidance provided in Chapter 21 of this SOP.
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Note: Some states, e.g., California, have laws that prohibit lienholders from
collecting the deficiency balance of a loan if they consent to a short sale. Lenders
should consult their legal counsel for case-specific information and advice. Any
short sale action that extinguishes the deficiency balance of an 7(a) Loan must
comply with the guidance provided by Chapter 21 of this SOP for offers in
compromise.
c. Required Supporting Documents
Lenders should obtain and review the following Supporting Documents in order
to reach a prudent decision regarding whether to recommend and/or approve a
short sale:
(1) Real estate listing agreement;
(2) Current Appraisal;
Note: See the definition of "Appraisal" in Chapter 2 of this SOP for additional
guidance. Given the inherent conflict of interest, do not rely on an appraisal
prepared solely 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.
(3) Real estate purchase and sale agreement, short sale and all other addenda;
(4) Current title report;
(5) Senior lienholder subordination, inter-creditor and/or other agreement with
any other creditor with a lien against the property;
(6) Transcript of account or functional equivalent for any loan secured by a
senior lien;
(7) Pre-approval letter from the buyer’s lender; and
(8) Draft settlement statement (HUD 1).
d. General Requirements
(1) Fair Sales Price
The sales price must be fair and justified by a current Appraisal;
(2) Consent of All Secured Creditors
All the Obligor-seller’s creditors with a lien on the property must consent to
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the short sale;
(3) 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;
(4) 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 7(a)
Loan by a senior lienholder, subordination, inter-creditor and/or other
agreement;
(5) No Sale Proceeds to Junior Lienholders, Unsecured Creditors or Others
Lenders should not disburse sale proceeds to 1) junior lienholders other than
token amounts, i.e., $500 or less, if necessary for release of lien; 2) unsecured
creditors, or 3) any other Person who does not have a senior lien against the
property, except as provided below with regard to closing costs;
(6) No Credits to Buyer
Since short sale property should be sold in "as is” condition, Lenders should
not provide the buyer with a credit for repairs or any other purpose;
(7) No Unreasonable Closing Costs
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. 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
owed to them, may require conditions for their approval of a short sale. For
example, creditors may condition their approval on increasing the purchase
price, reducing usual and customary sale closing costs such as the amount of
commissions paid to broker/realtors, or receiving substitute collateral for the
deficiency balance of their loan.
(8) Arrangement for Payment of Loan Balance Deficiency
Lenders must make satisfactory arrangements for repayment of the
remaining balance of the 7(a) Loan after the proceeds from a short sale are
applied, including releasing the lien as part of a compromise agreement
reached with the Obligor-seller pursuant to the guidance provided in Chapter
21 of this SOP.
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D. Credit Bids
1. Requirement
Lenders should enter a Credit Bid at all real property lien foreclosure sales initiated to
foreclose a lien securing an 7(a) Loan, whether the sale is judicial or non-judicial.
2. Credit Bid Amount
Lenders must consider the following factors when determining their Credit Bid amount:
(a) Recoverable Value of the property; (b) 7(a) Loan balance; and (c) need for and ability
to collect a deficiency judgment. Lenders should base their Credit Bid amount on the
Recoverable Value of the collateral; however, the Credit Bid should not exceed the 7(a)
Loan balance. Furthermore, Lenders should not bid the entire 7(a) Loan balance if doing
so would eliminate an otherwise collectible deficiency.
E. 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, Lenders may need to commence eviction proceedings. Eviction laws vary by
locality. Lenders should consult their legal counsel to determine the appropriate course of
action.
F. Abandonment
Lenders may abandon the pursuit of recovery from real property collateral if the real property
has insignificant Recoverable Value, i.e., a Recoverable Value of less than $10,000 per
parcel. (See Chapter 5 [Environmental Risk Management] of this SOP for SBA requirements
pertaining to the due diligence required to avoid abandoning collateral based on
unsubstantiated claims that the property is Contaminated, since the presence of Hazardous
Substances may not significantly impair the market value of the acquired collateral.)
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Chapter 19. Personal Property Collateral Liquidation
A. General Requirements
Lenders should liquidate all collateral for an 7(a) Loan that has Recoverable Value. Lenders
must liquidate personal property collateral that has an individual or aggregate Recoverable
Value of $10,000 unless doing so would create a Financial Hardship (see Chapter 2 of this
SOP for the definition of Financial Hardship). The most common methods of liquidating
personal property collateral are discussed below.
B. Procedure for Selecting Best Method of Liquidation
Lenders must liquidate personal property collateral in a manner that maximizes recovery for
an 7(a) Loan in the shortest period of time. The most appropriate method depends on
numerous factors including the following:
1. Military Service Status of Property Owner-Obligor
Lenders must determine whether the property owner-Obligor is on active military duty. If
so, Lenders must consult with their legal counsel regarding the implications of the
Servicemembers Civil Relief Act prior to initiating a lien foreclosure action.
2. Loan Document Review
Lenders must 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 through liquidation. Relevant Loan
Documents include the Loan Authorization/E-Tran Terms and Conditions, and any
security agreement, assignment, marine mortgage, certificate of title, landlord lien
waiver, senior lienholder agreement, subordination agreement, inter-creditor agreement,
deposit account control agreement, and/or lien search.
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
UCC Article 9, 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.
3. Lien Search
Lenders must verify the priority of liens securing and 7(a) Loan by conducting a new lien
search. Lenders should 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, if title is available.
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b. Airplanes
Order a title search (usually through an airplane title service company), from the
Federal Aviation Administration Registry 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.
d. Tax Liens
Contact the appropriate governmental entity (generally the county) to determine the
existence of liens for delinquent taxes that may have priority over the lien securing
the 7(a) Loan and decide whether the delinquent taxes should be paid. If there are
junior IRS liens on the property, ask the IRS for a certificate of discharge or reach an
amicable resolution regarding the amount of funds that should be applied to each IRS
tax lien.
4. Amount Owed on Senior Liens
Lenders must determine the amount owed, including unsubordinated Default Charges,
on any debt secured by a senior lien on the personal property collateral and deduct that
amount from the property’s estimated Liquidation Value. If the property still has an
individual or aggregate Recoverable Value of $10,000 or more, proceed to step 5. If not,
see Paragraph E of this Chapter regarding abandonment.
5. Borrower Business Records Review
If the collateral consists of inventory or accounts, Lenders must 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 Subparagraph
C.5 below for guidance on collecting accounts receivable.
6. Hazard Insurance Status
See Chapter 9 of this SOP for SBA Loan Program Requirements regarding the need to
adequately insure personal property collateral with Recoverable Value.
7. Updated Appraisal
Lenders must order an updated Appraisal to determine the Liquidation Value of personal
property collateral.
In addition, where the liquidation of property of any kind of any Obligor includes the
sale, disposition, and/or other transfer of any kind (whether directly or indirectly) of a
going concern (whether in full or in part) as determined by the SBA in its sole discretion,
the updated Appraisal (and the associated appraisal report) must specifically and
separately include (in addition and without limitation to Chapter 2 Para. A 4 c) the
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appraiser’s opinion as to the value of the going concern as a whole.
Note: See the definition of "Appraisal" in Chapter 2 of this SOP. Given the
inherent conflict of interest, do not rely on an Appraisal prepared solely for an
Obligor or another lender with a lien on the same collateral, and exercise caution if
the Appraisal was prepared by a broker or auctioneer with whom the collateral, if
acquired, will be listed for sale.
8. Environmental Risks
If there are Hazardous Substances located at the Borrower's business premises, Lenders
must follow prudent lending practices in order to minimize the risk and maximize the
recovery for the 7(a) Loan. (See, for example, the Practice Tip at the end of Subparagraph
C.3 below regarding the sale of used Hazardous Substances.) If the collateral includes
equipment associated with a gas station, commercial fueling facility, or dry cleaner,
Lenders must comply with the requirements in Chapter 5 (Environmental Risk
Management) of this SOP.
9. Estimated Liquidation Time and Cost
Lenders must estimate the time and costs associated with each viable method of
liquidation. This includes repossession or replevin; pre-liquidation collateral care and
preservation; the liquidation action; and post-liquidation care, preservation and resale if
acquiring title to the collateral is anticipated. For example, a Lender who intends to
initiate a marine mortgage foreclosure action should consider the possibility that it will
need to purchase the vessel at a U.S. Marshal’s sale.
10. Estimated Net Recovery
Using the information collected in Steps 1-9 above, Lenders should calculate the net
amount that could be recovered by utilizing each viable method of liquidation listed in
Subparagraph C. below, to determine which method will yield the highest possible
recovery in the shortest period of time.
C. Liquidation Methods
1. Release of Lien for Consideration
See Chapter 8 of this SOP for guidance on the release of liens for consideration.
2. Voluntary Sale of Collateral by Obligor
Lenders may allow an Obligor to conduct a voluntary sale of all or part of the personal
property collateral securing an 7(a) Loan provided that:
a. A voluntary sale would maximize recovery on the Loan;
b. The Obligor has possession or control of the collateral;
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c. All other lienholders have provided their written consent to the sale;
d. A current Appraisal has been obtained;
Note: See the definition of "Appraisal" in Chapter 2 of this SOP for Appraisal
guidelines. Given the inherent conflict of interest, do not rely 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 or auctioneer with whom
the collateral, if acquired, will be listed for sale.
e. The Recoverable Value of the collateral has been established;
f. The sale is supervised by the Lender (or appropriate SBA Loan Center if SBA has
taken over servicing);
g. The costs of sale are reasonable, necessary and customary;
h. The lien securing the 7(a) Loan is only released in exchange for cash in an amount
equal to or greater than the Recoverable Value of the collateral; and
i. All the net proceeds are applied to the principal balance of the 7(a) Loan.
3. UCC Sale
Lenders may foreclose liens on business assets such as equipment, inventory or fixtures
created under UCC Article 9 by conducting a UCC sale.
a. Types of UCC Sales
(1) 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 or may not be advertised to the general
public. Although public sales are preferred, a private UCC sale may be
conducted if doing so maximizes recovery for the 7(a) Loan. However, a 7(a)
Lender cannot conduct a private sale under UCC Article 9 to sell the business
as a going concern (including all machinery & equipment, inventory or fixtures,
general intangibles, account receivables, trade fixtures, accounts and chattel
paper) without obtaining a going concern appraisal for the business.
(2) Public Sale
A public UCC sale is open to the general public, occurs at a pre-appointed time
and place, and is widely advertised. Lenders are encouraged to use widely
advertised public UCC sales.
(a) Auction or Retail Sale
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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 lowered. Retail sales are often followed by a public
auction of any remaining collateral.
(b) 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 place and
time. A sealed bid sale differs from a public auction in that it does not allow
for interaction between competing bidders.
b. UCC Sale Requirements
(1) Possession of the Collateral
UCC Article 9 § 609 permits secured creditors to repossess collateral without
creating a "breach of the peace." If this is not possible, Lenders should consult
their legal counsel to determine whether litigation, such as a replevin action, is
an appropriate and cost effective method to obtain possession of the collateral.
(2) Reasonable Notice of the Sale
Lenders must send a reasonable notice of the sale to all Obligors and junior
lienholders, unless the collateral is perishable or sold in a recognized market
such as the New York Stock Exchange. (UCC § 9-611) Lenders should send
the notice of sale to all the Obligors and junior lienholders at least ten calendar
days prior to the sale, to ensure compliance with UCC requirements. Lenders
should document the Loan File with a copy of: (1) the post-Default UCC lien
search verifying the priority of the lien securing the 7(a) 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.
(3) 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:
(a) Post-default inventory and Appraisal of the sold property;
(b) UCC sale brochure and advertisements; and
(c) Final accounting for the sale, which includes the gross amount of proceeds,
an itemized list of expenses (including how they were calculated), and the
net amount recovered.
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Note: A good auction company will keep detailed records of the sale
including a list of registered bidders, the name of each buyer, and the
amount paid for each item.
c. UCC 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. (See UCC § 9-610 for additional information.)
d. Practice Tips
(1) How to Choose an Auction Company
Lenders should consider the following when choosing an auction company:
(a) Is it bonded? Does it have adequate insurance and the necessary licenses,
including a dealer’s license if the sale will include titled motor vehicles?
(b) Is it knowledgeable about the type of collateral that will be sold?
(c) Does it have experience attracting the appropriate customers for the type
of property involved?
(d) Does it have a good reputation in the area? Reference checks?
(e) 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?
(f) Can the auction company perform all of the duties associated with the
auction? For example, can it manage the pre-sale preparation and
inspection, the advertising, removal, and clean-up? And, most
importantly, can it provide an accurate record of all aspects of the sale?
(g) Is the proposed fee arrangement reasonable, necessary and customary?
When possible, Lenders should request and compare proposals from
several companies and scrutinize the costs, particularly the advertising
budget. Adequate advertising is essential for a successful auction and an
unusually low advertising budgets may be a cause for concern. If the
company is paid on a commission basis, 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 also 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.
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(2) Leased Equipment
If the UCC search reveals that a valuable piece of equipment is leased,
determine the residual amount owed on the lease and pay it off if doing so
would (1) allow inclusion of the equipment in the UCC sale, (2) attract more
potential buyers to the sale, and (3) maximize recovery for the Loan.
(3) 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 by pro-rating and sharing the costs with the other creditor,
and (3) maximize recovery for the Loan.
(4) Hazardous Substances
If the collateral includes Hazardous Substances such as used chemicals,
batteries or tires, ascertain whether there is a market for the Hazardous
Substances. If so, encourage the Borrower to sell the Hazardous Substances
and apply the net proceeds to the principal balance of the 7(a) Loan. (See
Chapter 8 of this SOP for guidance on the release of liens for consideration.
See EPA's website for a list of companies that purchase reusable hazardous
waste.)
4. Judicial Foreclosure
Although the self-help remedies authorized by the UCC are more economical and
efficient, filing a civil legal action to foreclose personal property liens is an option. 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, judicially
foreclosing both the real and personal property liens in the same action may be
appropriate.
5. Collection of Accounts Receivable
When an 7(a) Loan is secured by a lien on accounts receivable, Lenders should determine
whether the pledged accounts have Recoverable Value as soon as possible after an event
of Default. Thereafter, Lenders must take swift, aggressive action to collect any accounts
with Recoverable Value in a manner that is consistent with applicable law.
a. Collection by Borrower
The Borrower, who is liable for any deficiency balance on the 7(a) Loan, is best able
to handle disputed claims on their accounts. Lenders may allow Borrowers to collect
accounts receivable provided that precautions are taken to ensure that the proceeds
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are applied to the 7(a) Loan balance.
b. Collection by Lender
In order to protect the right to a deficiency judgment, when it appears that further
collection efforts by the Lender (or SBA if SBA has taken over servicing) would be
futile, Lenders should provide the Obligors with written notice of the intent to cease
collection efforts and give the Obligors the opportunity to pursue collection of the
remaining accounts, provided that the proceeds are applied to the 7(a) Loan balance.
c. Collection of Foreign Accounts Receivable
When collateral includes foreign accounts receivable, as is commonly the case with
EWCP Loans, Lenders must make demand for payment on the foreign accounts
receivable. Lenders must also pursue collection from any domestic risk mitigation
sources such as export credit insurance or international letters of credit. When all cost
effective domestic-based efforts to collect foreign accounts receivable are exhausted,
Lenders are not required to enforce collection from the Borrower’s foreign customers
outside of the United States. After documenting the Loan File for their actions,
Lenders may treat the outstanding balances of foreign accounts receivable as
uncollectable with no Recoverable Value.
6. Set-off of Deposit Account
When a 7(a) Loan is secured by a lien on a deposit account, on the occurrence of an event
of default, Lenders 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
7(a) Loan balance.
7. 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 7(a) Loan and a deficiency exists after all of the other collateral has been liquidated,
Lenders should surrender the policy to the insurance company for the cash value and
apply the proceeds to the principal balance of the Loan unless, under the circumstances,
it would be more prudent to keep the coverage in place even if it requires advancing funds
to pay the premiums. Premium payments, if made by the Lender or SBA are treated as
Recoverable Expenses. (See Chapter 23 of this SOP for guidance on Recoverable
Expenses.)
8. Foreclosure of Lien on Fixtures
Lenders may foreclose a lien on fixtures pursuant to UCC Article 9 or applicable real
property foreclosure law. (UCC § 9-604) (See Subparagraph C.3 above for guidance on
UCC sales, and Chapter 18 of this SOP for guidance on real property lien foreclosure.)
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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)
9. Marine Mortgage Foreclosure
Lenders may foreclose a marine mortgage on a documented vessel by filing an admiralty
action in the appropriate federal district court, which will issue a warrant for the arrest of
the vessel.
D. Credit Bids
1. Non-judicial Foreclosure Sales
Lenders must aggressively advertise non-judicial personal property lien foreclosure
sales, e.g., UCC sales, in order to obtain the highest price and avoid acquiring title to the
property. Unless the collateral has a high estimated Recoverable Value (e.g., state of the
art 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
Lenders must enter a Credit Bid when a personal property lien securing a 7(a) Loan is
judicially foreclosed. Lenders must consider the following factors when determining the
amount of a Credit Bid: (a) Recoverable Value of the personal property collateral; (b)
7(a) Loan balance; and (c) need for and ability to collect a deficiency judgment. Lenders
should base the Credit Bid amount on the Recoverable Value of the collateral; however,
the Credit Bid should not exceed the Loan balance. Furthermore, Lenders should not bid
the entire 7(a) Loan balance if doing so would eliminate an otherwise collectible
deficiency.
E. Abandonment
Lenders may abandon the pursuit of recovery from personal property collateral, including
vehicles, if the property has insignificant Recoverable Value, i.e., the individual or aggregate
Recoverable Value is less than $10,000. Lenders must document their decision and
justification for abandoning collateral, including the basis for the Recoverable Value
estimate, in their Loan File. (See Chapter 5 [Environmental Risk Management] of this SOP
for SBA requirements pertaining to the due diligence required to avoid abandoning collateral
based on unsubstantiated claims that it is Contaminated, since the presence of Hazardous
Substances may not significantly impair the market value of the collateral.)
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Acquired Collateral
Chapter 20. Acquired Collateral
A. General Requirements
Certain methods of liquidation may result in the acquisition of real property collateral ("Real
Estate Owned" or "REO") or personal property collateral. When collateral is acquired,
Lenders should liquidate it in a manner that will maximize recovery in the shortest period of
time.
B. Acquiring Title to Collateral
1. General SBA Policy and Requirements
a. Lenders should not acquire title to collateral unless it is necessary to maximize
recovery for a 7(a) Loan.
b. To avoid acquisition, Lenders should aggressively advertise foreclosure sales in order
to attract a large number of potential buyers.
c. Lenders must not take title to collateral in SBA's name without obtaining SBA's prior
written approval. (13 C.F.R. 120.536(a)(4))
d. When approved by SBA, Lenders should state SBA's ownership of acquired
collateral on the title as follows: "Administrator, U.S. Small Business Administration,
an Agency of the United States Government."
2. Real Property
a. Lenders that anticipate reselling REO within 120 calendar days should take title in
their own name. Because the Federal Government is exempt from paying future
property taxes, Lenders that anticipate resale to take more than 120 calendar days
should consult the appropriate SBA Loan Center about taking title in SBA's name.
b. Lenders must not take title to Contaminated property in their own name—or SBA's
name—without SBA's prior written approval. (13 C.F.R. 120.536(a)(5)) (See Chapter
5 (Environmental Risk Management) of this SOP.)
3. Personal Property
Lenders should rarely, if ever, take title to personal property collateral in SBA's name,
and must not take title in SBA’s name without SBA’s prior written approval.
C. Ownership Responsibilities
Lenders should take the following actions upon acquiring title to real or personal property
collateral:
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1. Possession and Control
a. Take possession of the acquired collateral;
b. Change the locks immediately on vacant, improved REO. 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
Upon taking title to real or personal property collateral, lenders must credit the 7(a)
Loan(s) for the value of the acquired collateral, based on the foreclosure laws of the
jurisdiction in which the property is located, and set up a new file in order to keep all
accounting records associated with the acquired collateral, e.g., holding and resale costs,
separate from the original Loan File. Lenders may not add expenses related to the
acquired collateral to the 7(a) Loan balance. Lenders must share any gain and may share
any loss on the sale of acquired collateral with SBA according to SBA’s participation
interest in the Loan after guaranty purchase. See Chapter 23 of this SOP for additional
guidance on the remittance of recoveries and the submission of requests for
reimbursement of recoverable expenses.
4. Taxes
Monitor and pay taxes and assessments to avoid liens, interest accrual and penalties.
5. Care and Preservation
Lenders should take reasonable steps to prevent deterioration of the acquired collateral,
such as arranging for utility services and essential repairs and maintenance. If the
property is listed on the National Register of Historic Places (NRHP) or has historic
significance such that it may be eligible for listing on the NRHP, or is part of an historic
district recognized by the NRHP, Lenders should consult with their legal counsel and the
appropriate SBA Loan Center to ensure compliance with section 106 of the National
Historic Preservation Act of 1966.
6. Insurance
See Chapter 9 of this SOP for SBA Loan Program Requirements pertaining to insurance
coverage for acquired collateral.
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7. Reporting Requirements
a. SBA Form 297
Lenders should consult with the appropriate SBA Loan Center to complete SBA
Form 297 (Collateral Purchase Report) when REO is acquired in SBA's name; and
b. Ongoing Reporting Duty
Lenders should notify the appropriate SBA Loan Center immediately if there is any
suspected risk of liability associated with the acquired collateral such as the presence
of Hazardous Substances.
D. Expenses
1. General Requirement
Expenses related to acquired collateral must be necessary, reasonable and customary.
2. Payment of Expenses
Lenders should pay the expenses related to acquired collateral and seek reimbursement
from SBA in accordance with the guidance provided in Chapter 23 of this SOP.
3. Recoupment of Expenses
Lenders may recoup necessary, reasonable and customary expenses related to acquired
collateral as follows:
a. General Requirement—SBA Approval
SBA must review and approve any cost, fee or other amount associated with acquired
collateral that a Lender seeks to recoup pursuant to the procedures set out in Chapter
23, Paragraph E of this SOP (Recoverable Expenses).
b. Recoupment Methods
(1) Deduction from Recoveries
Lenders may deduct expenses associated with the acquired collateral from the
acquired collateral sale proceeds.
(2) Reimbursement by SBA
Lenders may request SBA to reimburse any expense that was not deducted from
the acquired collateral sale proceeds.
c. Denied Expense Approval Requests
Lenders must reimburse SBA for the amount of any expense that SBA denies, when
the Lender has already deducted the denied expense from the acquired collateral sale
proceeds. Reconciliation of such expenses occurs when the Lender submits a final
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Wrap-up Report to the appropriate SBA Loan Center. See Chapter 27 of this SOP for
additional guidance on Wrap-up Reports.
E. Timeframe for Disposal
Lenders should dispose of acquired collateral within 12 months of acquisition.
F. Sale
Lenders should make diligent efforts to sell all acquired collateral.
1. Method of Sale
Lenders should attempt to sell acquired collateral by whatever method (e.g., broker's sale,
public auction, sealed bid sale, etc.) that will maximize recovery in the shortest period of
time.
2. Bidding or Acquisition by SBA Official or Lender
SBA officials and Lenders as well as their employees, Close Relatives and Associates
must not, directly or indirectly, bid on, purchase or otherwise take title to acquired
collateral, except pursuant to a written exception to policy in accordance with the
procedures set out in Chapter 1 of this SOP.
3. Transfer of Title and Closing Costs
a. REO—Quitclaim Deed
Lenders should advise buyers that the buyer is responsible for all closing costs, and
that title to the REO will convey by means of a quit claim 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 cost of
title insurance, use of a warranty deed, or payment of the seller's customary share of
the closing costs is necessary to maximize recovery in the shortest period of time.
b. Personal Property—Non-recourse Bill of Sale
Lenders should convey acquired personal property collateral 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."
4. Sales Price
Lenders should base their asking price for acquired collateral on the current appraised
value of the property. (See the definition of “Appraisal" in Chapter 2 of this SOP for
SBA guidelines pertaining to appraisals. See Chapter 5 (Environmental Risk
Management) of this SOP for SBA requirements pertaining to the due diligence that
Lenders must perform before selling acquired collateral for substantially less than its
appraised value due to the alleged presence of Contamination.)
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5. Use of Real Estate Brokers
Lenders may utilize the services of a real estate broker to list REO for sale provided that:
a. The terms of the listing agreement are not inconsistent with this SOP;
b. The listing price is supported by a current Appraisal;
c. The listing broker has a good reputation in the area where the property is located for
selling the type of property involved, 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' commission follow all laws, 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 and/or the Lender.
6. Sale to Obligors, Associates or Close Relatives of the Borrower
Lenders should not sell acquired collateral to Obligors, Close Relatives of Obligors, or
Associates of the Borrower for less than the full appraised value of the property unless it
is necessary to maximize recovery in the shortest period of time, and the following
conditions are met:
a. A comprehensive public foreclosure sale of the collateral is/was held;
b. A good faith effort is/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 Obligor
will continue to use the REO as the Obligor’s primary residence; and
f. The sale will not harm the integrity of the 7(a) Loan program. (See Chapter 3,
Paragraph C.3.d. and e. of this SOP for additional guidance regarding Loan Actions
that require SBA’s prior written approval.)
7. Purchase Offers
Lenders must handle all offers to purchase acquired collateral as follows:
a. Require all offerors to submit their offer in writing signed by the party making the
offer, along with a good faith deposit in the form of a cashier’s check for at least five
percent of the purchase price;
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b. Lenders must not disclose the offers they receive to other prospective purchasers or
their agents; and
c. Lenders must review and analyze all offers based on the sales efforts to date and the
value of the property established by a current Appraisal.
8. Term Sales
a. When Permitted
Lenders should not sell acquired collateral by means of a term sale unless doing so is
necessary to maximize recovery.
b. Buyer Pre-qualification
Lenders must pre-approve potential purchasers buying on credit.
c. Terms of Purchase and Sale
With regard to all term sales, Lenders must require purchasers to:
(1) Make a down payment of at least 20 percent;
(2) Properly execute a promissory note for the balance of the agreed upon
purchase price, which (a) is assignable; (b) has a maturity date that does not
exceed 15 years for REO or 5 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
Lender (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 the law varies from state to state, Lenders should consult with their legal counsel
to determine whether there are any state specific laws governing the distribution of a
surplus from the sale of acquired collateral. Lenders must remit any surplus to the
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appropriate SBA Loan Center along with a written explanation for how the surplus was
created and a recommendation, based on applicable law, for how to distribute the surplus
funds, e.g., retain by SBA, pay into the registry of the court, or distribute to junior
lienholders.
G. Lease
Generally, Lenders should not lease acquired collateral. However, if the property has not
sold after a reasonable period of time (e.g., one year), Lenders may lease acquired collateral
if doing so is necessary to maximize recovery in the shortest period of time, provided that:
1. A comprehensive public foreclosure sale of the collateral was held;
2. A good faith effort was made to sell the acquired collateral;
3. The terms and conditions of the lease, including the rental rate, are consistent with
prevailing market rates and terms;
4. A written lease is used, which is legally enforceable, assignable, allows the Lender to
show the acquired collateral to prospective buyers, and can be terminated upon
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 Small Business unless a comparable or more financially beneficial
proposal is unavailable;
6. Leasing the acquired collateral will not harm the integrity of the 7(a) Loan program; and
7. Lender inspects the leased property at least semi-annually and the inspection findings are
included in the Lender's semi-annual status report on the Loan.
H. Abandonment
Lenders must not abandon acquired collateral (including REO) without SBA’s prior written
approval as an exception to policy in accordance with the procedures set out in Chapter 1 of
this SOP.
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Offer in Compromise
Chapter 21. Offer in Compromise
A. Offer in Compromise 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 7(a) Loan. Submitting an offer does
not ensure that a Lender or SBA will accept it. Rather, it begins a process of evaluation
and verification by the Lender and SBA. Generally, SBA will accept an offer in
compromise if it reflects the Obligor’s true ability to pay. SBA will reject an offer 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 7(a) Loan program.
2. Legal Authority
The general requirements for compromise of a debt owed on an 7(a) Loan are based on
31 U.S.C. §3711 and 31 C.F.R. Part 902 et seq. (Standards for the compromise of claims
- by an agency of the federal government).
3. Effect of Compromise with One Obligor on the Obligations of Remaining Obligors
A compromise with one Obligor does not release the obligations of the remaining
Obligors since each Obligor is jointly and severally liable for the 7(a) Loan they promise
to pay or personally guarantee, i.e., Lenders may request full payment from one or all the
Obligors. Lenders should make no attempt to divide payment responsibility between the
Obligors or use the compromise amount with one Obligor as the basis for the compromise
amount required from another. (31 C.F.R. 902.4)
4. Finality of Compromise Action
An offer in compromise that is approved by SBA in writing is final and conclusive on
the Obligor, SBA and the Lender unless it was obtained through fraud, misrepresentation,
or mutual mistake of fact.
Note: Lenders must advise Obligors that acceptance of a compromise offer is
considered a loss to the Federal Government, which may adversely impact the
Obligor’s ability to obtain future financing from the Federal Government including
another 7(a) Loan. Lenders should also advise Obligors that acceptance of a
compromise offer could have tax consequences that the Obligor may want to consider.
B. When Compromise is Appropriate
1. Business Closed
Compromise with an Obligor is appropriate after the business has been closed and all the
collateral has been liquidated.
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Exception—Obligor’s Personal Residence
As required by Chapter 18 of this SOP, before foreclosing a lien on an Obligor’s personal
residence, Lenders should make a good faith effort to negotiate a release of the lien for
consideration and reach a compromise agreement regarding the amount the Obligor owes
on their 7(a) Loan.
2. Going Concern
Compromising with a going concern business is only appropriate when the viability of
the business is at stake and acceptance of the offer will not harm the integrity of the 7(a)
Loan program. (See Paragraph D of this Chapter for detailed guidance on compromising
with a going concern.) Lenders must not use the offer in compromise process as a means
to write down the debt of a business that is experiencing temporary cash flow problems.
(See Chapters 8 through 17 of this SOP for guidance on tools Lenders may use to resolve
temporary cash flow problems such as re-amortization and/or deferment of Loan
payments, or a Loan workout.)
3. Prior to Non-Judicial Foreclosure or Deed in Lieu of Foreclosure
When any deed in lieu of foreclosure or non-judicial foreclosure action will legally
extinguish the remaining balance of an 7(a) Loan, Lenders must review and analyze such
actions in accordance with the compromise guidelines provided in this Chapter 21.
C. General Compromise Requirements
The general requirements for compromising a debt owed on a 7(a) Loan are as follows:
1. Lenders should classify the Loan in liquidation status;
2. The Person making the offer must not currently be in bankruptcy, unless the bankruptcy
court has permitted the compromise action;
3. The full amount owed on the Loan cannot be recovered because:
a. The Obligor is unable to pay it in a reasonable period of time;
b. It cannot be collected through legal proceedings within a reasonable period of time;
c. The projected cost of collection exceeds the projected recovery;
d. There is significant litigative risk, i.e., the likelihood of not prevailing in court due to
legal issues or factual disputes;
e. Given the Obligor’s special circumstances (e.g., illness), paying it would cause a
Financial Hardship.
4. Collection of the Loan balance is not barred by a valid legal defense such as discharge in
bankruptcy or the statute of limitations;
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5. The Obligor has not engaged in fraud, misrepresentation or other financial misconduct;
and
6. The compromise amount bears a reasonable relationship to the amount that the Lender
or SBA could recover in a reasonable period of time through legal collection proceedings
and is sufficient to protect the integrity of the 7(a) Loan program.
Note: Obligors do not have a “right to compromise” the amount owed on their 7(a) Loan.
In order to protect the integrity of the 7(a) Loan program, SBA will refer Obligors to
Treasury for further collection actions rather than enter into a compromise agreement for a
nominal amount relative to the amount owed on an 7(a) Loan. (31C.F.R. §902.2(e)) (See
Chapter 27, Paragraph D of this SOP for more information on SBA’s referral of Loans to
Treasury for further collection.)
D. Compromise with a Going Concern Business
In addition to the general requirements in Paragraph C above, the following guidance applies
to compromise offers from going concern businesses:
1. The compromise must be necessary to avoid closure of the business, i.e., the business
must not be able to continue operating under its current debt structure and the Lender
must have exhausted all other options to allow the business to remain viable including
the sale of non-essential assets and the closure of non-profitable business segments or
locations;
2. The Lender must show that the Borrower passes the feasibility test for a successful
workout set forth in Chapter 17 of this SOP.
3. The Borrower and Lender must show that the compromise is part of an overall debt
restructuring plan that involves all the Borrower’s creditors. A detailed list of creditors,
current balances, and contact information is required.
4. The Lender must provide specific details regarding all the Borrower’s secured and
unsecured debt and the Borrower must provide the debt reduction arrangements it has
made with each of its other creditors, in a written agreement signed by all the Borrower’s
creditors; and
5. The Borrower’s proposed treatment of the 7(a) Loan must be fair and equitable in
comparison to the treatment to be received by the Borrower’s other creditors, including
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 asset appreciation sharing agreement. The lender must show why the
going concern compromise will maximize recovery.
E. Compromise Offer and Supporting Documents
Unless the basis for compromise is litigative risk, Lenders must require each Obligor
submitting an offer in compromise to provide the following documents:
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1. Written Offer
A signed written offer that must 1) refer to the penalties under 18 U.S.C. §1001 for false
statements, 2) identify the source of the funds for the offer, e.g., SBA Form 1150 (Offer
in Compromise), and 3) explain any special circumstances that the Obligor would like
taken into consideration, such as an illness that is causing Financial Hardship (see
Chapter 2 of this SOP for the definition of Financial Hardship);
2. Financial Statements
A current financial statement, signed under penalty of perjury, showing the Obligor's
assets, liabilities, income and expenses, e.g., SBA Form 770 (Financial Statement of
Debtor). In addition:
a. Going Concern Businesses—If the 7(a) Loan Borrower is a going concern business,
the Obligor submitting an offer must also provide the most recent year- end financial
statements for the business.
b. Affiliates—If the Obligor submitting an offer has any affiliates, the Obligor must
provide a current financial statement for each affiliate.
3. Personal Federal Income Tax Returns
A complete copy of the personal federal income tax returns the Obligor filed with the
IRS for the most recent two years, or a written explanation as to why a copy is not
available, together with an executed IRS Form 4506-C or Form 8821 (Request for
Transcript of Tax Return); and
4. Business Federal Income Tax Returns
If the offeror is a going concern business, the Borrower must provide complete copies of
the federal income tax returns for the business and any affiliates that were filed with the
IRS for the most recent two years, or a written explanation as to why a copy is not
available, together with an executed IRS Form 4506-C or Form 8821 (Request for
Transcript of Tax Return).
F. Review and Analysis of Offer in Compromise
To determine whether an offer in compromise is acceptable, Lenders must make a good faith
effort to verify the accuracy of the financial disclosure submitted by each Obligor making an
offer, to evaluate the adequacy of the amount offered.
1. Corroborating Evidence
Lenders must obtain independent financial information to determine whether the
financial information submitted by an Obligor making an offer is complete and accurate.
At a minimum, this should include a current credit report. (31 C.F.R. §902.2)
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2. Adequacy of Financial Disclosure
At a minimum, Lenders must compare the financial information an Obligor submitted
with the original Loan application, and any subsequent financial disclosures, to the
financial information the Obligor submits with the offer to compromise their
obligation(s) for the Loan. Lenders must investigate and explain any major discrepancies.
For example, Lenders should investigate concerns about the accuracy of tax returns
submitted with an offer in compromise by ordering and comparing the tax returns to IRS
transcripts for the same tax years. Lenders should document all their efforts to establish
the validity of the Obligor's current financial information in their Loan File.
3. Amount Recoverable Through Legally Enforced Collection Actions
Lenders must perform an analysis to determine the amount that could be recovered from
the Obligor in a reasonable period of time through enforced legal collection proceedings.
Lenders should, for example, take the following factors into consideration:
a. Recoverable Value of any collateral for the Loan that the Lender has not already
liquidated (e.g., the Obligor’s personal residence);
b. Exemptions available under state and federal law;
c. Amount that the Lender could recover from the offeror’s non-exempt assets that were
not pledged as collateral, through legally enforced collection proceedings, e.g., by
obtaining a judgment and attaching/executing it to achieve a recovery from the other
assets an offeror may own;
d. Amount of present and potential income that the Lender or SBA could obtain through
enforced collection proceedings, e.g., administrative wage garnishment after referral
to Treasury;
e. Litigative risk, i.e., the likelihood of not prevailing in court due to legal issues or
factual disputes;
f. The necessary, reasonable and customary administrative and litigation expenses the
Lender would incur to enforce collection actions;
g. The time it would take to enforce collection; and
h. The possibility that Obligors have and/or will conceal and/or or fraudulently convey
assets.
4. Adequacy of Proposed Compromise Amount
a. Standard of Review
The compromise amount must bear a reasonable relationship to the amount that the
Lender and SBA could recover in a reasonable period of time through enforced
collection proceedings, and must sufficiently protect the integrity of SBA 7(a) Loan
programs.
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Note: Obligors do not have a “right” to compromise the amount they owe on their
7(a) 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
Lenders should generally consider and submit compromise offers of $5,000 or more.
c. Hardship Exception
Lenders may consider and submit compromise offers of less than $5,000 if a larger
amount would cause Financial Hardship. (See Chapter 2 of this SOP for the definition
of Financial Hardship.)
d. Obligor’s Cooperativeness
When analyzing whether a proposed compromise offer is adequate, Lenders may give
consideration to the extent of an Obligor's cooperation during the liquidation process
to increase the overall recovery for the 7(a) Loan.
G. Inadequate Compromise Offers
1. Counteroffer
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 the Lender and/or SBA could
recover in a reasonable period of time through enforced collection actions, Lenders
should make a good faith effort to increase the offer to an acceptable level by making a
counteroffer.
2. Decline Offer and Refer to Treasury
If the Obligor will not agree to an acceptable compromise amount, Lenders should
decline the offer, complete all other cost-effective liquidation actions, and submit a
Wrap-up Report to SBA to enable SBA to change the status to be classified as SBA
Uncollectible and refer the 7(a) Loan to Treasury for offset and other enforced collection
actions, or charge off the 7(a) Loan if there are no remaining Obligors eligible for referral
to Treasury. (See Chapter 27 of this SOP for additional information.)
Note: Lenders should not forward unacceptable offers and counteroffers to SBA.
See Paragraph I of this Chapter for guidance on when Lenders must submit offers in
compromise to SBA for prior written approval.
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H. Compromise Payment Terms and Conditions
1. Cash Compromise Offers—Preferred
Lenders should encourage offerors to remit compromise offers in a lump sum on a
specified date, within 60 calendar days of the compromise approval date.
2. Term Compromise Offers—If Necessary to Maximize Recovery
Lenders should avoid negotiating compromise offers that are payable in installments over
time unless installment payments are necessary to maximize recovery for a 7(a) Loan. (31
C.F.R. §902.2(f)) If compromise offers are paid in installments:
a. The installment payments should satisfy the debt in three years or less. (This is
incorporated in 31 C.F.R. §901.8(b) – Collection in Installments.)
b. The Lender and offeror must establish the terms of the compromise payments in a
written, legally enforceable document;
c. Lenders must require the offeror(s) to execute a promissory note with a specified
maturity date for the amount due under the compromise agreement;
d. Lenders should require the offeror(s) to provide collateral to secure the promissory
note;
e. The compromise agreement should prohibit the release of collateral securing the
promissory note until the entire compromise amount is paid in full;
f. The compromise agreement must provide that in the event of default, the Lender and
SBA will reinstate and make the full balance of the original 7(a) Loan, less sums paid
the on promissory note, immediately due and payable; and
g. 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 of Compromise Actions
Lenders 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)) Lenders should submit requests for approval to the
appropriate SBA Loan Center utilizing the format set out in the Offer in Compromise (OIC)
Tabs, which is accessible from www.sba.gov/for-lenders. Failure to obtain SBA’s prior
written approval could result in a repair or denial of the guaranty.
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Note: If a compromise involves settlement of litigation involving SBA in conjunction
with the U.S. Attorney’s Office, the U.S. Attorney’s Office must approve and receive
payment for the compromise amount.
J. Completing the Compromise Process
1. After all necessary parties have approved the compromise action, Lenders must take the
following actions: 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 balance of the Loan;
4. Release the appropriate Loan Documents after verifying that the entire compromise
amount has been received; and
5. If the Lender has no legal remedy to collect the Loan balance (e.g., from another Obligor)
after the compromise amount is received, submit a Wrap-up Report to SBA to enable
SBA to change the status to be classified as SBA Uncollectible or charge off.
6. SBA may consider full payment of the outstanding principal balance of a Loan as
payment in full for the Loan, when supported by the analysis required by this Chapter.
In such cases, if the Borrower demonstrates good cause in accordance with 13 CFR
§120.110(q), SBA may exclude the reporting of unpaid accrued interest as a prior loss to
the government.
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Chapter 22. Litigation
This chapter provides guidelines and requirements with regard to conducting litigation activities
and incurring Debt Collection Litigation Expenses for 7(a) Loans. (See also Chapter 3 of this
SOP regarding Lender litigation responsibility and authority.)
A. General Requirements
Litigation involving 7(a) Loans must be:
1. Necessary, Reasonable and Customary for the Locality;
2. Cost Effective;
a. Due Diligence—Any Person conducting litigation to collect a 7(a) Loan must
exercise sufficient due diligence prior to initiating any legal action, to ensure that the
contemplated action is cost-effective.
b. Alternative—After the Lender has liquidated the collateral and determines that there
are no further cost-effective options to collect the deficiency balance of a 7(a) Loan,
the Lender must submit a Wrap-up Report to SBA to enable SBA to change the status
to be classified as SBA Uncollectible and refer the Loan to Treasury for further legally
authorized collection actions, including the use of tools such as federal offset,
administrative wage garnishment, and/or Department of Justice (DOJ) litigation, or
charge off the 7(a) Loan if there are no remaining Obligors eligible for referral to
Treasury. Lenders receive a pro-rata share of the net amount recovered by Treasury.
(See Chapter 27 of this SOP for additional information on Wrap-up Reports and SBA
status change to SBA Uncollectible or charge off.)
3. Conducted in the Name of the Person Responsible for the Litigation
Lenders are not authorized to conduct litigation in SBA's name and must not take any
action in litigation proceedings that SBA is handling, including the filing of a proof of
claim;
B. Legal Counsel Hired by Lenders
Any attorney selected by a Lender to perform litigation on a 7(a) Loan must meet the
following minimum qualifications:
1. Hold an active license to practice law in the state where the litigation will be conducted;
2. Maintain an office and practice regularly in the general locale or judicial district where
the majority of the litigation will occur, unless otherwise pre-approved by SBA;
3. Possess appropriate expertise for the proposed areas of litigation;
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In most cases, the attorney must have expertise in bankruptcy and debt collection. If
complex litigation is necessary, the attorney should have specialized legal expertise and
substantial experience conducting the particular type of proceedings; 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
with prior experience handling gas station receivership cases;
4. Have adequate legal malpractice insurance coverage; and
5. Have no actual or apparent conflict of interest with SBA, the Lender, an Obligor, a
Guarantor, senior lienholder, junior lienholder, landlord, competing creditor, or any other
Person involved in the issues pertaining to the 7(a) Loan.
Note: SBA will not approve fees and expenses for a non-local firm to manage or
oversee a local firm’s litigation activities. If extraordinary circumstances exist, SBA
may pre-approve the use of and reimbursement of a non-local firm to engage the
services of a local firm. The local firm must meet the qualifications required by SBA
to perform the litigation. However, even in such situations, SBA will not approve the
fees and costs of a non-local firm to manage or oversee the services of a local firm.
C. Litigation Plans
1. Litigation Plan Purpose
Lenders must submit a Litigation Plan to the appropriate SBA Loan Center for SBA
District Counsel approval prior to initiating any Non-Routine Litigation on a 7(a) Loan.
Lenders should use the current SBA template or submit identical information.
Although Lenders are not required to submit Litigation Plans for Routine Litigation to
SBA, Lenders should prepare a Litigation Plan for Routine Litigation for their own use
because, when properly and completely prepared, a Litigation Plan helps to ensure that
the litigation is cost-effective, necessary, reasonable and customary. Litigation Plans also
expedite SBA’s review of requests for approval of the Plan and/or reimbursement of Debt
Collection Litigation Expenses if a Non-Routine Litigation Plan becomes necessary. If
prepared, Lenders should keep the Litigation Plan for Routine Litigation in their Loan
File.
Note: Lenders must prepare a Litigation Plan prior to initiating any Non-Routine
Litigation for an 7(a) Loan, even if the Lender anticipates deducting litigation fees
and expenses from the liquidation recoveries for the Loan.
2. Format and Content of Litigation Plan
The template for preparing a Litigation Plan for a 7(a) Loan is accessible from
www.sba.gov/for-lenders. Lenders must include documentation establishing that the
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proposed attorney meets the requirements of Paragraph B above, with their Litigation
Plan. The plan must also include the estimated cost and justification for any expense that
SBA may otherwise deem unreasonable, such as costs associated with travel, hiring
multiple law firms, using a non-local firm, or appointing a receiver to perform routine
liquidation activities. (See Subparagraph D.3 of this Chapter for additional guidance on
reasonable legal expenses.)
3. When Lenders Must Submit a Litigation Plan to SBA
a. General Rule
(1) Litigation Plan (13 C.F.R. §120.540(c))
Except as provided in Paragraph C.3.b. below with regard to emergencies, all
Lenders must prepare and submit a Litigation Plan to the appropriate SBA Loan
Center for SBA District or Center Counsel written approval prior to initiating
Non-Routine Litigation. Except for Loans approved under CLP authority,
Lenders are not required to submit a Litigation Plan to SBA prior to initiating
Routine Litigation. For any change in Routine Litigation that elevates a legal
action to Non-Routine Litigation status, e.g., when actual or projected Debt
Collection Litigation Expenses exceed $10,000 in the aggregate, or when the
legal issues are contested, Lenders must submit a Non-Routine Litigation Plan
to SBA. In such cases, Lenders must submit a Non-Routine Litigation Plan to
SBA within thirty (30) days of the litigation becoming non-routine, including
30 days from the date that a legal fee invoice reflects aggregate Debt Collection
Litigation Expenses in excess of $10,000. (See Chapter 2, Paragraph A.12 of
this SOP for the definition of Debt Collection Litigation Expenses.)
Note: As explained in Subparagraph D.2. of this Chapter, SBA will not
reimburse Lenders for legal fees and expenses incurred for Non-Routine
Litigation that were not included and submitted in an initial or amendment to a
Litigation Plan and approved by SBA District Counsel prior to the incurrence
of such fees and expenses, except under the emergency situations set forth
below.
Note: With regard to CLP loans, Lenders should include Routine Litigation in
the Liquidation Plans they are required to submit to SBA for approval by the
appropriate SBA Loan Center. (See Chapter 15 of this SOP for additional
guidance on CLP Liquidation Plan requirements.)
(2) Amendment to Litigation Plan
Lenders must submit an amendment to a Litigation Plan to SBA for approval
by SBA District Counsel prior to taking any legal action or incurring any
expense that materially deviates from the original Litigation Plan. Material
changes include activities that cause actual or projected legal fees to exceed the
previously approved budget by more than 15 percent.
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b. Limited Waiver of Prior SBA Approval for a Litigation Plan or Amendment to a
Litigation Plan (13 C.F.R. §120.540(f))
(1) SBA may in its discretion, and upon written request by a Lender, waive the
requirement for SBA’s prior approval of a Litigation Plan or an amendment to a
Litigation Plan if one of the following extraordinary circumstances exist.
(a) Expeditious action is required to avoid potential risk of loss on the
Loan or the potential for dissipation of collateral;
(b) An immediate response to litigation initiated by a Borrower, Guarantor
or third party is required; or
(c) Another urgent need arises.
(2) A Lender may take legal action to respond under the preceding circumstances
without SBA District Counsel's written approval of a Litigation Plan or
amendment to a Litigation Plan, provided that the Lender:
(a) Makes a good faith effort to obtain SBA District Counsel's written
approval before undertaking the emergency action;
(b) Submits a written Litigation Plan or amendment to a Litigation Plan to
the appropriate SBA Loan Center for SBA District Counsel’s review
and approval as soon as possible after the emergency occurs; and
(c) Takes no further litigation action without SBA District Counsel's
written approval of the Litigation Plan or amendment to a Litigation
Plan.
c. Obtaining SBA Approval of Litigation Plan
Lenders must submit a request for approval of a proposed Litigation Plan or
amendment to a Litigation Plan in writing to the appropriate SBA Loan Center, for
SBA District Counsel approval prior to taking any action contemplated by the
Litigation Plan, except under the emergency situations set forth above.
4. SBA Response Time—No Implied Consent (13 C.F.R. §120.541)
Generally, SBA will respond to Lender requests for approval of proposed Litigation
Plans or amendments to Litigation Plans within 15 business days from the date that SBA
receives the request. However, if a Lender does not receive a response from SBA within
that time frame, it may not conclude that SBA has approved the request.
5. Appeal of SBA District or Center Counsel Decision on Litigation Plan
See Chapter 3 of this SOP for guidance on how to appeal the decision of an SBA District
or Center Counsel regarding a proposed Litigation Plan or amendment to a Litigation Plan.
D. Debt Collection Litigation Expenses
1. Debt Collection Litigation Expenses Covered by SBA Loan Guaranty
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SBA’s Loan guaranty covers Debt Collection Litigation Expenses (e.g., court filing fees,
court reporter and transcription fees) incurred to achieve a recovery for an 7(a) Loan,
which are necessary, reasonable and customary for the locality in which the litigation
proceeding is filed.
2. Debt Collection Litigation Expenses Incurred without a Pre-approved Litigation
Plan
SBA will not reimburse Debt Collection Litigation Expenses incurred for Non-Routine
Litigation if they were not included and submitted in a Litigation Plan or an amendment
to a Litigation Plan and approved by SBA District or Center Counsel prior to the
incurrence of such Debt Collection Litigation Expenses, except under the emergency
situations set forth in 13 C.F.R. §120.540(f).
For Litigation Plans that SBA has previously approved, SBA will not reimburse Debt
Collection Litigation Expenses incurred in excess of 15 percent of the amount most
recently approved by SBA Center or District Counsel in a Litigation Plan or an
amendment to a Litigation Plan. (Example: SBA approves a legal budget of $20,000.
Lender seeks reimbursement of $40,000 (expenses increased by 100 percent). Lender
was required to submit an amendment to the Litigation Plan because expenses increased
by more than 15 percent. SBA District Counsel may approve up to $23,000 of the Debt
Collection Litigation Expenses (the originally approved $20,000 plus 15 percent) and
decline $17,000 (the remaining 85 percent)).
3. Unreasonable Debt Collection Litigation Expenses
SBA presumes that litigation expenses related to any of the following categories are
unreasonable unless the Lender provides justification for incurring the expense that in
SBA’s sole discretion is sufficient to rebut the presumption:
a. Overhead, including conflict-of-interest determinations, file set up, calendaring,
secretarial work, billing for preparation of a Litigation Plan or an amendment to a
Litigation Plan;
b. Intra-law firm communications and billing by more than one person for the same
activity;
c. 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 District Counsel. SBA will not
approve the fees and costs of a non-local firm to manage or oversee the services of a
local firm;
d. Attorney fees and costs associated with travel that were not justified and itemized in
a Litigation Plan that was pre-approved by SBA District Counsel;
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Note: Lenders are expected to hire local legal counsel maintaining an office and
practicing regularly within the judicial district where the majority of the litigation
is conducted. However, SBA recognizes that in extraordinary circumstances,
hiring counsel from another geographic area may be necessary, reasonable and
customary. If so, Lenders should include the justification and estimated travel
expenses in such circumstances in the Litigation Plan submitted to SBA for
approval by SBA District Counsel.
e. Performance of routine Loan servicing and/or liquidation duties such as the
preparation of a Liquidation Plan, Universal Purchase Package or Protective Bid
analysis;
Note: Activities such as handling a non-judicial foreclosure actions or issuing a
final demand letter in Routine Litigation involving an uncontested judicial
foreclosure proceeding, if such activities are normally handled by an attorney
pursuant to local rules or practice, are not considered unreasonable.
f. Assertion of a claim, cross claim, counterclaim, or third-party claim against SBA,
including all routine communications between Lender’s counsel and SBA;
g. Rectifying Lender errors that would justify a partial Denial of Liability, Repair, or
full Denial of Liability;
h. Defense of an action brought by SBA against a Lender;
i. Defense of a claim by an Obligor or other Person seeking damages based on a
Lender's alleged wrongful action, unless SBA expressly directed the Lender to take
the alleged wrongful action;
j. Services rendered by Lender’s in-house counsel;
k. Services pertaining to Non-Routine Litigation handled by Lender’s legal counsel that
were not pre-authorized in writing by SBA Legal Counsel;
l. Debt Collection Litigation Expenses that exceed the recovery obtained in
affirmative litigation;
m. The appointment of a receiver to perform routine liquidation activities; and
n. Generic and non-itemized bills for Debt Collection Litigation Expenses.
E. Particular Litigation Activities
1. Suit for Judgment on Note or Guaranty
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a. When Lenders Should File Suit
Lenders should file a suit based on an event of Default on the Note or Guaranty for a
7(a) Loan to obtain a judgment against an Obligor when the Obligor:
(1) Does not have a valid legal defense to repayment, e.g., discharge in
bankruptcy;
(2) Has the ability to repay the 7(a) Loan in full or substantial part;
(3) Is unwilling to repay the Loan or to engage in good faith compromise
negotiations; and
(4) Litigation is a cost-effective method for collecting the Loan balance.
b. Referral to Treasury for Enforced Collection
Lenders must submit a Wrap-up Report to SBA after all cost effective recovery
actions are completed, to enable SBA to update the status to be classified as SBA
Uncollectible and refer the remaining balance of the Loan to Treasury for further
collection actions, including a suit for judgment filed by DOJ, if warranted, or charge
off the loan if there are no remaining Obligors eligible for referral to Treasury. (See
Chapter 27 of this SOP for information on Treasury collection actions. See Chapter
15 and Chapter 21 of this SOP for guidance on how to assess an Obligor’s repayment
ability for legally enforced collection actions. See Chapter 26 of this SOP for
guidance on how to report fraud and abuse to the SBA Office of the Inspector
General.)
2. Judicial Foreclosure and Deficiency Judgment
Although non-judicial foreclosure is generally preferable, state law may require judicial
foreclosure, or certain circumstances support the use of judicial foreclosure. For example,
judicial foreclosure is appropriate in some states when the proceeds of a non-judicial
foreclosure sale are insufficient to pay the 7(a) Loan in full and a judgment is needed to
collect the deficiency balance of the Loan from the other Obligors.
3. Settlement Offers
Lenders must review, analyze and process offers to settle ongoing litigation pursuant to
the requirements in Chapter 21 (Offer in Compromise) of this SOP.
4. Bankruptcy Proceedings
Note: For general information about federal bankruptcy laws, local bankruptcy
rules, and local court processes, Lenders should check the website of the local
United States Bankruptcy Court.
a. Impact of Automatic Stay on Collection Activities
The moment a bankruptcy petition is filed, the automatic stay stops all lawsuits,
foreclosure actions, garnishments, and most collection activities against the debtor.
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Upon learning that an Obligor has filed a bankruptcy petition (the "debtor" in the
bankruptcy proceedings as used in this Subparagraph E.4), Lenders should consult
their legal counsel regarding the impact of the automatic stay on any pending or
contemplated collection actions. Unless the Lender’s legal counsel determines that
the automatic stay is lifted or no longer in effect, all Lender collection actions against
the debtor must immediately stop. (11 U.S.C. § 362)
b. Notice Requirements
(1) Before Referral to Treasury
Upon receipt of a bankruptcy notice involving an Obligor, including notices
pertaining to Chapter 7 "no-asset" cases, the Person receiving the notice must
immediately notify the appropriate SBA Loan Center and SBA District Counsel
to enable SBA to monitor the bankruptcy case.
(2) After Referral to Treasury
Upon receipt of a bankruptcy notice involving an Obligor(s) on a Loan that
SBA has referred to Treasury, the Person receiving the notice must ensure that
the automatic stay is not violated by immediately notifying the SBA Treasury
Offset Division in Birmingham, Alabama so that SBA may recall the 7(a) Loan
from Treasury and take appropriate action. (SBA has sole responsibility and
authority for handling litigation on Loans referred to Treasury). Lenders should
fax or email the notice, including the Borrower's name and 7(a) Loan number,
to:
Supervisory Loan Specialist
Treasury Offset Division
Fax: 202-481-5706
Email: BirminghamTOPS@sba.gov
Phone: 1-205-290-7141
c. Litigation Requirements
If an Obligor files for bankruptcy protection, Lenders must notify the appropriate
SBA Loan Center in accordance with Subparagraph 4.b above, and should take the
following actions, at a minimum, when necessary to protect the ability to recover on
the 7(a) Loan:
(1) File a proof of claim;
(2) Review the debtor's statement of financial affairs and schedules, and compare
them with the financial documents the debtor provided to the Lender and/or
SBA to determine if there are any material discrepancies with regard to the
debtor's alleged assets, liabilities, income or expenses;
(3) Report suspected fraud to the Office of the Inspector General (see Chapter 26
of this SOP) and the appropriate Office of the U.S. Trustee;
(4) Monitor the bankruptcy proceedings;
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(5) Represent the Lender and SBA's interests at all hearings where the outcome
may adversely affect the ability to collect the 7(a) Loan balance;
(6) File a motion for relief from the automatic stay when necessary to pursue
enforced collection proceedings against the collateral;
(7) File an objection to discharge of the debt owed on the 7(a) 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;
(8) 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;
(9) Obtain the bankruptcy court's approval of a reaffirmation agreement if the
debtor is willing and able to continue paying the 7(a) Loan;
(10) Review proposed plans and disclosure statements and file an objection when
necessary;
(11) Cast a vote to accept or reject proposed plans based on an analysis of the
relevant facts (subject to obtaining prior SBA written approval to vote in favor
of any bankruptcy plan that results in less than full payment of the 7(a) Loan);
Note: SBA's prior written approval is required before a Lender may compromise the
principal balance of an 7(a) Loan. (13 C.F.R.§120.536(a)(3)) If a proposed
bankruptcy plan calls for a reduction or “cram down” of the principal balance owed
on an 7(a) Loan, the Lender handling the litigation must obtain SBA’s prior written
approval before voting in favor of the plan (but not before voting against the plan),
regardless of whether there are additional Obligors who will remain responsible for
the Loan balance. Lenders should submit a Servicing Request for such actions to the
appropriate SBA Loan Center.
(12) Resume collection efforts immediately if the bankruptcy case is dismissed and
the 7(a) Loan is still in Default; and
(13) Take any other action that is necessary and appropriate under the circumstances.
5. Probate Proceedings
In addition to collecting and applying the proceeds from any life insurance policy
assigned as collateral for a 7(a) Loan, if an Obligor dies, Lenders should take the following
actions, at a minimum, when necessary to protect the ability to achieve a recovery for the
Loan:
a. File a creditor's claim in the appropriate probate court within the time frames
prescribed by 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.
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b. Review the inventory of the decedent's estate and compare it with the financial
documents the decedent provided to the Lender and/or SBA to determine if there are
any material discrepancies;
c. Report suspected fraud to the SBA Office of the Inspector General (see Chapter 26
of this SOP);
d. Monitor the probate proceedings;
e. Represent SBA and the Lender's interests at all hearings where the outcome may
adversely affect the ability to collect the 7(a) Loan balance; and
f. Take any other action that is necessary and appropriate under the circumstances.
6. Enforcement of Judgments
a. Recordation of Judgment
After Lenders obtain a judgment against an Obligor, the Lender must record the
judgment, or an abstract thereof, in any state or other jurisdictional unit where the
Obligor resides or has assets that the Lender or SBA can seize and sell to satisfy the
judgment.
b. Enforcement and Execution of Judgment
Lenders should take all reasonable, necessary, and cost-effective actions to enforce
and recover on any judgment obtained against an Obligor (the “judgment debtor”) as
soon as it is practicable and cost-effective to do so. Lenders should take significant
steps to execute upon the judgment debtor’s non-exempt assets within 90 calendar
days of obtaining the judgment.
c. Assignment of Judgment to SBA
After obtaining a judgment against an Obligor, Lenders must submit a Wrap-up
Report to SBA, including an assignment of the judgment to SBA, if the only or most
cost-effective way to collect on the judgment is to utilize a remedy that is available
to SBA, but not the Lender. For example, SBA may have more favorable collection
options and timeframes under the Federal Debt Collection Procedures Act. If SBA
services the Loan after guaranty purchase, Lenders must properly assign the
judgment to SBA.
F. Application of Litigation Recoveries
Lenders must apply funds recovered through the litigation process in the following order:
1. Recoverable Expenses;
2. Principal Loan balance;
3. Accrued interest.
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Note: When litigation is handled by SBA District 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 percent surcharge pursuant to Section 3011 of the Federal Debt
Collection Procedures Act.
G. Litigation Plan Documentation & Updates
1. General Litigation Plan Requirements
Lenders must justify and document all Routine and Non-Routine Litigation activities.
Lenders must keep the documentation, including pleadings and all Supporting
Documents such as letters, financial statements, credit reports, Appraisals, title reports
and UCC lien searches, in the Lender’s Loan File.
2. Routine Litigation
Unless specifically requested, Lenders 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 23 (Expenses and Recoveries) of this SOP to support requests for
approval or reimbursement of Recoverable Expenses.
3. Non-Routine Litigation
Lenders must retain all pleadings (e.g., complaints and answers, motions and opposing
pleadings, orders and judgments, bankruptcy plans, bankruptcy motions and opposing
pleadings, and discharge orders) and the Supporting Documents, (e.g., letters, financial
statements, credit reports, Appraisals, lien searches, etc.) in their Loan File and provide
them to the SBA Loan Center and/or SBA District Counsel upon request.
4. Litigation Status Reports – see Chapter 3 Subparagraph F.4 of this SOP.
H. SBA Takeover of Lender-Serviced Litigation (13 C.F.R. §120.540(d))
SBA may take over the litigation for a 7(a) Loan that the legal counsel hired by a Lender is
handling, if SBA determines that it is in SBA’s best interest to do so. Situations in which the
SBA may take over litigation from a Lender include, but are not limited to, the following:
1. The outcome of the litigation could adversely affect SBA’s administration of the Loan
program;
2. SBA, as an Agency of the federal government, has legal remedies for the particular case
that are not available to the Lender;
3. The litigation involves important government policy or program issues;
4. The case appears to have great precedential value;
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5. The Lender has an actual, apparent or potential conflict of interest with SBA; or
6. The legal fees charged by Lender’s counsel are not reasonable, necessary or customary.
I. Reimbursement Requests for Debt Collection Litigation Expenses
1. SBA Approval of Debt Collection Litigation Expenses
SBA must provide a written decision for reimbursement of all Debt Collection Litigation
Expenses that a Lender actually incurs and seeks to recoup as a Recoverable Expense,
even if such attorney fees and costs were anticipated and within the budget of an SBA-
approved Litigation Plan. SBA will review such Debt Collection Litigation Expenses in
accordance with the standards set forth in Chapter 23 of this SOP, and 13 C.F.R.
§120.540 and 13 C.F.R. §120.542.
2. How to Obtain SBA Approval of Debt Collection Litigation Expenses
Lenders must submit requests for reimbursement of Debt Collection Litigation Expenses
along with the required Supporting Documents to the appropriate SBA Loan Center for
review and approval pursuant to the procedure set out in Chapter 23 (Expenses and
Recoveries) of this SOP.
3. Best Practices for Debt Collection Litigation Expense Reimbursement Requests
a. Lenders should include a narrative summary of the litigation in the reimbursement
requests they submit with their Wrap-up Report.
b. Lenders should include a summary tabulation page listing and totaling all the invoices
in chronological order.
c. Lenders should also submit the actual invoices in chronological order.
(1) Each invoice should itemize the legal activity, the date undertaken, the
attorney/professional who performed the work, a detailed description of the
activity, the hourly rate charged, and the time spent. Lender’s legal counsel
should avoid “block” billing and vague generic descriptions and itemize time
in increments of one tenth of an hour (0.1 hour or six minutes).
(2) The invoices should itemize all other reimbursable legal fees and costs.
d. Lenders should include information on the recoveries realized through the litigation
process in their requests for reimbursement of legal expenses.
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Chapter 23. Expenses and Recoveries
This chapter covers expenses that Lenders may incur to collect sums due under the Note, enforce
the terms of the Loan Documents, and preserve and/or dispose of collateral for a 7(a) Loan. See
Chapter 20 of this SOP for guidance regarding expenses related to acquired collateral.
A. Classification of Expenses
SBA classifies expenses involving a 7(a) Loan as either Recoverable Expenses, which are
reimbursable by SBA, or Non-Recoverable Expenses, which SBA does not reimburse. (See
Paragraphs C and D of this Chapter for additional guidance on Recoverable and Non-
Recoverable Expenses.) When reviewing Lender requests for approval and/or
reimbursement of expenses, 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 a Lender may not add to the principal balance
of a 7(a) Loan. These costs include, for example:
a. Any expense that is not related to collection of amounts due under the 7(a) Loan Note
and/or to the preservation or disposal of collateral for the Loan;
b. Any fee or cost, or portion thereof, that is not necessary, reasonable or customary;
c. Overhead costs that Lenders must absorb as a cost of doing business, e.g., telephone
calls, photocopying, mileage, meals, etc.;
d. SBA permitted Loan fees, e.g., late payment and NSF fees, which SBA allows
Lenders to charge and collect if the Loan is current, but does not guarantee nor
reimburse. (See Chapter 4 of this SOP for additional information on Loan fees.);
e. Fees and costs that a Lender incurs to hire an independent contractor or receiver to
perform routine Loan servicing and/or liquidation duties such as the preparation of a
demand letter, Liquidation Plan, Universal Purchase Package, or Protective Bid
analysis, and/or the review of an Appraisal or Environmental Investigation Report;
Note: As set out in Chapter 18 of this SOP, Lenders should use receivers only in
unusual situations and only after they have obtained SBA’s prior written approval to
do so. The appointment of a receiver involves Non-Routine Litigation. Therefore,
Lenders must submit a Litigation Plan for SBA District Counsel approval prior to
commencing receivership proceedings. See Chapter 22 of this SOP for guidance on
Litigation Plans.
f. Expenses related to actions taken for the sole benefit of the Lender, as determined by
SBA in its sole discretion;
g. Expenses associated with a claim by an Obligor or other Person seeking damages
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based on a Lender's alleged wrongful action, unless SBA expressly directed the
Lender to take the alleged wrongful action; and
h. The litigation expenses listed in Chapter 22 Paragraph D.3 of this SOP are examples
of litigation expenses that are not covered by the 7(a) Loan guaranty.
i. Expenses that are not necessary, reasonable, or customary for the geographic area
where the expenses are incurred.
j. Costs associated with the care, preservation and resale of acquired collateral are
recoverable from the sale proceeds of the acquired collateral if a Lender has credited
the 7(a) Loan for the value of the acquired collateral. Lenders must not add expenses
associated with acquired collateral to the balance of the original Loan.
2. Recoverable Expenses
As set out in Chapter 2 (Definitions) of this SOP, Recoverable Expenses are the SBA
approved, necessary, reasonable and customary costs for the geographic area where the
expenses are incurred to 1) collect amounts due under the Note, 2) enforce the terms of
the Loan Documents, or 3) preserve and/or dispose of collateral, which Lenders may add
to the principal balance of a 7(a) Loan according to the terms of the Note. Recoverable
Expenses include, for example:
a. Searches
(1) UCC lien searches;
(2) Title reports; and
(3) Credit and asset search reports.
b. Appraisals
(1) Appraisals;
(2) Environmental Investigation Reports; and
(3) Site Visit Reports prepared by contractors.
c. Debt Collection Litigation Expenses
(1) Attorney fees; and
(2) Costs such as court filing fees.
d. Legal expenses and attorney fees, other than Debt Collection Litigation
Expenses, which are incurred for Loan servicing and liquidation actions.
e. Collateral Care and Preservation
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(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. Liquidation 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, Lenders should apply liquidation recoveries (i.e.,
funds obtained through liquidation activities) in the following order:
a. Recoverable Expenses incurred in the liquidation process;
b. Principal balance of the Loan until the principal balance is paid in full;
c. Accrued interest;
d. Permitted 7(a) Loan fees. (See Chapter 4 of this SOP for additional guidance on the
application of Borrower payments on Loans in liquidation status.)
Note: For information on SBA permitted Loan fees such as late payment fees,
extraordinary servicing fees, assumption fees, overdraft fees, other out-of-pocket
Lender expenses and subsidy recoupment fees that Borrowers may owe to SBA, see
SOP 50 10 in effect at loan approval. SBA does not guarantee nor pay the Loan fees
that Lenders are permitted to charge Borrowers. Therefore, Lenders must not add
permitted Loan fees to the transcript of account they submit to SBA with their guaranty
purchase request.
2. Remittance of SBA's Share of Recoveries
After SBA guaranty purchase, Lenders should remit SBA's pro-rata share of the net
proceeds of any recovery or payment they receive for a 7(a) Loan to SBA within 15
business days of receipt, regardless of whether the Lender has charged off the Loan or
SBA has placed the Loan in SBA Uncollectible status or charge off status, until the Loan
is either paid in full or is returned to SBA from Treasury or charged off by SBA. This
applies to Loans that SBA has placed in SBA Uncollectible status and referred to
Treasury for further collection until Treasury concludes their collection actions and
returns the Loan to SBA to charge off and issue a 1099-C. (See Chapter 27 of this SOP
for additional information regarding SBA’s post-Treasury referral actions.) If Lenders
do not remit SBA’s pro-rata share of the recoveries or payments they receive after
guaranty purchase in a timely manner, SBA may charge interest on the late payment
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amount and refer the matter to the SBA Office of Credit Risk Management for corrective
action.
C. Non-Recoverable Expenses Incurred by Lenders
SBA does not pay, reimburse nor approve, in whole or in part, the Non-Recoverable Expenses
that Lenders incur for a 7(a) Loan.
D. Reimbursement of Recoverable Expenses Incurred by Lenders
Note: The provisions of the Prompt Payment Act (31 U.S.C. Chapter 39), which requires
federal agencies to pay interest and penalties on late payments for contracted expenses, do
not apply to SBA payments to Lenders for Recoverable Expenses. See Subpart 32.9 of
the Federal Acquisition Regulation (FAR) for further information.
1. General Requirement—SBA Approval
SBA must review and approve any cost, fee or other amount that a Lender seeks to treat
as a Recoverable Expense pursuant to Paragraph E below. While Lenders may incur
Recoverable Expenses prior to SBA guaranty purchase, SBA will not reimburse Lenders
for Recoverable Expenses until after SBA purchases its guaranty.
2. Reimbursement Methods
Lenders may receive reimbursement for Recoverable Expenses by one or both of the
following methods:
a. Deduction from Recoveries
Lenders may deduct Recoverable Expenses from the recoveries they receive from the
sale and release of collateral or acquired collateral, and/or the payments they receive
on Loans in liquidation status.
b. Reimbursement by SBA
Lenders may ask SBA to reimburse them directly for SBA-approved Recoverable
Expenses that were not paid through a deduction from the recoveries for an 7(a) Loan.
E. SBA Review and Approval
SBA must review and approve any cost, fee or other amount that a Lender seeks to treat as a
Recoverable Expense, including expenses that the Lender has already deducted from
recoveries. Lenders must submit requests for SBA approval in accordance with the following
guidelines:
1. Where and How to Submit Reimbursement Requests
Lenders must submit all requests for approval of Recoverable Expenses electronically,
to the appropriate SBA Loan Center.
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2. Preferred Format for Lender Reimbursement Requests
To expedite SBA’s review process, Lenders should utilize the Wrap-up Report template
to organize and submit their requests to the appropriate SBA Loan Center.
3. When Lenders May Submit Reimbursement Requests to SBA
Lenders may submit requests for reimbursement or deduction of Recoverable Expenses
from liquidation recoveries only at the following times:
a. Submission of Loan Guaranty Purchase Request
Lenders may submit requests for SBA reimbursement of Recoverable Expenses or
approval of expenses paid from recoveries with their Universal Purchase Package, or
b. Submission of Wrap-up Report
Lenders must submit all remaining requests for SBA reimbursement of Recoverable
Expenses or approval of expenses paid from recoveries with their Wrap-up Report
for the Loan.
4. Multiple Loans—Allocation of Expenses
When a request involves multiple loans to the same Borrower (either 7(a) Loans with
different guaranty percentages or non-SBA loans):
a. If the expense is related to collateral, Lenders must allocate the expense (as well as
any recovery) to the loans according to the priority of the lien securing each loan
(including the division of expenses between loans with a “pari passu” lien position).
b. If the expense is not related to collateral, Lenders must pro-rate and allocate the
expense (as well as any recovery) among the loans to which the expense relates.
5. Contents of Recoverable Expense Request Packages
Requests should include the following items as applicable:
a. Lender Contact Information
Lender's name, address, e-mail address, phone and fax numbers, and tax
identification number.
b. Borrower's Name and 7(a) Loan Number
c. Summary of Expenses
Lenders must group multiple invoices by the categories set out in Subparagraph A.2
of this Chapter and summarize them in a cover sheet that includes: (1) the date that
each service was performed; (2) the invoice number for each invoice; (3) a subtotal
for each category; and (4) the grand total of all categories.
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d. Itemized Invoices
Lenders must provide a paper or electronic copy of each invoice that must 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
Lenders must include a copy of all the Supporting Documents pertaining to each
invoice, for example, a copy of the Site Visit Report if the invoice is for a site visit,
with their Recoverable Expense request package. With regard to litigation expenses,
Lenders must include a copy of the SBA-approved Litigation Plan for Non-Routine
Litigation, pleadings and other documents required by Chapter 22 of this SOP with
their Recoverable Expense request packages, unless the Lender has already provided
this information to SBA.
6. Denied Expenses Deducted from Liquidation Recoveries
If SBA denies an expense that a Lender has already deducted from recoveries, the Lender
must reimburse SBA for the denied expense within 30 days of Lender’s receipt of SBA
notification that SBA has denied the expense. SBA will refer Lenders that fail to
reimburse SBA for denied expenses or fail to provide documentation acceptable to SBA
to support the denied expense within the 30-day notification period, subject to the
conclusion of any pending appeal process, to OCRM for appropriate action.
Note: See Chapter 3 of this SOP for guidance on how to appeal the final decision of
an SBA Loan Center Director, designee, or SBA Legal Counsel with regard to the
approval of liquidation or litigation expenses.
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Chapter 24. Loan Guaranty Purchase Requests
A. SBA Guaranty Purchase Overview
This chapter covers the process Lenders must use to prepare and submit their requests for
SBA to purchase the SBA guaranteed portion of a Loan. Pursuant to 13 C.F.R. §120.520,
SBA will not purchase the guaranteed portion of a Loan from a Lender unless the Lender has
submitted a complete Universal Purchase Package to SBA, which SBA deems to contain
sufficient, credible evidence that the Lender made, closed, serviced and liquidated the Loan
in accordance with SBA Loan Program Requirements including Prudent Servicing and
Prudent Liquidation practices. Lenders must submit purchase requests for PPP Loans in the
PPP Loan Paycheck Protection Platform (“Platform”). See Chapter 14 of this SOP for
additional guidance on the submission of purchase requests for PPP Loans.
Note: For the purposes of determining Lender compliance with SBA Loan Program
Requirements for SBA’s guaranty purchase review, SBA will apply the requirements of
SOP 50 10 in effect when the Loan was approved for loan making, loan closing, and loan
modifications that took place on the date of or prior to full disbursement and SBA will
apply the requirements of SOP 50 57 in effect when the servicing action was taken for
servicing actions taken after full disbursement.
In addition, SBA will not purchase the SBA guaranteed portion of a Loan if it has determined
that any of the events listed in 13 C.F.R. §120.524 have occurred. (See Chapter 25 of this SOP
for additional information on the denial of liability for an SBA 7(a) Loan guaranty.) This
chapter also covers the Prudent Liquidation Deadline for resolving a Loan after SBA
guaranty purchase.
Note: SBA may purchase the SBA-guaranteed portion of a Loan at any time to protect the
interests of the Government and/or the Borrower (13 C.F.R. §120.520). If the Lender
fails to request an SBA guaranty purchase in a timely manner, the FTA will request the
Lender or SBA to purchase the SBA guaranteed portion of a Loan sold in the secondary
market on behalf of the investor (see Secondary Market Participation Guaranty
Agreement SBA Form 1086).
B. Interest SBA Pays on Guaranteed Portion of Loan
1. Interest Rate
When SBA purchases the guaranteed portion of a Loan in response to a Lender’s request,
SBA pays the accrued interest for the Loan as follows:
a. If the Loan Note has a fixed interest rate—SBA pays accrued interest at the rate
specified in the Note unless the Loan was made under the SBA Express or Export
Express program delivery methods, in which case the interest rate is capped at the
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maximum interest rate allowed for standard 7(a) Loans as of the date SBA received
the original application for the SBA Express or Export Express Loan.
b. If the Loan Note has a variable interest rate—SBA pays accrued interest at the rate in
effect on the earliest uncured payment Default date unless the Loan was made under
the SBA Express or Export Express program delivery methods, in which case the
interest rate is capped at the maximum interest rate allowed for standard 7(a) Loans
as of the date SBA received the original application for the SBA Express or Export
Express Loan.
Note: The term “earliest uncured payment Default date” means the earliest date that
a Borrower has failed to pay the full amount owed on a scheduled installment of
principal and/or interest for an 7(a) Loan. Lenders must apply Borrower payments to
the earliest uncured payment default and advance the earliest uncured payment
Default date to the next installment due date when payment(s) are sufficient to pay
the full amount of the scheduled installment. However, if a Borrower makes a
payment after the Lender submits its guaranty purchase request to SBA, Lenders may
not advance the earliest uncured payment default date. Instead, Lenders must apply
the payment(s) to the principal balance of the Loan, in accordance with guidance
provided in Chapter 4 of this SOP. (13 C.F.R. §120.523)
2. Interest SBA Pays to Lenders
a. For 7(a) Loans approved on or after May 14, 2007, SBA pays up to a maximum of
120 calendar days of accrued interest on the SBA guaranteed portion of the Loan.
b. For 7(a) Loans approved prior to May 14, 2007, SBA pays accrued interest to Lenders
based on the applicable regulations in effect as of May 13, 2007.
3. Interest Paid to Secondary Market Investors
The Lender or SBA must pay the full amount of accrued interest owed to secondary
market investors up to the date of purchase. (13 C.F.R. 120.522(c)) However, if SBA is
required to pay a secondary market holder more than 120 calendar days of accrued
interest, SBA will bill the Lender to reimburse SBA for the difference between the
amount SBA paid and 120 calendar days of accrued interest, unless SBA approves an
exception, in its sole discretion. (See Secondary Participation Guaranty Agreement (SBA
Form 1086).
C. Lender Annual Service Fee Collection.
1. For Loans approved before December 8, 2004, SBA deducts and retains the Lender
annual service fee (also known as the on-going SBA guaranty fee) through the date of
guaranty purchase from the guaranty purchase amount SBA remits to the Lender, based
on the fee requirements in effect at the time the Loan was approved.
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2. For Loans approved on or after December 8, 2004:
a. If a Lender submits a Wrap-up Report acceptable to SBA concurrently with their
guaranty purchase request, SBA will retain the Lender annual service fee for a
maximum of 120 calendar days from the interest paid to date for the Loan. This SBA
fee is based on the requirements in effect at the time the Loan was approved and is
deducted from the guaranty purchase amount that SBA remits to the Lender.
b. If a Lender does not submit a Wrap-up Report acceptable to SBA concurrently with
their guaranty purchase request, SBA retains the SBA annual service fee the Lender
owes through the date of guaranty purchase. This fee is based on the requirements in
effect at the time the Loan was approved and is deducted from the guaranty purchase
amount that SBA remits to the Lender.
D. Guaranty Purchase Requirements
The following conditions must exist before a Lender may submit a request for guaranty
purchase to SBA:
1. Loan is in Uncured Payment Default
Loan must have an uncured payment Default of more than 60 calendar days, unless SBA
agrees otherwise in writing. (13 C.F.R. §120.520)
2. Loan is Classified as “In Liquidation” Status
Lenders must classify the Loan as “In Liquidation” on their monthly SBA Form 1502
report.
3. For Loans Sold in the Secondary Market
If the Lender has sold the SBA-guaranteed portion of a Loan in the secondary market,
the Lender must either repurchase the Loan through the FTA or submit a request to the
National Guaranty Purchase Center for SBA to purchase the Loan from the secondary
market investor. All Lender requests for SBA to purchase the guaranteed portion of a
Loan from a secondary market investor must include the following Loan Documents,
a. Certified transcript of account;
b. Copy of executed Loan Authorization/E-Tran Terms and Conditions;
c. Copy of all executed modifications to the Note, if any; and
d. If applicable, the secondary market investor written approval of all modifications to
the Note.
4. Collateral Liquidation
Lenders should liquidate all the collateral for a 7(a) Loan prior to submitting a guaranty
purchase request, but must, at a minimum, liquidate the collateral for a 7(a) Loan as
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follows:
a. Loans Approved on or after May 14, 2007
For Loans approved on or after May 14, 2007, unless the Borrower filed for
bankruptcy protection, the Lender must liquidate all business personal property
collateral with an aggregate Recoverable Value of $10,000 or more (13 C.F.R. §
120.520(a)); SBA considers liquidation of business personal property collateral
completed when a Lender has exhausted all prudent and commercially reasonable
efforts to collect upon these assets (13 C.F.R. §120.520(a)(1)). See Chapter 19 of this
SOP for additional guidance on the liquidation of personal property collateral.
b. Loans Approved Prior to May 14, 2007
For Loans approved prior to May 14, 2007, Lenders must liquidate the collateral
according to the requirements of the program delivery method under which the Loan
was made (13 C.F.R. §120.520(a)(2)). For example, Lenders must liquidate the
collateral for the following Loans prior to submitting a guaranty purchase request:
(1) LowDoc—All business personal property securing the Loan, unless the Loan
involves prolonged litigation or other circumstances that would extend the
liquidation process by more than 90 calendar days past the earliest date that
the Lender could otherwise submit its guaranty purchase request;
(2) EWCP—All collateral associated with the export transactions financed by the
Loan;
(3) CAPLine—All working capital assets securing the Loan; and
(4) SBA Express and Export Express —All collateral. In addition, Lenders
must exhaust all cost-effective means of recovery for the Loan unless:
(a) The Loan was made under the Export Express Program;
(b) The remaining principal balance of the Loan is $50,000 or less; or
(c) The Loan involves prolonged litigation or other circumstances that would
extend the liquidation process by more than 90 calendar days past the
earliest date that the Lender could otherwise submit its guaranty purchase
request.
5. Complete Purchase Package Submission to SBA
Lenders must submit a complete Universal Purchase Package in electronic form to the
appropriate SBA Loan Center. For Loans that Lenders have approved or modified in E-
Tran, the Lender must ensure that all the terms and conditions of the Loan, including all
Loan Actions that modified the terms and conditions of the Loan, are up to date in E-
Tran.
a. Contents of Purchase Package
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Lenders should prepare a Universal Purchase Package in electronic form in
accordance with the instructions issued by the SBA Loan Center to which the
Universal Purchase Package is submitted for review and processing as follows:
(1) National Guaranty Purchase Center (“NGPC”)
(a) For all Standard 7(a), Small 7(a), CLP, PLP, CAPLine, Export Working
Capital Program (EWCP), Working Capital Pilot, International Trade
Loan Program (ITL), USCAIP Guaranty (NAFTA), Export Import
Harmonization Small/Rural Lender Advantage, Dealer Floor Plan,
Lenders must submit their Universal Purchase Packages to the NGPC.
Lenders must use the Universal Purchase Package to assemble and
organize the required documentation. NGPC will consult with the
appropriate USEAC on guaranty Purchase requests for EWPC Loans, as
needed.
(2) Commercial Loan Servicing Center
Note: More information on the SBA guaranty purchase process and the
Universal Purchase Package Tab System is available at the NGPC
guaranty purchase process website.
(a) For SBA Express, Export Express, Community Advantage and Pilot
Program Loans, not sold on the secondary market, Lenders must submit
their Universal Purchase Packages to the CLSC. Lenders must use the
Universal Purchase Package Tab System accessible from the CLSC
website to assemble and organize the required documentation. See
Chapter 2 of this SOP for additional contact information for CLSC.
b. Deadline for Submission of Purchase Package
For Loans that SBA has purchased from the secondary market investor, Lenders must
submit a complete Universal Purchase Package to the appropriate SBA Loan Center
within 45 calendar days of the purchase. In all cases and in order to avoid the
expiration of SBA’s guaranty, Lenders must submit a Universal Purchase Package to
the appropriate SBA Loan Center no later than 180 calendar days after the maturity
date of the Loan, or the date the Lender completes the liquidation of a matured Loan.
13 C.F.R. §120.524(a)(8)
E. Prudent Liquidation Deadline for Lender Resolution of an SBA Purchased Loan
Lenders must resolve SBA purchased Loans as set forth in Subparagraphs E.1 thru E.3 below
and provide sufficient evidence of resolution, as determined by SBA in its sole discretion, to
the appropriate SBA Loan Center within 24 months of the date of SBA guaranty purchase,
unless the Lender submits a written request for an extension and SBA approves the Lender’s
request in writing prior to the expiration of the 24-month Prudent Liquidation Deadline.
Sufficient evidence of resolution includes the following:
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1. Loans Returned to Regular Servicing
Lenders must provide SBA with the relevant terms of the agreement under which the
Borrower has agreed to resume regular payments, as appropriate evidence of resolution.
Lenders must provide this information in writing. The relevant terms of a payment
agreement include, but are not limited to:
a. Gross outstanding principal and Interest amounts outstanding,
b. Payment amount,
c. Payment frequency,
d. Interest rate, and
e. Maturity Date
2. Loans Paid in Full
Lenders must remit SBA’s pro-rata share of the net liquidation proceeds needed to satisfy
the balance owed on the SBA purchased Loan. Lenders need to obtain an official payoff
amount from the appropriate Loan Center prior to verifying that the Lender has the 7(a)
Loan classified as “paid in full” in E-Tran.
3. Wrap-up Report
Lenders must submit a Wrap-up Report acceptable to SBA identifying all the Prudent
Liquidation actions they completed to resolve the Loan. (See Chapter 27 Paragraph B of
this SOP for guidance on what Lenders should include in a Wrap-up Report.)
F. Extensions to the Prudent Liquidation Deadline
1. SBA may grant an extension to the Prudent Liquidation Deadline for an SBA purchased
Loan on a case-by-case basis, if extenuating circumstances such as judicial foreclosure,
bankruptcy, or the subsequent return of an 7(a) Loan from regular servicing to liquidation
status after guaranty purchase prevents compliance with the original deadline. Lender
requests are not final until and unless SBA approves them in writing.
2. Lenders must submit all requests to extend the Prudent Liquidation Deadline for an SBA
purchased Loan to the appropriate SBA Loan Center in writing as soon as it becomes
apparent to the Lender that an extenuating circumstance will prevent them from
complying with the deadline. Lenders should submit their requests no later than 30
calendar days prior to the expiration of any deadline. At a minimum, Lender requests
must include:
a. A detailed description of the extenuating circumstance preventing timely liquidation;
b. Supporting documentation evidencing the extenuating circumstance;
c. A reasonable estimate of when the Lender expects to complete the Prudent
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Liquidation of the SBA-purchased Loan; and
d. A Lender status report for the Loan (see Chapter 3 Paragraph F of this SOP for
guidance on Loan status reporting).
3. SBA will review the request and provide a written response to the Lender either granting
or denying the extension. If SBA grants the extension request, SBA will provide a new
Prudent Liquidation deadline. Once SBA has granted an extension, Lenders must
continue submitting Loan status reports to SBA every 6 months. (See Chapter 3
Paragraph F of this SOP for guidance on Loan status reporting.)
4. If the extenuating circumstances supporting the Lender’s extension request cease to exist,
the Lender must promptly notify SBA and provide a Wrap-up Report within 30 calendar
days.
G. Lender Consequences for Failure to Comply with Prudent Liquidation Deadline
SBA will require Lenders that fail to comply with the Prudent Liquidation Deadline for a 7(a)
Loan to repurchase SBA’s share of the remaining balance of Loan back from SBA.
Additionally, SBA will refer Lenders that fail to comply with SBA’s Prudent Liquidation
Deadline to the Office of Credit Risk Management for possible enforcement action,
including, but not limited to, restriction from future participation in the secondary market for
7(a) Loans and/or suspension of delegated authority.
H. Practice Tips for Submitting Complete Purchase Packages
1. Submit a Complete Transcript of Account
Use of SBA Form 1149 (Lender's Transcript of Account) is not mandatory but is
recommended in order to expedite the purchase process.
Note: SBA does not guarantee nor pay SBA permitted Lender Loan fees. Therefore,
Lenders must not add their Loan fees to the transcript of account they submit to SBA
with their Universal Purchase Package.
2. Explain Missing Documents
If a required document is missing, Lenders should include a written explanation for the
omission in their Universal Purchase Package.
3. Provide Repair Estimate
If a Lender error causes a Material Loss on a Loan, the Lender should acknowledge the
error and provide an estimate of the amount needed to fully compensate SBA for the loss,
including justification for the estimate. For example, losses related to collateral are based
on the Recoverable Value of the collateral. If a Lender did not obtain the required lien
on real or personal property, the Lender should provide an estimate of the Recoverable
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Value that the property would have had at the time of liquidation if the Lender had
obtained the required lien, along with a detailed explanation of how the Lender calculated
the Recoverable Value. Although a Lender’s acknowledgement of its error is not
mandatory and the Lender’s estimate of Recoverable Value is not binding on SBA,
providing both will expedite SBA’s Repair analysis and guaranty purchase approval
process.
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Chapter 25. Denial of Liability on 7(a) Loan Guaranty
A. When SBA May Deny Liability on a 7(a) Loan Guaranty
Pursuant to 13 C.F.R. §120.524(a), SBA is released from liability on its guaranty of a 7(a)
Loan and may, in its sole discretion, refuse to honor a Lender’s guaranty purchase request
in full or in part, or recover all or part of the funds already paid in connection with a guaranty
purchase, whether they were paid directly to the Lender or to a secondary market investor,
if the Lender:
1. Failed to comply materially with a Loan Program Requirement;
2. Failed to make, close, service, or liquidate the Loan in a prudent manner;
3. Placed SBA at risk through improper action or inaction;
4. Failed to disclose a material fact to SBA in a timely manner;
5. Misrepresented a material fact to SBA regarding the Loan;
6. Sent a written request to SBA to terminate the guaranty;
7. Failed to pay the guaranty fee within the period required under SBA rules and
regulations;
8. Failed to request that SBA purchase a guaranty within 180 days after maturity of the
Loan. However, if the Lender is conducting liquidation and/or debt collection litigation
in connection with a Loan that has matured, SBA is released from its guaranty only if the
Lender fails to request SBA to purchase the guaranty within 180 days after the Lender
completes its Prudent Liquidation and/or debt collection litigation actions;
9. Failed to use required SBA forms or exact electronic copies, except for 7(a) Loan
program delivery methods that allow Lenders to use their own forms, such as SBA
Express; or
10. The borrower has paid the Loan in full.
Note: Pursuant to 13 C.F.R.§ 120.520, SBA will not purchase the guaranteed portion
of a Loan from a Lender unless the Lender has submitted documentation to SBA that
SBA deems sufficient to allow SBA to determine whether purchase of the guaranty is
warranted under 13 C.F.R. §120.524.
B. Losses Attributable to Lender Actions or Inactions
1. Material Loss or Harm to Program Integrity
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Generally, SBA will not deny liability on a 7(a) Loan guaranty unless the Lender's actions
or inactions caused, or could cause, a Material Loss on the Loan. SBA may, however,
deny liability on a guaranty in the absence of an actual or potential Material Loss if the
Lender's action or inaction is deemed material to the soundness and integrity of the 7(a)
Loan program, such as, for example, if the Loan was ineligible for SBA financing or the
Lender failed to disclose or misrepresented a material fact to SBA.
2. Losses on Recoveries from Collateral
The amount of a loss attributable to how a Lender handled the liquidation of collateral for
a 7(a) Loan is based on the Recoverable Value of the collateral.
3. Projected Losses
If a significant, but not yet quantified loss appears likely, unless SBA has already
purchased the Loan from the secondary market investor, the Lender should withdraw its
guaranty purchase request and resubmit it when the Lender has completed its liquidation
process.
C. SBA Guaranty Repairs
1. Repair Definition
As set forth in Chapter 2 (Definitions) of this SOP, the term Repair means an agreement
between SBA and a 7(a) Lender to deduct a specific dollar amount from the funds that
SBA pays to the Lender for SBA’s guaranty of a Loan, in order to fully compensate SBA
for any actual or anticipated loss caused by the Lender’s actions or inactions in connection
with the Loan. A Repair does not reduce SBA’s guaranty percentage nor SBA’s pro-rata
share of expenses and/or recoveries associated with the Loan.
2. Repair Amount
The net Repair amount is a specific dollar amount that fully compensates SBA for any
actual or anticipated loss caused by a Lender’s actions or inactions in connection with a
7(a) Loan. Generally, Repair amounts are calculated by multiplying the dollar amount of
the loss on a Loan by SBA’s guaranty percentage for the Loan (e.g., $50,000 loss x 75
percent guaranty = $37,500 Repair).
Note: In order to expedite SBA’s guaranty purchase review process, Lenders are
encouraged to include a Repair estimate in their Universal Purchase Package.
3. When a Repair is Appropriate
Except in cases involving gross Lender misconduct (see Subparagraph C.4 below), a
Repair is appropriate when the Lender's actions or inactions have caused an actual or
anticipated loss that justifies a partial Denial of Liability by SBA, but instead of SBA
formally denying liability, the Lender agrees to allow SBA to deduct a specific dollar
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amount from the funds that SBA would otherwise owe to the Lender for SBA’s guaranty,
in order to fully compensate SBA for the loss attributable to the Lender’s actions or
inactions.
4. When a Repair is Not Appropriate
a. Total Loss on a 7(a) Loan
A Repair is not appropriate if the Lender's actions or inactions have caused a total
or near total loss on a 7(a) Loan.
b. Lender Misconduct
A Repair is not appropriate if SBA deems that the Lender's misconduct is material
to the integrity and soundness of the 7(a) Loan program.
c. Justified Abandonment of Collateral
A Repair based on a Lender’s failure to liquidate personal property collateral is not
appropriate if the Lender abandoned the property in accordance with Prudent
Liquidation practices and SBA Loan Program Requirements. (See Chapter 19 of
this SOP for guidance regarding the abandonment of personal property collateral.)
For example, a Repair for failure to liquidate restaurant equipment (e.g., walk-in
freezer, built-in booths, stove hood and related ventilation equipment, pots and
pans, etc.) located on leased premises is appropriate if the appraised value of the
equipment is $12,000 and the estimated cost of removing, transporting, storing,
and selling it is $10,000. Under these circumstances, abandonment is justified not
only based on the estimated Recoverable Value of $2,000 (which is less than the
$10,000 threshold for abandoning personal property collateral established in
Chapter 19 of this SOP), but also the risk of Lender liability for damage done to the
leased premises while removing the trade fixtures.
D. Partial Denial of Liability
A partial Denial of Liability is justified if the Lender's actions or inactions caused, or could
cause, a Material Loss but less than a total or near total loss on the Loan, and the Lender does
not agree to a Repair amount that is acceptable to SBA.
E. Full Denial of Liability
A full Denial of Liability is justified if the Lender's actions or inactions caused an actual or
anticipated total or near total loss on the Loan, resulted in SBA guaranteeing an ineligible
Loan, or are deemed material to the soundness or integrity of the 7(a) Loan program and the
Lender does not voluntarily agree to terminate the 7(a) Loan guaranty.
F. Voluntary Termination of SBA Guaranty
Lenders may, at any time prior to guaranty purchase, voluntarily request SBA to terminate a
7(a) Loan guaranty. However, this option is not available when the Lender has sold the
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guaranteed portion of the Loan in the secondary market.
G. Examples of When a Repair or a Full or Partial Denial of Liability is Justified
Listed below are examples of common Lender deficiencies that can justify an SBA Repair or
Denial of Liability in full or in part. This list is not exhaustive and is provided for illustrative
purposes only.
1. Incorrect 7(a) Loan Eligibility Determination by a Delegated Lender
A full Denial of Liability is justified if a delegated Lender made an ineligible 7(a) Loan
in accordance with the Loan Program Requirements in effect when the Loan was
approved. A partial Denial of Liability is justified if a portion of the Loan proceeds were
used for an ineligible purpose.
2. Lender Use of Suspended or Debarred Agent(s)
SBA may deny liability in full on a Loan guaranty if a Lender uses the services of a
suspended or debarred Agent to administer the Loan at any time during the life of the
Loan, even if the actions of the suspended or debarred Agent did not directly cause the
business to fail or result in a loss on the Loan.
Note: Information regarding the identity of Agents who have been debarred,
suspended, proposed for debarment, excluded, disqualified or otherwise declared
ineligible from receiving Federal contracts, assistance and benefits is available to the
general public via the System for Award Management maintained by GSA at
https://www.sam.gov. In accordance with SOP 50 10, SBA expects Lenders to exercise
due diligence and prudent oversight of their employees who are directly involved in
the processing, closing, servicing, or liquidation of 7(a) Loans, and third party vendors
including Lender Service Providers (LSPs) and other Loan agents. This due diligence
and oversight includes the establishment of written policies governing such
relationships and monitoring the performance of Loans referred by an Agent or where
an Agent provided assistance. SBA will review evidence of such due diligence and
oversight of such relationships when conducting lender oversight activities. Federally-
regulated Lenders are reminded that they must comply with the requirements of their
primary federal financial institution regulator regarding third party vendors.
3. Early Default Due to Lender Failure to Properly Make or Close an 7(a) Loan
A full Denial of Liability is justified if a Lender's failure to make or close the Loan in
accordance with prudent lending practices and SBA Loan Program Requirements
contributed to or allowed an Early Default unless the Lender provides credible evidence
that the business failure was for unrelated reasons. For example, Denial of Liability is
justified if a Lender, utilizing its delegated authority, made a Loan based on underwriting
that was not consistent with prudent lending practices, such as where:
a. The Lender made the Loan even though the Borrower's projected expenses greatly
exceeded projected revenues, and the Borrower had no other source of income;
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b. The Lender made the Loan to a startup business without comparing the Borrower’s
projected revenue against an industry standard or some other reliable measure
including the Lender's own experience making loans to similar businesses;
c. The Lender’s cash flow analysis failed to take into account an identifiable fact or
foreseeable risk that could adversely affect the Borrower's ability to repay the 7(a)
Loan, such as the owner’s monthly draw;
d. The Lender’s cash flow analysis contained unsound assumptions and/or unjustified
and overly optimistic revenue projections, e.g., revenues that were projected to
increase by 100 percent in year one even though the industry average maximum
annual increase is 25% and the Lender has not provided a realistic explanation for the
difference; or
e. The Lender made a material mathematical error in its cash flow calculations, i.e., if
the Lender had not made the mathematical error, the Lender would not have made the
Loan or would have structured it in a way that would not have led to an Early Default.
4. Early Default and Lender Failure to Use IRS Transcripts to Verify Borrower
Financial Information
A full Denial of Liability is justified if there was an Early Default on the Loan and the
Lender failed to provide credible evidence that it verified the Borrower's financial
information by comparing it to relevant IRS tax return transcripts as required by SOP 50
10 in effect at the time the loan was approved. A full Denial of Liability may not be
justified, however, if the Lender provides credible evidence that the business failure was
caused by factors that were unrelated to any financial difficulties the Lender could have
identified through the IRS verification process.
Note: As set forth in SOP 50 10 in effect at the time of loan approval, delays in
receiving transcripts from the IRS do not excuse a Lender from complying with
SBA's IRS tax return verification requirements.
5. Lender Failure to Ensure Borrower Use of 7(a) Loan Proceeds as Required by the
Loan Authorization/E-Tran Terms and Conditions
A Repair or a full or partial Denial of Liability is justified if there is a Material Loss on
a Loan due to the Lender's failure to ensure that the Borrower used the 7(a) Loan proceeds
as required by the Loan Authorization/E-Tran Terms and Conditions. Refer to SOP 50
10 in effect at the time of loan approval for additional guidance regarding Loan closing
documentation that SBA accepts as credible evidence that a Borrower used SBA 7(a)
Loan proceeds as required by the Loan Authorization/E-Tran Terms and Conditions.
Lenders may also rely on a post-default Appraisal or Site Visit Report as evidence of the
assets that the Borrower was required to use the 7(a) Loan proceeds to acquire.
a. Examples of When a Repair or a Full or Partial Denial of Liability is Justified
(1) Early Default Due to Borrower Failure to Purchase Key Assets
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A full Denial of Liability is justified if there is a total or near total loss on a Loan
due to operational problems caused by the Lender’s failure to ensure that the
Borrower purchased the key assets listed in the "Use of Proceeds" section of the
Loan Authorization/E-Tran Terms and Conditions, resulting in an Early Default
on the Loan. For example, a full Denial of Liability is justified if a Lender made
a $350,000 Loan to enable a Borrower to purchase the equipment needed to start
a new dental practice but failed to ensure that the Borrower purchased the dental
chairs, x-ray machines, etc., and as a result, the Borrower could not generate
sufficient income to repay the Loan and SBA suffered a total or near total loss
on the Loan.
(2) Collateral Not Available for Liquidation and Application to 7(a) Loan
A Repair or a full or partial Denial of Liability is justified if there is a Material
Loss on a Loan due to the Lender’s failure to ensure that the Borrower used 7(a)
Loan proceeds as required by the Loan Authorization/E-Tran Terms and
Conditions to acquire property that the Borrower was required to pledge as
collateral for the Loan, and it is likely that the required collateral would have
had Recoverable Value at the time of Loan Default.
In the example in Subparagraph 5.a.(1) above, a repair or partial Denial of
Liability is justified if the Lender failed to ensure that the Borrower used the
Loan proceeds to purchase the dental practice equipment, resulting in a Material
Loss equivalent to the Recoverable Value the equipment would have had if it
had been purchased and pledged to secure the Loan.
b. Credible Evidence of Use of Loan Proceeds
SOP 50 10 in effect at loan approval provides examples of Loan closing documentation
that SBA accepts as credible evidence that a Borrower used 7(a) Loan proceeds as
required by E-Tran Terms and Conditions. Lenders may also rely on a post-Default
Appraisal or Site Visit Report as evidence of the assets the Borrower was required to
use the 7(a) Loan proceeds to acquire.
c. Unacceptable Evidence of Use of Proceeds
Without corroborating documentation, an affidavit from the Borrower or a bank
statement showing only a check number and amount is not credible evidence that the
Loan proceeds were used in accordance with the E-Tran Terms and Conditions.
6. Early Default and Lender Failure to Verify a Required Equity Injection
a. General Rule
If there was an Early Default on the 7(a) Loan, documentation verifying that any
equity injection required by the Loan Authorization/E-Tran Terms and Conditions, or
other loan documents was made and that it came from a source consistent with SOP
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50 10 in effect when the Loan was approved must be included in the Lenders Purchase
Package.
b. Rebuttable Presumption
A Lender's failure to properly document a material portion of any injection of cash or
non-cash equity into the Borrower’s business that was required by the Loan
Authorization/E-Tran Terms and Conditions, or other loan documents raises a
rebuttable presumption that the Early Default was caused by the absence of the
required equity injection and justifies a full Denial of Liability on the SBA guaranty.
To rebut the presumption, the Lender must provide credible evidence that the primary
cause of the Borrower’s Default was something other than the lack of the required
equity injection, e.g., the death of an irreplaceable Key Employee or an uninsured
natural disaster that destroyed the Borrower's business premises and customer base.
c. Examples of Credible Evidence of a Cash Injection
Credible evidence of a cash injection includes:
(1) Documentation showing that a check or wire transfer was processed and that
the funds were deposited into an escrow account on the Borrower's behalf or
into the Borrower's bank account prior to the initial disbursement of the 7(a)
Loan; or
(2) Documentation showing that the Borrower received the injected funds prior
to the initial disbursement of the 7(a) Loan, such as a copy of a signed third-
party escrow settlement statement showing the disbursement to the Borrower
or the Borrower's bank account statement showing the deposit of the injected
funds.
d. Examples of Unacceptable Evidence of a Cash Injection
A promissory note, gift letter or financial statement on their own, are not credible
evidence of a cash injection without corroborating documentation such as the
documentation specified in Subparagraph 6.c. above.
e. Examples of Credible Evidence of an Asset Injection
Credible evidence of an asset injection includes, for example, an escrow settlement
statement, receipt, or cancelled check, along with corroborating documentation such
as a deed or certificate of title, or invoice marked "Paid," which shows that the
Borrower owned or acquired the asset needed for the injection prior to disbursement
of the 7(a) Loan, plus credible evidence that the asset was available for use by the
Borrower and was not financed with any of the Borrower’s other debt if the Lender
intends the asset injection to satisfy the Borrower’s equity injection requirements.
f. Equity Injection Source
The Lender must provide credible evidence that an equity injection came from a
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source consistent with SOP 50 10 in effect when the 7(a) Loan was approved.
Verifying that an equity injection came from a legitimate source is essential in order
to prevent 7(a) Loan fraud.
7. Lender Failure to Obtain Required Lien or Lien Position on Collateral
A Repair or a full or partial Denial of Liability is justified if a Lender failed to obtain the
required lien and lien position on the property that the Loan Authorization/E-Tran Terms
and Conditions required the Borrower to provide as collateral for the 7(a) Loan, and that
failure caused, or could cause, a Material Loss on the Loan. SBA will use the aggregate
Recoverable Value of the property that the Borrower was required to provide as collateral
for the Loan, as the basis for any Repair or Denial or Liability due to the Lender’s failure
to obtain the required lien or lien position on the property.
8. Lender Failure to Prepare and Use an Adequate List of the Required Collateral
A Repair or a full or partial Denial of Liability is justified if a Lender fails to prepare and
utilize an adequate list of the collateral for an 7(a) Loan and that failure caused, or could
cause, a Material Loss on the Loan. SBA will use the aggregate Recoverable Value of
the collateral the Borrower was required to provide for the Loan, as the basis for any
Repair or Denial of Liability for the Lender’s failure to prepare and utilize an adequate
list of the required collateral for the Loan.
Note: Lenders should attach a list of the items that reasonably describes the
collateral to the security agreement and UCC financing statements to ensure that (1)
a security interest “attaches” to the collateral, i.e., the creditor obtains a lien on the
items; and (2) the lien is “perfected,” i.e., the creditor establishes the priority of its
lien over those of competing creditors.
a. Example of When a Repair or Full or Partial Denial of Liability Is Justified
A Repair or a full or partial Denial of Liability is justified if the collateral required by
the Loan Authorization/E-Tran Terms and Conditions was present at the time of Loan
Default, but the Lender’s failure to perfect a security interest in the collateral caused,
or could cause, a Material Loss on the Loan.
b. Example of When a Repair or Full or Partial Denial of Liability Is Not Justified
A Repair or a full or partial Denial of Liability is not justified, despite the Lender’s
failure to prepare an adequate list of collateral when the Loan was made, if all the
collateral required by the Loan Authorization/E-Tran Terms and Conditions was
located at the time of Loan Default and liquidated, and all the net proceeds were
applied to the principal balance of the Loan, i.e., there was no Material Loss on the
Loan.
9. Lender Failure to Conduct a Post Default Site Visit
A Repair or a full or partial Denial of Liability is justified if the collateral required by the
Loan Authorization/E-Tran Terms and Conditions is either unavailable or declines in
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value due to the Lender’s failure to conduct a timely post-Default site visit as required by
Chapter 16 of this SOP, and that failure caused, or could cause, a Material Loss on the
Loan. SBA will use the Recoverable Value of the required collateral that was either
unavailable for liquidation, or the aggregate amount by which the required collateral
declined in value due to the Lender's failure to conduct a timely site visit, as the basis for
any loss associated with a Repair or Denial of Liability for the Loan.
Note: A UCC sale conducted at the debtor's business premises where the machinery
and equipment is set up, connected to an appropriate power source, and easily inspected
and tested will usually produce a significantly higher recovery than a sale of the same
collateral held off-site, after the machinery and/or equipment is dismantled and moved
to a storage facility due to the lender’s failure to conduct a timely site visit and make
arrangements with the landlord to conduct an on-site UCC sale.
10. Lender Failure to Conduct Prudent Liquidation of Collateral
a. Examples of When a Repair or Full or Partial Denial of Liability is Justified
A Repair or a full or partial Denial of Liability is justified if a Lender fails to conduct
Prudent Liquidation for an 7(a) Loan and that failure caused, or could cause, a
Material Loss on the loan. For example, a Repair or a full or partial Denial of
Liability is justified if a Lender:
(1) Failed to safeguard the collateral and the collateral either became unavailable
or diminished in value;
(2) Permitted a substantial decline in the value of the collateral due to
unnecessary delays or mismanagement of the liquidation process;
(3) Failed to account for items listed on the pre-closing collateral list that were
not listed on the post-Default inventory and Appraisal; or
(4) Failed to account for items listed on the post-Default inventory and Appraisal
that were not included in the liquidation sale.
b. Example of When a Repair or Denial of Liability is Not Justified
A Repair or Denial of Liability is not justified for a Lender’s failure to liquidate
personal property collateral if the Lender abandoned the collateral pursuant to
Prudent Liquidation practices and SBA Loan Program Requirements. For example, a
Repair or Denial of Liability is not justified if a Lender abandons the inventory of a
souvenir shop with a Liquidation Value of $10,000 and routine
foreclosure/repossession costs of $5,000, if repossession of the collateral would cause
a breach of the peace and the Lender provides evidence that a replevin action would,
at a minimum, cost an additional $3,000.
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11. Loan Actions Resulting in Lender Preference
A Repair or a full or partial Denial of Liability is justified if a Lender takes any Loan
Action that confers a Preference onto the Lender or Borrower/Guarantor, which caused,
or could cause SBA to suffer a Material Loss on the Loan or adversely impacts the
soundness or integrity of the 7(a) Loan program. For example, if a Lender:
a. Applies recoveries from an 7(a) Loan to the Lender’s non-SBA loans(s) or to another
7(a) Loan with a lower guaranty percentage in a junior lien position;
b. Releases the collateral for a 7(a) Loan in order to use it as security for a non-SBA
loan;
c. Subordinates the lien securing an existing 7(a) Loan to a lien securing the Lender’s
non-SBA loan or 7(a) Loan with a lower guaranty percentage, without SBA’s prior
written approval; or
d. Renews or increases the amount owed on the Lender’s non-SBA loan or an 7(a) Loan
with a lower guaranty percentage, after subordinating the lien securing an existing
7(a) Loan to the lien securing the loan the Lender renewed or increased, without
SBA’s prior written approval.
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Chapter 26. Inspector General Referrals
A. Duty to Report Irregularities
All SBA officials, Lenders Borrowers contractors and others must report any known or
suspected irregularities involving 7(a) Loan programs, program participants, or personnel to
the SBA Office of the Inspector General ("OIG"). (13 C.F.R. §120.197)
B. Irregularities Requiring Referral
Examples of irregularities that SBA officials, Lenders, Borrowers, contractors and others
must refer to the OIG include:
1. Loan Application Fraud
False statements made by, or false documents submitted by, Loan applicants or
Borrowers regarding their 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 to meet Loan closing requirements. This includes, for
example, the following types of documents that are often submitted as “proof” that a
required equity injection was made:
a. False gift letter or affidavit;
b. False promissory note and standby agreement; or
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c. False bank statement and/or cashier’s check.
3. Loan Agent Fraud
Actions by Agents who orchestrate, facilitate or otherwise support any of the illegal acts
committed by Loan applicants, Lenders, 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 a 7(a)
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 and/or liquidating an
7(a) Loan.
7. Lender Misconduct
Misconduct by a Lender, an Associate of a Lender, an employee of the Lender or a Close
Relative of an employee, such as soliciting or accepting a bribe in connection with
making, closing, servicing, and/or liquidating an 7(a) Loan.
C. Referral Methods
SBA officials, Lenders, Borrowers, contractors, and others may refer matters to OIG by:
1. Calling the OIG Hotline toll-free at 1-800-767-0385;
2. Completing an SBA OIG Complaint Submission Form; 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 Referral Information
1. Answers to Basic Questions
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Referrals to OIG should include as much information as possible in response to these
basic questions:
a. Who is involved? (Name, occupation, address, phone numbers, email address, etc.)
b. What occurred and how is SBA involved?
c. When and where did, or will, the activity take place?
d. Why does the activity appear to be illegal or improper?
e. Dollar amount 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, SBA officials, Lenders, Borrowers, contractors, and others should
submit copies of documents that support the statements made in response to the questions
listed in Subparagraph d.1. above, as part of the referral.
E. Post-referral Responsibility
After referring a matter to OIG, the Person who made the referral should:
1. Report any new or additional information discovered about the matter to OIG;
2. Not disclose or discuss the existence of the OIG referral or investigation with any Person
other than SBA officials on a need-to-know basis;
3. Coordinate any activities related to the Loan with OIG in order to avoid taking any action
that could interfere with the investigation or subsequent prosecution; and
4. With OIG approval, and in coordination with OIG, take appropriate and timely action to
maximize recovery for the Loan.
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Chapter 27. Lender Wrap-up and SBA Status Change
A. General Requirements
Lenders must submit a Wrap-up Report in electronic form to the appropriate SBA Loan
Center for review and approval after all Prudent Liquidation activities are completed and
there is little or no likelihood of timely, cost-effective recovery for a 7(a) Loan. Upon receipt
and approval of the Wrap-Up Report by SBA, SBA will update the 7(a) Loan status in E-
Tran to be classified as “SBA Uncollectible” and refer the remaining balance of any legally
collectable Loan to Treasury for further collection, or charge off the 7(a) Loan if no
remaining Obligors are eligible for referral to Treasury. Lenders must retain their SBA Loan
Files in accordance with the retention requirements established by their regulators, or for six
years following the date of final disposition of an 7(a) Loan for SBA supervised Lenders.
SBA Lenders must submit all relevant legal, bankruptcy or contractual notices received
during the retention period to the appropriate SBA Loan Center for coordination with
Treasury collection efforts. Lenders must also cooperate with SBA in the production of
collateral release documents as needed, in conjunction with ongoing Treasury collection
actions.
B. Lender Wrap-up Report
The submission of a Wrap-up Report indicates that no further collection action will be
pursued by the Lender, and that the 7(a) Loan is ready for status change to SBA Uncollectible
and referral to Treasury, or charge off if no remaining Obligors are eligible for referral to
Treasury.
1. When Wrap-up Report Required
a. Lenders must submit a Wrap-up Report, including an assignment of the Loan Note,
personal guarantees, and any judgments to SBA, in electronic form to the appropriate
SBA Loan Center for review and approval within 30 calendar days after Prudent
Liquidation is completed, or upon receipt of a request from SBA, whichever occurs
first. After review and approval by SBA, SBA will update the status to be classified
as SBA Uncollectible and refer any remaining Loan balance and legally obligated
parties to Treasury for further collection actions, or charge off if no remaining
Obligors are eligible for referral to Treasury.
b. In addition to the requirement to submit a Wrap-Up Report within 30 calendar days
after completion of Prudent Liquidation, or upon request from SBA, Lenders must
comply with SBA’s Prudent Liquidation Deadline as defined in Chapter 2 of this
SOP. SBA’s Prudent Liquidation Deadline requires Lenders to prepare and submit
an acceptable Wrap-up Report in an electronic form to the appropriate SBA Loan
Center no later than 24 months after the date of SBA guaranty purchase, unless SBA
approves an extension in writing prior to the expiration of the 24-month period. (See
Chapter 24, Paragraphs E and F of this SOP for additional guidance on the Prudent
Liquidation Deadline and extensions to the Prudent Liquidation Deadline for Lender
resolution of 7(a) Loans.)
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2. Consequences of Failure to Submit a Timely Wrap-up Report
If a Lender fails to submit a Wrap-up Report within the timeframe specified in
Subparagraph B.1 above, in addition to referring the Lender to the SBA Office of Credit
Risk Management (OCRM) for possible enforcement action, SBA has the right to require
the Lender to repurchase SBA’s participation interest in the Loan, or proceed with the
status change to SBA Uncollectible and referral of the Loan and legally obligated parties
to Treasury for further collection or charge off, if appropriate, after the Lender assigns
the Loan documents to SBA.
3. Contents of Wrap-up Report
Lenders must submit Wrap-up Reports in electronic form to the appropriate SBA Loan
Center for SBA review and approval. All Wrap-up Reports must contain the information
outlined in SBA’s Wrap-up Report template found on SBA’s website, and the following
websites:
For loans serviced at the National Guaranty Purchase Center:
https://www.sba.gov/about-sba/sba-locations/loan-guaranty-centers/national-guaranty-
purchase-center-herndon-va
For loans serviced at the Commercial Loan Servicing Center:
https://www.sba.gov/about-sba/sba-locations/loan-guaranty-centers/commercial-loan-
service-centers
C. SBA Loan Status Change
1. General
SBA status change is an administrative action whereby SBA reclassifies a Loan from “In
liquidation” to “SBA Uncollectible” or “Charge Off” status. The SBA status change has
no impact on an Obligor's liability for the Loan balance.
2. When Appropriate
SBA charges off a Loan after receiving, reviewing and approving a Lender Wrap-up
Report in which the Lender confirms that it has:
a. Exhausted all Prudent Liquidation actions to achieve a recovery from: (1) voluntary
payments on the Note; (2) liquidation of the collateral; (3) compromising the balance
owed by the remaining Obligors; and (4) legally enforced collection actions; and
b. Determined that there are no further cost effective-collection actions available to the
Lender and the Lender is either unable to locate the remaining Obligors or the
remaining Obligors are unable and/or unwilling to repay the outstanding balance of
the Loan; or
c. Determined that the Loan balance is legally uncollectible due to (1) a discharge in
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bankruptcy (i.e., the release of a debtor from any further personal liability for pre-
bankruptcy debts), (2) the expiration of the statute of limitations (i.e., the passing of
the deadline for suing to collect the Note), or (3) the existence of another valid legal
defense available to the remaining Obligors under state or federal law.
D. Assignment of Loan Documents and Referral to Treasury for Further Collection
1. When Referral Required
After the status change to SBA Uncollectible, if further collection is not barred by a valid
legal defense such as compromise or discharge in bankruptcy, SBA refers the Loan and
remaining Obligors to Treasury within the time period required by the Debt Collection
Improvement Act of 1996 for further collection actions.
2. Assignment of Loan Documents to SBA
a. Lenders must assign the Loan Note and any personal guarantees or judgments to SBA
in the SBA approved assignment form and submit it to SBA with their Wrap-up
Report.
b. SBA may request Lenders to assign certain Loan Documents, including mortgages,
judgments, UCCs or other unliquidated collateral documents, to SBA at any time and
to record the requested assignment. Upon receipt of such a request, Lenders must
assign all requested Loan Documents to SBA within five (5) business days and record
the assignment of all requested Loan Documents to SBA in accordance with local
practice. Lenders must not assign Loan Documents to SBA outside of the Wrap-Up
process unless SBA requests such an assignment in writing. (See Paragraph B of this
Chapter for Wrap-Up Report contents, which includes an assignment of the Note to
SBA.)
3. Distribution of Post-Referral Recoveries
Lenders must submit any recoveries they receive for Loans that SBA has placed into
“SBA Uncollectible” status and referred to Treasury within 15-days of receipt using
payment code 172 in http://www.pay.gov/. SBA will remit the Lender’s share of any
recoveries received from the Treasury collection process (net of Treasury’s Loan
collection fees) according to the Lender’s participation interest in the Loan. Lenders may
direct questions regarding the distribution of post-SBA status change to SBA
Uncollectible recoveries to the SBA Treasury Offset Division in Birmingham, Alabama
at:
Supervisory Loan Specialist
Treasury Offset Division Fax:
1-202-481-5706
Email: BirminghamTOPS@sba.gov
Phone: 1-205-290-7141
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Note: Prior to referral, SBA send an automated due diligence notice to the Obligors
giving them 60 calendar days to either pay the Loan in full or negotiate an acceptable
payment plan. The two primary delinquent debt collection programs of the U.S.
Treasury are the Treasury Offset Program (“TOP”) and Cross-Servicing Program.
They are managed by the Debt Management Services division (“DMS”) of the
Treasury Bureau of the Discal Service. Under TOP, 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.
4. Post-Referral Servicing
a. Exclusive Authority of Treasury Department
After SBA changes the loan status to SBA Uncollectible and refers a Loan to
Treasury for further collection, the Lender must retain the Loan File in accordance
with the guidance provided in Chapter 3, Subparagraph D.5 of this SOP. Except as
provided below with regard to post-Treasury referral litigation, no one other than
Treasury may take any further servicing or liquidation action on the Loan. This
exclusion applies to both SBA and the Lender.
b. Notice of Bankruptcy Filing or Other Litigation
Upon receipt of notice of a bankruptcy filing or other litigation concerning an 7(a)
Loan referred to Treasury, the Person receiving the notice must immediately notify the
SBA Treasury Offset Division in Birmingham, Alabama so that SBA may recall the
Loan from Treasury and SBA District Counsel can take appropriate action in
response to the litigation. Lenders should fax or email the notice, including the
Borrower's name and 7(a) Loan number, to:
Supervisory Loan Specialist
Treasury Offset Division
Fax: 202-481-5706
Email: BirminghamTOPS@sba.gov
Phone: 1-205-290-7141
Note: Regardless of whether a Lender originally serviced the 7(a) Loan, after SBA
updates the status to SBA Uncollectible and refers the Loan to Treasury, or charges
off the 7(a) Loan, all subsequent litigation for the Loan is handled by SBA District
Counsel. (See Chapter 3, Paragraph B of this SOP.) However, SBA District Counsel
may request a re-assignment of the Loan Documents back to the Lender to handle
litigation for the Loan.
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E. Credit Reporting
1. Lender Responsibility for Credit Reporting
Lenders must report the combined balance of all SBA Loans, i.e., both Lender and SBA
shares, to appropriate credit reporting agencies until they submit a final Wrap-Up Report
that is acceptable to SBA. See Chapter 3, Subparagraph F.2 of this SOP for additional
guidance on credit bureau reporting.
2. SBA Responsibility for Credit Reporting
SBA reports the combined balance of all Loans after SBA status change , i.e., both Lender
and SBA shares, to appropriate credit reporting agencies and federal delinquent debtor
databases, e.g., Credit Alert Verification Reporting System ("CAIVRS").
Note: CAIVRS is an information system maintained by HUD 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.
F. Reporting Cancelled Debt to IRS
1. When IRS Form 1099-C Required
SBA files an IRS Form 1099-C (Cancellation of Debt) in the name of the Borrower
only—and not the Guarantors— and notifies the Borrower whenever the principal owed
on an SBA loan is $600 or more and the Loan balance has become uncollectible and the
Loan is placed in charge off status.
2. Responsibility for Issuing IRS Form 1099-C
The SBA Denver Finance Center will issue an IRS Form 1099-C to both the Borrower
and IRS for the aggregate amount of the uncollected balance of a charged off SBA Loan.
The aggregate amount reported by SBA includes both the SBA and Lender shares of the
Loan. SBA complies with IRS reporting requirements by filing a single IRS 1099-C for
both the SBA and Lender.
3. When IRS Form 1099-C is Issued
a. SBA reports the remaining/uncollected balance of a compromised Loan in the
calendar year after the year in which an approved compromise amount is paid in full;
b. SBA reports the remaining/uncollected balance of a Loan that is discharged in
bankruptcy in the calendar year after the year in which the Loan is discharged; and;
c. SBA reports the remaining/uncollected balance of a charged off Loan that is not
impacted by compromise or bankruptcy, in the calendar year after the year in which:
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(1) An event occurs that renders the Loan totally uncollectible (e.g., the date the
statute of limitations for collecting a Loan expires); or
(2) Treasury completes its collection actions and returns the Loan to SBA.
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