SOP 50 57: 7(a) Loan Servicing and Liquidation (March 1, 2013) — Small Business Administration, Office of Capital Access

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SBA SOP 50 57

7(a) LOAN
SERVICING and LIQUIDATION

Office of Capital Access
Small Business Administration
March 1, 2013
7(a) Loan Servicing and Liquidation
50 57

1. Purpose: Update and consolidate SBA policy and procedures on 7(a) loan servicing
and liquidation.

2. Personnel Concerned: All SBA employees.

3. SOPs Partially Revised:
(a) SOP 50 50 4—deletion of the provisions that apply solely to 7(a) loan servicing;
(b) SOP 50 51 3—deletion of the provisions that apply solely to 7(a) loan liquidation;
and
(c) SOP 70 50—deletion of Paragraph 4 in Chapter 5 of SOP 70 50, which lists the
loan servicing and liquidation actions that SBA counsel must review.

4. Originator: Office of Capital Access

Jeanne A. Hulit 03/01/13
Associate Administrator
Office of Capital Access
1
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Effective Date: March 1, 2013 2
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Table of Contents
Chapter 1. Introduction ........................................................................................................... 7
A. Purpose............................................................................................................................. 7
B. Authority ............................................................................................................................ 7
C. General Policy and Goals .................................................................................................. 7
D. Performance Standards..................................................................................................... 7
E. Exceptions to Policy .......................................................................................................... 8
Chapter 2. Definitions ............................................................................................................. 9
A. General Terms .................................................................................................................. 9
B. Environmental Terms .......................................................................................................21
Chapter 3. Lender Responsibility and Authority .................................................................23
A. Servicing and Liquidation .................................................................................................23
B. Litigation ...........................................................................................................................23
C. Decision-Making ...............................................................................................................23
D. Recordkeeping .................................................................................................................26
E. Loan Monitoring................................................................................................................28
F. Reporting Requirements...................................................................................................29
G. SBA Take Over of Servicing or Liquidation .......................................................................31
H. Enforcement Action by OCRM..........................................................................................31
Chapter 4. Loan Payment Administration ............................................................................33
A. Collection and Application of Loan Payments ...................................................................33
B. Post-Guaranty Purchase Servicing Fee on SBA Portion of Interest Payments .................34
C. Remittance of Borrower Loan Payments ..........................................................................35
D. Prepayment ......................................................................................................................35
E. Paid in Full Loans .............................................................................................................36
F. Reinstatement of Guaranty on Loan Mistakenly Coded "PIF" ...........................................36
Chapter 5. Environmental Risk Management .......................................................................37
A. Overview ..........................................................................................................................37
B. General Requirements .....................................................................................................37
C. When an Environmental Investigation is Required............................................................38
D. Environmental Investigation Process for Loans in Regular Servicing Status.....................38
E. Environmental Investigation Process for Loans in Liquidation Status ...............................38
F. Environmental Investigation Reports ................................................................................41
G. Remedial Action by Secured Creditor ...............................................................................41
H. Taking Title to Contaminated Property or Control of Business with Environment Risks ....41
Chapter 6. Servicing Requests..............................................................................................47
A. General Requirements .....................................................................................................47
B. Review and Analysis ........................................................................................................47
C. How To Obtain SBA Approval of a Proposed Loan Action ................................................50
D. Implementing Loan Actions ..............................................................................................52
Chapter 7. Modification of Note ............................................................................................53
A. General Requirements .....................................................................................................53
B. Payment Due Date ...........................................................................................................54
C. Change from Revolving to Non-revolving Loan ................................................................54
D. Installment Amount...........................................................................................................54
E. Interest Rate.....................................................................................................................54
F. Maturity Date ....................................................................................................................54

Effective Date: March 1, 2013 3
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G. Loan Amount ....................................................................................................................55
Chapter 8. Modification of Collateral Requirements ............................................................57
A. Subordination of Lien Position ..........................................................................................57
B. Inter-creditor Agreements .................................................................................................58
C. Substitution of Collateral...................................................................................................59
D. Substitution of Guarantor..................................................................................................60
E. Release of Lien without Consideration .............................................................................60
F. Release of Lien for Consideration ....................................................................................60
G. Release of Guarantor or Co-Borrower ..............................................................................61
H. Release of Condemnation Proceeds ................................................................................62
Chapter 9. Insurance Coverage............................................................................................63
A. General Requirements .....................................................................................................63
B. Mortgagee’s Title Insurance .............................................................................................63
C. Hazard Insurance .............................................................................................................63
D. Life Insurance...................................................................................................................64
E. Flood Insurance................................................................................................................66
Chapter 10. Modification of Management Covenants ..........................................................67
A. General Requirements .....................................................................................................67
B. Financial Statements ........................................................................................................67
C. Restrictions on Compensation, Dividends, Fixed Assets, etc............................................67
D. Standby Agreements ........................................................................................................67
Chapter 11. Assumption, Assignment or Sale of Loan .......................................................69
A. Assumption ......................................................................................................................69
B. Assignment of Lender's Interest in Loan ...........................................................................70
C. Sale of Loan in Liquidation Status ....................................................................................70
Chapter 12. Deferments .........................................................................................................71
A. Overview ..........................................................................................................................71
B. General Rule ....................................................................................................................71
C. General Requirement—Temporary Cash Flow Problem ...................................................71
D. Deferred Amount ..............................................................................................................71
E. Amount of Payments during Deferment Period .................................................................72
Chapter 13. Delinquent Secured Senior Loans ....................................................................73
A. General Requirements .....................................................................................................73
B. Procedure for Developing Best Strategy to Protect Junior Lien Securing SBA Loan .........73
C. Options.............................................................................................................................74
Chapter 14. Classifying Loans in Liquidation ......................................................................79
A. When Loans Must Be Classified in Liquidation Status ......................................................79
B. When the Note Should Be Accelerated ............................................................................79
C. Repurchase from Secondary Market ................................................................................79
D. Demand Letters ................................................................................................................80
E. Skip Tracing .....................................................................................................................80
F. Obligors in Active Military Service ....................................................................................80
G. Liquidation Plans ..............................................................................................................81
H. Payments and Recoveries on Loans in Liquidation Status ...............................................83
I. When Loans Should Be Removed from Liquidation Status...............................................83

Effective Date: March 1, 2013 4
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Chapter 15. Site Visits ...........................................................................................................85
A. When Required ................................................................................................................85
B. Preparation.......................................................................................................................85
C. Goals................................................................................................................................86
Chapter 16. Workouts ............................................................................................................89
A. Overview ..........................................................................................................................89
B. Required Financial Information .........................................................................................89
C. Feasibility Test .................................................................................................................90
D. Timing ..............................................................................................................................90
E. Requirement—New Consideration from Borrower ............................................................90
F. Options.............................................................................................................................90
G. Agreement Provisions ......................................................................................................92
H. SBA Approval ...................................................................................................................92
Chapter 17. Real Property Collateral Liquidation ................................................................93
A. General Requirements .....................................................................................................93
B. Procedure for Selecting Best Method of Liquidation .........................................................93
C. Liquidation Methods .........................................................................................................96
D. Credit Bids......................................................................................................................102
E. Eviction Proceedings ......................................................................................................102
F. Abandonment .................................................................................................................102
Chapter 18. Personal Property Collateral Liquidation .......................................................103
A. General Requirements ...................................................................................................103
B. Procedure for Selecting Best Method of Liquidation .......................................................103
C. Liquidation Methods .......................................................................................................105
D. Credit Bids......................................................................................................................110
E. Abandonment .................................................................................................................111
Chapter 19. Acquired Collateral ..........................................................................................113
A. General Requirements ...................................................................................................113
B. Acquiring Title to Collateral .............................................................................................113
C. Ownership Responsibilities ............................................................................................113
D. Expenses .......................................................................................................................114
E. Timeframe for Disposal ..................................................................................................115
F. Sale ................................................................................................................................115
G. Lease .............................................................................................................................118
H. Abandonment .................................................................................................................119
Chapter 20. Offer in Compromise .......................................................................................121
A. Overview ........................................................................................................................121
B. When Compromise is Appropriate ..................................................................................121
C. General Requirements ...................................................................................................122
D. Compromise with a Going Concern ................................................................................123
E. Offer and Supporting Documents ...................................................................................123
F. Review and Analysis of Offer..........................................................................................124
G. Inadequate Offers...........................................................................................................125
H. Payment Terms and Conditions .....................................................................................126
I. Obtaining SBA Approval .................................................................................................127
J. Completing the Compromise Process ............................................................................127

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Chapter 21. Litigation ..........................................................................................................129
A. General Requirements ...................................................................................................129
B. Legal Counsel Hired by Lenders ....................................................................................129
C. Litigation Plans ...............................................................................................................130
D. SBA Take Over of Lender-serviced Litigation .................................................................131
E. Documentation ...............................................................................................................132
F. Attorney Fees and Costs ................................................................................................132
G. Suit for Judgment on Note or Guaranty ..........................................................................134
H. Judicial Foreclosure and Deficiency Judgment ...............................................................134
I. Settlement Offers ...........................................................................................................134
J. Bankruptcy Proceedings.................................................................................................134
K. Probate Proceedings ......................................................................................................136
L. Enforcement of Judgments .............................................................................................137
M. Application of Litigation Recoveries ................................................................................137
Chapter 22. Expenses and Recoveries ...............................................................................139
A. Classification of Expenses ..............................................................................................139
B. Recoveries .....................................................................................................................140
C. Payment of Non-recoverable Expenses Incurred by Lenders .........................................141
D. Recoupment of Recoverable Expenses Incurred by Lenders .........................................141
E. SBA Review and Approval .............................................................................................142
Chapter 23. Loan Guaranty Purchase Requests ................................................................145
A. Overview ........................................................................................................................145
B. Interest Paid on Guaranteed Portion of Loan..................................................................145
C. Requirements .................................................................................................................146
D. Practice Tips for Lenders................................................................................................148
Chapter 24. Denial of Liability on 7(a) Guaranty ................................................................149
A. When SBA May Deny Liability ........................................................................................149
B. Loss Attributable to Lender .............................................................................................149
C. Repairs ...........................................................................................................................150
D. Partial Denial of Liability .................................................................................................151
E. Full Denial of Liability .....................................................................................................151
F. Voluntary Termination of Guaranty .................................................................................151
G. Examples of When a Full or Partial Denial of Liability May Be Justified ..........................151
Chapter 25. Inspector General Referrals ............................................................................159
A. Duty to Report Irregularities ............................................................................................159
B. Irregularities Requiring Referral ......................................................................................159
C. Referral Methods ............................................................................................................160
D. Required Information ......................................................................................................160
E. Post-referral Responsibility .............................................................................................161
Chapter 26. Charge-off and Wrap-up Procedures..............................................................163
A. General Requirements ...................................................................................................163
B. Charge-off ......................................................................................................................163
C. Wrap-up Report ..............................................................................................................163
D. Referral to Treasury for Further Collection......................................................................166
E. IRS Notification of Cancelled Debt .................................................................................167
F. Credit Bureau Reporting .................................................................................................168

Effective Date: March 1, 2013 6
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Chapter 1.
Introduction
____________________________________________________________________________

A. Purpose

SOP 50 57 1 sets out the standard operating policies and procedures of the Small Business
Administration (“SBA”) for the administration of 7(a) Loans that are in "regular servicing” and
"liquidation" status.

Note: An SBA loan moves from "approval" status (governed by SOP 50 10) to "regular servicing”
status when the loan has been closed and the final loan disbursement has been made. It moves
from "regular servicing” status to "liquidation” status if the loan is in default and has been classified
in liquidation pursuant to Chapter 14 of this SOP.

B. Authority

The policy and procedures set out in this SOP are based on 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, the Debt Collection Improvement Act of 1996 (“DCIA”) and the Federal Debt
Collection Procedures Act.

C. General Policy and Goals

Borrowers should repay their SBA loans in accordance with the terms specified in the Loan
Authorization, Note and the other Loan Documents. However, when loan servicing and
liquidation activities are necessary, they should reflect a balancing of SBA's interest in: (1)
achieving the goals of the loan program, i.e., helping entrepreneurs start, build and grow
viable small businesses; and (2) maintaining the integrity of the loan program, i.e., ensuring
that the Agency can maximize its recovery if the Borrower defaults on the loan.

D. Performance Standards

1. All Lenders must service and liquidate their SBA loans in a diligent, commercially
reasonable manner that is free of conflicts of interest and Preferences, and is consistent
with the Loan Authorization, prudent lending practices and the SBA Loan Program
Requirements in effect at the time the action is taken. (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 or the National Credit Union Administration), 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.

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E. Exceptions to Policy

Any contemplated Loan Action that is in conflict with the use of the word “must” in this SOP
must be treated 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. A request for an exception to policy must be submitted
through the appropriate SBA Loan Center to the Director of Financial Program Operations
(“OFPO”) and the Director of the Office of Financial Assistance for joint approval.

Effective Date: March 1, 2013 8
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Chapter 2.
Definitions
____________________________________________________________________________

The terms defined below have the same meaning wherever they are used in this SOP. Unless
otherwise indicated, defined terms are capitalized wherever they appear.

A. General Terms

1. 7(a) 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 SBA loan servicing and liquidation purposes, (See SOP 50 10 for
SBA Loan Program Requirements pertaining to appraisals for loan origination
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 SBA loan, which is
obtained in accordance with following requirements:

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”].)

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b. Appraisal Standards

(1) Real Property

(a) A real property Appraisal to support a substitution of collateral Loan Action
should comply with the appraisal requirements in SOP 50 10 that applied to
the original collateral;

(b) A real property Appraisal should comply with the Uniform Standards of
Professional Appraisal Practice whenever required by prudent lending
practices, e.g., to support Loan Actions dealing with release of liens for
consideration, Protective Bids, or deeds in lieu of foreclosure, 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
plenty of equity to secure the SBA loan; and

(c) In all other cases, (i.e., when neither SBA Loan Program Requirements nor
prudent lending practices require an appraisal in compliance with the Uniform
Standards of Professional Appraisal Practice), a real property Appraisal may
consist of a broker price opinion (“BPO”) prepared in substantial compliance
with the Broker Price Opinion Board Standards. For example, a BPO may be
used to support a Loan Action to abandon real property collateral if it is
apparent, (based on the tax assessed value, current market conditions,
condition of the property, balance owed on prior liens, etc.,) that there is little
or no equity available to secure the SBA loan.

(2) Personal Property

(a) A personal property Appraisal to support a substitution of collateral Loan
Action should comply with the appraisal requirements in SOP 50 10 that
applied to the original collateral;

(b) A personal property Appraisal should comply with the Uniform Standards of
Professional Appraisal Practice whenever required by prudent lending
practices, e.g., to support Loan Actions dealing with unique items of personal
property such as coin collections, jewelry, or art work; and

c. Report Format

All Appraisal reports should contain the following:

(1) The appraiser's opinion as to value of the property, including an opinion as to the
individual value of any item of personal property valued at $5,000 or more at the
time the loan was made;

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(2) The type of valuation, e.g., liquidation or fair market value, and how the appraisal
is to be used;

(3) The methodology, standards, resources and markets the appraiser used or relied
on;

(4) A complete and accurate description of the collateral, including its current
condition, photographs, and the manufacturer, model, and serial number of
significant items of personal property, i.e., items with a Liquidation Value of
$5,000 or more;

(5) The date and location of the appraisal inspection, and the effective date of the
valuation;

(6) The appraiser's certification that he or she has no financial interest in the
property or conflict of interest with SBA, the 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 an SBA loan.

5. Associate of the Borrower means an officer, director, Key Employee of the Borrower,
or a Person who has an ownership interest of 20% or more in the Borrower's business;
any entity in which one or more of the foregoing Persons has an ownership interest of
20% or more in the entity's business; or any Person in control of, or controlled by, the
Borrower except a Small Business Investment Company licensed by SBA. (13 C.F.R. §
120.10)

6. Associate of a Lender means an officer, director, Key Employee of a Lender or other
senior lender, or owner of 20% or more of the value of the Lender's stock or debt
instruments; an Agent involved in the loan process; or any entity in which one or more of
the foregoing Persons, or a Close Relative of any such Person, has an ownership
interest of 20% or more. (13 C.F.R. § 120.10)

7. Borrower means the Person or Persons who executed the Note evidencing the SBA
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. 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 an SBA loan,
such as Loan Actions and the substance of telephone calls, meetings or letters
regarding the loan.

Effective Date: March 1, 2013 11
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10. Credit Bid means an offer to purchase at a foreclosure sale submitted by a creditor
who, instead of paying cash, will "credit" the bid amount against the debt owed to the
creditor.

11. Default Charges means all monetary amounts payable as the result of a default on a
senior secured creditor’s loan, such as prepayment penalties, late fees and interest paid
at an escalated rate.

12. 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. A Denial of Liability may be for the full amount of the
guaranteed portion of the loan or any part thereof.

13. Early Default means any of the following events of default that occurred either within 18
months of the initial disbursement of the loan or within 18 months of the final
disbursement of the loan if the final disbursement occurred more than six months after
the initial disbursement, unless the Borrower cured the default and made the scheduled
loan payments for 12 consecutive months following the 18 month period:

a. Failure to make a scheduled loan payment;

b. Funding a scheduled loan payment from the sale of collateral rather than from
business operations;

c. Deferment of more than three consecutive scheduled full payments; or

d. Any other event of default that required the loan to be classified in liquidation status,
e.g., bankruptcy.

14. 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.

15. FTA means the entity that acts as SBA's fiscal and transfer agent. (13 C.F.R. § 120.
600(d))

16. Good Faith, whether capitalized or not, means the absence of any intention to seek an
unfair advantage or to defraud another party; i.e., an honest and sincere intention to
fulfill one's obligations in the conduct or transaction concerned.

17. Guarantor means a Person who executed a Guaranty as security for a Note executed
by a Borrower.

18. Guaranty means SBA Form 148 (Unconditional Guarantee), SBA Form 148 L
(Unconditional Limited Guarantee) or a substantially similar document executed by a
Guarantor that contains an unconditional promise to pay the debt owed on a Note if the
Borrower fails to pay it.

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19. Including, whether capitalized or not, means "including but not limited to," i.e., the list is
exemplary and not exhaustive.

20. Key Employee means any Person hired by a business to manage its day-to-day
operations, including, for example, the hiring and firing of employees, and the
expenditure of money.

21. Lender or 7(a) Lender means an institution that has executed a Participation
Agreement (SBA Form 750) with SBA under the 7(a) Guaranteed Loan Program. (13
C.F.R. § 120.10)

22. Liquidation Plan means a Lender's written plan outlining the actions that it intends to
take to maximize recovery on a specific SBA loan, which includes the information
outlined in the template accessible from www.sba.gov/for-lenders.

23. Liquidation Value is the likely price collateral will sell for if sold quickly and with limited
exposure to potential buyers. An Appraisal is necessary to determine the Liquidation
Value of real or personal property collateral unless it consists of:

a. Cash or Equivalent—the Liquidation Value of cash or cash equivalent items such as
retirement accounts, trust funds, life insurance policies with a cash surrender value,
certificates of deposit, letters of credit, or other commercial instruments should be the
net amount arrived at after deducting verifiable, documented costs such as penalties
for early withdrawal; or

b. Motor Vehicles and Stock—the Liquidation Value of items that are customarily sold in
a recognized market should be based on industry standards. For example, the
Liquidation Value of motor vehicles should be based on NADA or Kelley Blue Book
value, and the Liquidation Value of publically traded stock should be based on official
stock exchange prices.

24. Litigation Plan means a Lender's written plan outlining the court proceedings it intends
to initiate or otherwise participate in to maximize recovery on a specific SBA loan, which
includes the information outlined in the template accessible from www.sba.gov/for-
lenders as well as any other information or documentation required by Chapter 21, such
as the qualifications of the attorney the Lender intends to hire, a copy of the engagement
letter, and the justification for, and estimate of, any expense listed in Chapter 21,
Paragraph F that is presumed to be unnecessary, unreasonable and non-customary
such as the use of multiple law firms, travel, or the appointment of a receiver to perform
routine liquidation duties.

25. Loan Action, (formerly known as an SBA Form 327 Action), means an activity or
decision regarding a specific SBA loan including a decision to engage or not to engage
in a particular activity, such as a decision not to enter a Protective Bid at a senior
lienholder's foreclosure sale.

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26. Loan Action Record means the paper or electronic document used to memorialize the
decision and justification for a specific Loan Action. It may consist of a memo, email,
letter, SBA Form 327 or other document provided that it contains: the Borrower's name
and the SBA loan number; the 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 applicable SOP provision that
provides authority for the proposed Loan Action.

27. 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. (13 C.F.R. § 120.10)

28. Loan Documents means the Loan Authorization, Note, Guaranty, lien instruments, and
all other agreements and documents related to an SBA loan.

29. Loan File, whether capitalized or not, means the electronic or paper folder dedicated
exclusively to storing a hard copy or an electronic copy of all of the Loan Documents
pertaining to a specific SBA loan.

30. Loan Program Requirements mean the requirements pertaining to SBA’s 7(a) Loan
Program, as revised from time to time, imposed by statutes, regulations, use of the word
“must” in SOPs, contracts, Loan Authorizations, and SBA Notices and program guides.
(13 C.F.R. § 120.10)

31. Material Loss means: (a) with regard to personal property collateral—a single loss or
the aggregate amount of multiple losses totaling $5,000 or more; and (b) with regard to
real property collateral—a loss in the amount of $10,000 or more.

32. Must, whether capitalized or not, means that the action is mandatory.

33. Non-recoverable Expense means a cost that is not SBA-approved and cannot be
recouped by being added to the principal balance of the Note, because, e.g., the cost
was not: (a) related to collection of amounts due under the Note, enforcement of the
terms of the Loan Documents, or the preservation or disposal of the collateral; (b)
necessary, reasonable or customary; or (c) incurred in accordance with prudent lending
practices or SBA Loan Program Requirements.

34. Non-routine Litigation means: (a) all litigation where factual or legal issues are in
dispute and require resolution through adjudication; (b) any litigation where legal fees
are estimated to exceed $10,000 in the aggregate; (c) any litigation involving a loan
where a Lender has an actual or potential conflict of interest with SBA; or (4) any
litigation involving a 7(a) Loan where the Lender has made a separate loan to the same
Borrower that is not an SBA loan. (13 C.F.R. § 120.540(c)(1))

35. Note means the promissory note (e.g., SBA Form 147) executed by the Borrower on an
SBA loan.

36. Obligor means any Person with direct liability for repaying an SBA loan, such as the
Borrower, an assumptor, and every Person with contingent liability, such as a Guarantor.

Effective Date: March 1, 2013 14
SOP 50 57

37. Office of Financial Program Operations ("OFPO") means the SBA office in charge of
administering SBA's loan program operations and managing SBA’s loan portfolio.

38. Person means any individual, corporation, partnership, limited liability company,
association, unit of government, or other legal entity, however organized. (13 C.F.R. §
120.10)

39. Pilot Loan Program means any program designated by SBA as a pilot loan program at
the time that the loan is approved by SBA, and as of November 1, 2012, includes the
following programs: Patriot Express, Community Advantage, and Dealer Floor Plan.

40. Preference means an arrangement not pre-approved by SBA that gives a 7(a) Lender a
preferred position compared to SBA relating to the making, servicing, or liquidation of an
SBA loan. (13 C.F.R. § 120.10) E.g., a Lender would receive a Preference if it released
the collateral for an SBA loan in order to use it as security for a non-SBA loan to the
same Borrower.

41. 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.

42. 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 guaranteed portion of a
7(a) Loan.

43. Purchase Package means the packet of documentation prepared and submitted by a
7(a) Lender to support its request to have SBA honor its guaranty by purchasing the
guaranteed portion of a loan.

44. Real Estate Owned ("REO") means real property collateral acquired by a Lender or
SBA (formerly referred to by SBA as "COLPUR").

45. Recoverable Expense means an SBA approved, necessary, reasonable and customary
cost incurred to collect amounts due under the Note, to enforce the terms of the Loan
Documents, or to preserve or dispose of collateral, which according to the terms of the
Note, can be recouped by adding it to the principal balance of the loan.

46. Recoverable Value means the net dollar amount that a prudent lender could reasonably
expect to recover by liquidating a particular piece of collateral. Recoverable Value is
determined by deducting the following amounts from the Liquidation Value of the
collateral: (a) the balance owed on senior liens (less amounts waived or subordinated
by a Loan Document); (b) Recoverable Expenses associated with any necessary lien
foreclosure action; and (c) if the collateral is likely to be acquired by SBA or the Lender
at the foreclosure sale (e.g., real property), the expenses associated with the care,
preservation and resale of the acquired collateral.

Effective Date: March 1, 2013 15
SOP 50 57

47. Repair means an agreement between SBA and a 7(a) Lender as to a specific dollar
amount that will be deducted from the amount SBA pays on the Lender's SBA loan
guaranty in order to fully compensate SBA for an actual or anticipated loss on the loan
caused by the Lender’s actions or omissions. A Repair does not reduce the percent of
the loan guaranteed by SBA or SBA’s pro-rata share of expenses or recoveries.

48. Routine Litigation means uncontested litigation, such as non-adversarial matters in
bankruptcy and undisputed foreclosure actions, the estimated legal fees for which will
not exceed $10,000 in the aggregate. (13 C.F.R. § 120.540(c)(2))

49. SBA Loan Center means the following SBA facilities:

a. National Guaranty Purchase Center ("NGPC")

Geographic Coverage: SBA Regions 1-10

Loan Type and Status:
Standard, CLP, PLP and EWCP 7(a) Loans classified in liquidation status

Street Address: 1145 Herndon Parkway, Suite 900, Herndon, VA 20170

Web Site Address: http://www.sba.gov/HerndonNGPC

Telephone Numbers:
Phone: (703) 487-9283
Toll Free: (877) 488-4364

Fax Number:
General: (202) 481-4674
Expense Reimbursement: 202-481-4599
Wrap-up Reports: 202-292-3789

Email:
General inquiries: loanresolution@sba.gov
Loans sold on the secondary market: secondarymarketliq@sba.gov
Loans not sold on the secondary market: sbapurchase@sba.gov
Expense Reimbursement: SBACPC@sba.gov
Wrap-up Reports: SBAChargeoff@sba.gov

b. SBA Commercial Loan Service Center (“CLSC”) West

Geographic Coverage: SBA Regions 5, 6 (except for Arkansas, Oklahoma and
Texas) 7, 8, 9 , and 10.

Loan Type and Status:
(1) Fully disbursed Standard, CLP, and PLP 7(a) Loans classified in regular
servicing status;
(2) Fully disbursed Small Loan Advantage, Express and Pilot Loan Program 7(a)
Loans, including Community Advantage loans, in regular servicing or liquidation
status, and
(3) ARC loans classified in liquidation status.

Effective Date: March 1, 2013 16
SOP 50 57

Street Address: 801 R Street, Suite 101, Fresno, CA 93721

Web Site Address: http://www.sba.gov/FresnoCLSC

Telephone Numbers:
Phone: (559) 262-4960
Toll Free: (800) 347-0922

Fax Numbers:
Servicing: (202) 481-0483
Express Purchase: (202) 481-0663
Post-Servicing: (202) 481-1756

Email:
Servicing: fsc.servicing@sba.gov
Express Purchase: fsc.expresspurchases@sba.gov
Post-servicing: fsc.postservicing@sba.gov

c. SBA Commercial Loan Service Center (“CLSC”) East

Geographic Coverage: SBA Regions 1, 2, 3, 4, and 6 (except New Mexico and
Louisiana).

Loan Type and Status:
(1) Fully disbursed Standard, CLP, and PLP 7(a) Loans classified in regular servicing
status;
(2) Fully disbursed Small Loan Advantage, Express and Pilot Loan Program 7(a)
Loans, including Community Advantage loans, in regular servicing or liquidation
status; and
(3) ARC loans classified in liquidation status.

Street Address: 2120 Riverfront Drive, Suite 100, Little Rock, AR 72202-1794

Web Site Address: http://www.sba.gov/LittleRockCLSC

Telephone Numbers:
Phone: (501) 324-5871
Toll Free: (800) 644-8564

Fax Numbers:
Servicing: (202) 292-3878
Liquidation: (202) 481-6481

Email:
Servicing: lrsc.servicing@sba.gov
Liquidation: lrsc.504liquidation@sba.gov
Customer Service: lrsc.customerservice@sba.gov
Express Purchase: LRSC.ExpressPurchase@sba.gov

Effective Date: March 1, 2013 17
SOP 50 57

d. SBA Standard 7(a) Loan Guaranty Processing Center (“LGPC”)

Geographic Coverage: SBA Regions 1-10

Loan Type and Status: All ARC Loans that are not in liquidation or charge-off status.

Street Address: 6501 Sylvan Road, Suite 122, Citrus Heights, CA 95601

Web Site Address: http://www.sba.gov/CitrusHeightsLGPC

Telephone Number: Toll Free: (877) 475-2435

Fax Number: Servicing: (916) 2735-1680

Email: 7(a) Servicing: 7aloanmod@sba.gov
ARC Servicing: ARCloanmod@sba.gov
ARC Form 1502 Issues: ARC1502Inquiries@sba.gov

e. U. S. Export Assistance Centers (“USEACs”)

Loan Type and Status: All revolving and non-revolving Export Working Capital
(“EWCP”) loans in regular servicing status.

Geographic Coverage and Contact Information: USEACs are located in the following
cities:

Atlanta
Territory: Georgia, Alabama, West/Central Tennessee, Kentucky
75 Fifth Street, NW, Suite 1055, Atlanta, GA 30308
Telephone: (404) 897-6089 Fax: (202) 481-2966
Email: Sandro.murtas@sba.gov
Arlington, VA
Territory: Maryland, District of Columbia, Virginia, West Virginia, Delaware
2800 S. Randolph St., Suite 800, Arlington, VA 22206
Telephone: (202) 557-4063 Fax: (202) 292-3539
Email: william.houck@sba.gov
Boston
Territory: Maine, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island
JFK Federal Building, Suite 1826A, 55 New Sudbury Street, Boston, MA 02203
Telephone: (617) 565-4305 Fax: (617) 565-4313
Email: john.joyce@sba.gov
California
Irvine
Territory: Southern California, Southern Nevada, Arizona
2302 Martin Court, Suite 315, Irvine, CA 92612
Telephone: (949) 660-8935 Fax: (202) 481-4434
Email: martin.selander@sba.gov

Effective Date: March 1, 2013 18
SOP 50 57

Sacramento
Territory: Northern California - Fresno to the Oregon border, Northern Nevada,
Hawaii, Guam
6501 Sylvan Road, Citrus Heights, CA 95610
Telephone: (916) 735-1708 Fax: (202) 741-6851
Email: jerry.avila@sba.gov
Charlotte
Territory: North Carolina, South Carolina, Eastern Tennessee
521 East Morehead Street, Suite 435, Charlotte, NC 28202
Tel: (704) 333-4886 ext. 226 Fax: (704) 332-2681
Email: dan.holt@trade.gov
Chicago
Territory: Wisconsin, Illinois, Iowa
200 West Adams Street, Suite 2450, Chicago, IL 60606
Telephone: (312) 353-8065 Fax: (202) 481-2281
Email: john.nevell@sba.gov
Cleveland
Territory: Ohio, Western New York, Western Pennsylvania
600 Superior Avenue, Suite 700, Cleveland, OH 44114
Telephone: (216) 522-4731 Fax: (216) 522-2235
Email: patrick.hayes@sba.gov
Dallas/Fort Worth
Territory: Texas, Oklahoma
4300 Amon Carter, Blvd., Suite 114, Fort Worth, TX 76155
Telephone: (817) 684-5506 Fax: (817) 684-5516
Email: richard.schulze@sba.gov
Denver
Territory: Colorado, New Mexico, Utah, Wyoming
1625 Broadway, Suite 680 Denver, CO 80202
Telephone: (303) 844-6623 ext. 218 Fax: (202) 481-0540
Email: Bryson.Patterson@sba.gov
Detroit
Territory: Michigan, Indiana
440 Burroughs, Suite 315, Detroit, MI 48202
Telephone: (313) 872-6793 Fax: (202) 481-2666
Email: john.ogara@sba.gov
Miami
Territory: Florida, Puerto Rico
5835 Blue Lagoon Drive, Suite 203, Miami, FL 33126
Telephone: (305) 526-7425 ext. 21 Fax: (202) 481-4471
Email: mary.hernandez@sba.gov
Minneapolis
Territory: Minnesota, North Dakota, South Dakota
100 North Sixth Street 210-C Butler Square
Minneapolis, MN 55403

Effective Date: March 1, 2013 19
SOP 50 57

Telephone: (612) 348-1642 Fax: (612) 370-2303
Email: carlos.sosa@sba.gov
New Orleans
Territory: Louisiana, Arkansas, Mississippi
423 Canal Street, Suite 419, New Orleans, LA 70130
Tel: (504) 589-6730 Fax: (202) 481-1525
Email: pellson.lau@sba.gov
New York City
Territory: New York's 5 boroughs plus Eastern Upstate New York, New Jersey
290 Broadway, Room 1312, New York, NY 10007
Telephone: (212) 809-2645 Fax: (212) 809-2687
Email: toni.corsini@trade.gov
Philadelphia
Territory: Eastern Pennsylvania
The Curtis Center, 601 Walnut Street, Suite 580 West, Philadelphia, PA 19106
Tel: (215) 597-6110 Fax: (202) 481-5216
Email: robert.elsas@trade.gov
Portland
Territory: Oregon, Southern Idaho, Montana
One World Trade Center, 121 SW Salmon Street, Suite 242, Portland, OR 97204
Telephone: (503) 326-5498 Fax: (202) 292-3534
Email: jeff.deiss@trade.gov
Seattle
Territory: Washington, Alaska, Northern Idaho
2001 Sixth Avenue, Suite 2610, Seattle, WA 98121
Telephone: (206) 553-0051 ext. 228 Fax: (206) 553-7253
Email: pru.balatero@trade.gov
St. Louis
Territory: Kansas, Missouri, Nebraska
8235 Forsyth Blvd., Suite 520, St. Louis, MO 63105
Telephone: (314) 260-3788 Fax: (314) 425-3381
Email: john.blum@trade.gov

50. Seasoned Loan or a loan that is “Seasoned” means that for 18 months after the initial
disbursement or 18 months after the final disbursement if it occurred more than six
months after the initial disbursement, or if there was a default, the Borrower cured it and
for 12 consecutive months following the 18 month post-disbursement period, the
Borrower did not:

a. Fail to make a scheduled loan payment;

b. Fund a scheduled loan payment from the sale of collateral;

c. Have more than three consecutive scheduled full payments deferred; or

d. Experience an event of default that required the loan to be classified in liquidation.

Effective Date: March 1, 2013 20
SOP 50 57

51. Servicing Request means a Loan Action requested by a Borrower regardless of
whether it is simple (e.g., address change) or more complex such as the Loan Actions
covered in Chapters 7 through 12 of this SOP (e.g., subordination of lien position).

52. Should, whether capitalized or not, means that the action is recommended but not
required.

53. Site Visit Report means the paper or electronic record documenting the Lender’s
findings and conclusions after visiting 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.

54. Supporting Document or “Supporting Documentation” means the original, or a
complete and accurate executed copy, (i.e., it must contain all of the required signatures
and include all of the addendums thereto), of any document relied upon to reach a
decision regarding a Loan Action, e.g., a purchase and sale agreement, Appraisal or
Environmental Investigation Report.

55. Treasury means the U.S. Department of the Treasury Bureau of Financial Management
Service.

56. Wrap-up Report refers to the documentation, whether or not it is entitled “Wrap-up
Report,” that a Lender must provide to the SBA Loan Center after completing the
liquidation of an SBA loan, which includes the information outlined in the template
accessible from http://www.sba.gov/for-lenders.

B. Environmental Terms

Effective Date: March 1, 2013 21
SOP 50 57

Effective Date: March 1, 2013 22
SOP 50 57

Chapter 3.
Lender Responsibility and Authority

A. Servicing and Liquidation

7(a) Lenders must service and liquidate:

1. All of the SBA loans in their portfolio both before and after SBA purchases the
guaranteed portion.

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 SBA loans to secondary market investors and keeping track of current and prior registered
holders ("investors"), whenever a 7(a) Loan is sold on the secondary market, the FTA is
responsible for:
1. Tracking loan payment histories;
2. 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.);
3. Resolving Form 1502 reporting discrepancies with Lenders;
3
4. Remitting payments to investors, (FTA sends one check to the investor that includes an
accounting of the funds for all loans held by that investor.);
5. Forwarding all Servicing Requests from a Lender to the investor and forwarding the response
back to the Lender;
6. Notifying SBA of delinquent loans; and
7. Handling SBA and Lender repurchases from investors.

B. Litigation

Lenders, are responsible for conducting all litigation needed to ensure recovery on all of the
SBA loans in their portfolios except those loans that have been referred to Treasury
pursuant to Chapter 26. After a loan has been referred to Treasury, SBA has sole authority
to conduct any litigation that may become necessary; and Lenders must immediately notify
the SBA Treasury Offset Division (via fax 202-481-0592 or email BirminghamTOPS@sba.gov)
of any pending litigation, including bankruptcy filings, so that the loan can be recalled from
Treasury and appropriate action taken by SBA legal counsel. (See Chapter 21 for
information on litigation, including when SBA’s prior written approval of a Lender’s Litigation
Plan is required.)

C. Decision-Making

1. Unilateral Authority

Lenders have unilateral authority to take all necessary action to service and liquidate the
7(a) Loans in their portfolio, subject to SBA’s right to take over the servicing or
liquidation of any loan as provided in Paragraph G and except as provided in
Subsections 2 and 3 below, provided that their actions are consistent with the
performance standards set out in Chapter 1.

Effective Date: March 1, 2013 23
SOP 50 57

2. Unilateral Actions that Require Notice to SBA

Lenders must notify the appropriate SBA Loan Center in writing or via e-Tran when they
take substantive unilateral Loan Actions, such as those listed below. For specific
information on how to notify SBA, see the most recent version of the 7(a) Lenders
Servicing and Liquidation Matrix.

a. Decrease the SBA guaranty percentage;

b. Extend the final disbursement date;

c. Cancel SBA’s guaranty before guaranty purchase;

d. Modify the Note repayment terms including the interest rate;

e. Extend the maturity date;

f. Change the Borrower’s name, address, legal structure, employer identification
number, or Social Security number;

g. Classify the loan in “liquidation” status;

h. Classify the loan in “paid in full” status;

i. Reclassify loan in “regular servicing” status;

j. Approve an assumption of the loan without release of an Obligor;

k. Change the loan from revolving to non-revolving; or

l. Transfer or sell 90% or less of the loan.

3. Actions Requiring Prior SBA Approval

Lenders must obtain SBA’s prior written approval before taking any Loan Action that
involves:

a. Exception to policy;

b. Preference;

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;

f. Release of a co-Borrower or Guarantor;

Effective Date: March 1, 2013 24
SOP 50 57

g. Compromise of the principal loan balance;

h. Assumption of the loan with release of an Obligor;

i. Extraordinary servicing fee;

j. Prepayment that requires a subsidy recoupment fee;

k. Liquidation Plan or amended Liquidation Plan for a CLP loan;

l. Litigation Plan or amended Litigation Plan;

m. Acquisition of title to any property in SBA’s name;

n. Acquisition of title to Contaminated property in SBA’s name or the Lender’s name;

o. Operation or control of a business that handles Hazardous Substances;

p. Operation or control of a business located on Contaminated Property;

q. Increase in the loan amount;

r. Increase in SBA’s guaranty percentage;

s. Reinstatement of SBA’s guaranty;

t. Emergency purchase of the loan from the secondary market; or

u. Transfer or sale of more than 90% of the loan.

4. Where to Send Notices and Requests for SBA Approval

a. Prior to Full Disbursement

Notices and requests for SBA’s prior approval pertaining to loans that have been
approved but are not fully disbursed should be sent to the LGPC at Citrus Heights.

b. Post-Full Disbursement

Notices and requests for SBA’s prior approval pertaining to loans that have been fully
disbursed should be sent to the appropriate CLSC (at Fresno or Little Rock) or to the
NGPC at Herndon. (See the definition of “SBA Loan Center” in Chapter 2 for a
complete list.)

Note: SBA Loan Centers should respond to Lenders’ requests for approval of proposed Loan
Actions within 15 business days from the date SBA received the request. (13 C.F.R. §
120.541)

Effective Date: March 1, 2013 25
SOP 50 57

5. Requests for Reconsideration

When SBA’s prior approval is required, a request for reconsideration of an SBA Loan
Center’s decision regarding a proposed Loan Action may only be submitted if relevant
new facts are provided. The request for reconsideration must be prepared and
submitted in accordance with the procedures that applied to the original request.

6. Appeal of Final Decision

a. Liquidation—Liquidation Plan, Loan Action or Expense

The final decision of a SBA Loan Center Director or designee regarding approval of a
Liquidation Plan, liquidation Loan Action (e.g., compromise), or liquidation expense,
which is not related to litigation or environmental risk management, may be appealed
to the Director of OFPO, provided that the appeal: (1) is in writing; (2) includes a
copy of the decision and Supporting Documents; (3) states the reason(s) why the
decision is believed to be incorrect; and (4) is submitted within 30 calendar days of
the date of the decision. (13 C.F.R. § 120.542(d))

b. Litigation—Litigation Plan or Expense

The final decision of an SBA Loan Center Director or designee regarding approval of
a Litigation Plan or litigation expenses (e.g., attorney fees and costs) may be
appealed 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 decision and Supporting Documents; (3) states the reason(s) why the decision is
believed to be incorrect; and (4) is submitted within 30 calendar days of the date of
the decision. (13 C.F.R. § 120.542(e))

c. Environmental Risk Management—Denial of Request re Contaminated Property

The final decision of an SBA Loan Center Director or designee denying a request for
approval to take title to Contaminated Property or to take over the operation of a
business that handles Hazardous Substances or is located on Contaminated
Property may be appealed to the Associate General Counsel for Litigation, who will
consult with the Director of OFPO, provided that the appeal: (1) is in writing; (2)
includes a copy of the decision and Supporting Documents; (3) states the reason(s)
why the decision is believed to be incorrect; and (4) is submitted within 30 calendar
days of the date of the decision.

D. Recordkeeping

1. General Requirements

All servicing and liquidation Loan Action decisions, including the justification for the
decision, must be documented in the Loan File or Computer Tracking System.

Effective Date: March 1, 2013 26
SOP 50 57

2. Loan Action Records and Supporting Documents

Loan Action Records should be dated and kept in the Loan File along with the
Supporting Documents, such as Appraisals, credit reports and Environmental
Investigation Reports, and any other document relied upon before taking the action
memorialized in the Loan Action Record, including, for example, a copy of the 7(a)
Lender Loan Action Matrix.

3. Correspondence

Copies of all paper and electronic correspondence concerning the loan must be dated
and kept in the Loan File.

4. Telephone Conferences and Meetings

Detailed information concerning telephone calls and face-to-face meetings, i.e., date,
time, place, Persons in attendance, substance of conversation, etc., must be kept in the
Loan File or entered in a Computer Tracking System.

5. Electronically Stored Information

Because electronically stored information may be needed for litigation purposes and is
subject to discovery, all electronically stored information should be preserved in its
originally created or "native" format along with the related metadata. Upon request by
SBA, Lenders must make electronically stored information available to SBA in a timely
manner.

6. Loan File Retention

a. General Rule

Nationally-chartered and state-chartered 7(a) Lenders must adhere to the applicable
record retention requirements established by their regulators. SBA supervised
Lenders, i.e., Small Business Lending Companies, must retain their Loan Files for at
least six years following the final disposition of each loan, (i.e., after the loan has
been paid in full or charged-off.) (13 C.F.R § 120.461)

b. Exception—Litigation Hold

If litigation involving a 7(a) Loan is reasonably anticipated, all potentially relevant
information regarding the loan, including electronically stored information must be
preserved. This preservation requirement supersedes the general rule set out in
Paragraph 5 and Subparagraph 6.a and means that routine retention and destruction
policies must be suspended and a "litigation hold" must be put on the Loan File,
electronically stored information, and other relevant documents and data to ensure
the preservation of such documents and data.

Effective Date: March 1, 2013 27
SOP 50 57

Note: “Reasonable anticipation of litigation” arises when an organization is on notice of a
credible threat it will become involved in litigation or anticipates taking action to initiate
litigation.” Guideline 1. The Sedona Conference Commentary on Legal Holds: The
Trigger & The Process (Sedona Conference Working Group on Electronic Document
Retention & Production, August, 2007.)

E. Loan Monitoring

After a loan has closed, changes often occur that can impact the ability to administer or
collect the loan. They include, for example, a Borrower’s name change, relocation, or
consolidation with another entity; a deterioration in the Borrower’s financial condition; and
changes that affect the value of collateral, such as failure to pay real estate taxes that can
become a senior lien on the collateral. Lenders are responsible for monitoring each SBA
loan in their portfolio and for mitigating the risk of loss associated with any change in
accordance with prudent lending practices. For example:

1. Name, Address or Legal Structure Changes

In addition to notifying SBA and updating the Loan File or Computer Tracking System, if
a change in the name, address, legal structure, etc., of an Obligor or any other relevant
Person (e.g., a standby creditor) could impact the ability to collect the SBA loan,
appropriate corrective action must be taken immediately. For example, a UCC 3 should
be filed to reflect a name change and preserve the priority of personal property liens; if a
Borrower changes its legal structure, generally the new entity should be required to
formally assume the SBA loan; and if an Obligor dies, in addition to collecting the
proceeds from any life insurance policy pledged as collateral for the loan, legal action
may be necessary to protect the ability to collect the balance owed on the loan.

2. Borrower's Creditworthiness

a. The Borrower's creditworthiness, i.e., financial and operational condition, should be
monitored through the use of tools such as periodic submission of financial
statements, contact with the Borrower via phone or site visits, 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, the
statements should be reviewed and analyzed in a timely manner.

c. If the financial information provided by the Borrower raises concerns, an executed
copy of IRS Form 4506-T should be requested, and a transcript of the Borrower’s
most recent Federal Income Tax return should be obtained and compared to the
questionable information.

d. SBA does not permit Lenders to charge a default interest rate or a separate servicing
fee for past due financial statements. (SOP 50 10) (Submission of the past due
financial statements should be required as a condition for considering any future
servicing request made by the Borrower.)

Note: If an Obligor files bankruptcy, appropriate action must be taken to protect the ability to
collect the SBA loan. See Chapter 21 (Litigation) for information on bankruptcy proceedings.

Effective Date: March 1, 2013 28
SOP 50 57

3. UCC Filings

All UCC filings must be monitored and any document needed to maintain the perfection
and priority of the lien securing the SBA loan must be properly prepared and filed,
including, for example, a UCC-3 to continue an existing financing statement.

4. Taxes and Assessments

Secured SBA loans should be monitored to ensure that all taxes and assessments,
which if unpaid could become senior liens against the collateral for the SBA 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. Consult legal counsel for case specific information.

5. Insurance

7(a) Loans should be monitored to ensure that all required insurance coverage is in
place throughout the term of the loan. See Chapter 9 for information on force placing
coverage if the Obligor has allowed it to lapse.

6. Senior Secured Loans

The loans of other creditors' secured by senior liens against the collateral for an SBA
loan should be monitored and timely, prudent, commercially reasonable action must be
taken to prevent elimination of the lien securing the SBA loan through a foreclosure
action by the senior lien holder or dissipation of the equity available to cover the SBA
loan through, for example, the imposition of Default Charges.

F. Reporting Requirements

1. Monthly 1502 Report—Pre-guaranty Purchase Loans

All loans in regular servicing status and all pre-guaranty purchase loans in liquidation
status must be included on the Lender's SBA Form 1502 report, which must be
submitted to the SBA on a monthly basis through the FTA. (Detailed information on
Form 1502 reporting is available on SBA’s Web site at www.sba.gov/for-lenders.

Note: A 7(a) Loan should not be reported as “paid in full” simply because it has been
transferred to another Lender or because the balance on a revolving loan that the Borrower
intends to continue to draw on has been paid to zero. When a 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 guaranty reinstatement pursuant to the requirements set out in Chapter 4.

Effective Date: March 1, 2013 29
SOP 50 57

2. Reports to Credit Reporting Agencies

In accordance with the Debt Collection Improvement Act of 1996, Lenders are required
to report information to the appropriate credit reporting agencies whenever they extend
credit via an SBA loan. Thereafter, they should continue to routinely report information
concerning servicing, liquidation, and charge-off activities throughout the life-cycle of the
loan. (See Chapter 26 for more information regarding credit reporting requirements for
loans in charge-off status.)

3. Quarterly Status Report—Post-guaranty Purchase Loans

a. Reporting Requirement

Lenders must provide the SBA Loan Center with a written quarterly status report
within 15 business days after receiving notice that SBA purchased its guaranty from
the secondary market or within 90 calendar days of SBA's purchase directly from the
Lender, and every 90 calendar days thereafter until a Wrap-up Report has been filed.
The quarterly report on each loan must include, at a minimum, a description of the
status of the following:

(1) Obligors;

(2) Collateral;

(3) REO and acquired personal property collateral;

(4) Workout negotiations;

(5) Recoveries and expenses incurred; and

(6) Liquidation and litigation proceedings.

b. Failure to Comply—Referral to OCRM

Lenders who fail to timely provide quarterly status reports may be referred to the
SBA Office of Credit Risk Management for appropriate action.

4. Site Visit Report

A Site Visit Report, which should be kept in the Loan File, should be prepared after
every visit to the Borrower’s business premises regardless of whether the loan is in
regular servicing or liquidation status. All Lenders must prepare a post-default Site Visit
Report. With regard to loans processed under the CLP program, Lenders must provide
the SBA Loan Center with a Site Visit Report along with their proposed Liquidation Plan.
With regard to all other 7(a) Loans, Lenders must provide the SBA Loan Center with a
Site Visit Report along with their Wrap-up Report unless it was previously submitted with
the Lender's guaranty purchase request. If a site visit was not conducted, the reason
why a site visit was neither necessary nor prudent must be documented in the Loan File
and explained in the Wrap-up Report. (See Chapter 15 for information on site visits.)

Effective Date: March 1, 2013 30
SOP 50 57

5. Wrap-up Report

Lenders must provide the SBA Loan Center with a Wrap-up Report upon completion of
the liquidation activities associated with each SBA loan in their portfolio. (See Chapter
26 for information on Wrap-up Reports including SBA’s right to charge off the loan and
refer it to Treasury if appropriate.)

G. SBA Take Over of Servicing or Liquidation

SBA may, in its sole discretion, take over the servicing or liquidation, including litigation, on
any 7(a) Loan. If SBA elects to do so, the Lender must assign the Loan Documents to SBA
within 30 calendar days and provide any assistance requested by SBA. (13 C.F.R. §
120.535(d))

H. Enforcement Action by OCRM

If a Lender is unable or unwilling to properly service or liquidate its SBA loan portfolio, the
SBA Office of Credit Risk Management may take enforcement action pursuant to 13 C.F.R.
§ 120.1400 and 13 C.F.R. § 120.1500. (See SOP 50 53 for information on SBA's credit risk
management policy and procedures.)

Effective Date: March 1, 2013 31
SOP 50 57

Effective Date: March 1, 2013 32
SOP 50 57

Chapter 4.
Loan Payment Administration
____________________________________________________________________________

This chapter provides SBA policy and procedures with regard to collecting and processing loan
payments. (See Chapter 22 for information regarding recoveries on loans in liquidation status.)

A. Collection and Application of Loan Payments

Lenders are responsible for collecting scheduled loan payments and for crediting the
payments to the proper account, unless SBA has taken over servicing of the loan.

1. Payments on Loans in Regular Servicing Status

Unless the terms of the Note specify otherwise, funds from payments received on loans
in regular servicing status must be applied in the following order:

a. Accrued Interest

Funds from payments received on loans in regular servicing status must first be
applied to interest accrued to the date the payment was received;

b. Principal

After the accrued interest has been paid, funds from payments received on loans in
regular servicing status must be applied to bring the principal balance of the loan
current as of the date the payment was received;

c. SBA Permitted Loan Fees

After the accrued interest has been paid and the principal balance has been brought
current, funds from payments received on loans in regular servicing status may be
applied to SBA permitted loan fees; and

Note: For information on SBA permitted loan fees, such as late payment fees,
extraordinary servicing fees, maturity date extension fees, assumption fees, subsidy
recoupment fees, and fees for overdraft and other out-of-pocket expenses, see the most
current version of SOP 50 10.

d. Additional Principal

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, must be applied to reduce the
principal balance of the loan.

Effective Date: March 1, 2013 33
SOP 50 57

2. Payments on Loans in Liquidation Status

a. Overview

a. After acceleration and demand due to default, (followed by classification of the loan
in liquidation in accordance with Chapter 14), the Borrower no longer has a legal
right to make payments on the loan. As a result, payments (as opposed to
recoveries) on loans in liquidation status are generally rare. In those cases where
the Borrower is financially able to resume making regularly scheduled payments, the
loan should be returned to regular servicing status. (See Chapter 14 for information
on returning loans classified in liquidation to regular servicing status, and Chapter 25
for information on how to apply recoveries.)

b. Impact on Liquidation Plan

Before accepting any payment, other than payment in full, on a loan in liquidation
status, determine whether accepting the payment could cure the default and curtail
plans for liquidating the loan. For more information, consult legal counsel.

c. Application of Payment Proceeds

Unless the terms of a workout agreement or some other legally binding document
(e.g., a court approved bankruptcy plan) specifies otherwise, funds from payments
received on loans in liquidation status must be applied in the following order:

(1) Principal

Funds from payments received on loans in liquidation status must be applied to
the principal balance of the loan until it has been paid in full;

(2) Accrued Interest

After the principal balance of the loan has been paid in full, funds from payments
received on loans in liquidation status must be applied to accrued interest; and

(3) SBA Permitted Loan Fees

After the principal balance of the loan and the accrued interest have been paid in
full, funds from payments received on loans in liquidation status may be applied
to SBA permitted loan fees.

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 cannot 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

Effective Date: March 1, 2013 34
SOP 50 57

3. Reflected on SBA Form 172 (Transaction Report on Loan Serviced by Lender).

Note: For information on other SBA permitted loan fees, such as late payment fees,
extraordinary servicing fees, maturity date extension fees, assumption fees, subsidy
recoupment fees, and fees for overdraft and other out-of-pocket expenses, see the most
current version of SOP 50 10. SBA does not guaranty or pay Lender loan fees. Therefore,
loan fees must not be added 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 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. (Paragraph 6, SBA Form
1086)

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 to the Agency via
www.pay.gov within 15 business days of receipt.

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 SBA loan that was not sold on the secondary
market. (7(a) Note) The prepayment may, however, be subject to an SBA subsidy
recoupment fee as provided in Subparagraph 4 below.

2. Loans Sold on Secondary Market

Borrowers may, at any time, prepay 20% or less of the unpaid principal balance of a loan
sold on the secondary market. (7(a) Note) The prepayment may, however, be subject
to an SBA subsidy recoupment fee as provided in Subparagraph 4 below. In addition,
the Lender must comply with the terms of the Secondary Market Guaranty Agreement
executed by the Lender. For example, the latest version (SBA Form 1086 (9-10) OMB
No.:3245-0185) provides as follow:

Effective Date: March 1, 2013 35
SOP 50 57

For loans approved by or on behalf of SBA after February 15, 1985, Lender must
give ten (10) business days advance written notice to FTA to allow time for FTA to
request that Registered Holder return the Certificate. On the date of prepayment,
Lender will wire funds to FTA consisting of principal and accrued interest through
the date immediately preceding the date funds are wired, plus any penalty or other
fees due to FTA. (See Paragraph 15 of the Terms and Conditions.)

3. No Lender Prepayment Penalty

Lenders may not impose a penalty or charge a fee for full or partial prepayment of an
SBA loan. (13 C.F.R. § 120.221 (e))

4. SBA Subsidy Recoupment Fee

SBA requires Borrowers to pay a subsidy recoupment fee for full or partial prepayment
of SBA loans with a maturity of 15 years or longer in accordance with the conditions and
requirements of 13 C.F.R. § 120.223. (See the most current version of SOP 50 10 for
information regarding subsidy recoupment fees.)

Note: Pursuant to SOP 50 10, if a Lender believes that a subsidy recoupment fee should not
be required, the Lender may submit a request for a determination as to whether the
prepayment was voluntary, supported by the Lender’s analysis, to the appropriate SBA Loan
Center.

E. Paid in Full Loans

Payment in full (“PIF”) means payment of the total amount due on the loan, including
principal, interest, and any applicable subsidy recoupment fee or Recoverable Expense.
When a loan is verified as PIF, the Note should be cancelled and the collateral released in a
timely manner.

Note: Many states impose significant penalties on creditors who fail to release collateral in a
accordance with state law. Consult 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 on a 7(a) Loan erroneously
reported as paid in full on SBA Form 1502.

2. Procedure

To reinstate the SBA guaranty on a loan mistakenly coded PIF, the Lender should
submit a written request for reinstatement to the appropriate SBA Loan Center. The
request must include a reasonable explanation for the mistake and a certification that the
guaranty fee has been paid.

Effective Date: March 1, 2013 36
SOP 50 57

Chapter 5.
Environmental Risk Management
____________________________________________________________________________

This chapter sets out SBA policy and procedures for managing environmental risks associated
with SBA loans in regular servicing or liquidation status.

A. Overview

1. Environmental Risks

For secured creditors, the risks associated with Contaminated collateral include, for
example:

a. Impairment of the Borrower’s ability to repay the loan due to the high cost of
Remediation, regulatory fines and penalties;

b. Diminishment of the value and marketability of the collateral;

c. Direct liability for tort claims and Remediation by becoming an owner or operator of
the Property, (e.g., by acquiring title at a foreclosure sale or by taking over the
operation of the Borrower’s business); and

d. Loss of lien priority if a Governmental Entity cleans up the Property.

2. Definitions

Definitions of the environmental terms used in this SOP, which are capitalized when they
appear, are located in Appendix 2 of SOP 50 10, the most current version of which is
accessible from the SOP section of SBA’s Web site. The defined terms include, for
example, the term “Property,” which means commercial real property and does not
include personal property or residential real estate.

B. General Requirements

Prudent servicing and liquidation of an SBA loan includes:

1. Conducting adequate due diligence before taking any Loan Action that could result in a
loss, or increase the risk of loss, due to actual or alleged presence of Contamination;

2. Monitoring the loan for compliance with the environmental covenants in the Loan
Documents, and requiring the Borrower to take appropriate corrective action if
necessary; and

Note: Changes in the Borrower’s financial condition that could signify an increase in
environmental risk include, e.g., regulatory fines discovered while reviewing financial
statements. Activities that could signify an increase in environmental risk include, e.g., failure
to maintain Engineering Controls or evidence of a Release discovered during a site visit.

3. Compliance with Environmental Laws that allow secured creditors to avoid or
significantly limit potential liability.

Effective Date: March 1, 2013 37
SOP 50 57

Note: Many Environmental Laws provide secured creditors with a “safe harbor” from liability
as an owner or operator. Two of the most important laws are the Comprehensive
Environmental Response, Compensation, and Liability Act (“CERCLA”) and the Resource
Conservation and Recovery Act (“RCRA”). To qualify for the exemption under CERCLA or
RCRA, the most critical requirements are that the secured creditor: (1) hold indicia of
ownership primarily to protect its security interest; (2) take no action that could be construed
as “participating in the management” of the Borrower’s facility; and (3) attempt to divest itself
of Contaminated acquired collateral at the earliest practicable and commercially reasonable
time using commercially reasonable means. For Information on the types of activities that
constitute “participating in the management” of a facility or UST system, with regard to
CERCLA see CERCLA Lender Liability Exemption: Updated Questions and Answers; and
with regard to RCRA, see 40 C.F.R § 280.210. Consult legal counsel for loan-specific
information.

C. When an Environmental Investigation is Required

An Environmental Investigation must be conducted before taking any Loan Action that could
result in a loss, or increase the risk of loss, due to the actual or alleged presence of
Contamination. For example, an Environmental Investigation must be conducted before:

1. Accepting Property as substitute collateral;

2. Releasing a lien on collateral for substantially less than its estimated Recoverable Value
based on unsubstantiated allegations of Contamination;

3. Abandoning collateral, which would otherwise have Recoverable Value, based on
unsubstantiated allegations of Contamination;

4. Acquiring title to Property held as collateral, e.g., by purchasing it at a foreclosure sale or
accepting a deed-in-lieu of foreclosure;

5. Taking over the operation of a business that uses Hazardous Substances or is located
on Contaminated Property regardless of whether the Borrower owns the Property;

6. Selling REO or acquired personal property collateral for substantially less than its
appraised value based on unsubstantiated allegations of Contamination; and

7. Abandoning REO or acquired personal property collateral based on unsubstantiated
allegations of Contamination.

D. Environmental Investigation Process for Loans in Regular Servicing Status

Environmental Investigations in support of regular loan servicing activities, e.g., substitution
of collateral, should be conducted in accordance with SOP 50 10.

E. Environmental Investigation Process for Loans in Liquidation Status

Environmental Investigations in support of liquidation activities, e.g., acquiring Property at a
foreclosure sale, should be conducted as follows:

Effective Date: March 1, 2013 38
SOP 50 57

1. Scope of investigation

The amount of due diligence must be prudent based on the loan specific circumstances
such as the Property’s appraised value, the amount owed on senior liens, the SBA loan
balance, the activities conducted at the Property, the results of previous Environmental
Investigations, access to the Property, and the cost and time involved.

2. Use of Environmental Professionals

Environmental Investigations on loans in liquidation status must be conducted by an
Environmental Professional except for the Environmental Questionnaire (“EQ”) portion of
an Environmental Investigation that consists of an EQ and Records Search with Risk
Assessment (“RSRA”).

3. Reliance Letter Requirement

An Environmental Investigation Report prepared by an Environmental Professional must
be accompanied by a Reliance Letter unless the Environmental Investigation consists of
an EQ and RSRA. (See Appendix 3 to SOP 50 10 for the Reliance Letter template.)

4. General Procedure

Generally, the following steps should be taken to conduct a post-default Environmental
Investigation that will provide adequate information for a prudent lender to make an
informed decision regarding the risks of Contamination.

Step 1. Order an Environmental Site Assessment (“ESA”)

High Risk—If the risk of Contamination appears to be high, begin with a Phase I
ESA. Generally, the risk should be considered high if, for example, there are
underground storage tanks at the Property, a NAICS Code for a past or present use
of the Property matches one on the List of Environmentally Sensitive Industries
(Appendix 4 to SOP 50 10), or past Environmental Investigations have concluded
that the Property is Contaminated or that there is a high or elevated risk of
Contamination.

Exception for Non-Industrial Condominiums: The Environmental Investigation of a
condominium in a non-industrial, multi-unit building may begin with a Transaction
Screen or an EQ and RSRA.

Low Risk—If the risk of Contamination appears to be low, begin with a Transaction
Screen or an EQ and RSRA.

Step 2. Conduct Additional Necessary, Cost-effective Inquiries

If a prudent lender could not make an informed decision based on the Environmental
Investigation Report from Step 1, conduct any additional cost-effective inquiry
recommended in the Environmental Investigation Report or otherwise needed to
obtain enough information to make an informed decision. For example, when the
Property appears to have significant Recoverable Value:

Effective Date: March 1, 2013 39
SOP 50 57

(1) A Phase I ESA should be conducted if a Transaction Screen or EQ and RSRA
shows a high or elevated risk of Contamination;

(2) Inquiries regarding environmental problems beyond the scope of a Phase I ESA
(e.g. asbestos), should be conducted if the problem could have a material effect
on the Recoverable Value of the Property;

(3) A Phase II ESA should be conducted if it is necessary to determine the nature
and extent of Contamination identified by a Phase I ESA; and

(4) A Remediation estimate should be obtained if Remediation is recommended in a
Phase II ESA Report.

Note: For guidance on how to prepare a Remediation estimate, see ASTM E2137-06
(Standard Guide for Estimating Monetary Costs and Liabilities for Environmental
Matters). Note also that SBA officials may request an estimate from the SBA
environmental engineers at the SBA Sacramento Loan Processing Center.

Step 3. Additional Requirements for Gas Stations and Dry Cleaners

If, after obtaining a Phase I ESA, a prudent lender would obtain additional
information before making a decision regarding Property associated with the
operation of a gas station, commercial fueling facility, or a dry cleaner that uses
Hazardous Substances, then the Environmental Investigation should also include:

(1) A Phase II ESA conducted by an independent Environmental Professional with
three years of full-time relevant experience who holds a current Professional
Engineer’s or Professional Geologist’s license;

(2) Any further investigation recommended in the Phase I ESA or Phase II ESA
Report;

(3) An estimate that covers the method, cost and time required for completion of any
recommended Remediation; and

(4) Testing of the equipment related to the operation of the facility.

Note: Generally, if a gas station or dry cleaner has been in operation for five years or
more, there is a high probability that the Property is Contaminated.

Step 4. Extra Requirement if Taking Over Business Using Hazardous Substances

(1) Environmental Regulatory Compliance Audit

Generally, an environmental regulatory compliance audit should be conducted
prior to taking over the operation of a business that handles Hazardous
Substances. The audit should be conducted in substantial compliance with
ASTM E2107-06 (Standard Practice for Environmental Regulatory Compliance
Audits).

Effective Date: March 1, 2013 40
SOP 50 57

Note: Unknown regulatory compliance violations can significantly diminish a secured
creditor’s estimated recovery. For example, the cost of obtaining licenses and permits
needed to operate the business can be substantial, and outstanding regulatory fines
and enforcement actions can have a chilling affect on the price potential purchasers
are willing to pay for the business assets.

(2) Practice Tip

To avoid “participating in the management” of a Borrower’s business and losing
the secured creditor liability exemption, it is generally advisable to have a
receiver appointed by the court to take possession of the collateral and operate
the business. (See Chapter 21 for SBA requirements pertaining to Non-routine
Litigation such as receivership proceedings.)

F. Environmental Investigation Reports

The results of an Environmental Investigation must be set out in a written Environmental
Investigation Report, which must be kept in the Loan File. An Environmental Investigation
Report should be less than 180 calendar days old at the time it is relied on.

G. Remedial Action by Secured Creditor

Given the complexity of the applicable Environmental Laws and the risks involved, Lenders
should obtain a legal opinion from an attorney with Environmental Law expertise before
undertaking Remedial action. (See 40 C.F.R. § 280.210(b)(2)(i)(B), which deals with
participating in the management of underground storage tanks [“USTs”], as an example of
the risks and complexity of the law.)

H. Taking Title to Contaminated Property or Control of Business with Environment Risks

1. When Appropriate

Title to Contaminated Property should not be acquired, and businesses that use
Hazardous Substances or are located on Contaminated Property should not be taken
over, unless despite the risk of incurring liability as an owner or operator, a prudent
lender would do so based on the estimated net recovery.

2. Requirement – SBA’s Prior Written Approval

Lenders must obtain SBA’s prior written consent before taking title to Contaminated
Property or taking over the operation of a business that uses Hazardous Substances or
is located on Contaminated Property regardless of whether the Borrower owns the
Property.

3. How to Obtain SBA Approval

A written request must be submitted to the appropriate SBA Loan Center.

Effective Date: March 1, 2013 41
SOP 50 57

4. Request Format

The request, which must be accompanied by the appropriate Supporting Documents,
must include a thorough analysis of all the relevant factors to determine whether a
prudent lender would take the proposed action despite the risks. Such factors and
Supporting Documents should generally include:

a. Appraised Value of Collateral to be Acquired

Provide the appraised value of the Property supported by a copy of the post-default
Appraisal.

b. Liquidation Value of Collateral to be Acquired

Provide the estimated Liquidation Value of the Property and explain the basis for the
estimate.

c. SBA Loan Balance

Provide the SBA loan balance supported by a copy of the transcript of account or
other credible evidence of the loan balance.

d. Amount Owed on Senior Liens

Provide a list of senior liens against the collateral, including landlord liens and tax
liens, and the amount owed on each, supported by a copy of:

(1) Schedule B of the post-default title report;

(2) A current UCC lien search if the request includes personal property collateral or
taking over the operation of a business;

(3) Any senior lienholder agreement, landlord lien waiver, subordination agreement
or other Loan Document that establishes the priority of the liens against the
collateral; and

(4) Transcript of account or similar proof of compliance with any provision in the
foregoing documents that requires a senior lender to subordinate any portion of
the senior loan to the SBA loan (e.g., Default Charges).

e. Foreclosure Costs

List the foreclosure costs including any extraordinary expenses such as the legal
fees and administrative expenses associated with a receivership.

f. Nature and Extent of the Contamination

Provide a summary of the nature and extent of the Contamination supported by
copies of the Environmental Investigation Report(s) required by Paragraph E.

Effective Date: March 1, 2013 42
SOP 50 57

g. Clean-up Costs and Liability

Indicate whether Remediation is required or on-going, and:

(1) If Remediation is not required—attach a copy of the no further action letter,
closure letter, or functional equivalent from the responsible Government Entity.

(2) If Remediation is recommended—attach a copy of any document that: (a)
provides a description of the recommended method and cost of Remediation and
anticipated completion date; (b) that establishes the identity of those responsible
for Remediation (e.g., Superfund consent decree); or (c) that demonstrates the
ability of the responsible party to pay for the cost of Remediation.

(3) If Remediation is on-going—attach a copy of any document that shows the
progress of the cleanup, or that the Person conducting the cleanup has sufficient
financial resources to complete it.

h. Secured Creditor Liability Exemptions

Provide a list of applicable liability exemptions that the Person who will take title
qualifies for, such as the secured creditor exemption under CERCLA, RCRA or a
similar state law, the bona fide purchaser exemption under CERCLA § 101(4) and
107(r), or the involuntary acquisition by a government entity exemption under
CERCLA § 101(20)(D).

Note: Pursuant to 40 C.F.R. § 300.1105(a)(3), acquisition of title by SBA through
foreclosure or a deed-in-lieu while administering an SBA loan program is considered an
"involuntary acquisition."

i. Mitigating Factors

List any mitigating factor and attach a copy of the relevant Supporting Document(s),
e.g., an indemnification agreement and the indemnitor’s financial statement.
Mitigating factors include, for example:

(1) SBA Environmental Indemnification Agreement—was executed by a Person with
sufficient financial resources to cover the cost of Remediation;

(2) Escrow Account—has been established to cover the cost of a Remediation plan
approved by the responsible Government Entity;

(3) Solvent Government Cleanup Fund—has unconditionally agreed to cover the
cost of Remediation; or

(4) Lender Liability Environmental Insurance—is in place and will cover the cost of
Remediation after title is acquired.

Effective Date: March 1, 2013 43
SOP 50 57

j. Tort Liability

Provide information regarding the status and anticipated outcome of any known
litigation regarding alleged injury to people, property or natural resources due to
Contamination at the Property.

k. Exceptions to Title that Impact Marketability

Review Schedule B of the post-default title report and indicate whether there is any
recorded covenant, deed restriction or other exception to title that will have a
negative impact on the Property’s Recoverable Value such as a covenant that
requires future owners of the Property to indemnify a major oil company or a deed
restriction that prevents future owners from using the Property for any purpose other
than to operate a gas station that sells a particular brand of gasoline.

l. Alternative Methods of Recovery

List and analyze the feasibility of alternative methods of collecting the loan balance
that involve less risk. At a minimum, this should include (1) the estimated recovery
from other collateral and the Obligors; and (2) alternative methods of liquidation that
do not require taking title to the Contaminated collateral such as release of lien for
consideration, sale of the Note and assignment of the lien to the purchaser, or
appointment of a receiver to operate the business until enough money can be
recovered to pay-off the loan or the collateral can be sold.

m. Acquired Collateral Divestiture Plan

Provide a description of the plan for disposing of any collateral to be acquired, which
includes the holding and resale costs, as well as an explanation of how easy or
difficult it will be to resell. For example, have any third parties expressed an interest
in purchasing the collateral? Is it currently listed for sale by the owner? If so, why
hasn’t it sold?

Note: Generally, in order to preserve its liability exemption, a secured creditor is required
to try to dispose of Contaminated acquired collateral at the “earliest practicable,
commercially reasonable time using commercially reasonable means”. For more
information, see the applicable Environmental Law. For example, 40 C.F.R.
280.210(c)(2)(i) sets out a “bright line” test under RCRA for determining whether a
secured creditor is attempting to sell a gas station in an expeditious manner.

n. Other Relevant Facts or Expenses

List and discuss any other loan-specific relevant facts. For example:

(1) Remediation by Secured Creditor—Will additional costs be incurred to
Remediate the Property prior to listing it for sale? If so, attach a copy of the legal
opinion recommended in Paragraph G above, provide a Remediation estimate,
and indicate how the costs will be paid;

Effective Date: March 1, 2013 44
SOP 50 57

(2) Receivership Proceedings—Will a receiver be appointed, for example, to operate
the business or sell the collateral? If so, attach a draft Litigation Plan that
describes the prior experience and qualifications of the proposed receiver and
includes an estimate of costs of the court and receivership proceedings; or

(3) Emptying and Closing USTs—If there are USTs at the Property and a receiver
will not be appointed, indicate whether it will be necessary to empty and close the
USTs. (For more information, see, for example, 40 C.F.R. §280.230(b).)

o. Estimated Net Recovery

Provide the estimated net recovery from taking the proposed action based on the
analysis of factors “a” through “n” above.

Effective Date: March 1, 2013 45
SOP 50 57

Effective Date: March 1, 2013 46
SOP 50 57

Chapter 6.
Servicing Requests
____________________________________________________________________________

A. General Requirements

Frequently after an SBA loan has been disbursed, circumstances change and give rise to
Borrower Servicing Requests. They can range anywhere from a simple request to change a
mailing address to a complicated request involving the exchange of collateral. Regardless
of the level of complexity, all Servicing Requests must be reviewed, analyzed and acted
upon in accordance with prudent lending practices. As long as the Borrower is viable, when
responding to a Servicing Request, the goal should be to meet the Borrower’s short and
long term needs without impairing the integrity of the SBA loan program, i.e., the ability to
recover on the loan.

B. Review and Analysis

Generally, the Loan Documents should not be modified unless there has been a material
change in the Borrower's circumstances since the loan was made. The Supporting
Documents and the level of analysis required to make an informed decision regarding
whether the Servicing Request should be denied or approved, and if so, under what
conditions, will vary depending on the circumstances. In all cases, the decision must be
justified and documented in a Loan Action Record that is independent of any document
prepared by a senior lienholder or any other Person with a conflict of interest. The relevant
steps listed below should be followed to ensure that each Servicing Request is properly
reviewed and analyzed.

1. Document Receipt of the Servicing Request

All Servicing Requests must be entered in a Computer Tracking System or noted in the
Loan File.

2. Ensure that the Servicing Request is in the Proper Format

Borrower requests for modification of loan terms or conditions should be in writing.

3. Research the Applicable Loan Program Requirements

a. Requests Concerning Assumptions, or Substitution of Collateral or Obligors

The same SBA Loan Program Requirements that applied to the original loan with
regard to Obligors and collateral apply to Servicing Requests on loans in regular
servicing status that involve assumption of the loan or substitution of a Guarantor,
co-Borrower, or collateral. See SOP 50 10 to find the applicable Loan Program
Requirements, including, for example, those pertaining to Appraisals, Environmental
Investigations, and SBA Form 912 (Statement of Personal History.)

b. All Other Servicing Requests

See Chapters 7 through 12 of this SOP to find the applicable Loan Program
Requirements for the Loan Actions most commonly requested.

Effective Date: March 1, 2013 47
SOP 50 57

4. Determine Whether the Servicing Request is Properly Supported

Servicing Requests should be accompanied by the Supporting Documents that a
prudent lender would need to make an informed decision. For example:

a. Servicing Requests Involving Credit Issues

Generally, all Servicing Requests that require a credit analysis, (e.g., an increase in
the amount of the SBA loan or a prior lien), should be supported by the Borrower's:

(1) Current financial statement; and

(2) Last two federal income tax returns.

b. Servicing Requests Involving Collateral

In addition to the financial documents listed above, Servicing Requests that involve
collateral, (e.g., subordination, substitution or release of lien), should also be
supported by a current:

(1) Appraisal of the relevant collateral;

(2) Lien search, i.e., a title report if the request involves real property, a UCC search
if the request involves personal property; and

(3) Transcript of account or other credible evidence of the balance owed on any
senior liens.

5. Obtain Additional Supporting Documents When Necessary

Obtain any additional Supporting Documentation needed to properly analyze and decide
whether the Servicing Request should be approved. For example:

a. Credit Report

Generally, a new credit report should be ordered to verify the financial information
submitted in support of the proposed Loan Action.

b. Guarantor Financial Statements and Tax Returns

Current financial statements and federal income tax returns for the past two years
should be required from all of the Guarantors—not just the Borrower—when a
complete analysis of each Obligor’s repayment ability is necessary.

c. Refinance or Purchase and Sale Documents

A complete executed copy of all of the relevant documents, (e.g., purchase and sale
agreement, escrow instructions, estimated closing statement (HUD-1), seller carry-
back note, etc.), must be obtained if the Servicing Request involves the sale or
refinance of collateral.

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SOP 50 57

d. Environmental Investigation Report

A Servicing Request should be supported by an Environmental Investigation Report
when required by Paragraph C of Chapter 5.

e. Evidence of Authority to Take Proposed Action

Proper evidence should be obtained to establish that each Person whose signature
is necessary had the required authority to execute the Loan Documents involved in
the Servicing Request, e.g., a board of directors’ resolution.

6. Analyze the Borrower's Financial Condition

Analyze the Borrower's financial documents to determine whether the Borrower is viable,
i.e., will be able to repay the loan if the request is approved. If the Borrower is viable,
proceed to Step 7. If not, the Servicing Request should be denied and more appropriate
action taken. (See, for example, Chapter 14 [Classifying Loans in Liquidation].)

7. Analyze the Collateral

If the Servicing Request will impact the collateral, a thorough analysis of its Recoverable
Value, before and after the requested modification, should be conducted.

8. Check for Problems

The Loan Documents, such as the loan application and collateral documents, as well as
the information in the Computer Tracking System should be reviewed to: (1) ensure that
the Servicing Request is consistent with the Borrower's previous representations; and (2)
ascertain whether there are any non-monetary defaults, collateral deficiencies, or
problems with the Loan Documents that need correction.

9. List Conditions for Approval

a. Compliance with Terms and Conditions of Loan

Approval of a Servicing Request should be conditioned on curing the defaults
identified in Step 8. For example, the Borrower should be required to reinstate
lapsed insurance coverage.

b. Adequate Consideration

In order for a change in the Loan Documents to be legally binding, the Borrower
must provide consideration, (i.e., something of value), before or at the same time that
the Borrower receives the benefit of the requested change. For example, as
consideration for granting the Servicing Request, the Borrower could be required to:

(1) Fix errors in the Loan Documents identified in Step 8;

(2) Waive defenses to litigation;

(3) Release lender liability claims; or

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SOP 50 57

(4) Provide additional collateral.

c. Written Consent of All Obligors

The written consent to any material change in the terms and conditions of the loan
must be obtained from each Obligor in order to protect the ability to recover from
them in the event of default.

10. Comply with SBA 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 should comply with the applicable SBA Loan Program
Requirements pertaining to decision-making authority and notice to SBA. (See Chapter
3 for a detailed list of Loan Actions that require notice to, or prior written approval from,
the appropriate SBA Loan Center.) Unless notice to SBA is required, Lenders with
unilateral authority should not notify the SBA Loan Center of the Loan Action.

11. Comply with the Applicable Recordkeeping Requirements

In accordance with Chapter 3, the response to the Servicing Request must be noted in
the Computer Tracking System or Loan File; a copy of the Loan Action Record and
Supporting Documents must be kept in the Loan File; and the substance of any
telephone calls or face-to-face meetings regarding the Servicing Request must be kept
in the Loan File or entered into a Computer Tracking System.

Note: To protect their guaranty, Lenders should consider keeping a copy of the 7(a) Lender
Servicing and Liquidation Action Matrix that they relied on at the time the Loan Action was
taken.

C. How To Obtain SBA Approval of a Proposed Loan Action

If SBA’s prior written approval is required before a Loan Action can be implemented, (See
Chapter 3 for a detailed list.), the Lender should submit a written request, usually in the
form of a letter, to the appropriate SBA Loan Center in accordance with the guidelines listed
below.

1. Required Documentation

a. Letter Outlining Request

Requests for SBA approval of a proposed Loan Action should be in the form of a
clearly and concisely drafted letter based on the Lender’s internal credit
memorandum. The letter must be independent of any document or analysis
prepared by a Person with a conflict of interest, such as a senior lienholder. And,
although SBA reserves the right to request additional information, the letter should
generally include:

(1) A brief description of the proposed Loan Action;

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SOP 50 57

(2) The 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 loan;

(4) The current financial condition of the Borrower;

(5) If the proposed Loan Action will increase the risk of loss, any mitigating factor,
e.g., the value of SBA's collateral will be increased, or the Borrower's business
performance will be improved;

(6) If the proposed Loan Action will impact the collateral, a summary of prior Loan
Actions impacting the collateral and an analysis of the Recoverable Value of the
collateral both before and after the proposed Loan Action;

(7) A summary of prior servicing experience with the Borrower, i.e., loan
modifications or problems pertinent to the request;

(8) Whether the written consent of the FTA is required, and if so, whether it has been
or will be obtained; and

(9) A list of the Obligors and a statement as to whether their consent has been or will
be obtained for the proposed Loan Action.

b. Credit Memo and Supporting Documents

A credit memo, which must be independent of any document or analysis prepared by
a Person with a conflict of interest, such as a senior lienholder, should accompany a
request for approval of a proposed Loan Action. Generally, it is not necessary to
include a copy of the Borrower's financial statement or the Supporting Documents
such as Appraisals, etc., provided that they are adequately analyzed in the credit
memo.

2. Where to Submit Requests

Requests for approval of proposed Loan Actions must be submitted to the appropriate
SBA Loan Center. (Prior to full disbursement, requests should be sent to the LGPC at
Citrus Heights. After full disbursement, requests should be sent to the CLSC at Fresno
or Little Rock, or the NGPC at Herndon. See the definition of “SBA Loan Center” in
Chapter 2 for a complete list.)

3. SBA Response Time

SBA should respond to a Lender's request for approval of a proposed Loan Action within
15 business days from the date that SBA received the request, (13 C.F.R. § 120.541), or
sooner if possible.

Note: After a loan has been fully disbursed, SBA will not provide written approval for a
proposed Loan Action that the Lender has unilateral authority to take.

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D. Implementing Loan Actions

Loan Actions must be implemented in accordance with prudent lending practices, for
example, it may be necessary to:

1. Modify Existing Loan Documents

If the Loan Action modifies the terms and conditions of the Note or any other Loan
Document, each impacted Loan Document must be properly modified;

2. Prepare New Loan Documents

Any new Loan Document needed to implement the Loan Action must be properly
prepared and executed; and

3. Record New or Modified Loan Documents

Whenever necessary, reasonable or customary, the modified Loan Documents as well
as any newly prepared Loan Documents must be properly recorded.

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SOP 50 57

Chapter 7.
Modification of Note
____________________________________________________________________________

A. General Requirements

1. Review and Analysis of Request for Modification

Requests for modification of the terms of a Note, should be reviewed, analyzed and
implemented pursuant to the requirements of Chapter 6, the provisions of applicable
statutes, regulations and contracts (e.g., Note and Secondary Participation Guaranty
Agreement), and this chapter.

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 the guaranteed portion of the loan has been purchased by SBA or
the written consent of the secondary market investor has been obtained—unless the
modification involves a one-time deferment that does not exceed a continuous period
of three monthly installments. (See Chapter 12 for information on deferments.)

b. Alternative—Emergency Repurchase from Investor

Generally, a Lender may only repurchase an SBA 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 a 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, modifications may be approved as long as the interest rate is not
altered. Lenders are encouraged to propose modifications that will enable the Borrower
to remain viable.

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SOP 50 57

B. Payment Due Date

The date that regularly scheduled installment payments are due may be modified to facilitate
the Borrower's ability to repay the loan or a workout, provided that the general requirements
in Paragraph A are met. For example, payments originally scheduled to be made on a
monthly basis, may be changed to a quarterly or annual basis if there is justification for the
change such as the seasonal or cyclical nature of the Borrower's revenue stream.

C. Change from Revolving to Non-revolving Loan

A loan may be changed from a revolving loan to a non-revolving loan to facilitate the
repayment or orderly liquidation of the loan, provided that the general requirements in
Paragraph A are met.

D. Installment Amount

The installment amount due under a Note may be modified 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, or to facilitate a workout, provided that the general requirements in
Paragraph A are met. (See also Chapter 12 on deferments and Chapter 16 on workouts.)

E. Interest Rate

The interest rate on the Note may be modified to help a viable Borrower meet long or short
term goals, or to facilitate the recovery on a loan in liquidation status, provided that the
general requirements in Paragraph A are met. For example, the interest rate may be
modified as part of a workout agreement designed to achieve the highest possible recovery
in the shortest amount of time.

F. Maturity Date

1. Extension of Maturity Date

Subject to the general requirements in Paragraph A, the maturity date of a Note may be
extended for up to 10 years beyond its original maturity date if:

a. The extension is requested before the SBA loan guaranty expires, i.e., less than 180
calendar 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

Pursuant to SOP 50 10, Lenders must pay an additional guaranty fee, which may be
passed on to the Borrower, when the maturity of a short term 7(a) Loan is extended
beyond 12 months. The amount of the additional guaranty fee is based on the
version of SOP 50 10 in effect at the time the loan was approved. The notice of
maturity date extension required by Chapter 3 should be accompanied by evidence
that the additional fee has been paid.

Effective Date: March 1, 2013 54
SOP 50 57

Note: Pursuant to SOP 50 10, the additional guaranty fee must be paid within 30 days
from the date the extension was approved or the total loan guaranty will be cancelled.

b. Loans in Liquidation Status

Lenders are not required to pay an additional guaranty fee if a maturity date
extension is needed to aid in the orderly liquidation of the loan and no additional
funds are disbursed.

G. Loan Amount

The amount of a 7(a) Loan in regular servicing status may be increased provided that: (1)
the general requirements in Paragraph A above are met; (2) the general requirements in
SOP 50 10 with regard to loan increases are met; and (3) the additional guaranty fee
required by SOP 50 10 is paid. The amount of the additional guaranty fee is based on the
version of SOP 50 10 in effect at the time the loan was approved.

Note: The amount owed on a fully disbursed 7(a) Loan (as opposed to the amount of the loan)
may, in some instances, be increased through the addition of Recoverable Expenses to the
principal loan balance. See Chapter 22 for information on Recoverable Expenses and when they
may be added to principal. The amount owed on a fully disbursed 7(a) Loan (as opposed to the
amount of the loan) may, in some instances, be reduced through a compromise agreement. See
Chapter 20 for more information on offers in compromise.

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SOP 50 57

Effective Date: March 1, 2013 56
SOP 50 57

Chapter 8.
Modification of Collateral Requirements
____________________________________________________________________________

A. Subordination of Lien Position

1. General Requirements

The position of a lien securing an SBA loan may be subordinated (i.e., lowered) when
doing so is consistent with SBA loan servicing goals, i.e., it will help the long or short
term needs of the Borrower without unduly impairing the ability to recover on the loan.
Requests for subordination should be reviewed, analyzed and implemented pursuant to
the requirements of Chapter 6 and the following guidelines:

a. The Borrower should have a satisfactory credit history;

b. The Borrower should have the ability to repay all of the obligations that would be
outstanding after the proposed subordination;

c. The subordination should be to a specific amount and should not extend to future
advances;

d. There should be sufficient equity in the collateral to adequately secure the SBA loan
after the proposed subordination; and

e. The terms of the subordination should be set out in a document signed by all of the
parties to the agreement.

Note: SBA Loan Program Requirements prohibit any action that confers a Preference on
a Lender without SBA’s prior written approval. For example, a Lender would receive a
Preference if it subordinated the lien securing an existing SBA loan to a lien securing a
new non-SBA loan or a new SBA 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 SBA loan with a lower guaranty
percentage if the lien securing an existing SBA loan was previously subordinated to the
loan the Lender renewed or increased.

2. Subordination to Facilitate Refinance of a Senior Loan

In addition to the general requirements in Paragraph A.1, the position of a lien securing
an SBA loan should not be subordinated to facilitate the refinance of an existing senior
loan unless:

a. The refinancing is on terms that are more favorable to the Borrower;

b. There is no increase in the principal balance of the senior lien except for necessary,
reasonable and customary closing costs;

c. No cash out of the equity in the collateral will go to the Borrower for non-business
purposes; and

Effective Date: March 1, 2013 57
SOP 50 57

d. The subordination will not adversely affect the priority of the lien securing the SBA
loan.

Note: When analyzing a request for subordination to facilitate the refinance of a senior
loan, a complete financial analysis may not be necessary if the Borrower has been
making timely payments and the refinance terms are more favorable for the Borrower.

3. Subordination to Facilitate a New Loan

In addition to the general requirements in Paragraph A.1, the position of a lien securing
an SBA loan should not be subordinated to facilitate a new loan unless:

a. The new loan is necessary to satisfy a legitimate need such as paying for
improvements to the collateral that will maintain or increase its value; and

b. All other avenues of obtaining the funds have been exhausted.

Note: The U.S. Department of Agriculture will take a junior lien position on assets already
encumbered by an SBA’s loan.

4. Subordination to Facilitate Assumption of the Loan

The position of the lien securing a 7(a) Loan must not be subordinated to a loan that
provides funds to an assumptor to acquire the business or assets of an Obligor, unless
the acquisition loan includes funds that will be used to make improvements to the
collateral that will maintain or increase its value, in which case, the lien securing the SBA
loan may be subordinated up to the documented amount spent on the improvements.

B. Inter-creditor Agreements

Requests for execution of an inter-creditor agreement, (i.e., an agreement among creditors
who made separate loans to the same borrower with commonality of purpose or collateral,
which sets forth the various lien positions and the rights and liabilities of each creditor and
its impact on the other creditors), should be reviewed, analyzed and implemented pursuant
to the requirements of Chapter 6 and the following guidelines:

1. The inter-creditor agreement should not adversely impact the position of the lien
securing the SBA loan;

2. The delineated rights and responsibilities with regard to loan servicing responsibilities,
and the remedies in the event of default, should be consistent with prudent lending
practices; and

3. Entering into the inter-creditor agreement should not adversely impact the ability to
recover on the SBA loan.

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SOP 50 57

C. Substitution of Collateral

1. General Requirements

Requests to allow a substitution of collateral should be reviewed, analyzed and
implemented pursuant to Chapter 6 and the following guidelines and requirements:

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;

b. If the substitute collateral is commercial real property, adequate due diligence must
be conducted to ensure that the risks of Contamination are minimal as required by
Chapter 5 (Environmental Risk Management);

c. There should be no more than a nominal increase (i.e., 3.5% or less) in the amount
of any proposed senior lien;

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 be outstanding after the substitution;

f. There should be sufficient equity in the collateral to adequately secure the SBA loan
after the proposed substitution;

g. The release and substitution must not impair the ability to foreclose upon the
remainder of the collateral or collect the loan balance from the Obligors; and

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 of the parties involved in the transaction.

2. Substitution of Residence Held as Collateral

Requests to allow an Obligor to substitute a lien on a new residence in exchange for
releasing the lien on the Obligor's existing residence should be reviewed, analyzed and
implemented pursuant to the general requirements in Paragraph C.1 above and the
following additional requirements:

a. All of the proceeds from the sale of the Obligor's existing residence, other than the
funds needed to pay off senior liens and necessary, reasonable and customary
closing costs, must be used to purchase the new residence, placed in an escrow
account to facilitate the purchase of a new residence, or used to pay down the SBA
loan;

b. The amount of equity in the new residence available to secure the SBA loan must be
the same as or greater than the amount of equity in the existing residence available
to secure the SBA loan;

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SOP 50 57

c. The release of the existing lien, or proceeds thereof, must be concurrent with the
recording of the new lien in the required position of priority and should be done
pursuant to an escrow agreement signed by all of the parties involved in the
transaction; and

d. The Obligor must provide the title, hazard and flood insurance required by Chapter 9.

D. Substitution of Guarantor

Guarantors must not be released without SBA’s prior written consent. Requests to allow
substitution of a Guarantor should be reviewed, analyzed and implemented pursuant to the
requirements of Chapter 6 and the following guidelines:

1. The financial strength of the proposed substitute Guarantor should be equal to or greater
than the financial strength of the existing Obligor; and

2. Neither the release of the existing Guarantor nor the substitution for the proposed
Guarantor should adversely impact the operation of the business. Substitution of the
proposed Guarantor may be conditioned on retention of the original Guarantor for a
transitional period (e.g., two years) during which time there must be no material adverse
change in the financial condition of the business.

E. Release of Lien without Consideration

Requests for the release of liens on real or personal property collateral without consideration
before the loan has been paid in full should be reviewed, analyzed and implemented
pursuant to Chapter 6 and the following guidelines and requirements:

1. The proceeds from the release of lien should be used for business purposes only;

2. The Borrower must have the ability to repay the SBA loan in full;

3. The release should not materially interfere with the operation of the business or
decrease the value of the other collateral securing the loan;

4. The Recoverable Value of the remaining collateral should be sufficient to adequately
secure the SBA 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 remainder of the collateral.

F. Release of Lien for Consideration

Requests for the release of liens on real or personal property collateral for consideration
should be reviewed, analyzed and implemented pursuant to Chapter 6 and the following
requirements:

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SOP 50 57

1. General Requirements

a. The amount of consideration received must be approximately equal to or greater
than the Recoverable Value of the collateral, (See Chapter 5 [Environmental Risk
Management] with regard to the due diligence that must be performed if the collateral
is alleged to be worth substantially less than its estimated Recoverable Value due to
the alleged presence of Contamination.); and

b. Release of the lien must not jeopardize the ability to maximize recovery on the 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, the real property lien should not be released
unless the personal property collateral has already been liquidated or additional
consideration is received for release of the lien on the trade fixtures.

b. Public Auctions

If a public auction of machinery and equipment is planned, the lien on the most
valuable items should not be released beforehand since it would impair the ability to
attract bidders for the remaining collateral.

G. Release of Guarantor or Co-Borrower

Guarantors and co-Borrowers must not be released without SBA’s prior written consent. A
request for release of a Guarantor or a co-Borrower should be reviewed, analyzed and
implemented pursuant to Chapter 6 and the following requirements and guidelines:

1. Loans in Regular Servicing Status

a. The loan must be Seasoned;

b. The release must not conflict with the SBA Loan Program Requirements in 13 C.F.R.
Part 120 and SOP 50 10that require Guaranties from specific Persons as a condition
for SBA’s guaranty of the loan, (e.g., any Person who owns 20 per cent or more of
the small business Borrower);

c. The release must not: jeopardize the ability to maximize recovery on the loan; shift
the risk of loss to SBA; or otherwise harm the integrity of the SBA loan program; and

d. If the request is in conjunction with the sale or reorganization of the small business
Borrower, the parties should be encouraged to pay off the 7(a) Loan as part of the
transaction. If the loan will not be paid off or substantially paid down, instead of
releasing the Guarantor or co-Borrower, they should still be required to guaranty the
loan, but their Guaranty may be limited to the amount of any funds they are to
receive as part of the change of ownership or reorganization.

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SOP 50 57

2. Loans in Liquidation Status

a. The release must not jeopardize the ability to maximize recovery on the loan or the
integrity of the SBA loan program;

b. The release must be conditioned on receipt of consideration in an amount
approximately equal to or greater than the amount that could be collected through
enforced collection proceedings from the Guarantor or co-Borrower requesting the
release;

c. The Guarantor or co-Borrower requesting the release should be required to provide
the same documentation that is required for an offer in compromise; and

d. The offer and financial documentation provided by the Guarantor or co-Borrower
should be reviewed, verified and analyzed pursuant to the requirements of Chapter
20 (Offer in Compromise).

H. Release of Condemnation Proceeds

Requests for release of condemnation proceeds should be reviewed, analyzed and
implemented pursuant to the requirements of Chapter 6, the general requirements in
Paragraph E (Release of Lien Without Consideration) or Paragraph F (Release of Lien for
Consideration) and the following guidelines:

1. Condemned Property Replaced

When the condemnation proceeds will be used to replace the condemned property, they
should only be released pursuant to an escrow agreement approved by legal counsel
that conditions release of the funds on:

a. Receipt of a perfected lien on the substitute collateral in the required lien position;

b. Compliance with the title, hazard and flood insurance requirements set out in
Chapter 9.

2. Condemned Property Not Replaced

When the condemnation proceeds will not be used to replace the condemned property:

a. Condemnation Proceeds < $5,000

If the amount of condemnation proceeds is relatively insignificant, i.e., $5,000 or less,
and the release will not adversely affect the ability to recover on the SBA loan, they
may be released directly to the Borrower.

b. Condemnation Proceeds > $5,000

If the amount of condemnation proceeds is more than $5,000, they should be applied
to the principal balance of the SBA loan, provided that up to $5,000 may be released
directly to the Borrower if the release will not adversely affect the ability to recover on
the SBA loan.

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SOP 50 57

Chapter 9.
Insurance Coverage
____________________________________________________________________________

A. General Requirements

All decisions regarding insurance, including the justification for the each decision, must be
documented in a Loan Action Record and kept in the Loan File.

B. Mortgagee’s Title Insurance

1. Substitute Collateral

When existing real property collateral is released and substitute real property collateral
taken, a mortgagee’s title insurance policy should be obtained to insure the new lien on
the substitute property. (See Chapter 8 for information on substitution of collateral.)

2. Additional Collateral

When real property collateral is taken as additional collateral, whether a mortgagee’s title
insurance policy should be obtained will vary depending on the circumstances including
the amount of equity available in the property to secure the SBA loan.

3. Installment Sale of REO

When REO is sold on an installment basis, a mortgagee’s title insurance policy must be
obtained to ensure the new lien on the REO. (See Chapter 19 for information on term
sales of acquired collateral.)

C. Hazard Insurance

1. Modification of Coverage on Existing Collateral

The hazard insurance coverage requirements set out in the Loan Authorization should
not be terminated or reduced unless the insured assets have been sold or have
significantly depreciated.

2. Coverage on Substitute or Additional Collateral

When existing collateral is released and substitute collateral taken, 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 for information on how to review and analyze Servicing Requests. See
Chapter 8 for additional information on substitution of collateral.)

3. Care and Preservation of Collateral and Acquired Collateral

Lenders must take prudent action, on a case-by-case basis, to ensure that all collateral
and acquired collateral with Recoverable Value is adequately insured in order to protect
the ability to recover on the SBA loan. (See, for example, Chapter 15 with regard to
post-default site visits and Chapter 19 with regard to ownership responsibilities
pertaining to acquired collateral.)

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4. Forced Placement

If hazard insurance is required by the Loan Documents and the Obligor has allowed the
coverage to lapse, the decision whether to force-place insurance should be based on
prudent lending practices and made on a case-by-case basis. If coverage is continued
by the Lender, the cost should be treated as a Recoverable Expense.

5. Release of Policy Proceeds

a. General Rule—Collateral Repaired or Replaced

When SBA or the Lender is named as the loss payee on a hazard insurance policy,
the proceeds should not be released unless the Supporting Documentation
submitted with the request verifies that the insured collateral has been properly
repaired or replaced and that no construction or repair related liens have been filed
against the property, particularly if the insurance check is for $100,000 or more.

b. Exception—Controlled Distribution

If a request for release of insurance proceeds is not accompanied by Supporting
Documentation establishing that the insured collateral was repaired or replaced,
instead of endorsing and delivering the insurance check to the Borrower,
disbursement of the insurance proceeds should be controlled and monitored.

(1) Use of Escrow Agent

Generally, insurance proceeds, which are required to be used to repair or replace
collateral, should be disbursed pursuant to an escrow agreement approved by
legal counsel. An escrow company, the first lien holder or an impartial third party
such as an attorney, architect or construction loan officer at a financial institution
may serve as the escrow agent.

(2) Progress Payments

Rather than use an escrow agent, a Lender may allow the Borrower to open a
federally insured joint savings or custodial account with the Lender; establish a
draw schedule based on stages of construction; present paid invoices and lien
waivers documenting each stage of construction; and request release of the
funds specified in the draw schedule; provided that the 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 account. (The
Borrower should be allowed to retain the interest earned on the funds in the
savings account.)

D. Life Insurance

1. Modification of Requirement

The life insurance requirements in the Loan Documents should not be modified or
terminated unless the reason for requiring the life insurance policy no longer exists.

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2. Use of Escrow Account to Collect Premiums

If an assignment of a life insurance policy is required by the Loan Documents, in order to
ensure that the Borrower pays the premiums, an escrow account may be set up to
collect the funds needed to pay the premiums on the policy. (See SOP 50 10 for SBA
Loan Program Requirements concerning life insurance escrow accounts.)

3. Continuation of Coverage

If an assignment of a life insurance policy is required by the Loan Documents and the
Lender receives notice that the required payments have not been made, the decision
whether or not to continue coverage should be based on prudent lending practices and
made on a case-by-case basis. If coverage is continued, the cost should be treated as a
Recoverable Expense.

4. Release of Policy Proceeds

a. General Rule

The proceeds from the assignment of a life insurance policy should be applied to the
principal balance of the loan without advancing the payment due date. (Application
of life insurance proceeds is not considered to be a voluntary loan prepayment.
Therefore, a subsidy recoupment fee is not required.)

b. Exceptions

Depending on the circumstances, all or part of the proceeds of a life insurance policy
may be released if, in addition to meeting the requirements for release set out in
Chapter 8 Paragraph E (Release of Lien Without Consideration) or Paragraph F
(Release of Lien for Consideration), the death of the insured will have no significant
impact on the management of the small business Borrower and:

(1) The proceeds are needed for a valid business purpose;

(2) The proceeds are needed to prevent Financial Hardship; or

(3) Based on the strength of the business, there is no reason to anticipate that the
loan will not be repaid in full.

c. Use of an Escrow Account

If the estimated strength of the business is not strong enough to justify release or
weak enough to justify immediate application to the loan balance, the insurance
proceeds may be placed in an escrow account for distribution at a later date after the
Lender has had the opportunity to observe the Borrower’s on-going operations and is
able to make a prudent decision.

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E. Flood Insurance

1. General Rule—Termination or Modification Not Permitted

When an SBA loan is secured by improved real estate, a mobile home or other personal
property located in a FEMA-designated special flood hazard area ("SFHA") and the
community participates in the National Flood Insurance Program ("NFIP"), the Borrower
must maintain flood insurance for the life of the loan. (See the National Flood Insurance
Reform Act of 1994 for more information.) This requirement pertains to substitute
collateral as well as the original collateral for the loan.

2. Events Triggering Flood Insurance Review

The need for flood insurance, as well as the adequacy of any existing flood insurance
coverage, should be reviewed whenever the Borrower makes a Servicing Request.

3. Forced Placement

If at any time during the life of a loan, real or personal property collateral, which is
located in a SFHA, is not covered by flood insurance or is covered by an inadequate
amount of flood insurance, the Borrower must be instructed to obtain adequate flood
insurance. If the Borrower fails to do so within 45 calendar days, flood insurance must
be purchased on the Borrower’s behalf at the Borrower’s expense. (The cost should be
treated as a Recoverable Expense.) All Borrower Servicing Requests should be
declined until the Borrower is in compliance with the applicable flood insurance
requirements. (See the National Flood Insurance Reform Act of 1994 for more
information.)

4. Unavailability of Flood Insurance

If a Borrower had the required flood insurance when the loan was made, but the
coverage has lapsed because the community dropped out of the NFIP, documentation
establishing why the property is no longer covered by flood insurance must be
maintained in Loan File.

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Chapter 10.
Modification of Management Covenants
____________________________________________________________________________

A. General Requirements

Borrowers should comply with the management covenants in the Loan Documents unless
modification is consistent with the loan servicing goals set out in Chapter 1. Requests for
modification should be reviewed, analyzed and implemented pursuant to the requirements
of Chapter 6 and the guidelines set out below.

B. Financial Statements

Loan Document provisions requiring Obligors to submit periodic financial statements, should
not be modified (e.g., temporarily or permanently waived; changed from audited to compiled
or reviewed; or required less frequently), unless a prudent lender would modify them based
on the circumstances. For example, it may be prudent to modify the requirement if:

1. The loan is Seasoned or the requirement would cause Financial Hardship for the
Borrower;

2. The waiver is temporary and limited to one year at a time; and

3. The right to reinstate the requirement is reserved and exercised in the event of default.

C. Restrictions on Compensation, Dividends, Fixed Assets, etc.

Management covenants in the Loan Documents pertaining to matters such as limitations on
compensation, fixed assets, working capital levels, or dividend payments, should not be
modified unless a prudent lender would modify them based on the circumstances. For
example, modification may be prudent if:

1. The loan is Seasoned;

2. The maturity date of the Note has not been extended, and payments have not been
deferred during the 24 month period before the date of the Borrower's request; and

3. Based on an analysis of the Borrower's cash flow for the past three months, the
Borrower will have the necessary cash flow to repay all of its debt including the SBA loan
after the modification.

D. Standby Agreements

1. General Rule

Except as provided in Subsection 2 below with regard to equity injections, a standby
agreement required by the Loan Documents should not be terminated or modified to
allow the Borrower to make full or partial payments to the standby creditor, unless a
prudent lender would modify or terminate the standby agreement based on the
circumstances. For example, modification or termination may be prudent if:

a. The loan is Seasoned;

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b. Based on an analysis of the Borrower's cash flow for the past three years, the
Borrower will have the necessary cash flow to repay all of its debt including the SBA
loan after modification or termination; and

c. There is minimal risk that the Borrower will not be able to repay the SBA loan in full
and in a timely manner.

2. Standby Agreement Used as Equity Injection

A standby agreement used in connection with an equity injection required by the Loan
Authorization must not be terminated or modified unless the proposed termination or
modification is permitted by the applicable Loan Program Requirements in SOP 50 10.

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Chapter 11.
Assumption, Assignment or Sale of Loan
____________________________________________________________________________

A. Assumption

Requests to allow another Person to assume an SBA loan, (i.e., take over the Borrower's
legal obligations and benefits under the Loan Documents), should be reviewed, analyzed
and implemented pursuant to the requirements in Chapter 6. In addition:

1. Unless the assumption is part of a workout or the loan is in liquidation status, the
proposed assumptor must meet the applicable 7(a) Loan eligibility requirements in SOP
50 10;

2. The proposed assumptor should be the primary owner of the business;

3. The proposed assumptor should have business experience and management skills that
are equal to or better than the Borrower's;

4. The proposed assumptor must have a satisfactory credit history;

5. The proposed assumptor must have the ability to repay the SBA loan in full;

6. No collateral should be released;

7. No collateral should be subordinated except as provided in Chapter 8, Paragraph A with
regard to funds that will be used to make improvements to the collateral that will
maintain or increase its value;

8. The proposed assumption should not have a negative impact on the operation of the
business;

9. The proposed assumption must not have a negative impact on the Recoverable Value of
the collateral;

10. The existing collateral should be adequate to secure the loan, if not and whenever
possible, additional collateral should be required as a condition for the assumption;

11. Existing Obligors must not be released without SBA’s prior written approval,;

12. The terms of the assumption must be set out in a written agreement signed by all of the
parties to the agreement;

13. The terms of the assumption must include a "due on sale or death" clause that prohibits
any future assumption of the SBA loan; and

14. The terms of the assumption must not include a real estate contract, i.e., the seller may
not retain title to the property until an agreed upon amount is paid.

Note: See the most current version of SOP 50 10 with regard to the fee that Lenders may charge
for an assumption.

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B. Assignment of Lender's Interest in Loan

A 7(a) Lender may assign its interest in a 7(a) Loan to another 7(a) Lender. (For additional
information see 13 C.F.R. § 120.430 et seq.) A Lender may assign an individual 7(a) loan
to another 7(a) Lender pursuant to a Transfer of Participation Agreement provided it obtains
SBA's prior written approval. A Lender may assign an entire 7(a) loan portfolio to another
7(a) Lender provided it provides SBA with a copy of the purchase, sale and assignment
documents, and obtains SBA’s prior written approval.

Note: SBA does not charge a loan assignment fee, nor does it require or prohibit the assignor
Lender from negotiating an assignment fee to be paid by the assignee Lender.

C. Sale of Loan in Liquidation Status

A 7(a) Loan in liquidation status may be sold, 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. SBA's prior written approval is obtained if the sale involves a compromise of the principal
balance of the loan, or purchase of the loan by a Guarantor, a Close Relative of the
Borrower, or an Associate of the Borrower;

4. SBA has already purchased the guaranteed portion of the loan if it was sold on the
secondary market; and

5. The Lender selling the loan has submitted a complete guaranty Purchase Package and
SBA has completed its guaranty purchase review process.

Note: For information regarding the sale of SBA 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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Chapter 12.
Deferments
____________________________________________________________________________

A. Overview

A deferment is a temporary solution to a temporary problem. When used appropriately, i.e.,
when a Borrower is experiencing a temporary cash flow problem, a deferment can enable
the Borrower to improve its cash flow so that it can resume payments on its SBA loan.
When used inappropriately, i.e., when the Borrower’s problems are permanent, a deferment
can harm the Borrower, Lender and SBA. Especially if, for example, during the deferment
period, the collateral loses its value and the Obligors deplete all of their resources, including
the money in their retirement accounts and the equity in their homes, in a futile attempt to
turnaround a non-viable business.

Note: Free, confidential technical and management counseling is available to small businesses
through the nationwide network of SCORE Chapters and Small Business Development Centers,
Women’s Business Centers and Veterans Business Outreach Centers.

B. General Rule

If the Borrower's cash flow problem is temporary, any delinquent payments, as well as full or
partial future monthly payments, may be deferred (i.e., postponed without classifying the
loan in liquidation) for a stated period of time. (13 C.F.R § 120.530)

C. General Requirement—Temporary Cash Flow Problem

1. The Borrower’s financial information should be reviewed and analyzed in accordance
with prudent lending practices to ensure that the Borrower’s cash flow problems are
temporary and that the Borrower is otherwise viable.

2. When an SBA loan is more than 60 calendar days past due and the Borrower’s
problems appear to be permanent or long-term, a deferment should not be granted.
Instead, the loan should be classified in liquidation and more appropriate Loan Actions
should be initiated such as liquidation of the collateral and compromise with the
Obligors. (See Chapters 19 - 22.)

D. Deferred Amount

1. Loan Not Sold on Secondary Market

If the loan has not been sold on the secondary market, the Lender may grant a
deferment of up to six consecutive months. During the deferment period, the Lender
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
can determine whether an additional deferment is necessary and prudent. Prior to
granting an additional deferment, however, the Lender must have a documented
strategy that specifies the justification for a deferment of more than six months.
Generally, the amount deferred should not exceed six cumulative monthly payments or
20% of the original loan amount, whichever is less.

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2. Loan Sold on Secondary Market

If the loan has been sold on the secondary market, the Lender may only grant a one-
time deferment of up to three consecutive months without the written consent of the
investor. Any additional deferment requires the written consent of the investor.
(Paragraph 2 of Secondary Participation Guaranty Agreement [SBA Form 1086]).

3. Interest Accrual

Generally, interest will continue to accrue during a deferment period, and may be
handled in one of the following ways:

a. Interest may be paid during the deferment period;

b. The deferred interest may be paid in a lump sum at the end of the deferment period;

c. After the deferment period, the loan payment may be increased for a period of time
necessary for the Borrower to catch up to the original amortization schedule; or

d. When payments resume, they may be applied first to accrued interest, then to
principal.

E. Amount of Payments during Deferment Period

Payments during a deferment period are not mandatory, but are preferred since even a
small payment, such as $1, 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 in active military service, consult legal counsel or SBA's Office
of Veterans Business Development for information regarding the Servicemembers Civil Relief Act
and the Veterans Entrepreneurship and Small Business Development Act.

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Chapter 13.
Delinquent Secured Senior Loans
____________________________________________________________________________

A. General Requirements

Prudent, commercially reasonable action must be taken to prevent elimination of the lien
securing an SBA loan through a foreclosure action by a senior lien holder or dissipation of
the equity available to cover the SBA loan due to the imposition of Default Charges.

B. Procedure for Developing Best Strategy to Protect Junior Lien Securing SBA Loan

When it is apparent that an Obligor is in default on a loan secured by a senior lien on the
collateral for an SBA loan, the following steps, when applicable, should be taken to develop
a prudent and commercially reasonable strategy for protecting the equity available for
application to the SBA loan.

1. Review the Loan Documents

Begin the process by reviewing the Loan Authorization and other relevant Loan
Documents, to determine what priority the lien securing the SBA loan had at the time the
loan was closed. For example:

a. Real Property Collateral

If the senior lien is on real property collateral, review the mortgage, deed of trust or
other lien instrument, assignment of rents, title insurance policy, as well as any
senior lienholder, inter-creditor, subordination, non-disturbance or attornment
agreement.

b. Personal Property Collateral

If the senior lien is on personal property collateral, review the security agreement,
landlord lien waiver, UCC financing statements, and UCC searches, as well as any
senior lienholder, subordination or inter-creditor agreement.

2. Order a Current Lien Search

Order a current title report or UCC search to verify the priority of the lien(s) securing the
SBA loan. Or, at a minimum, review the existing title insurance policy or UCC search
and gather any other information needed to determine whether there could be any
additional liens against the property that could have seniority over the lien securing the
SBA loan such as liens for unpaid property taxes.

3. Verify the amount Owed on All Senior Liens

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 SBA loan pursuant
to a subordination agreement, inter-creditor agreement or other Loan Document.

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4. Order an Appraisal

Order an Appraisal to obtain up-to-date information regarding the value of the collateral.

Note: See the definition of "Appraisal" in Chapter 2, which includes a broker’s price opinion,
for SBA requirements pertaining to appraisals. Given the inherent conflict of interest, do not
rely solely on an appraisal prepared for an Obligor or another lender with a lien on the same
collateral, and exercise caution if the Appraisal was prepared by a broker with whom the
collateral, if acquired, will be listed for sale.

5. Determine the Recoverable Value of the Collateral

Calculate the Recoverable Value of the collateral encumbered by the senior lien.

6. Estimate Recovery from All Other Sources

Determine the repayment ability of the Obligors (See Chapter 14.) and the Recoverable
Value of any additional collateral.

7. Determine whether the Senior Lienholder Provided Required Notice

If a senior lienholder, who signed a lienholder agreement, has initiated a foreclosure
action, determine whether it complied with all of 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 Legal Counsel

If a notice of judicial foreclosure is received, the legal counsel, who will be responsible
for handling the litigation, should be notified immediately.

9. Analyze Facts, Review Options and Plan Strategy

Based on an analysis of the information collected in Steps 1-8 above, decide which Loan
Action or combination of Loan Actions, such as those listed in Paragraph C below, is
most appropriate under the circumstances.

C. Options

Generally, the strategy used to protect the equity available for an SBA loan in a junior lien
position includes one or more of the Loan Actions listed below.

1. Bring the Senior Loan Current

In order to maximize recovery on an SBA loan, funds may be advanced to keep the
payments on a senior secured loan current if the goal is to:

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a. Facilitate a Workout

Negotiate a workout that will maximize the recovery on the loan and enable an
otherwise viable small business Borrower to continue operating;

b. Negotiate a Sale of the Collateral

Work with the Obligor and other lienholders to complete a negotiated sale of the
collateral, (See Chapter 17 [Real Property Liquidation] or Chapter 18 [Personal
Property Liquidation] for information on short sales and release of lien for
consideration.); or

c. Foreclose the Lien Securing the SBA Loan

Preserve the equity available for application to the SBA loan and minimize costs by
leaving the senior lien in place and foreclosing the junior lien securing the SBA loan.
(See Chapter 17 [Real Property Liquidation] or Chapter 18 [Personal Property
Liquidation] for information 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
SBA loan, funds may be advanced to purchase or pay off a debt secured by a senior
lien, particularly if the senior lienholder offers a discount, and:

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 SBA 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 SBA loan balance; and (2) purchasing
or paying off the loan will improve the Borrower's ability to repay the SBA 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, the legal counsel, who will
be responsible for handling the litigation, should be notified immediately and
instructed to take whatever legal action is necessary, reasonable and customary
under the circumstances. For example, in addition to, or in lieu of, any of the other
options listed in this chapter, legal counsel may:

(1) File a disclaimer or an answer;

(2) Foreclose the lien securing the SBA loan in the same action; or

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(3) Cross-claim for judgment against the Obligors.

Note: If SBA has taken over servicing, SBA legal counsel is responsible for managing the
litigation in coordination with the local U.S. Attorney's Office, which has final decision-
making authority with regard to litigation strategy, credit matters and settlements.

b. Enter a Protective Bid

(1) When to Enter

A Protective Bid should be entered at a senior lienholder's foreclosure sale if the
Recoverable Value of the property is 10% or more of its Liquidation Value, unless
abandonment is appropriate, (i.e., Recoverable Value of less than $10,000 for
real property and $5,000 for personal property collateral), or a prudent lender
would not enter a Protective Bid based on the circumstances that are not
reflected in the Appraisal, but are documented in the Loan File. (For example, if
the collateral has an appraised value of $100,000, a Liquidation Value of
$80,000, and a Recoverable Value of $50,000 [i.e., Liquidation value minus the
balance owed on senior liens, foreclosure costs, and holding and resale costs] a
Protective Bid should be entered because $50,000 is more than $8,000 [10% of
$80,000].)

(2) Protective Bid Amount

(a) Maximum Amount

The maximum amount of a Protective Bid should be the lesser of the balance
owed on the SBA loan or the Recoverable Value of the collateral.

(b) Tolerance Range

The amount of a Protective Bid should include a "tolerance range," (i.e., a
specific percent of the authorized bid amount by which the authorized bidder
is allowed to increase or decrease the amount of the Protective Bid
depending on unanticipated events at the foreclosure sale). Generally, an
acceptable tolerance range is 10% above or below the authorized bid
amount.

Because state laws vary, legal counsel should be consulted 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, if any, owed on the
loan balance after the bid is entered.

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c. Take a No Bid Position

(1) When Appropriate

A Protective Bid should not be entered at a senior lienholder’s foreclosure sale if
abandonment is appropriate, (i.e., Recoverable Value of less than $10,000 for
real property and $5,000 for personal property collateral), or the Recoverable
Value of the collateral is less than 10% of its Liquidation Value. A no bid position
may also be justified if based on the circumstances, which are not reflected in the
Appraisal but are documented in the Loan File, a prudent lender would not enter
a Protective Bid even though the Recoverable Value of the collateral is 10% or
more of its Liquidation Value.

(2) Failure to Conduct an Environmental Investigation

Failure to conduct the Environmental Investigation required by Chapter 5 is not
an acceptable reason for taking a "no bid" position at a senior lienholder's
foreclosure sale when there is equity that should be protected. In emergency
situations, prudent judgment must be exercised and the best possible due
diligence under the circumstances must be conducted in order to avoid
unnecessary loss.

d. Exercise Right of Redemption

(1) Background

Under federal law, as an Agency of the Federal Government, SBA (but not a 7(a)
Lender) has one year from the date of a judicial foreclosure sale to redeem, i.e.,
buy back, the foreclosed-upon property (28 U.S.C. § 2410(c)). Under state law,
SBA and the 7(a) Lender's redemption rights generally stem from their status as
a junior lienholder. Whether junior lienholders have redemption rights varies by
state. Consult legal counsel for case specific information and advice.

(2) General Rule

The redemption rights on an SBA loan should be exercised whenever it would be
prudent and commercially reasonable to do so, for example, when the property
sells for less than expected at a senior lienholder's foreclosure sale.

e. Release Right of Redemption for Consideration

If redemption rights are available under federal or state law but it would not be
prudent or commercially reasonable to redeem the foreclosed-upon property, after
the senior lienholder's foreclosure sale has been confirmed, the redemption rights
associated with the SBA loan may be released upon receipt of cash in an amount
approximately equal to 50% of the property's Recoverable Value.

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f. Collect Excess Proceeds from Foreclosure Sale

(1) Requirement

When the property is not acquired via a Protective Bid at a senior lienholder’s
foreclosure sale, after the sale, all necessary, reasonable and customary action
must be taken to ascertain whether there are excess foreclosure sale proceeds
available for distribution to junior lienholders, and if so, all of the funds to which
the Lender or SBA is entitled must be collected and applied to the SBA loan
balance in accordance with Chapter 22 (Expenses and Recoveries).

(2) Practice Tip—Default Charges

When ascertaining whether funds are available for application to an SBA loan
after a senior lienholder's foreclosure sale, make certain that all Default Charges
(and advances, if any) were subordinated to the SBA loan as required by any
relevant subordination, lienholder or inter-creditor agreement.

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Chapter 14.
Classifying Loans in Liquidation
____________________________________________________________________________

Lenders should make a good faith effort to help delinquent Borrowers bring their loans current.
But, when a payment default cannot be cured, the Note should be accelerated, demand made
on the Obligors, the loan classified in liquidation, the SBA guaranteed portion re-purchased from
the secondary market, and a Liquidation Plan prepared and implemented without further delay.

A. When Loans Must Be Classified in Liquidation Status

A 7(a) Loan must be classified in liquidation when the Note is accelerated.

B. When the Note Should Be Accelerated

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 Portfolios

Lenders with a non-SBA guaranteed loan portfolio may decide whether to accelerate the
Note based on their own policies and procedures for 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 can 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. For information on the requirements
for guaranty purchase, see Chapter 23, 13 C.F.R. § 120.520, and SOP 50 10.

2. Lenders without Non-SBA Loan Portfolios

Lenders without a non-SBA guaranteed loan portfolio should accelerate 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 catch-up plan.)

C. Repurchase from Secondary Market

At the time the Note is accelerated and the loan is classified in liquidation, if the loan was
sold on the secondary market, the Lender must immediately either repurchase the SBA
guaranteed portion or request that SBA purchase it.

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D. Demand Letters

1. Whenever the Note is accelerated, unless prohibited by applicable law (e.g., the
automatic stay in bankruptcy), demand should be made on all of the Obligors for
immediate payment of the entire loan balance.

2. Demand letter(s) should be sent via regular mail as well as certified mail or some other
method that enables the sender to confirm delivery.

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 to
collect the loan balance from all of the Obligors including those who are missing or difficult
to locate.

F. Obligors in Active Military Service

The military service status of an Obligor must be determined before taking liquidation action
that could adversely impact the Obligor; and if an Obligor is in active military service, any
action taken must be in compliance with the Servicemember's Civil Relief Act ("SCRA"),
(Appendix to 50 U.S.C. §§ 501-596).

Note: SCRA provides servicemembers relief from certain obligations and temporarily suspends
judicial and administrative proceedings and transactions involving civil liabilities when military
service affects the servicemember’s ability to meet or attend to civil matters. The protections are
not automatic. Generally, servicemembers must request them and show that their military service
has materially impaired their ability to meet their obligations. Creditors may, however, seek relief
in court by proving otherwise. For detailed information, consult legal counsel or SBA's Office of
Veterans Business Development, but, simply stated SCRA:
1. Places limitations on foreclosures and interest rates;
2. Requires creditors to forgive interest in excess of 6 percent on certain pre-service debts;
3. Protects servicemembers from default judgments if they fail to appear at trial or respond to a
lawsuit because of their military service (50 USC App. § 521);
4. Authorizes the court to stay lien foreclosure actions or adjust the servicemember's obligation
to preserve the interests of all parties (50 USC App. § 533);
5. Makes a servicemember's personal assets that were not pledged as collateral unavailable to
satisfy a business obligation (50 USC App. § 596);
6. Prohibits creditors from pursuing adverse actions (e. g., notifying credit reporting agencies,
denying credit, changing terms) against servicemembers solely because they exercise their
rights under SCRA (50 USC App. § 518; and
7. Imposes criminal sanctions on creditors who violate certain provisions of the statute including
those pertaining to mortgage foreclosures.

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G. Liquidation Plans

All Lenders should prepare a Liquidation Plan prior to taking any material action to liquidate
a loan, since 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

For information on site visits, see Chapter 15. (A Liquidation Plan for a CLP loan
must include a copy of the Lender’s Site Visit Report.)

b. Feasibility of a Workout

For information on workouts, see Chapter 16.

c. Recoverable Value of the Collateral

For information on how to determine the Recoverable Value of collateral, see the
definition of “Recoverable Value” in Chapter 2.

d. Available Methods of Liquidation

For information on collateral liquidation, see Chapter 17 with regard to real property
collateral and Chapter 18 with regard to personal property collateral.

e. Routine Litigation

For information on Routine Litigation as well as Non-routine Litigation, see Chapter
21.

f. Status of Senior Liens

For information on senior liens, see Chapter 13.

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 c
above.);

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(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 26);

(5) Litigative risk, i.e., a real doubt concerning the ability to prevail in court because
of legal issues or factual disputes;

(6) The necessary, reasonable and customary administrative and litigation expenses
that would be incurred through enforced collection;

(7) The time it would take to enforce collection; and

(8) The likelihood that the Obligor’s assets have been or will be concealed or
fraudulently transferred.

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. For information on allocation and approval of
expenses and recoveries, see Chapter 22.

2. When a Liquidation Plan Must be Submitted 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 15. A copy of the Lender’s Site
Visit Report must be attached to the proposed Liquidation Plan.

(2) Amended Liquidation Plan

Except as provided below with regard to emergencies, Lenders should 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 written approval of a Liquidation Plan or amended Liquidation Plan for
a CLP loan, provided that it:

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(1) Makes a good faith effort to obtain SBA's written approval before undertaking the
emergency action;

(2) Submits a written Liquidation Plan or amended Liquidation Plan to the SBA Loan
Center as soon after the emergency as possible; and

(3) Takes no further liquidation action without SBA's written approval of the
Liquidation Plan or amended Liquidation Plan. (13 C.F.R. § 120.540(f))

c. SBA Response Time

If SBA does not respond to a Lender's request for approval of a Liquidation Plan for
a CLP loan within ten business days, the request is deemed approved. (13 C.F.R §
120.541(c))

H. Payments and Recoveries on Loans in Liquidation Status

See Chapter 4 for information on how to apply payments received on loans in liquidation.
See Chapter 22 for information on how to apply recoveries.

I. When Loans Should Be Removed from Liquidation Status

Regardless of whether or not the Guaranty has been purchased:

1. Returned to Regular Servicing

SBA loans should be removed from liquidation status and returned to regular servicing
after three consecutive timely payments have been made pursuant to a workout
agreement, bankruptcy plan, reaffirmation agreement, assumption, or other written
agreement that provides for resumption of regular payments.

2. Paid in Full

SBA loans should be removed from liquidation status and classified as “paid in full” when
the debt owed on the SBA loan has been satisfied. (Purchase of the loan from the FTA
should not be confused with payment of the loan by an Obligor or through liquidation
recoveries.)

3. Charged-off

SBA loans should be removed from liquidation status and classified as “charged-off”
when:

a. The Lender’s Wrap-up Report has been approved, and the remaining loan balance
has been charged-off; or

b. The Lender has failed to submit a Wrap-up Report within the timeframe specified by
SBA and the SBA Loan Center has determined that the loan should be charged off.
(See Chapter 26 for information on Wrap-up Reports.)

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Chapter 15.
Site Visits
____________________________________________________________________________

This chapter provides SBA policy and procedures concerning post-default site visits. With
regard to loans in regular servicing status, a site visit should be made whenever warranted by
prudent lending practices. All site visits should be documented by a Site Visit Report, which
should be kept in the Loan File. (See Chapter 3 for site visit reporting requirements.)

A. When Required

Unless the loan is unsecured, or the aggregate Recoverable Value of the personal property
collateral is less than $5,000 and the Recoverable Value of each parcel of real property
collateral is less than $10,000, a site visit must be conducted:

1. Payment Default—within 60 calendar days of an uncured payment default or sooner if
the collateral could be removed, lost or dissipated.

2. Non-payment Default—within 15 calendar days of the occurrence of an adverse event
that caused the loan to be classified in liquidation status or sooner if the collateral could
be removed, lost or dissipated.

B. Preparation

Prior to conducting a site visit, the steps listed below should be taken when they are
applicable and necessary to obtain sufficient information to make prudent lending decisions.

1. Review the Loan Documents

Determine what collateral was required, what collateral was actually taken, and what
priority position the liens had when the loan was closed by reviewing the Loan
Authorization and other relevant Loan Documents, including for example:

a. Personal Property Collateral—The security agreement, landlord lien waiver, UCC
financing statements, and UCC searches, as well as any senior lienholder,
subordination or inter-creditor agreement; and

b. Real Property Collateral—The mortgage or deed of trust, assignment of rents, and
title insurance policy, as well as any senior lienholder, subordination, inter-creditor or
non-disturbance agreement.

2. Obtain a Current Lien Search

Obtain a current title report or UCC search to verify the priority of the lien(s) securing the
SBA loan.

3. Contact the Landlord

If the collateral is located on leased premises, contact the landlord to determine whether
the rent is past due.

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4. Contact Local Taxing Authorities

Contact local taxing authorities to determine whether there are delinquent real or
personal property taxes that have, or will soon have, priority over the lien securing the
SBA loan.

5. Order an Appraisal

a. Personal Property

If the loan is secured and the collateral includes personal property such as
machinery, equipment, furniture, fixtures or inventory, hire an auctioneer or other
expert to prepare a Liquidation Value Appraisal and to assist with the relevant site
visit goals listed below. If the collateral includes unusual personal property that an
auctioneer would not ordinarily have the expertise to appraise, e.g., intellectual
property, order an Appraisal from an expert with the appropriate qualifications.

b. Real Property

If the loan is secured and the collateral includes real property, hire a qualified expert
to prepare an Appraisal.

Note: See the definition of "Appraisal" in Chapter 2 for SBA requirements pertaining to
appraisals. Given the inherent conflict of interest, do not rely solely on an appraisal
prepared for an Obligor or another lender with a lien on the same collateral, and exercise
caution if the Appraisal was prepared by a broker with whom the collateral, if acquired, will
be listed for sale.

C. Goals

During a post-default site visit, a good faith effort should be made to gather sufficient
information to accomplish the applicable goals listed below.

1. Inspect and Inventory the Collateral

Prepare a comprehensive written inventory that includes a complete and accurate
description of the collateral, including its current condition, photographs, and the serial
numbers of significant items of personal property, i.e., items with a Liquidation Value of
$5,000 or more.

2. Establish the Recoverable Value of the Collateral

Determine the amount of expenses that must be taken into consideration to accurately
calculate the Recoverable Value of the collateral, such as the cost of any necessary care
and preservation measures.

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3. Ascertain Whether Real Property Collateral is Occupied

If the collateral consists of real property, find out whether there are occupants who are
entitled to notice, who will need to be evicted, or who are paying rent that can be
collected and applied against the SBA loan balance.

4. Assess Environmental Risk

Review the Environmental Investigation Report prepared at the time the loan was made,
look for potential environmental problems while inspecting the Borrower’s business
premises, and follow the requirements concerning Environmental Investigations set out
in Chapter 5.

5. Develop a Liquidation Strategy

Begin developing a strategy for liquidating the loan. For example, if there is personal
property collateral that must be liquidated, determine whether the Borrower and landlord
will cooperate so that it can be sold via a public auction held on the Borrower’s business
premises. (See Chapter 18 for information on public UCC sales.)

6. Ascertain Whether a Workout is Feasible

If Obligors who have not filed for bankruptcy protection are present and cooperative,
obtain a copy of the financial records needed to determine whether a workout is feasible.
(See Chapter 16 for information on workouts including how to ascertain whether the
Borrower is a good candidate for a successful workout.)

7. Repossess the Personal Property Collateral

Unless a workout or a judicial foreclosure action is contemplated, make arrangements to
repossess the collateral using self-help methods pursuant to UCC Article 9 if it can be
done without a "breach of the peace. If the collateral cannot be repossessed without a
“breach of the peace;" consult legal counsel about filing a replevin action to obtain a
court order requiring the Obligor to turn-over the collateral.

8. Arrange for Care and Preservation of the Collateral

After acquiring possession or control of the collateral, take prudent and commercially
reasonable measures to care for and preserve it until it can be liquidated. For example:

a. Security and Safekeeping

Make arrangements to keep the collateral safe and secure until it can be liquidated.
For example, depending on the circumstances, it may be necessary to have the
locks changed, hire a caretaker, pay utility bills, or transport personal property
collateral to a secure, temperature-controlled storage facility pending a foreclosure
sale.

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b. Insurance

Purchase or maintain appropriate insurance coverage, such as hazard or general
public liability insurance pursuant to the requirements in Chapter 9 (Insurance
Coverage).

c. General Maintenance

Arrange for cost-effective repairs, clean-up, etc., to ensure that the foreclosure sale
is commercially reasonable and the collateral sells for the highest possible price.

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Chapter 16.
Workouts
____________________________________________________________________________

A. Overview

The term “workout” refers to the debt collection and negotiation process as well as the final
plan agreed upon by a creditor and a debtor with regard to how the problems and issues
surrounding the debtor’s delinquent obligation to the creditor can be “worked out” or
resolved. Generally, a workout agreement restructures the material terms and conditions of
the debtor’s delinquent loan in order to: avoid the need for actions such as foreclosure or
bankruptcy; enable the debtor to cure defaults and improve repayment ability; and to enable
the creditor to maximize recovery on the loan. Because a workout agreement alters the
material terms and conditions of the loan, the loan will generally need to be purchased from
the secondary market investor before a formal workout agreement can be executed.
Whenever feasible, a good faith effort must be made to negotiate a workout on an SBA 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 in order to make prudent lending decisions
regarding the feasibility and structure of a workout agreement. If the Obligors are not willing
to provide the following information, workout negotiations should not be pursued.

1. Financial Statement

c. A current financial statement that should be signed under penalty of perjury and must
show the Borrower’s assets, liabilities, income and expenses, e.g., SBA Form 770
(Financial Statement of Debtor);

d. The Borrower’s last year-end financial statements; and

e. Affiliates—If the Borrower has any affiliates, a current consolidated financial
statement must also be provided;

2. Business Federal Income Tax Returns

A complete copy of the Borrower and each affiliate’s business federal income tax return
that was filed with the IRS for the past two years or a written explanation as to why a
copy is not available; and

3. Personal Federal Income Tax Returns

A complete copy of the personal federal income tax returns that each Guarantor filed
with the IRS for the past two years or a written explanation as to why a copy is not
available.

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Note: Obtaining current financial statements at this stage is critical. Not only are they
needed to make prudent lending decisions regarding the feasibility and structure of a workout
agreement, but they also provide valuable information that would be difficult to obtain in the
event the workout is unsuccessful and enforced liquidation becomes necessary.

C. Feasibility Test

To determine whether a Borrower is a good candidate for the workout process, in addition to
reviewing the existing Loan Documents, review the new financial information required by
Paragraph B above, conduct a site visit if feasible, and ascertain whether the Borrower is:
(1) competent, i.e., has the necessary technical and management skills to turn the business
around; (2) cooperative, i.e., willing to take the necessary action to address the problems
that caused the default; (3) acting in good faith, and (4) financially and operationally viable.

D. Timing

If a workout is feasible, negotiations should begin immediately and a final workout plan
should be put into effect as soon as possible. If an acceptable workout plan is not in place
within a reasonable time, (e.g., 60 calendar days), the Lender should move forward with its
plan for enforced debt collection.

E. Requirement—New Consideration from Borrower

In order for a workout agreement to be legally binding, the debtor must provide
consideration, (i.e., something of value) before or at the same time that the debtor receives
the benefit of the workout agreement. For example, in exchange for an agreement to
forbear or restructure the loan, the Obligors should generally be required to:

1. Correct Loan Document errors;

2. Waive defenses;

3. Release lender liability claims;

4. Provide additional collateral; and

5. Consent to a speedy and inexpensive method of liquidating the loan if the workout fails.
This could include, for example, placing a deed or bill of sale to the collateral in escrow,
signing a confession of judgment, or agreeing to waive the automatic stay and to turn-
over the collateral if the Obligor subsequently files bankruptcy.

F. Options

The elements of a plan to work out the problems on an SBA loan will vary depending on the
circumstances. The final decision, and justification for it, must be documented in the Loan
File. The decision should be supported by a credit memo that includes a cash flow and
complete liquidation analysis based on the Obligors' current personal and business financial
documents required by Paragraph B. The most common workout options are listed below.

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1. Forbearance

Enforced collection activities may be postponed for a stated period of time in order to
provide the Borrower with an opportunity to improve its cash flow and avoid foreclosure.

2. Reinstatement of Maturity Date

If the Note has been accelerated, the maturity date may be reinstated. (See Chapter 7
for information on maturity date extensions.)

3. Deferment

Delinquent and future payments of principal, interest or both may be deferred for a
stated period of time to enable the Borrower to overcome a temporary cash flow
problem. (See Chapter 12 for information on deferments.)

4. Modification of Repayment Terms of Note

The repayment terms of the Note may be modified, (e.g., the payment amount or interest
rate may be lowered or the maturity date may be extended). See Chapter 7 for
information on modification of the Note.

5. Assumption of Loan

Another Person may assume the loan. (See Chapter 11 for information on
assumptions.)

6. Subordination to Working Capital Loan

The priority position of a lien securing the loan may be subordinated to a short-term
working capital loan. (See Chapter 8 for information on subordination to a new loan.)

7. Relief on Secured Senior Loan

A loan secured by a senior lien on the collateral securing the SBA loan may be kept
current, purchased or paid off. (See Chapter 13 for information on senior liens.)

8. Voluntary Sale of Collateral

The Borrower may be allowed to voluntarily sell all or part of the collateral provided that
sale is closely monitored to ensure that it is commercially reasonable and that all of the
net proceeds are applied to the principal balance of the SBA loan or used to facilitate the
workout plan. (For SBA Loan Program Requirements pertaining to voluntary sale of
collateral, see Chapter 17 with regard to real property collateral and Chapter 18 with
regard to personal property collateral.)

Note: The amount of accrued interest or principal owed on an SBA loan may only be reduced
through the offer in compromise process. (See Chapter 20 for information on offers in
compromise from going concerns.)

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G. Agreement Provisions

A workout agreement should be in writing and should include:

1. A list of events of default to date;

2. The consideration for entering into the agreement;

3. Confirmation of the collateral for the SBA loan, which should include the priority of each
lien;

4. An acknowledgement that neither SBA nor the 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 D;

7. The events that constitute a default under the workout agreement including the dates by
which obligations under the workout agreement must be performed;

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 on the loan.

H. SBA Approval

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 2 for information on Loan Actions that require prior
written SBA approval.)

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Chapter 17.
Real Property Collateral Liquidation
___________________________________________________________________________

A. General Requirements

All collateral that has Recoverable Value should be liquidated. With regard to real property
collateral, if the Recoverable Value of an individual parcel is $10,000 or more, it must be
liquidated unless there is a documented compelling reason for not doing so. The most
common methods of liquidating real property collateral are discussed below.

B. Procedure for Selecting Best Method of Liquidation

Real property collateral must be liquidated in a manner that will maximize recovery on the
loan in the shortest amount of time. The most appropriate method will depend on numerous
factors including those that can be ascertained by following the steps listed below.

1. Check the Military Service Status of Property Owner-Obligor

Determine whether the property owner-Obligor is in active military service. If so, consult
legal counsel regarding the implications of the Servicemembers Civil Relief Act prior to
initiating a lien foreclosure action.

2. Determine the Use of the Property

Determine how the property is used since it may trigger special requirements. For
example, if the property is used as an Obligor’s primary residence, the requirements set
forth in Paragraph C.4.b. below must be met before initiating a foreclosure action. If the
property is used for agricultural purposes, state law may require judicial foreclosure and
federal law may provide the Borrower with homestead rights. (For information on farmer
homestead rights, see 13 C.F. R. § 120.550, et seq. and the Consolidated Farm and
Rural Development Act.) Finally, if the property is used to operate a gas station, a major
oil company may have special rights with regard to matters such as notice of default, the
right of first refusal, or the ability to control future ownership or use of the property.

3. Review the Loan Documents

Review the Loan Documents to determine which methods of liquidation are available.
For example, in most states, a mortgage must be judicially foreclosed, while a deed of
trust may be foreclosed through either judicial or non-judicial proceedings.

4. Order a Title Report

Order a new title report or at a minimum, review the existing title insurance policy and
gather any other information needed to identify all liens and other encumbrances against
the property.

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5. Determine the Amount Owed on Senior Liens

With regard to each parcel of real property collateral, determine the amount owed,
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
Liquidation 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 below regarding
abandonment.

6. Decide How to Handle Each Title Encumbrance

After deducting the amount secured by senior liens, if the collateral appears to have a
Recoverable Value of $10,000 or more, consider the impact, if any, each encumbrance
would have on the various methods of liquidation and decide how to handle each
encumbrance. For example:

a. Senior Tax Liens

Consider the possibility of further erosion of equity due to late fees and other
penalties, and 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 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 as to the amount that should be applied to the tax lien.

e. Leases

If tenants are leasing the property, determine: (1) whether the lease enhances or
diminishes the Liquidation Value and marketability of the property; and (2) whether a
foreclosure sale will extinguish the lease or whether it will survive and bind the
purchaser to the lease terms.

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.

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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
whether

(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. Check Status of Hazard Insurance

If the property is improved, see Chapter 9 for SBA Loan Program Requirements
pertaining to ensuring that all collateral with Recoverable Value is adequately insured.

8. Order an Appraisal

Order an Appraisal to obtain up-to-date information on the market value of the property;

Note: See the definition of "Appraisal" in Chapter 2 for SBA requirements pertaining to
appraisals. Given the inherent conflict of interest, do not rely solely on an appraisal prepared
for an Obligor or another lender with a lien on the same collateral, and exercise caution if the
Appraisal was prepared by a broker with whom the collateral, if acquired, will be listed for
sale.

9. Assess Environmental Risks

When required by Chapter 5, conduct an Environmental Investigation to obtain the
information needed to mitigate the risks associated with liquidating Contaminated
collateral.

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10. Check Historic Register Status

If the property could have historical value based on its age, integrity and significance,
determine whether it is listed on, or eligible for, the National Register of Historic Places
by contacting the State Historic Preservation Office where the property is located. If so,
determine whether the historical significance impacts the Recoverable Value of the
collateral.

11. Review Relevant Business Records

When it would be prudent to do so, review the Borrower's books and records showing
the cash flow related to the operation and use of the property, and verify that the
property and its use do not violate any applicable laws such as those pertaining to
zoning and land use.

12. Consider Need to Collect Deficiency

If the recovery from liquidating a single parcel of real property collateral will not be
enough to pay the loan in full, consult legal counsel to determine whether use of a
particular method of liquidation, e.g., non-judicial foreclosure or acceptance of a deed in
lieu, would bar collection of the deficiency or foreclosure of any remaining collateral.

13. Estimate Time and Costs Involved

Estimate the time and expense associated with each viable method of liquidation. This
includes: the time and cost associated with pre-liquidation collateral care and
preservation; the liquidation action; and post-liquidation care, preservation and resale if
acquiring title to the collateral is anticipated.

14. Estimate Net Recovery

Using the information collected in Steps 1-13, calculate the net amount that could be
recovered by utilizing each viable method of liquidation to determine which would yield
the highest recovery in the shortest amount of time.

C. Liquidation Methods

1. Release of Lien for Consideration

See Chapter 8 for information on release of lien for consideration.

2. Voluntary Sale of Collateral by Obligor

An Obligor may be allowed to conduct a voluntary sale of all or part of the real property
collateral securing an SBA loan provided that:

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;

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d. An Appraisal has been obtained;

Note: See Chapter 2 for SBA requirements pertaining to ”Appraisals”. Given the inherent
conflict of interest, do not rely solely on an appraisal prepared for an Obligor or another
creditor with a lien on the same collateral.

e. The Recoverable Value of the collateral has been established;

f. The sale is supervised by the Lender (or SBA if SBA has taken over servicing);

g. The costs of sale are reasonable, necessary and customary;

h. The lien securing the SBA loan is only released in exchange for cash in an amount
equal to or greater than the Recoverable Value of the collateral; and

i. All of the net proceeds are applied to the principal balance of the SBA loan.

Note: When analyzing whether a proposed compromise amount is adequate, consideration
may be given to whether the Obligor's cooperation during the liquidation process increased
the overall recovery on the loan. (See Chapter 20, Paragraph F.)

3. Deed in Lieu of Foreclosure

Real property collateral may be liquidated by accepting a deed in lieu of foreclosure (i.e.,
a deed by which a debtor conveys fee-simple title to a secured creditor as a substitute
for foreclosure) if doing so would maximize recovery on the loan. All deeds in lieu must
be accompanied by a written agreement executed by all of the Obligors as to the amount
to be applied to the loan balance once title has been transferred. Although this
procedure may save time and money, it has inherent risks. For example, accepting a
deed in lieu could eliminate the right to collect any deficiency. It could also eliminate the
opportunity to foreclose the SBA lien and remove any junior liens before marketing the
property as REO. Because state laws vary regarding the impact of accepting a deed in
lieu of foreclosure, the advice and assistance of legal counsel should be obtained before
undertaking this method of liquidation.

Note: In addition to a Foreclosure Policy, Trustee Sale Guarantee, or a Litigation Guarantee,
most title insurance companies also offer deed in lieu of foreclosure services that include not
only a new title (commitment) report, but review of title issues, recording of the deed in lieu
documents, and issuance of a title policy to the Person to whom the lender sells the property
after acquiring it via the deed in lieu.

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4. Lien Foreclosure

a. General

Foreclosure is an action taken to sell property that was pledged as security for a
loan. Since the laws pertaining to the foreclosure of mortgages, deeds of trust, and
other types of real property liens vary by state, consult legal counsel to determine
which type of foreclosure action is the most appropriate with regard to a particular
loan. The two primary methods of real property lien foreclosure actions are judicial
foreclosure and non-judicial foreclosure.

b. Primary Residences

Unless the Obligor-owner has engaged in fraud, misrepresentation or other financial
misconduct, a good faith effort should be made to reach an agreement covering
release of the lien for consideration and compromise of the Obligor’s liability for the
SBA loan balance prior to initiating a foreclosure action against the Obligor's primary
residence. Documentation showing that a Lender has complied with applicable state
or federal laws requiring mortgage lenders to work with home owners prior to
foreclosure will be considered evidence that a Lender has made a good faith effort to
meet the foregoing SBA Loan Program Requirement. (For information on offers in
compromise, see Chapter 20.)

c. Judicial Foreclosure

Judicial foreclosure requires filing a lawsuit.

(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

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 the applicable state statutory
provisions governing non-judicial foreclosure is mandatory.

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(1) Advantages

(a) Fees and costs are generally lower than judicial foreclosure;

(b) Takes less time than judicial foreclosure; and

(2) Disadvantages

(a) Deficiency judgment may not be obtainable, and

(b) Judicial action may still be necessary if there are unlawful occupants who
need to be evicted.

5. Collection of Rents

If the Loan Documents include an assignment of rents and there are tenants paying rent
to an Obligor, consult legal counsel as to the applicable state law regarding the
collection of rent pending a workout or foreclosure action. In some cases, this may be
accomplished by means of a letter to the tenants. In other cases, a receiver may need
to be appointed.

6. Appointment of Receiver

a. When Receiverships are Appropriate

A receiver is a Person appointed by the court to preserve and protect the collateral in
connection with, or in lieu of, foreclosure. Receivers should only be used in
exceptional circumstances when, for example, to maximize the recovery and
minimize loss on a loan, it is necessary to operate the business (e.g., hotel or gas
station) until it can be sold or the collateral can be liquidated. The laws governing
receiverships vary by state. Generally, however, the court will authorize the receiver
to take possession of the property, manage it, collect rents, and take any reasonably
necessary action to protect and preserve its value.

b. Approved Litigation Plan Required

The appointment of a receiver involves Non-routine Litigation. Therefore, Lenders
must submit a proposed Litigation Plan for SBA approval prior to commencing
receivership proceedings. SBA will not approve the appointment of a receiver to
perform basic loan liquidation functions, and will not approve or reimburse Lenders
for expenses related to unauthorized receiverships. (See Chapter 21 for information
on Litigation Plans and Chapter 22 for information on Recoverable Expenses.)

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7. Short Sale Approval

A “short sale” is a sale of real property by the owner in which the proceeds from the sale
of the property fall short of the balance of the debts secured by liens against the
property, and because the owner cannot afford to repay the full amount of the secured
debt, the secured creditors agree to release their liens on the real property for less than
the total amount that would otherwise be due at closing.

a. Review and Analysis

Servicing Requests for short sale approval should be reviewed, analyzed and
implemented in accordance with Chapter 6 (Borrower Servicing Requests).

b. General Rule

A short sale should not be approved unless:

(1) The dollar amount of the sale proceeds to be received and applied against the
SBA loan balance is approximately equal to or greater than the Recoverable
Value of the collateral; and

(2) The Obligor-seller will remain liable for the SBA loan balance, or approval of the
short sale is part of a compromise agreement reached in accordance with the
requirements of Chapter 20.

Note: Some states, e.g., California, have laws that prohibit lienholders from collecting
the deficiency if they consent to a short sale. Consult legal counsel for case-specific
information and advice, and before approving a request that will eliminate ability to
collect the loan balance, follow the requirements set out in Chapter 20 with regard to
offers in compromise.

c. Required Supporting Documents

The Supporting Documents that should be obtained and reviewed in order to reach a
prudent decision regarding whether to approve a short sale include the following:

(1) Real estate listing agreement;

(2) Appraisal;

Note: See the definition of "Appraisal" in Chapter 2 for SBA requirements pertaining
to appraisals. Given the inherent conflict of interest, do not rely solely on an appraisal
prepared for an Obligor or another lender with a lien on the same collateral, and
exercise caution if the Appraisal was prepared by a broker with whom the collateral, if
acquired, will be listed for sale.

(3) Real estate purchase and sale agreement, short sale and all other addendums;

(4) Current title report;

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(5) Senior lienholder, subordination, inter-creditor 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 an Appraisal;

(2) Consent of All Secured Creditors

All of the Obligor-seller’s creditors with a lien on the property must have
consented to the short sale;

(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 SBA loan
by a senior lienholder, subordination, inter-creditor or other agreement;

(5) No Sale Proceeds to Junior Lienholders, Unsecured Creditors or Others

No sale proceeds should be disbursed to junior lienholders other than token
amounts, i.e., $500 or less, if necessary for release of lien; unsecured creditors,
and any other Person who does not have a senior lien against the property
except as provided below with regard to closing costs;

(6) No Credits to Buyer

Since short sale property should be sold in "as is” condition, no funds should be
credited to the buyer for repairs or any other purpose;

(7) No Unreasonable Closing Costs

Generally, since the Obligor-seller has no equity in the property, the seller’s
closing costs should not be paid from the sale proceeds unless it is necessary
under the circumstances, in which case, the amount of any cost that will be paid
from the sale proceeds, e.g., real estate commissions, must be reasonable and
justified under the circumstances;

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Note: Secured creditors, who are asked to accept less than the full amount due to
them, can condition their approval of a short sale. For example, their approval can be
conditioned on increasing the purchase price, reducing usual and customary sale
closing costs such as the amount of commissions paid to realtors, or receiving
substitute collateral for the deficiency.

(8) Arrangement for Payment of Loan Balance Deficiency

Satisfactory arrangements must have been made for payment of the loan
balance that will remain after receipt of the sale proceeds, (i.e., consideration for
release of the lien), unless the release is part of a compromise agreement
reached with the Obligor-seller pursuant to the requirements of Chapter 20.

D. Credit Bids

1. Requirement

A Credit Bid should be entered at all real property lien foreclosure sales initiated to
foreclose a lien securing an SBA loan, whether the sale is judicial or non-judicial.

2. Credit Bid Amount

To determine the amount of a Credit Bid, the following factors must be considered: (a)
Recoverable Value; (b) the SBA loan balance; and (c) need for and ability to collect a
deficiency judgment. The Credit Bid amount should be based on the Recoverable Value
of the collateral, but should not exceed the loan balance. Further, the entire loan
balance should not be bid if doing so would eliminate an otherwise collectible deficiency.

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, it
may be necessary to evict them. Eviction laws vary by locality. Consult legal counsel to
determine the appropriate course of action.

F. Abandonment

The pursuit of recovery on real property collateral may be abandoned if the collateral has no
significant Recoverable Value, i.e., a Recoverable Value of less than $10,000 per parcel.
(See Chapter 5 [Environmental Risk Management] for SBA requirements pertaining to the
due diligence required before collateral may be abandoned based on unsubstantiated
claims that it is Contaminated, since the presence of Hazardous Substances may not
significantly impair the market value of the acquired collateral.)

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Chapter 18.
Personal Property Collateral Liquidation
____________________________________________________________________________

A. General Requirements

All collateral that has Recoverable Value should be liquidated. With regard to personal
property collateral, if the individual or aggregate Recoverable Value is $5,000 or more, it
must be liquidated unless there is a documented compelling reason for not doing so. The
most common methods of liquidating personal property collateral are discussed below.

B. Procedure for Selecting Best Method of Liquidation

Personal property collateral must be liquidated in a manner that will maximize recovery on
the loan in the shortest amount of time. The most appropriate method will depend on
numerous factors including those that can be ascertained by taking the steps listed below.

1. Check the Military Service Status of Property Owner-Obligor

2. Review the Loan Documents

Review the applicable Loan Documents to begin the process of determining what
personal property is available for liquidation, how the liens on that property can be
foreclosed, and how much money can be recovered through liquidation. For example,
review the Loan Authorization, 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 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. Order a Lien Search

Verify the priority of the liens securing the SBA loan by conducting a new lien search.
For example, order a current UCC lien search, or follow the steps below to search for
liens against special types of property, such as:

a. Motor Vehicles and Small Boats

Check for security interests noted on the certificate of title.

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b. Airplanes

Order a title search, (usually through an airplane title service company), from the
Federal Aviation Administration Registry in Oklahoma City, Oklahoma and if the
plane is subject to the Cape Town Convention, the international registry in Ireland.

c. Documented Vessels

Order an abstract of title, (usually through a marine title service company), from the
U.S. Coast Guard National Vessel Documentation Center in West Virginia.

d. Tax Liens

Contact the appropriate Government Entity, (generally the county), to determine, and
continue to monitor, whether there are liens for delinquent taxes that have priority
over the lien securing the SBA loan and decide whether they should be paid. If there
are junior IRS liens against the property, ask the IRS for a certificate of discharge or
reach an amicable resolution as to the amount of funds that should be applied to
each IRS tax lien.

4. Determine Amount Owed on Senior Liens

With regard to each type of personal property collateral, determine the amount owed,
including unsubordinated Default Charges, on any debt secured by a senior lien against
the property, and deduct that amount from the property’s estimated Liquidation Value. If
it still appears that the property will have an individual or aggregate Recoverable Value
of $5,000 or more, proceed to step 5. If not, see Paragraph E below regarding
abandonment.

5. Review Relevant Business Records

If the collateral consists of inventory or accounts, review the Borrower's books and
records to determine whether there are accounts receivable that can be collected or
inventory that can be returned for cash or credit. If so, see Paragraph C.5 below for
information on collecting accounts receivable.

6. Check Status of Hazard Insurance

See Chapter 9 for SBA Loan Program Requirements regarding the need to adequately
insure collateral with Recoverable Value.

7. Order an Appraisal

Order an Appraisal to obtain up-to-date information on the Liquidation Value of the
collateral.

Note: See the definition of "Appraisal" in Chapter 2 for SBA requirements pertaining to
appraisals. Given the inherent conflict of interest, do not rely solely on an appraisal prepared
for an Obligor or another lender with a lien on the same collateral, and exercise caution if the
Appraisal was prepared by a broker with whom the collateral, if acquired, will be listed for
sale.

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8. Assess Environmental Risks

If there are Hazardous Substances at the Borrower's business premises, follow prudent
lending practices in order to minimize the risk and maximize the recovery on the loan.
(See, for example, the Practice Tip at the end of Paragraph C.3 below regarding the sale
of used chemicals, batteries and tires.) If the collateral includes equipment associated
with a gas station or dry cleaner, comply with the requirements in Chapter 5
(Environmental Risk Management).

9. Calculate Time and Costs Involved

Calculate the time and costs associated with each viable method of liquidation. This
includes: repossession or replevin; pre-liquidation collateral care and preservation; the
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 take into account the possibility that it will need to
purchase the vessel at the U.S. Marshal’s sale.

10. Estimate the Net Recovery

Using the information collected in Steps 1-9, calculate the net amount that could be
recovered by utilizing each viable method of liquidation to determine which would yield
the highest recovery in the shortest amount of time.

C. Liquidation Methods

1. Release of Lien for Consideration

See Chapter 8 for information on release of lien for consideration.

2. Voluntary Sale of Collateral by Obligor

An Obligor may be allowed to conduct a voluntary sale of all or part of the personal
property collateral securing an SBA loan provided that:

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. An Appraisal has been obtained;

Note: See the definition of "Appraisal" in Chapter 2 for SBA requirements pertaining to
appraisals. Given the inherent conflict of interest, do not rely solely on an appraisal prepared
for an Obligor or another lender with a lien on the same collateral, and exercise caution if the
Appraisal was prepared by a broker with whom the collateral, if acquired, will be listed for
sale.

e. The Recoverable Value of the collateral has been established;

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f. The sale is supervised by the Lender (or SBA Loan Center if SBA has taken over
servicing);

g. The costs of sale are reasonable, necessary and customary;

h. The lien securing the SBA loan is only released in exchange for cash in an amount
equal to or greater than the Recoverable Value of the collateral; and

i. All of the net proceeds are applied to the principal balance of the SBA loan.

3. UCC Sale

Liens on business assets such as equipment, inventory or fixtures created under UCC
Article 9 may be foreclosed by conducting a UCC sale.

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 would maximum recovery on the loan, e.g., when the
collateral can be sold as part of the sale of a going concern.

(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. The use of widely advertised public UCC
sales is encouraged.

(a) Auction or Retail Sale

The most common type of public UCC sale is a public auction where the
collateral is sold to the highest bidder. Another common type is a retail sale
of the collateral conducted over a limited number of days during which time
the prices are gradually lower. 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.

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b. Requirements

(1) Possession of the Collateral

The secured creditor must be able to repossess the collateral without a "breach
of the peace." (UCC § 9-609) If not, legal counsel should be consulted to
determine whether litigation, such as a replevin action, is appropriate to obtain
possession of the collateral.

(2) Reasonable Notice of the Sale

Reasonable notice of the sale must be sent 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) To ensure compliance, notice of the
sale should be sent to all of the Obligors and junior lienholders at least ten
calendar days prior to the sale. To prove compliance, the Loan File should be
documented with a copy of: (1) the post-default UCC lien search verifying the
priority of the lien securing the SBA loan and the identity of any junior lienholders
entitled to notice; (2) the notice sent to the Obligors and junior lienholders; and
(3) proof that the notice was transmitted.

(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 property sold;

(b) UCC sale brochure and advertisements; and

(c) Final accounting for the sale that includes the gross amount of proceeds, an
itemized list of expenses, including how they were calculated, and the net
amount recovered.

Note: A good auction company will keep detailed records of the sale including, e.g., a
list of registered bidders, the name of each buyer, and the amount paid for each item.

c. Bill of Sale

The bill of sale should state that the personal property is sold "as is" and "without
warranties of any kind including those relating to title, possession, quiet enjoyment or
the like." (For more information, see UCC § 9-610.)

d. Practice Tips

(1) How to Choose an Auction Company

Lenders that want help choosing a good auction company should consider the
following:

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(a) Is it bonded? Does it have adequate insurance and the necessary licenses,
including a dealer’s license if you have titled motor vehicles to sell?

(b) Is it knowledgeable about the type of collateral you have to sell?

(d) Does it have a good reputation in your area? Check its references.

(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 handle the pre-sale preparation and inspection,
the advertising, removal, and clean-up? And, most importantly, can it provide
you with accurate records concerning all aspects of the sale?

(g) Is the proposed fee arrangement reasonable, necessary and customary?
When possible, request and compare proposals from several companies.
Scrutinize the costs, particularly the advertising budget. Be suspicious of an
unusually low advertising budget. Adequate advertising is essential for a
successful auction. If you decide to pay the company on a commission basis,
try to make sure that it will not also charge a buyer’s premium, i.e., a
percentage of the final bid amount (generally 10% – 20%) that is added on to
the price like a sales tax and goes directly to the auction company as
additional compensation.

Note: A buyer’s premium can affect your net recovery because not as many
people will attend the auction, and those who do will bid lower because they know
they will have to pay an extra 10-20% on top of the applicable sales tax.

(2) Leased Equipment

If the UCC search reveals that a valuable piece of equipment is leased, find out
the residual amount owed on the lease and pay it off if doing so would (1) allow
the equipment to be included in the UCC sale; (2) attract more potential buyers to
the sale; and (3) maximize recovery on the loan.

(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 on the loan.

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(4) Used Chemicals, Batteries and Tires

If the collateral includes Hazardous Substances such as used chemicals,
batteries or tires, ascertain whether there is a market for it. If so, encourage the
Borrower to sell it and apply the net proceeds to the principal loan balance. (See
Chapter 8 for information on release of liens for consideration. See the EPA’s
Website for a list of companies that purchase reusable hazardous waste.)

4. Judicial Foreclosure

Although the self-help remedies authorized by the UCC tend to be more economical and
efficient, personal property liens may also be foreclosed by filing a lawsuit. For example,
if the personal property collateral consists of trade fixtures attached to real property
collateral and the real property lien must be judicially foreclosed, judicially foreclosing
both the real and personal property liens in the same action may be appropriate.

5. Collection of Accounts Receivable

When an SBA loan is secured by a lien on accounts receivable, a determination as to
whether the pledged accounts have Recoverable Value should be made as soon as
possible after an event of default. Thereafter, swift, aggressive action must be taken to
collect any accounts with Recoverable Value in a manner consistent with applicable law.

a. Collection by Borrower

The Borrower, who will be liable for any deficiency and is best able to handle
disputed claims, may be allowed to collect accounts provided that precautions are
taken to ensure that the proceeds are applied to the loan balance.

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, the Obligors should be provided with written notice of the intent to cease
collection efforts and given the opportunity to pursue collection of the remaining
accounts provided that the proceeds are applied to the loan balance.

6. Set-off of Deposit Account

When an SBA loan is secured by a lien on a deposit account, on the occurrence of an
event of default the Lender 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 SBA loan balance.

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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 an SBA loan and a deficiency exists after all of the other collateral has been
liquidated, the policy should be surrendered to the insurance company for the cash value
and the proceeds applied to the principal balance of the 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 should be treated as Recoverable Expenses. (See Chapter 22 for
information on Recoverable Expenses.

8. Foreclosure of Lien on Fixtures

A lien on fixtures may be foreclosed pursuant to UCC Article 9 or applicable real
property foreclosure law. (UCC § 9-604) (See Paragraph C.3 above for information on
UCC sales. See Chapter 17 for information on real property lien foreclosure.)

Note: A creditor who removes fixtures is responsible to the owner of the real property, other
than the debtor, for the cost of repairing any physical damage caused by the removal, but not
for any diminution in the value of the real property caused by the absence of the fixtures.
(UCC § 9-604)

9. Marine Mortgage Foreclosure

A marine mortgage on a documented vessel can only be foreclosed by filing an
admiralty action in the appropriate federal district court, which will issue a warrant for the
arrest of the vessel.

D. Credit Bids

1. Non-judicial Foreclosure Sales

Non-judicial personal property lien foreclosure sales, e.g., UCC sales, must be
aggressively advertised in order to obtain the highest price and to avoid acquiring title.
Generally, unless the collateral has a high estimated Recoverable Value, (e.g., state of
the art printing equipment), it is not advisable to enter a Credit Bid or to establish a
minimum bid or a reserve amount because doing so could have a chilling effect on the
bidding.

2. Judicial Foreclosure Sale

A Credit Bid must be entered when a personal property lien securing an SBA loan is
judicially foreclosed. To determine the amount of a Credit Bid the following factors must
be considered: (a) Recoverable Value; (b) SBA loan balance; and (c) need for and
ability to collect a deficiency judgment. The Credit Bid amount should be based on the
Recoverable Value of the collateral, but should not exceed the loan balance. Further,
the entire loan balance should not be bid if doing so would eliminate an otherwise
collectible deficiency.

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E. Abandonment

The pursuit of recovery on personal property collateral may be abandoned if the collateral
has no significant Recoverable Value, i.e., the individual or aggregate Recoverable Value is
less than $5,000. The decision and justification for abandoning collateral, including the
basis for the Recoverable Value estimate, must be documented in the Loan File. (See
Chapter 5 [Environmental Risk Management] for SBA requirements pertaining to the due
diligence required before collateral may be abandoned based on unsubstantiated claims
that it is Contaminated, since the presence of Hazardous Substances may not significantly
impair the market value of the acquired collateral.)

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Chapter 19.
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, it
should be liquidated in a manner that will maximize recovery in the shortest amount of time.

B. Acquiring Title to Collateral

1. General SBA Policy and Requirements

a. Title to collateral should not be acquired unless it is necessary to maximize recovery
on the loan.

b. To avoid acquisition, foreclosure sales should be aggressively advertised in order to
attract a large number of potential buyers.

c. Title to collateral must not be taken in SBA's name without obtaining SBA's prior
written approval. (13 C.F.R. § 120.536(a)(4))

d. SBA's ownership of acquired collateral should be reflected on the title as follows:
"Administrator, U.S. Small Business Administration, an Agency of the United States
Government."

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 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))

3. Personal Property

Title to personal property collateral should rarely, if ever, be taken in SBA's name.

C. Ownership Responsibilities

Upon acquiring title to real or personal property collateral, the following actions should be
taken:

1. Possession and Control

a. Take possession of the acquired collateral;

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b. Change the locks immediately on vacant, 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

Set up a new file in order to keep all accounting associated with the acquired collateral,
e.g., holding and resale costs, separate from the original Loan File since expenses
related to acquired collateral cannot be added to the loan balance.

4. Taxes

Monitor and pay taxes and assessments to avoid liens, interest accrual and penalties.

5. Care and Preservation

Take reasonable steps to prevent deterioration, such as arranging for utility services and
essential repairs and maintenance. And, if the property has historic significance, consult
legal counsel and the SBA Loan Center to ensure compliance with Section 106 of the
National Historic Preservation Act of 1966.

6. Insurance

See Chapter 9 for SBA Loan Program Requirements pertaining to insurance coverage
on acquired collateral.

7. Reporting Requirements

a. SBA Form 297

Complete SBA Form 297 (Collateral Purchase Report) when REO is acquired in
SBA's name; and

b. Ongoing Reporting Duty

Notify the SBA Loan Center immediately of 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.

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2. Payment of Expenses

Expenses related to acquired collateral should be paid by the Lender.

3. Recoupment of Expenses

Necessary, reasonable and customary expenses related to acquired collateral paid by
the Lender may be recouped as follows:

a. General Requirement—SBA Approval

Any cost, fee or other amount associated with acquired collateral that a Lender
seeks to recoup must be reviewed and approved by SBA pursuant to the procedure
set out in Paragraph E of Chapter 22 with regard to Recoverable Expenses.

b. Recoupment Methods

(1) Deduction from Recoveries

Lenders may deduct the amount of the expenses from the proceeds of the sale
of the acquired collateral.

(2) Reimbursement by SBA

Lenders may ask SBA for reimbursement of any expense that was not deducted
from the proceeds of the sale of the acquired collateral.

c. Denied Expense Approval Requests

Lenders must reimburse SBA for the amount of any expense denied by SBA that the
Lender has already deducted from the proceeds of the sale of the acquired collateral.

E. Timeframe for Disposal

Acquired collateral should be disposed of within 12 months of acquisition.

F. Sale

Acquired collateral should be disposed of by sale.

1. Method of Sale

Acquired collateral should be sold by whatever method, (e.g., broker's sale, public
auction, sealed bid sale, etc.), will maximize recovery on the loan in the shortest amount
of time.

2. Bidding or Acquisition by SBA 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 approved by the Director of
OFPO.

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3. Transfer of Title and Closing Costs

a. REO—Quitclaim Deed

Buyers should be responsible for all closing costs, and title to REO should be
conveyed 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 the recovery on the loan in the shortest amount of time.

b. Personal Property—Non-recourse Bill of Sale

Acquired personal property collateral should be conveyed by means of a bill of sale
that specifies that the property is sold "as is" and "without warranties of any kind
including those relating to title, possession, quiet enjoyment or the like."

4. Sales Price

The sales price for acquired collateral should be based on an Appraisal. (See the
definition of “Appraisal" in Chapter 2 for SBA requirements pertaining to appraisals. See
Chapter 5 (Environmental Risk Management) for SBA requirements pertaining to the
due diligence that must be performed before selling acquired collateral alleged to be
worth substantially less than its appraised value due to the alleged presence of
Contamination.)

5. Use of Real Estate Brokers

REO may be sold by listing it with a real estate broker provided that:

a. The terms of the listing agreement are not inconsistent with this SOP;

b. The listing price is supported by an 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 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 is reasonable, necessary
and customary in the community where the property is located for the type of
property involved; and

f. Neither the listing nor selling broker has an actual, apparent, or potential conflict of
interest with regard to the REO, Obligors, SBA or the Lender.

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6. Sale to Obligors, Associates or Close Relatives of the Borrower

Acquired collateral should not be sold to Obligors, Close Relatives of Obligors, or
Associates of the Borrower for less than the full amount due on the SBA loan unless it is
necessary to maximize recovery on the loan and the following conditions are met:

a. A comprehensive public foreclosure sale of the collateral was held;

b. A good faith effort was made to resell the acquired collateral to a disinterested party;

c. The acquired collateral is sold for fair market value;

d. It is an all cash sale;

e. If the sale is to an Obligor to repurchase the Obligor’s primary residence, the REO
will continue to be the Obligor’s primary residence; and

f. The sale will not harm the integrity of the SBA loan program.

7. Purchase Offers

All offers to purchase acquired collateral must:

a. Be in writing signed by the party making the offer and accompanied by a good faith
deposit in the form of a cashier’s check, which should generally be for at least 5% of
the purchase price;

b. Not be disclosed to other prospective purchasers or their agents; and

c. Be reviewed and analyzed based on the sales efforts to date and the value of the
property established by an Appraisal.

8. Term Sales

a. When Permitted

Acquired collateral should not be sold by means of a term sale unless doing so is
necessary to maximize recovery on the loan.

b. Buyer Pre-qualification

Potential purchasers buying on credit must be pre-approved.

c. Terms of Purchase and Sale

With regard to all term sales, the purchaser must:

(1) Make a down payment of at least 20%;

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(2) Properly execute a promissory note for the balance, which (a) is assignable; (b),
has a maturity date that does not exceed 15 years for REO or five years for
personal property; (c) has an appropriate interest rate; (c) 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, after the sale proceeds have been applied to
the loan balance, legal counsel should be consulted to determine whether there are any
state specific laws governing distribution of the surplus. Thereafter, any surplus must be
remitted to the SBA Loan Center along with a written explanation for the profit and a
recommendation based on the applicable law, regarding how the surplus funds should
be distributed, e.g., retained by SBA, paid into the registry of the court, or distributed to
junior lienholders.

G. Lease

Generally, acquired collateral should not be leased. However, if it has not sold after a
reasonable amount of time (e.g., one year), acquired collateral may be leased if doing so is
necessary to maximize recovery on the loan, provided that:

1. A comprehensive public foreclosure sale of the collateral was held;

2. A good faith effort was made to sell the acquired collateral;

3. The terms and conditions of the lease, including the rental rate, are consistent with
prevailing market rates and terms;

4. A written lease is used, which is legally enforceable, assignable, allows the acquired
collateral to be shown to prospective buyers, and can be terminated on reasonable
notice if a favorable purchase offer is received;

5. The acquired collateral is not leased to an Obligor, Close Relative of an Obligor, or an
Associate of the Borrower unless a comparable or more desirable proposal cannot be
obtained;

6. Leasing the acquired collateral will not harm the integrity of the SBA loan program; and

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7. The leased property is inspected at least semi-annually and the inspection findings
included in the Lender's quarterly status report on the loan.

H. Abandonment

Acquired collateral must not be abandoned unless abandonment of the specific REO or
acquired personal property collateral has been pre-approved by SBA as an exception to
policy obtained in accordance with the procedures set out in Chapter 1.

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Chapter 20.
Offer in Compromise
____________________________________________________________________________

A. Overview

1. Definition

An offer in compromise is an offer made by an Obligor to pay less than what is owed in
full settlement of the Obligor’s obligation on their SBA loan. Submitting the offer does
not ensure that it will be accepted. Rather, it begins a process of evaluation and
verification by the Lender and SBA. Generally, an offer in compromise will be accepted
if it reflects the Obligor’s true ability to pay, and will be rejected if the Obligor can pay the
loan in full via a lump sum payment or an installment agreement, or if acceptance of the
offer would harm the integrity of the SBA loan program.

2. Legal Authority

The general requirements for compromise of a debt owed on an SBA loan are based on
31 U.S.C. § 3711 and 31 C.F.R. Part 902 (Standards for the Compromise of Claims - by
an agency of the Federal Government).

3. Effect of Compromise with One Obligor on Remaining Obligors

A compromise with one Obligor does not release the remaining Obligors since each is
jointly and severally liable, i.e., full payment may be requested from one or all of the
Obligors. No attempt should be made to divide payment responsibility between the
Obligors or to use the compromise amount with one Obligor as the basis for the
compromise amount required from another. (31 C.F.R. § 902.4)

4. Finality

An offer in compromise that is approved by SBA is final and conclusive on the Obligor,
SBA and the Lender unless it was obtained through fraud, misrepresentation, or mutual
mistake of fact.

Note: Lenders may wish to advise Obligors that acceptance of a compromise offer is
considered to be a loss to the Federal Government and may adversely impact the Obligor’s
ability to obtain future financing from the Federal Government including another SBA loan.

B. When Compromise is Appropriate

1. Business Closed

Compromise with an Obligor is appropriate after the business has been closed and all of
the collateral has been liquidated.

Exception—Obligor’s Personal Residence

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As required by Chapter 17, before foreclosing a lien on an Obligor’s personal residence,
a good faith effort should be made to negotiate a release of the lien for consideration
and to reach a compromise regarding the amount the Obligor owes on their SBA loan.

2. Going Concern

Compromise with a going concern is only appropriate when the viability of the business
concern is at stake and acceptance of the offer will not harm the integrity of the SBA
loan program. (See Paragraph D below for detailed information on compromise with a
going concern.) The offer in compromise process must not be used as a means for a
business that is experiencing temporary cash flow problems to write down its debt. (See
Chapters 8 - 18 for information on tools that can be used to help resolve temporary cash
flow problems such as re-amortization, deferment, or a workout.)

C. General Requirements

The general requirements for compromise of a debt owed on an SBA loan are as follows:

1. The loan must be classified in liquidation status;

2. The Person making the offer must not currently be in bankruptcy;

3. The full amount owed on the loan cannot be recovered because:

a. The Obligor is unable to pay it in a reasonable time;

b. It cannot be collected through enforced collection proceedings within a reasonable
amount of time;

c. The cost of collection does not justify enforced collection of it;

d. There is significant litigative risk, i.e., a real doubt concerning the ability to prevail in
court because of legal issues or factual disputes;

e. Given the Obligor’s special circumstances, (e.g., illness), paying it would cause
Financial Hardship.

4. Collection of the loan balance is not be barred by a valid legal defense such as
discharge in bankruptcy or the statute of limitations;

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 could be
recovered in a reasonable amount of time through enforced collection proceedings and
is sufficient to protect the integrity of the SBA loan program.

Note: Obligors do not have a “right to compromise” the amount owed on their SBA loan. In
order to protect the integrity of the SBA loan program, Obligors should be referred to Treasury
for further collection efforts rather than be allowed to compromise for a nominal amount
relative to the amount owed on their loan. (31 C.F.R. § 902.2(e))

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D. Compromise with a Going Concern

In addition to the general requirements in Paragraph C above, the following requirements
apply to compromise offers from going concerns:

1. The compromise must be necessary to avoid closure of the small business, i.e., the
business must not be able to continue operating under its current debt structure and all
other options for remaining viable must have been exhausted including, for example, the
sale of non-essential assets and the closure of non-profitable locations;

2. The Borrower must pass the Feasibility Test for a successful workout set forth in
Chapter 16;

3. The compromise must be part of an overall debt restructuring plan that involves all of the
Borrower’s creditors;

4. The specific details regarding the Borrower’s secured and unsecured debt and debt
reduction arrangement with each of its creditors must be set out in a written agreement
signed by all of the Borrower’s creditors; and

5. The Borrower’s proposed treatment of the SBA loan must be fair and equitable in
comparison to the treatment to be received by the Borrower’s other creditors. This
includes, for example, the percentage of debt to be forgiven, whether collateral is
provided or retained if the compromise amount is to be paid in installments, and whether
other lenders are allowed to participate in an appreciation sharing agreement.

E. Offer and Supporting Documents

Unless the basis for compromise is litigative risk, each Obligor submitting an offer in
compromise must submit the following documents:

1. Written Offer

A signed written offer that should refer to the penalties under 18 U.S.C. § 1001 for false
statements, identify the source of the funds for the offer, e.g., SBA Form 1150 (Offer in
Compromise), and explain any special circumstances that the Obligor would like taken
into consideration, such as an illness that is causing Financial Hardship;

2. Financial Statement

A current financial statement, which should be signed under penalty of perjury and must
show the Obligor's assets, liabilities, income and expenses, e.g., SBA Form 770
(Financial Statement of Debtor). In addition:

a. Going Concerns—If the Obligor is a going concern, the Obligor’s last year-end
financial statements must also be provided.

b. Affiliates—If the Obligor has any affiliates, a current consolidated financial statement
must also be provided.

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3. Personal Federal Income Tax Returns

A complete copy of the personal federal income tax returns that the Obligor filed with the
IRS for the past two years or a written explanation as to why a copy is not available; and

4. Business Federal Income Tax Returns

For each going concern and affiliate, a complete copy of the business federal income tax
returns that were filed with the IRS for the past two years or a written explanation as to
why a copy is not available.

F. Review and Analysis of Offer

To determine whether an offer in compromise is acceptable, a good faith effort must be
made to verify the accuracy of the Obligor's financial disclosure and to evaluate the
adequacy of the amount offered.

1. Corroborating Evidence

Independent financial information must be obtained to determine whether the financial
information submitted by the Obligor is complete and accurate. At a minimum, this
should include a current credit report. (31 C.F.R. § 902.2)

2. Adequacy of Financial Disclosure

At a minimum, the current credit report and the financial information submitted by the
Obligor in the past (e.g., the personal financial statement submitted with the loan
application) must be compared to the financial information the Obligor submitted in
support of the offer in compromise. Any major discrepancies must be investigated and
explained. For example, concerns about the accuracy of tax returns submitted with the
offer in compromise should be investigated by ordering and comparing IRS transcripts
for the same tax years. All efforts to establish the validity of the Obligor's current
financial information should be documented in the Loan File.

3. Amount Recoverable Through Enforced Collection

An analysis must be performed to determine the amount that could be recovered from
the Obligor in a reasonable amount of time through enforced collection proceedings. It
should, for example, take the following factors into consideration:

a. Recoverable Value of any collateral pledged by the Obligor that has not already been
liquidated (e.g., the Obligor’s personal residence);

b. Exemptions available under state and federal law;

c. Amount that could be recovered from the Obligor’s non-exempt assets that were not
pledged as collateral through enforced collection proceedings, e.g., by obtaining a
judgment and executing on it;

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d. Amount of present and potential income that could be obtained through enforced
collection proceedings, e.g., administrative wage garnishment after referral to
Treasury;

e. Litigative risk, i.e., a real doubt concerning the ability of the Lender or SBA to prove
its case in court because of legal issues or factual disputes;

f. The necessary, reasonable and customary administrative and litigation expenses
that would be incurred through enforced collection;

g. The time it would take to enforce collection; and

h. The possibility that assets have been or will be concealed or fraudulently transferred.

4. Adequacy of Proposed Compromise Amount

a. Standard of Review

The compromise amount must bear a reasonable relationship to the amount that
could be recovered in a reasonable amount of time through enforced collection
proceedings and must be sufficient to protect the integrity of the SBA loan program.

Note: Obligors do not have a “right” to compromise the amount they owe on their SBA
loan. In this regard 31 C.F.R. § 902.2(e) states: “…agencies should consider whether
continued collection of the debt, regardless of cost, is necessary to further an enforcement
principle, such as the Government’s willingness to pursue aggressively defaulting and
uncooperative debtors.”

b. Minimum Amount

Generally, the compromise amount should be more than $5,000.

c. Hardship Exception

The compromise amount may be $5,000 or less if a larger amount would cause
Financial Hardship. (See Chapter 2 for the definition of “Financial Hardship”.)

d. Obligor’s Cooperativeness

When analyzing whether a proposed compromise amount is adequate, consideration
may be given to whether the Obligor's cooperation during the liquidation process
increased the overall recovery on the SBA loan.

G. Inadequate Offers

1. Counter Offer

Generally, if an offer in compromise was made in good faith, but the amount offered
does not bear a reasonable relationship to the amount that could be recovered in a
reasonable amount of time through enforced collection, a good faith effort should be
made to arrive at an acceptable amount by countering the offer.

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2. Decline Offer and Refer to Treasury

If the Obligor will not agree to an acceptable compromise amount, the offer should be
declined; and, as soon as all other cost-effective avenues of collection have been
exhausted, a Wrap-up Report should be submitted so that the loan can be charged off
and referred to Treasury for offset and other enforced collection efforts. (See Chapter
26 for more information.)

Note: Unacceptable offers and counter-offers should not be forwarded to SBA. See
Paragraph I below for information on when offers in compromise must be submitted for SBA’s
prior written approval.

H. Payment Terms and Conditions

1. Cash Compromise—Preferred

The compromise amount should be paid in one lump sum on a specified date.
Generally, payment should be received within 60 calendar days of the compromise
approval date.

2. Term Compromise—If Necessary to Maximize Recovery

The compromise amount should not be payable in installments unless installment
payments are necessary in order to maximize recovery on the loan. (31 C.F.R. § 902.2)
If the compromise amount is to be paid in installments:

a. The terms of the compromise must be set out in a written, legally enforceable
document;

b. The amount due under the compromise agreement must be evidenced by a
promissory note with a specified maturity date;

c. Payment of the promissory note should be secured by collateral;

d. The compromise agreement should prohibit release of the collateral securing the
promissory note until the entire compromise amount has been paid in full;

e. The compromise agreement must provide that in the event of default, the full loan
balance, less sums paid the on promissory note, will be reinstated and become
immediately due and payable; and

f. The compromise agreement should provide for remedies in the event of default such
as entry of a confession of judgment or delivery and recording of any deed or bill of
sale to the collateral securing the promissory note.

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I. Obtaining SBA Approval

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)) Requests for approval should be submitted to the
appropriate SBA Loan Center utilizing the format set out in the Offer in Compromise Tab
System, which is accessible from www.sba.gov/for-lenders.

Note: If a compromise involves settlement of litigation involving SBA in conjunction with the U.S.
Attorney’s Office, the compromise amount must be approved by and paid directly to the
Department of Justice (“DOJ”).

J. Completing the Compromise Process

After the compromise has been approved by all of the necessary parties, the following
actions should be taken:

1. Prepare and obtain the necessary signatures on a mutual release that is effective when
the compromise amount is paid in full (i.e., upon payment of the compromise amount,
SBA and the Lender will release the Obligor from further non-tax liability on the loan and
the Obligor will release SBA and the Lender from all claims and causes of action arising
from the loan);

2. Collect the compromise amount; or if the compromise agreement involves installment
payments, set up a separate accounting record for the promissory note, properly perfect
the lien on any asset offered to secure payment of the promissory note, and reference
the note receivable number that SBA will assign to the promissory note account rather
than the parent loan number when remitting payments to the Denver Finance Center;

3. Promptly apply the compromise amount to the principal loan balance;

4. Release the appropriate Loan Documents after verifying that the entire compromise
amount has been received; and

5. If there is no legal remedy to collect the loan balance (e.g., from another Obligor) after
the compromise amount is received, submit a Wrap-up Report so that the remaining
loan balance can be charged-off.

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Chapter 21.
Litigation
____________________________________________________________________________

This chapter provides guidance with regard to litigation activities and expenses on 7(a) Loans.
(See Chapter 3 regarding Lender litigation responsibility and authority.)

A. General Requirements

Litigation on SBA loans should be:

1. Necessary, reasonable and customary for the locality;

2. Cost effective;

a. Due Diligence—Adequate due diligence should be conducted prior to taking legal
action to collect an SBA loan in order to ensure that the contemplated action will be
cost-effective.

b. Alternative—If the contemplated legal action will not be cost-effective, after the
collateral has been liquidated, the Lender should submit a Wrap-up Report so that
the loan can be referred to Treasury for enforced collection through the use of tools
such as offset, administrative wage garnishment, or DOJ litigation. Lenders receive
a pro-rata share of the net amount recovered by Treasury. For more information,
see Chapter 26.

Note: Litigation expenses that exceed the recovery on affirmative litigation undertaken
without an SBA pre-approved Litigation Plan are presumed to be unreasonable. See
Paragraph F.3 below for more information.

3. Conducted in the name of the Person responsible for the litigation, i.e., Lenders are not
authorized to conduct litigation in SBA's name;

4. Conducted solely by the Person responsible for handling the litigation, i.e., Lenders must
not take any action in litigation proceedings handled by SBA, including filing a proof of
claim, without SBA's prior written approval; and

5. Consistent with the terms of any senior lienholder agreement, i.e., whenever the
litigation is in response to an action initiated by the senior lienholder, legal counsel must
enforce the pre-litigation notice and subordination requirements contained in the
lienholder agreements, if any, executed by the senior lienholder in order to protect SBA's
equity in the collateral and to provide sufficient time to negotiate a workout whenever
feasible.

B. Legal Counsel Hired by Lenders

Any attorney selected by a Lender to perform litigation on an SBA loan must possess the
following minimum qualifications:

1. A valid license to practice law in the state where the litigation will be conducted;

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2. Expertise in debt collection and bankruptcy law;

3. If complex litigation is necessary, specialized legal expertise and substantial experience
conducting the type of proceedings required based on the circumstances of the loan,
(e.g., an attorney hired to have a receiver appointed to operate or sell a gas station must
have expertise not only in debt collection and bankruptcy law, but also environmental
and receivership law and must have prior experience handling gas station receivership
cases);

4. Adequate legal malpractice insurance coverage (i.e., at least $1,000,000/$1,000,000);
and

5. No actual or apparent conflict of interest with SBA, the Lender, an Obligor, senior
lienholder, junior lienholder, landlord, competing creditor or any other Person involved in
the issues pertaining to the SBA loan.

C. Litigation Plans

1. Purpose

All Lenders should prepare a Litigation Plan prior to taking any material legal action on
an SBA loan since when properly prepared, a Litigation Plan helps ensure that the
litigation is cost-effective, necessary, reasonable and customary. It also expedites
SBA’s review of requests for approval or reimbursement of litigation expenses.

2. Format and Content

A template for preparing a Litigation Plan for a 7(a) Loan is accessible from
www.sba.gov/for-lenders. Documentation establishing that the proposed attorney meets
the requirements of Paragraph B above and a copy of the engagement letter should be
attached to the proposed plan. The plan should also include the justification for, and the
estimated cost of, any expense that is presumed to be unreasonable, such as those
associated with travel, hiring multiple law firms, or appointing a receiver to perform
routine liquidation activities. (See Paragraph F.3 below.)

3. When a Litigation Plan Must be Submitted to SBA

a. General Rule

(1) Litigation Plan

Except as provided below with regard to emergencies, all Lenders, including PLP
Lenders, must submit a Litigation Plan for SBA’s written approval prior to
initiating Non-routine Litigation. (13 C.F.R. § 120.540(c)) Lenders are not
required to submit a Litigation Plan to SBA prior to initiating Routine Litigation.
But, all Lenders must submit a Litigation Plan if a material change arises during
the course of Routine Litigation that transforms it into Non-routine Litigation, e.g.,
the legal fees exceed $10,000 in the aggregate. (13 C.F.R. § 120.540(c))

Note: With regard to CLP loans, Lenders should include Routine Litigation in the
Liquidation Plans they are required to submit to SBA for approval. (Chapter 14.)

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(2) Amended Litigation Plan

All Lenders must submit an amended Litigation Plan to SBA for approval before
taking any legal action or incurring any expense that materially deviates from its
original Litigation Plan. (13 C.F.R. § 120.540(e)) Material changes are those
that, for example, cause approved legal fees to increase by more than 15%.

b. Exception—Emergency Situations

A Lender can take legal action to respond to an emergency without SBA's written
approval of a Litigation Plan or amended Litigation Plan, provided that the Lender:

(1) Makes a good faith effort to obtain SBA's written approval before undertaking the
emergency action;

(2) Submits a written Litigation or amended Litigation Plan to SBA as soon after the
emergency as possible; and

(3) Takes no further litigation action without SBA's written approval of the Plan or
amended Plan. (13 C.F.R. § 120.540(f))

4. How to Obtain SBA Approval

A request for approval of a proposed Litigation Plan or amended Litigation Plan must be
submitted to the appropriate SBA Loan Center.

5. SBA Response Time—No Implied Consent

Generally, SBA will respond to a request for approval of a proposed Litigation Plan or
amended Litigation Plan within 15 business days from the date of receipt of the Litigation
Plan. However, if a response is not received within that time frame, pursuant to 13
C.F.R § 120.541, SBA will not be deemed to have approved the proposed plan.

6. Appeal of Loan Center Decision

See Chapter 3 or information on how to appeal the final decision of an SBA Loan Center
Director or designee with regard to approval of a proposed Litigation Plan.

D. SBA Take Over of Lender-serviced Litigation

SBA may take over the litigation on a 7(a) Loan handled by Lender’s legal counsel if SBA
determines that the outcome of the litigation could adversely affect SBA’s administration of
the loan program or that SBA as an agency of the Federal Government is entitled to legal
remedies that are not available to the Lender. (13 C.F.R. § 120.540(d)) For example, SBA
may take over Lender-serviced litigation when:

1. The litigation involves important government policy or program issues;

2. The case appears to have great precedential value;

3. The Lender has an actual, apparent or potential conflict of interest with SBA; or

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4. The legal fees charged by Lender’s counsel are not reasonable, necessary or
customary.

Note: Once an SBA loan has been referred to DOJ, DOJ—not SBA—has final approval authority.
This includes issues pertaining to litigation strategy, credit matters, settlement and compromise.

E. Documentation

1. General Requirement

All Routine and Non-routine Litigation activities and decisions must be justified and
documented. The documentation, including pleadings and all Supporting Documents
such as letters, financial statements, credit reports, Appraisals, title reports and UCC lien
searches, must be kept in the Loan File.

2. Routine Litigation

Unless specifically requested, 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 22 (Expenses and Recoveries) to support requests for approval or
reimbursement of Recoverable Expenses.

3. Non-routine Litigation

To enable SBA to effectively monitor Non-routine Litigation conducted by Lenders—and
to expedite the review of requests for approval or reimbursement of litigation expenses—
copies of all significant documents, such as the pleadings (e.g., complaints and answers,
motions and opposing pleadings, orders and judgments, and bankruptcy plans and
discharge orders) and the Supporting Documents, (e.g., letters, financial statements,
credit reports, Appraisals, lien searches, etc.), should be provided to the SBA Loan
Center at the time the pleading or other document is created or received.

F. Attorney Fees and Costs

1. Attorney Fees and Costs Covered by SBA Loan Guaranty

The SBA loan guaranty only covers attorney fees and the cost of litigation proceedings,
e.g., court filing fees, court reporter and transcription fees, incurred to collect the SBA
loan that are necessary, reasonable and customary for the locality where the court in
which the litigation proceeding was filed is located.

2. Examples of Fees and Costs Not Covered by SBA Loan Guaranty

The SBA loan guaranty does not cover legal fees and costs that are not necessary,
reasonable, or customary. This may include, for example, those related to:

a. Overhead, including for example, conflict of interest determinations, file set up,
calendaring, secretarial work, and billing;

b. Intra-law firm communications and billing by more than one person for the same
activity;

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c. Performance of routine loan servicing or liquidation duties such as the preparation of
a demand letter, Liquidation Plan, Purchase Package, or a Protective Bid analysis;

d. Assertion of a claim, cross claim, counterclaim, or third-party claim against SBA;

e. Rectifying Lender error(s) that would justify a partial Denial of Liability, Repair, or full
Denial of Liability;

f. Defense of an action brought by SBA against a Lender;

g. 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;

h. Services rendered by Lender’s in-house counsel; or

i. Services pertaining to litigation handled by SBA legal counsel that were not pre-
authorized in writing by SBA.

3. Litigation Expenses That are Presumed to be Unreasonable

The SBA loan guaranty only covers litigation expenses that are necessary, reasonable,
and customary. Litigation expenses related to any of the following categories are
presumed to be unreasonable unless the Lender provides justification for incurring the
expense that in SBA’s sole discretion is sufficient to rebut the presumption:

a. Attorney fees and costs associated with travel that were not justified and itemized in
a Litigation Plan that was pre-approved by SBA;

Note: Lenders are expected to hire local legal counsel. SBA recognizes, however, that in
unusual circumstances, hiring counsel from another geographic area may be necessary,
reasonable and customary. If so, the justification and estimated travel expenses should
be included in a Litigation Plan submitted for SBA approval pursuant to Paragraph C.

b. 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;

c. Attorney fees and costs that exceed the recovery obtained in affirmative litigation that
was undertaken without a Litigation Plan that was pre-approved by SBA;

d. The appointment of a receiver to perform routine liquidation activities; and

e. Generic, i.e., non-itemized, bills for attorney fees or costs.

4. SBA Approval of Attorney Fees

All actually incurred attorney fees and costs that a Lender seeks to recoup as a
Recoverable Expense must be approved by SBA in writing, even if the estimated
attorney fees and costs were listed in an SBA approved Litigation Plan.

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5. How to Obtain SBA Approval of Attorney Fees

Requests for approval of attorney fees and costs (along with the required Supporting
Documents) should be submitted to the appropriate SBA Loan Center pursuant to the
procedure set out in Chapter 22 (Expenses and Recoveries).

G. Suit for Judgment on Note or Guaranty

1. When Suit Should be Filed

Suit based on the Note or Guaranty should be filed to obtain a judgment against an
Obligor when that Obligor:

a. Does not have a valid legal defense to repayment (e.g., discharge in bankruptcy);

b. Has either the ability to repay the SBA loan in full or substantial part;

c. Is unwilling to repay the loan or to engage in good faith compromise negotiations;
and

d. Litigation would be a cost-effective method of collecting the loan balance.

2. Alternative—Referral to Treasury for Enforced Collection

When litigation would not be cost-effective, after the collateral has been liquidated, the
loan should be charged-off and referred to Treasury for enforced collection including a
suit for judgment filed by DOJ, if warranted. (See Chapter 26 for information on
enforced collection by Treasury. See Chapter 14 or Chapter 20 for information on how to
access an Obligor’s repayment ability and net worth for enforced collection purposes.
See Chapter 25 for information on how to report fraud and abuse to the SBA Office of
the Inspector General.)

H. Judicial Foreclosure and Deficiency Judgment

Although non-judicial foreclosure is generally preferable, judicial foreclosure may be
required by state law or be more appropriate under certain circumstances. For example,
judicial foreclosure is appropriate when the proceeds of a non-judicial foreclosure sale will
not be sufficient to pay the loan in full and a deficiency judgment will be needed to collect
the balance from the Obligors.

I. Settlement Offers

Offers to settle ongoing litigation should be reviewed, analyzed and processed pursuant to
the requirements in Chapter 20 (Offer in Compromise).

J. Bankruptcy Proceedings

Note: For general information about federal bankruptcy laws and the bankruptcy process, see
Bankruptcy Basics on the United States Courts Website.

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1. Impact of Automatic Stay on Collection Activities

The moment a bankruptcy petition is filed, the automatic stay, (i.e., an injunction),
automatically stops lawsuits, foreclosures, garnishments, and most collection activities
against the debtor. Therefore, upon learning that a bankruptcy petition has been filed
with respect to an Obligor, (the "debtor" in the bankruptcy proceedings and as used in
this Paragraph), legal counsel should be consulted regarding the impact of the automatic
stay on any pending or contemplated collection activities. Unless legal counsel
determines that the automatic stay has been lifted or is no longer in effect, collection
activity against the debtor must stop immediately. (11 U.S.C. § 362)

2. Notice Requirements

a. Pre-charge Off and Referral to Treasury

Upon receipt of notice of a bankruptcy involving an Obligor, including those
pertaining to "No Asset" Chapter 7 bankruptcies, the Person receiving the notice
must immediately notify the appropriate SBA Loan Center so that the litigation can
be monitored by SBA.

b. Post-Charge-off and Referral to Treasury

Upon receipt of a bankruptcy notice concerning an SBA loan that has been charged-
off and 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 the loan can be recalled from Treasury and
SBA, which has sole responsibility and authority for handling litigation on loans
referred to Treasury, can take appropriate action. The notice, which must include the
Borrower's name and the SBA loan number, should be faxed or emailed to:

Supervisory Loan Specialist
Treasury Offset Division
Fax: 202-481-0592
Email: BirminghamTOPS@sba.gov
Phone: 1-800-736-6048 Extension 7705

3. Litigation Requirements

If an Obligor files for bankruptcy protection, at a minimum, the following actions should
be taken when necessary to protect the ability to recover on the SBA loan:

a. File a proof of claim;

b. Review the debtor's Statement of Financial Affairs and schedules and compare them
with the financial documents the debtor provided to the Lender and SBA to
determine if there are any material discrepancies with regard to the debtor's alleged
assets, liabilities, income or expenses;

c. Report suspected fraud to the Office of the Inspector General (Chapter 25) and the
appropriate Office of the U.S. Trustee;

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d. Monitor the bankruptcy proceedings;

e. Represent the Lender and SBA's interests at all hearings where the outcome may
adversely affect the ability to collect the SBA loan balance;

f. File a motion for relief from the automatic stay when necessary to pursue enforced
collection proceedings against the collateral;

g. File an objection to discharge of the debt owed on the SBA loan if there is reason to
believe that the debtor obtained the loan through fraud, misrepresentation or
omission of a material fact, or fraudulently transferred or converted collateral;

h. File a motion to revoke the debtor's discharge if there is reason to believe that it was
obtained through fraud or other acts of impropriety;

i. Obtain the bankruptcy court's approval of a reaffirmation agreement if the debtor is
willing and able to continue paying on the SBA loan;

j. Review proposed plans and disclosure statements and file an objection when
necessary;

k. Cast a vote to accept or reject proposed plans based on an analysis of the relevant
facts;

Note: SBA's prior written approval is required before a Lender compromises the principal
balance of an SBA loan. (13 C.F.R § 120.536(a)(3)) Therefore, if a proposed bankruptcy
plan calls for the reduction of the principal loan balance, the Lender handling the litigation
must obtain SBA's written approval before voting in favor of the plan, but not before voting
against it - regardless of whether there are additional Obligors who will remain responsible
for the entire loan balance.

l. Resume collection efforts immediately if the bankruptcy case is dismissed and the
SBA loan is still in default; and

m. Take any other action that may be necessary and appropriate under the
circumstances.

K. Probate Proceedings

In addition to collecting the proceeds from any life insurance policy assigned as collateral for
the SBA loan, if an Obligor dies, at a minimum, the following actions should be taken when
necessary to protect the ability to recover on the SBA loan:

1. File a creditor's claim in the probate proceedings within the time prescribed by the
applicable law;

Note: 31 U.S.C. § 3713(a)(1)(B) gives priority to claims of the United States filed against the
estate of an Obligor.

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2. Review the inventory of the decedent's estate and compare it with the financial
documents the decedent provided to the Lender and SBA to determine if there are any
material discrepancies;

3. Report suspected fraud to the SBA Office of the Inspector General (Chapter 25);

4. Monitor the probate proceedings;

5. Represent SBA and the Lender's interests at all hearings where the outcome may
adversely affect the ability to collect the SBA loan balance; and

6. Take any other action that is necessary and appropriate under the circumstances.

L. Enforcement of Judgments

1. Registration

After a judgment has been obtained against an Obligor, the judgment, or an abstract
thereof, should be recorded in any state or other jurisdictional unit (e.g., territory or
foreign country) where the Obligor resides or has assets that can be seized and sold to
satisfy the judgment.

2. Execution

After a judgment has been obtained against an Obligor (the “judgment debtor”), the
judgment debtor’s non-exempt assets should be executed on within 90 calendar days of
obtaining the judgment.

3. Assignment to SBA

After a judgment has been obtained against an Obligor, the judgment should be
assigned to SBA if the only way to collect it, or most cost-effective way, is to utilize a
remedy that is available to SBA—but not the Lender—under the Federal Debt Collection
Procedures Act.

M. Application of Litigation Recoveries

Funds recovered through litigation should be applied in the following order:

1. Recoverable Expenses;

2. Principal loan balance; and

3. Accrued interest.

Note: When litigation is handled by SBA legal counsel in their capacity as a Special Assistant
U.S. Attorney or by the local U.S. Attorney's Office, DOJ is authorized to collect and retain a 10%
surcharge pursuant to Section 3011 of the Federal Debt Collection Procedures Act.

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Chapter 22.
Expenses and Recoveries
____________________________________________________________________________

This chapter covers expenses related to collecting sums due under the Note, enforcing the
terms of the Loan Documents, and preserving or disposing of collateral. See Chapter 19 for
information regarding expenses related to acquired collateral.

A. Classification of Expenses

Expenses are classified by SBA as either Recoverable Expenses, which can be recouped,
or Non-recoverable Expenses, which cannot be recouped. (See Paragraphs C and D
below.) When reviewing Lender requests for expense approval or reimbursement, SBA may
determine that an expense is Recoverable or Non-recoverable in whole or in part.

1. Non-recoverable Expenses

Non-recoverable Expenses are costs that cannot be added to the principal balance of
the loan. They include, for example:

a. Any expense that is not related to collection of amounts due under the Note or to
preservation or disposal of the collateral for the loan;

b. Any fee or cost, or portion thereof, that is not necessary, reasonable or customary;

c. Lender overhead costs that should be absorbed as a cost of doing business, e.g.,
telephone calls, photocopying, mileage, meals, etc.;

d. Fees, e.g., late payment and NSF fees, which SBA allows Lenders to collect if the
loan is current, but does not guaranty, (See Chapter 4 for information on loan fees.);

e. Fees and costs incurred by a Lender to have an independent contractor or a receiver
perform routine loan servicing or liquidation duties such as the preparation of a
demand letter, Liquidation Plan, Purchase Package, or Protective Bid analysis, or the
review of an Appraisal or Environmental Investigation Report;

Note: As set out in Chapter 17, receivers should only be used in unusual situations and
only after SBA’s prior written approval has been obtained. The appointment of a receiver
involves Non-routine Litigation. Therefore, Lenders must submit a Litigation Plan for SBA
approval prior to commencing receivership proceedings. See Chapter 21 for information
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
based on a Lender's alleged wrongful action unless SBA expressly directed the
Lender to take the alleged wrongful action; and

h. The attorney fees and costs listed in Chapter 21 Paragraph F as examples of
litigation expenses not covered by the SBA loan guaranty.

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2. Recoverable Expenses

As set out in Chapter 2 (Definitions), Recoverable Expenses are the SBA approved,
necessary, reasonable and customary costs incurred to collect amounts due under the
Note, to enforce the terms of the Loan Documents, or to preserve or dispose of
collateral, which according to the terms of the Note, can be added to the principal
balance of the loan. Recoverable Expenses include, for example:

a. Searches

(1) UCC lien searches;

(2) Title reports; and

(3) Credit and asset search reports.

b. Appraisals

(1) Appraisals;

(2) Environmental Investigation Reports; and

(3) Site Visit Reports prepared by contractors.

c. Litigation Expenses

(1) Attorney fees; and

(2) Costs such as court filing fees.

d. Collateral Care and Preservation

(1) Utility bills;

(2) Insurance premium payments;

(3) Caretaker fees;

(4) Repair bills;

(5) Real estate and personal property taxes; and

(6) Expenses related to non-tax senior liens.

B. Recoveries

1. Application of Recoveries

Unless the terms of a workout agreement or some other legally binding document, such
as a court order, specify otherwise, recoveries (i.e., funds obtained through liquidation
activities) should be applied in the following order:

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a. Recoverable Expenses incurred in the liquidation process;

b. Principal balance of the loan; and

c. Accrued interest.

2. Remittance of SBA's Share of Recoveries

SBA's pro-rata share of the net proceeds of any recovery on a 7(a) Loan should be
remitted to SBA within 15 business days of receipt regardless of whether the loan has
been charged-off by SBA or the Lender. If SBA's share is not remitted in a timely
manner, the SBA Loan Center may charge interest on the late amount and refer the
matter to the SBA Office of Credit Risk Management.

C. Payment of Non-recoverable Expenses Incurred by Lenders

Lenders must pay their own Non-recoverable Expenses. SBA will not pay, reimburse or
approve, in whole or in part, Non-recoverable Expenses incurred by Lenders.

D. Recoupment of Recoverable Expenses Incurred by Lenders

Note: The Prompt Payment Act, which requires federal agencies to pay interest and penalties on
late payments for contracted expenses, does not apply to payments to Lenders for Recoverable
Expenses. See SOP 20 17 and Subpart 32.9 of the Federal Acquisition Regulation for further
information.

1. General Requirement—SBA Approval

Any cost, fee or other amount that a Lender seeks to treat as a Recoverable Expense
must be reviewed and approved by SBA pursuant to Paragraph E below.

2. Recoupment Methods

Recoverable Expenses incurred by a Lender should be paid by the Lender and
recouped by one of the following methods:

a. Deduction from Recoveries

Lenders may deduct the amount needed to pay Recoverable Expenses from
recoveries on the loan.

b. Reimbursement by SBA

Lenders may ask SBA to reimburse them for Recoverable Expenses that were not
paid through a deduction from recoveries.

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E. SBA Review and Approval

Any cost, fee or other amount that a Lender seeks to treat as a Recoverable Expense must
be reviewed and approved by SBA including expenses that the Lender has already
deducted from recoveries. Requests for approval must be submitted to SBA in accordance
with the following requirements:

1. Where to Submit Requests

Requests must be submitted to the appropriate SBA Loan Center.

2. Preferred Format

To expedite the SBA review process, Lenders should utilize the tab system
recommended by the appropriate SBA Loan Center to organize and submit their
requests. (See, for example, the NGPC CPC tab system.)

3. When Requests May be Submitted

To prevent backlogs and expedite the SBA review process, requests for reimbursement
or for approval of Recoverable Expenses deducted from recoveries may only be
submitted at the following times:

a. Submission of Loan Guaranty Purchase Request

Requests for SBA reimbursement of Recoverable Expenses or approval of expenses
paid for from recoveries may be submitted with the Lender’s Purchase Package.

b. When Recoverable Expenses Total $5,000 or More Per Loan

Requests involving Recoverable Expenses totaling $5,000 or more per loan may be
submitted at any time after guaranty purchase. A request involving a Recoverable
Expense that is less than $5,000 must be compiled with other expense requests
involving the same loan, and can only be submitted when the aggregate amount
totals $5,000 or more, or at the time the Wrap-up Report on the loan is submitted,
whichever occurs first.

c. Submission of Wrap-up Report

All outstanding requests for SBA reimbursement of Recoverable Expenses or
approval of expenses paid for from recoveries must be submitted with the Lender’s
Wrap-up Report on the loan.

4. Multiple Loans—Allocation of Expenses

When a request involves multiple loans to the same Borrower, (either SBA loans with
different guaranty percentages or non-SBA loans):

a. If the expense is related to collateral, the expense (as well as any recovery) must be
allocated to the loans according to the priority of the lien securing each loan;

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b. If the expense is not related to collateral, the expense (as well as any recovery) must
be pro-rated and allocated among the loans to which it relates.

5. Contents of Recoverable Expense Request Packages

Requests should include the following items as applicable:

a. Lender Contact Information

Lender's name, address, e-mail address, phone and fax numbers, and Tax
Identification Number.

b. Borrower's Name and Loan Number

c. Summary of Expenses

Multiple invoices must be grouped by the categories set out in Paragraph A.2 of this
chapter and summarized in a cover sheet that includes: (1) the date each service
was performed; (2) the number of each invoice; (3) the subtotal for each category;
and (4) the grand total of all categories.

d. Itemized Invoices

A paper or electronic copy of each invoice must be provided and include: (1) the
date of the invoice; (2) a thorough description of the goods or services provided; (3)
the date the goods were provided or the services were performed; (4) the amount
charged for each service or product provided; (5) the total amount due; and (6) if the
invoice is for services billed on an hourly basis, the name, title, hourly billing rate and
time spent by each individual who performed services covered by the invoice.

e. Supporting Documents

Recoverable Expense request packages must include a copy of all of the Supporting
Documents pertaining to the invoices, e.g., a copy of the Site Visit Report if the
invoice is for a site visit. With regard to litigation expenses, the Recoverable
Expense request package must include a copy of the SBA-approved Litigation Plan,
pleadings and other documents required by Chapter 21 unless they have already
been provided to SBA.

6. Denied Expense Approval Requests

Lenders must reimburse SBA for the amount of any expense denied by SBA that the
Lender has already deducted from recoveries.

Note: For information on how to appeal the final decision of an SBA Loan Center Director or
designee with regard to approval of liquidation or litigation expenses, see Chapter 3.

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Chapter 23.
Loan Guaranty Purchase Requests
____________________________________________________________________________

A. Overview

This chapter covers the process Lenders should use to request that SBA purchase the
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 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 and prudent lending practices. (13 C.F.R. § 120.524)

Note: SBA can purchase the guaranteed portion of a loan at any time to protect the interests of
the Government or the Borrower ( 13 C.F.R. § 120.520); and if the Lender fails to request
purchase in a timely manner, the FTA can request purchase on behalf of the investor (Secondary
Participation Guaranty Agreement).

B. Interest Paid on Guaranteed Portion of Loan

1. Interest Rate

When SBA purchases the guaranteed portion of a loan in response to a Lender’s
request, accrued interest is paid at the following rates:

a. If the Note has a fixed interest rate—accrued interest is paid at the rate specified in
the Note unless the loan was made under the SBA Express program, in which case
the interest rate is set at the maximum interest rate for standard 7(a) Loans as of the
date the loan originated.

b. If the Note has an adjustable interest rate—accrued interest is paid at the rate in
effect on the earliest uncured payment default date unless the loan was made under
the SBA Express program, in which case the interest rate is capped at the maximum
interest rate for standard 7(a) Loans as of the date of the final disbursement on the
loan.

Note: The term “earliest uncured payment default date” means the date of the earliest
failure by a Borrower to pay the full amount of a regular installment of principal or interest
when due. Payments, which are made by a Borrower before the Lender requests that
SBA purchase its guaranty, are applied to the earliest uncured payment default amount
and if the installment is paid in full, the earliest uncured payment default date advances to
the next unpaid installment date. If the Borrower makes a payment after the Lender has
exercised its right to request that SBA purchase its guaranty, the earliest uncured
payment default date does not change (13 C.F.R. § 120.523) and the payment must be
applied to the principal balance of the loan in accordance with Chapter 4.

2. Interest Paid to Lenders

a. Loans Approved On or After May 14, 2007—Lenders are paid up to a maximum of
120 calendar days interest.

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b. Loans Approved Before May 14, 2007—Lenders are paid the amount of accrued
interest allowed by the applicable regulations in effect on May 13, 2007.

3. Interest Paid to Secondary Market Investors

Secondary market investors are paid all accrued interest 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 because of Lender delay, SBA may
demand that the Lender reimburse SBA for the difference between the amount paid by
SBA and 120 calendar days of accrued interest. (Secondary Participation Guaranty
Agreement (SBA Form 1086) Paragraph 11)

C. Requirements

Before SBA can honor a Lender’s request for guaranty purchase, all of the following
requirements must be met:

1. Uncured Loan Default

The Borrower must be in default on a payment due on the Note for more than 60
calendar days unless SBA agreed otherwise in writing. (13 C.F.R. § 120.520)

2. Loan Classified in Liquidation

The Lender must report the loan as in “liquidation” status on the Lender’s monthly Form
1502 report.

3. Loan Purchased from Secondary Market Investor

If the loan was sold on the secondary market, the Lender must purchase the SBA
guaranteed portion of the loan through the FTA or submit a secondary market purchase
request to the appropriate SBA Loan Center accompanied by the following documents:

a. Certified transcript of account;

b. Executed copy of the Loan Authorization;

c. Executed copies of all modifications of the Note, if any; and the

d. Secondary market investor's written approval of all modifications of the Note.

4. Collateral Liquidated

Prior to requesting guaranty purchase, Lenders should liquidate all of the collateral for
the loan, but must, at a minimum, liquidate the following:

a. Loans Approved on or after May 14, 2007

For loans approved on or after May 14, 2007, unless the Borrower filed for
bankruptcy, the Lender must liquidate the business personal property collateral with
an aggregate Recoverable Value of $5,000 or more (13 C.F.R. § 120.520(a));

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b. Loans Approved Prior to May 14, 2007

For loans approved prior to May 14, 2007, the Lender must liquidate the collateral
according to the requirements of the program under which the loan was made. For
example, the following collateral must be liquidated:

(1) LowDoc—The business personal property securing the loan unless the loan
involves prolonged litigation or other circumstances that will extend the
liquidation process more than 90 calendar days past the earliest date that the
Lender could request guaranty purchase;

(2) EWCP—The collateral associated with the export transactions financed by the
loan;

(3) CAPLine—The working capital assets securing the loan; and

(4) Express and Pilot Loan Programs—All collateral; in addition, all cost-effective
means of recovery must be exhausted 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 will extend
the liquidation process more than 90 calendar days past the earliest date that
the Lender could request guaranty purchase.

5. Complete Purchase Package Submitted to SBA

To request guaranty purchase, Lenders must submit a complete Purchase Package to
the appropriate SBA Loan Center in accordance with the following requirements:

a. Contents of Purchase Package

The Lender should prepare a Purchase Package for the type of loan in question in
accordance with the procedural instructions issued by the SBA Loan Center to which
the Purchase Package must be sent for review and processing.

(1) Standard 7(a), CLP, PLP and EWCP Purchase Packages

Standard 7(a), CLP, PLP and EWCP loan Purchase Packages must be
submitted to the National Guaranty Purchase Center (“NGPC”). Lenders should
use the 10 Tab System, which is accessible from www.sba.gov/HerndonNGPC,
to assemble and organize the required documentation.

Note: For more information on the NGPC 10-Tab System, see the notes posted
under “Guaranty Purchase Information” on the NGPC’s Web site.

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(2) Express, SLA, CA, ARC, and Pilot Loan Program Purchase Packages

Express, Small Loan Advantage, Community Advantage, ARC, and Pilot Loan
Program loan guaranty Purchase Packages must be submitted to the appropriate
SBA Loan Center, i.e., either the SBA Commercial Loan Service Center West in
Fresno or the Commercial Loan Service Center East in Little Rock. Lenders
should use the appropriate Purchase Demand kit to assemble and organize the
required documentation. Demand kits, such as the ARC 10 Tab or 10 Tab
Express kit, are accessible from the Little Rock and Fresno CLSC Web sites.

b. Deadline for Submission of Purchase Package

If SBA purchased the guaranteed portion of the loan from the secondary market
investor, the Lender must submit a complete Purchase Package to the appropriate
SBA Loan Center within 45 calendar days of the purchase. In all cases, in order to
avoid expiration of SBA’s guaranty, Lenders must request SBA guaranty purchase
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)

D. Practice Tips for Lenders

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 guaranty or pay Lender loan fees. Therefore, loan fees must not be
added to the transcript of account submitted with a guaranty purchase request.

2. Do Not Assign Loan Documents to SBA

Do not assign the Loan Documents to SBA without obtaining SBA's prior written
approval to transfer servicing of the loan to SBA.

3. Explain Missing Documents

If a required document is missing, include a written explanation for the omission in the
Purchase Package.

4. Provide Repair Estimate

If there was a Material Loss on the loan due to Lender error, include an acknowledgment
of the error, an estimate of the amount needed to fully compensate SBA for the loss, and
the justification for the estimate. For example, since the amount of loss related to
collateral is based on its Recoverable Value, if a required lien was not obtained on real
or personal property, provide an estimate of the Recoverable Value that the property
would have had if the lien had been obtained, along with a detailed explanation of how
the Recoverable Value was calculated. Although the acknowledgement is not
mandatory and the estimate is not binding on SBA, providing both will expedite the
Repair and guaranty purchase process.

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Chapter 24.
Denial of Liability on 7(a) Guaranty
____________________________________________________________________________

A. When SBA May Deny Liability

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 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 the 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; or

5. Misrepresented a material fact to SBA regarding the loan.

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 to SBA documentation that SBA deems sufficient
to allow SBA to determine whether purchase of the guaranty is warranted under 13 C.F.R. §
120.524.

B. Loss Attributable to Lender

1. Material Loss or Harm to Program Integrity

Generally, SBA does not deny liability on a 7(a) Loan guaranty unless the Lender's
actions or omissions 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 misconduct 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. Amount of Loss on Collateral

The amount of a loss related to collateral should be based on the collateral's
Recoverable Value.

3. Projected Loss

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 the
liquidation process.

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C. Repairs

1. Definition

As set forth in Chapter 2 (Definitions), the term Repair means an agreement between
SBA and a 7(a) Lender as to a specific dollar amount to be deducted from the funds
SBA pays on the Lender's guaranty in order to fully compensate SBA for an actual or
anticipated loss caused by the Lender’s actions or omissions. A Repair does not reduce
the percent of the loan guaranteed by SBA or SBA’s pro-rata share of expenses or
recoveries.

2. Repair Amount

The net amount of a Repair must be a specific dollar amount that fully compensates
SBA for the actual or anticipated loss caused by the Lender’s actions or omissions.
Generally, it is determined by multiplying the dollar amount of the loss by the percent of
the loan guaranteed by SBA. (E.g., $50,000 loss x 75% guaranty = $37,500 Repair)

Note: In order to expedite the guaranty purchase review process, Lenders are encouraged to
include a Repair estimate in their Purchase Package.

3. When a Repair is Appropriate

Except in cases involving gross Lender misconduct (See Subparagraph 4 below.), a
Repair is appropriate when the Lender's actions or omissions caused an actual or
anticipated loss that justifies a partial Denial of Liability by SBA, but rather than have
SBA formally deny liability, the Lender agrees to allow SBA to deduct a specific, agreed-
upon dollar amount from the amount that SBA owes to the Lender on its guaranty in
order to fully compensate SBA for the loss.

4. When a Repair is Not Appropriate

a. Total Loss on Loan

A Repair is not appropriate if the Lender's actions or omissions caused a total or
near total loss on the loan.

b. Gross Lender Misconduct

A Repair is not appropriate if the Lender's misconduct is deemed 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 lending
practices and SBA Loan Program Requirements. (See Chapter 18 for information
regarding abandonment of personal property collateral.)

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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 would not be appropriate if the appraised value of
the equipment is $12,000 and the estimated cost of removing, transporting, storing,
and selling it is approximately $10,000. Under the circumstances, abandonment
would be justified not only based on the estimated Recoverable Value of $2,000, but
the fact that the actual Recoverable Value could be significantly less due to the
Lender’s risk of 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 omissions 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 that is acceptable to SBA.

E. Full Denial of Liability

A full Denial of Liability is justified if the Lender's actions or omissions 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 request that SBA cancel the loan guaranty.

F. Voluntary Termination of Guaranty

Lenders may, at any time prior to guaranty purchase, voluntarily request termination of the
SBA loan guaranty.

G. Examples of When a Full or Partial Denial of Liability May Be Justified

Listed below are examples of common Lender deficiencies that justify SBA Denial of Liability
in full or in part. The list is not exhaustive and is provided for illustrative purposes only.

1. Incorrect Eligibility Determination

A full Denial of Liability is justified if the Lender made an ineligible loan. A partial Denial
of Liability is justified if a portion of the loan proceeds were used for an ineligible
purpose.

2. Use of Suspended or Debarred Agent

A full Denial of Liability is almost always justified if the Lender placed SBA at risk by
making a loan based on a loan package prepared by an Agent who was suspended or
debarred by SBA or another federal agency, unless the Lender provides credible
evidence that the business failed for totally unrelated reasons.

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.

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3. Early Default Due to Failure to Properly Make or Close Loan

A full Denial of Liability is almost always justified if the 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 totally unrelated reasons. For
example, Denial of Liability is almost always justified if the 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;

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 obvious fact that could
easily affect the Borrower's repayment ability, such as the owner’s monthly draw;

d. The Lender’s cash flow analysis contained unjustified and overly optimistic revenue
projections, e.g., revenues projected to increase by 100% in year one even though
the industry standard is 25% maximum and there is no explanation for the difference;
or

e. The Lender made a material mathematical error in its cash flow calculations, i.e., if
the mathematical error had not been made, 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. Failure to Use IRS Transcripts to Verify 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 the
version of SOP 50 10 in effect at the time the loan was approved. Full Denial of Liability
may not be justified, however, if the Lender provided credible evidence that the business
failure was due to factors unrelated to any financial difficulties that the Lender could not
have identified through the IRS verification process.

Note: As set forth in SOP 50 10, delays in receiving transcripts from the IRS do not excuse a
Lender from complying with SBA's IRS tax return verification requirements.

5. Failure to Use Loan Proceeds as Required by the Loan Authorization

A full or partial Denial of Liability may be justified if there was a Material Loss on the loan
due to the Lender's failure to ensure that the loan proceeds were used in accordance
with the Loan Authorization.

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a. Examples of When a Full or Partial Denial of Liability is Justified

(1) Early Default Due to Failure to Buy Key Assets

A full Denial of Liability may be justified if there was a total or near total loss on
the loan due to operational problems caused by the Borrower's failure to
purchase the key assets listed in the "Use of Proceeds" section of the Loan
Authorization, which resulted in an Early Default. For example, a full Denial of
Liability would be justified if a Lender made a $350,000 loan 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 income to repay the loan and SBA suffered a total
or near total loss.

(2) Collateral Not Available for Liquidation

A full or partial Denial of Liability may be justified if there was a Material Loss on
the loan because collateral required to be purchased with the loan proceeds,
which would have had Recoverable Value, was not purchased and therefore,
was not available for liquidation. For example, a partial Denial of Liability would
be justified if a Lender made a $350,000 loan to purchase the equipment needed
to start a new dental practice but failed to ensure that the Borrower purchased
the equipment, and after several years of operating, the Borrower defaulted and
SBA suffered a Material Loss equivalent to the Recoverable Value that the
equipment would have had if it had been purchased with the loan proceeds and
available for liquidation.

b. Credible Evidence of Use of Proceeds

SOP 50 10 includes a list of documentation considered to be credible evidence that
the loan proceeds were used in accordance with the Loan Authorization. A post-
default Appraisal or Site Visit Report may also serve as credible evidence that assets
were purchased in accordance with the Loan Authorization and available for
liquidation.

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 Loan Authorization.

6. Early Default and Failure to Verify an Equity Injection

a. General Rule

If there was an Early Default on the loan, documentation verifying that any equity
injection required by the Loan Authorization was not only made, but that it came from
a proper source, must be included in the Lender's Purchase Package.

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b. Rebuttable Presumption

The Lender's failure to verify and properly document a material portion of an injection
of cash or non-cash assets required by the Loan Authorization raises a rebuttable
presumption that the Early Default was caused by the lack of the injection and a full
Denial of Liability is justified. To rebut the presumption, the Lender must provide
credible evidence that the primary cause of the default was something other than the
lack of the required injection, e.g., the death of an irreplaceable Key Employee or a
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 on the SBA loan;

(2) Documentation showing that the injected funds were received by the Borrower
prior to the initial disbursement on the SBA loan, such as a copy of a signed
third-party escrow settlement statement showing the disbursement on behalf of
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

Without corroborating documentation, a promissory note, gift letter or financial
statement is not credible evidence of a cash injection.

e. Examples of Credible Evidence of a Proper Equity Injection Source

Note: Verifying that an equity injection came from a legitimate source is essential in order
to prevent loan fraud. According to the SBA Office of Inspector General, an increasingly
common loan fraud scheme involves loan brokers, who in conspiracy with others, arrange
to have the amount of a required cash injection deposited into the Borrower’s bank
account until the loan is closed. Thereafter, the funds are withdrawn and reused for the
same deceptive practice until all of the loans begin to fail and the fraudulent scheme is
uncovered.

Examples of credible evidence that an equity injection came from a source
consistent with SBA Loan Program Requirements and prudent lending practices
include:

(1) A gift letter from an identified credible source that includes the amount and date
of the gift and releases the Borrower from any obligation to repay the donor,
along with corroborating evidence that the gift amount was actually remitted to
the Borrower, such as a copy of the Borrower’s bank account statement dated
prior to the initial loan disbursement documenting a cash deposit in the amount of
the gift;

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(2) A home equity loan agreement plus a statement of account showing funds were
drawn for the cash injection and paid into the Borrower's bank account along with
credible evidence that the home equity loan would be repaid from sources other
than the Borrower's cash flow;

(3) Shareholder note and full standby agreement along with corroborating evidence
that the note amount was actually remitted to the Borrower, such as a copy of the
Borrower's bank account statement dated prior to the initial loan disbursement
documenting a cash deposit in the amount of the note;

(4) Business-related expenditures on behalf of the Borrower made with a principal’s
own funds that are supported by paid receipts or processed checks showing the
nature of the expenditures; or

(5) A deposit into the Borrower's bank account made by an Associate of the
Borrower supported by the Associate’s bank account statements for at least two
months prior to the loan application showing that the Associate had the funds to
make the required injection along with corroborating evidence that the funds
were actually remitted to the Borrower, such as a bank account statement dated
shortly before the initial loan disbursement showing the deposited funds.

Note: Large unexplained deposits should always be questioned and the source of
the funds verified and documented.

f. 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 plus credible
evidence that the asset was available for use by the Borrower.

7. Failure to Obtain Required Lien or Lien Position

A full or partial Denial of Liability is justified if the Lender failed to obtain either the lien or
the lien position required by the Loan Authorization on the property required to be taken
as collateral for the loan, and that failure caused, or could cause, a Material Loss on the
loan. The amount of the loss should be based on the aggregate Recoverable Value that
the property would have had if the Lender had obtained the lien or the required lien
position.

8. Failure to Prepare and Use an Adequate List of Collateral

A full or partial Denial of Liability is justified if the Lender failed to prepare and utilize an
adequate list of the collateral and that failure caused, or could cause, a Material Loss on
the loan. The amount of the loss should be based on the aggregate Recoverable Value
that the collateral would have had if the Lender had prepared and utilized an adequate
list.

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Note: A list, which reasonably describes the collateral, should be attached to the security
agreement and UCC financing statement to ensure that (1) a security interest "attaches" to
the collateral, i.e., that the creditor obtains a lien on the items; and (2) the lien is "perfected,"
i.e., that the creditor establishes the priority of its lien over those of competing creditors.

a. Example of When a Full or Partial Denial of Liability Is Justified

A full or partial Denial of Liability is justified if the collateral required by the Loan
Authorization was present at default, but due to the Lender's failure to prepare an
adequate list of the collateral when the loan was made, the Lender was unable to
enforce its security interest against the Borrower, a trustee in bankruptcy, or a
competing creditor, and that failure caused, or could cause, a Material Loss on the
loan.

b. Example of When a Full or Partial Denial of Liability Is Not Justified

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 of the collateral
required by the Loan Authorization was present at default and liquidated, and all of
the net proceeds were applied to the principal balance of the loan, i.e., there was no
Material Loss on the loan.

9. Failure to Conduct a Post-default Site Visit

A full or partial Denial of Liability is justified if the collateral required by the Loan
Authorization disappeared or declined in value due to the Lender’s failure to conduct a
post-default site visit as required by Chapter 15 and that failure caused, or could cause,
a Material Loss on the loan. The amount of the loss should be based on the aggregate
Recoverable Value of the collateral that was not available for liquidation or the aggregate
amount by which the collateral declined in value due to the Lender's failure to properly
conduct a timely site visit.

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 can easily be inspected
and tested will usually produce a significantly higher recovery than a sale of the same
collateral held off-site after it has been dismantled and moved to a storage facility because the
lender failed to conduct a timely site visit and make arrangements with the landlord to conduct
an on-site UCC sale.

10. Failure to Liquidate in a Commercially Reasonable Manner

a. Examples of When a Full or Partial Denial of Liability is Justified

A full or partial Denial of Liability is justified if the Lender failed to liquidate the loan in
a prudent and commercially reasonable manner and the failure caused, or could
cause, a Material Loss on the loan. For example, a full or partial Denial of Liability is
justified if the Lender:

(1) Failed to safeguard the collateral until it could be liquidated;

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(2) Permitted a substantial decline in the value of collateral to occur because of
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 Full or Partial Denial of Liability is Not Justified

A partial Denial of Liability is not justified based on the Lender’s failure to liquidate
personal property collateral if the Lender abandoned it pursuant to prudent lending
practices and SBA Loan Program Requirements. For example, a partial Denial of
Liability would not be justified if the Lender abandoned the inventory of a souvenir
shop with a Liquidation Value of $10,000, even though the routine foreclosure costs
were estimated at $5,000, if the collateral could not be repossessed without a breach
of the peace and the Lender provided evidence that a replevin action would, at a
minimum, cost an additional $3,000.

11. Loan Actions Resulting in Lender Preference

A full or partial Denial of Liability is justified if the Lender took any Loan Action that
conferred a Preference on the Lender, which caused, or could cause, SBA to suffer a
Material Loss on the loan or is deemed by SBA to be material to the soundness or
integrity of the 7(a) Loan program, including, for example, if the Lender:

a. Applied recoveries from an SBA loan to the Lender’s non-SBA loans(s) or to another
SBA loan with a lower guaranty percentage in a junior lien position;

b. Released the collateral for an SBA loan in order to use it as security for a non-SBA
loan;

c. Subordinated the lien securing an existing SBA loan to a lien securing a non-SBA
loan or SBA loan with a lower guaranty percentage; or

d. Renewed or increased the amount owed on a non-SBA loan or an SBA loan with a
lower guaranty percentage, after subordinating the lien securing an existing SBA
loan to the lien securing the loan the Lender renewed or increased.

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Chapter 25.
Inspector General Referrals
____________________________________________________________________________

A. Duty to Report Irregularities

All SBA officials, Lenders and contractors must be on the lookout for fraud and report any
known or suspected irregularities involving SBA programs, program participants, or
personnel to the Office of the Inspector General ("OIG"). (13 C.F.R. § 120.197)

B. Irregularities Requiring Referral

Examples of irregularities that must be referred to the OIG include:

1. Loan Application Fraud

False statements made by, or false documents submitted by, loan applicants or
Borrowers with regard to 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 an
equity injection required by the Loan Authorization was made:

a. False gift letter or affidavit;

b. False promissory note and standby agreement; or

c. False bank statement and cashier’s check.

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3. Loan Agent Fraud

Actions by Agents who orchestrate, facilitate or otherwise support any of the illegal acts
committed by loan applicants, 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 an SBA
loan.

6. SBA Employee Misconduct

Misconduct by an SBA official or Close Relative of an SBA official, such as soliciting or
accepting a bribe in connection with making, closing, servicing or liquidating an SBA
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 or liquidating an SBA loan.

C. Referral Methods

A referral to the OIG can be made by:

1. Calling the OIG Hotline toll-free at 1-800-767-0385;

2. Completing the on-line OIG Complaint Submission Form at
http://web.sba.gov/oigcss/client/dsp_welcome.cfm and submitting the referral via the
Internet; or

3. Mailing the referral to:

U.S. Small Business Administration
Office of Inspector General
Investigations Division, Mail Code: 4113
409 Third Street, SW
Washington, DC 20416

D. Required Information

1. Answers to Basic Questions

A referral to the OIG should include as much information as possible in response to
these basic questions:

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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. What dollar amount is involved? (E.g., loan amount or value of converted collateral.)

f. Who can confirm the allegation and how can that Person be contacted?

g. Who can provide more information?

2. Copies of Relevant Documents

When applicable, copies of documents that support the statements made in response to
the above questions should be submitted as part of the referral.

E. Post-referral Responsibility

After referring a matter to the OIG, the Person who made the referral should:

1. Report any new or additional information discovered about the matter to the OIG;

2. Not disclose or discuss the existence of the OIG referral or investigation to any Person
other than SBA officials on a need-to-know basis;

3. Coordinate any activities related to the loan with the OIG in order to avoid taking any
action that could be detrimental to the investigation or subsequent prosecution; and

4. With OIG approval, and in coordination with the OIG, take appropriate and timely action
to maximize recovery on the loan.

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Chapter 26.
Charge-off and Wrap-up Procedures
____________________________________________________________________________

A. General Requirements

Before the Loan File on an SBA loan classified in liquidation status may be closed, a Wrap-
up Report must be submitted to the appropriate SBA Loan Center for review and approval.
Thereafter, the remaining loan balance, if any, should be charged-off and any loan that is
still legally collectible should be referred to Treasury for further collection efforts.

B. Charge-off

1. General

Charge-off is an SBA administrative action whereby a loan is reclassified from
“liquidation” to “charge-off” status, and the outstanding balance of the loan is removed
from the Agency’s accounting records. It has no impact on an Obligor's liability for the
loan balance.

2. When Appropriate

Charge-off is appropriate when:

a. All reasonable efforts have been exhausted to achieve recovery from: (1) voluntary
payments on the Note; (2) compromise with the Obligors; (3) liquidation of the
collateral; and (4) enforced collection;

b. The estimated cost of further collection efforts exceeds the anticipated recovery;

c. The only remaining avenue of recovery is from Obligors who cannot be located or
who are unable to pay the loan balance; or

d. The loan balance is uncollectible due to discharge in bankruptcy (i.e., release of the
debtor from any further personal liability for pre-bankruptcy debts), expiration of the
statute of limitations (i.e., the passing of the deadline for suing), or the existence of
another defense available to the remaining Obligors under state or federal law.

C. Wrap-up Report

The submission of a Wrap-up Report indicates that no further collection action will be
pursued, and that the loan is ready for charge-off and Treasury referral if the balance is
legally collectible.

1. When Required

For each SBA loan classified in liquidation status, a Wrap-up Report must be prepared
and submitted to the appropriate SBA Loan Center within 90 calendar days of
completing all reasonable and cost-effective recovery efforts or upon receipt of a request
from SBA, whichever occurs first.

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SOP 50 57

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 1 above, in addition to referring the Lender to the SBA Office of Credit
Risk Management, SBA has the right to charge-off the loan balance and, if appropriate,
to refer the loan to Treasury.

3. Contents

A Wrap-up Report should include the information listed below. A template for drafting a
Wrap-up Report is accessible from http://www.sba.gov/for-lenders.

a. Identifying Information

(1) SBA loan number, Borrower’s name, and principal loan balance; and

(2) Lender’s name, contact person’s name, phone number and email address.

b. Status of Obligors

A discussion of the status of each Obligor required by the Loan Authorization, which
includes, when applicable, the following information and Supporting Documents:

(1) Each Obligor’s name, address and Taxpayer Identification Number (Employer
Identification Number or Social Security number), whether they are still liable for
the loan balance, and if not, the reason why, e.g., compromise, discharge in
bankruptcy, etc.;

(2) A copy of the demand letter sent to each Obligor—or an explanation for its
absence (e.g., bankruptcy filing);

(3) A description of the efforts made to locate any missing Obligor(s);

(4) A description of any efforts made to obtain an offer in compromise from each
Obligor who remains liable for the loan balance; and

(5) An estimate of the potential recovery from each remaining Obligor based on a
current asset search, credit report or other credible Supporting Document(s).

Note: See Chapter 14 (Classifying Loans in Liquidation) and Chapter 20 (Offer in
Compromise) for information on how to analyze an Obligor’s repayment ability.

c. Status of Collateral

A discussion of the status of the collateral required by the Loan Authorization, which
includes, when applicable, the following information and Supporting Documentation:

(1) List of how and when each significant item or category of collateral (i.e., real
property with a Recoverable Value of $10,000 or more per parcel, and personal
property with an aggregate or individual Recoverable Value of $5,000 or more)
was liquidated and the amount recovered;

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SOP 50 57

(2) List of any remaining collateral;

(3) Justification for abandoning any remaining collateral, and a description of the
efforts made to compromise with the owner-Obligor if it includes a lien on a
personal residence;

(4) Summary section of any post-default Appraisal;

(5) With regard to commercial real property collateral, the summary section of any
post-default Environmental Investigation Report or an explanation for why an
Environmental Investigation was neither necessary nor prudent; and a

(6) Description of the efforts to liquidate any life insurance policy with a cash-
surrender value.

d. Status of Collection Activities

A statement verifying that there are no collection activities, which are on-going or
planned for the immediate future, (e.g., collection of payments under a workout
agreement or plans to execute on a judgment), and that SBA may refer the loan, if it
is legally collectible, to Treasury for further collection efforts. (If there are collection
activities, which are on-going or will be implemented in the immediate future, neither
charge-off nor Treasury referral is appropriate.)

e. Site Visit Report

A copy of the post-default Site Visit Report, previously approved site visit waiver, or
an explanation for why a site visit was not conducted, i.e., why a site visit was neither
necessary nor prudent.

f. Recoveries

If not previously reported to SBA, a list of all recoveries that includes: the source,
amount and date of the recovery; an accounting of how the recovery was applied to
the loan balance; a copy of any relevant Supporting Document(s); and an
explanation for why the recoveries were not reported and submitted to SBA within 15
business days of receipt as required by Chapter 22 (Expenses and Recoveries).

g. Expenses

(1) A list of all expenses incurred to liquidate the loan; and

(2) A request for approval or reimbursement of any Recoverable Expense that has
not already been reviewed and approved by SBA. The request must be
accompanied by the Supporting Documents required by Chapter 22 (Expenses
and Recoveries).

h. Recommendation

A recommendation regarding whether:

(1) The loan balance should be charged-off;

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SOP 50 57

(2) Any remaining collateral or acquired collateral should be abandoned;

(3) The loan should be referred to Treasury for further collection efforts; and whether

(4) The loan should be referred to the Office of the Inspector General ("OIG") to
investigate any suspected fraud or abuse. (See Chapter 25 for information on
OIG Referrals.)

D. Referral to Treasury for Further Collection

1. When Referral Required

After charge-off, if further collection is not barred by a valid legal defense such as
compromise, discharge in bankruptcy, or the statute of limitations, the loan and
remaining Obligors must be referred to Treasury for further collection efforts. (Debt
Collection Improvement Act of 1996)

2. Distribution of Post-Referral Recoveries

SBA shares the net amount recovered on the loan after referral to Treasury with the
Lender on a pro-rata basis.

Note: Prior to referral, SBA sends an automated letter to the Obligors giving them 60
calendar days to either pay the loan in full or negotiate an acceptable payment plan.

Treasury's two primary delinquent debt collection programs, the Treasury Offset Program
("TOP") and Cross-servicing Program, are managed by the Bureau of Financial Management
Service's ("FMS") Debt Management Services ("DMS").

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.

Under the Cross-servicing Program, in addition to offset (i.e., TOP), delinquent debt is
collected through the use of a wide variety of tools such as administrative wage garnishment,
skip tracing, negotiated repayment plans, use of private collection agencies, litigation, and
preventing receipt of additional federal financial assistance.

3. Post-Referral Servicing

a. Exclusive Authority of Treasury Department

After charge-off and referral of an SBA loan to Treasury, the Loan File should be
retained by the Person originally responsible for liquidating the loan. But, except as
provided below with regard to post-Treasury referral litigation, no one other than
Treasury can take any further servicing or liquidation action on the loan. This
exclusion applies to both SBA and the Lender.

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SOP 50 57

b. Notice of Bankruptcy Filing or Other Litigation

Upon receipt of notice of a bankruptcy filing or other litigation concerning an SBA
loan referred to Treasury, the Person receiving the notice must immediately notify
the SBA Treasury Offset Division in Birmingham, Alabama so that the loan can be
recalled from Treasury and SBA legal counsel can take appropriate action in
response to the litigation. The notice, which must include the Borrower's name and
the SBA loan number, should be faxed or emailed to:

Supervisory Loan Specialist
Treasury Offset Division
Fax: 202-481-0592
Email: BirminghamTOPS@sba.gov
Phone: 1-800-736-6048 Extension 7705

Note: Regardless of whether the loan was originally serviced by the Lender, after the
loan has been referred to Treasury, all subsequent litigation is handled by SBA legal
counsel. (Chapter 3, Paragraph B.)

E. IRS Notification of Cancelled Debt

1. When IRS Form 1099-C Required

IRS Form 1099-C (Cancellation of Debt) must be filed with the IRS and mailed to the
Borrower—but not Guarantors—whenever the principal owed on an SBA loan is $600 or
more; and the loan balance has become uncollectible as a result of, for example,
compromise or discharge in bankruptcy.

2. Responsibility for Issuing IRS Form 1099-C

a. SBA

The SBA Denver Finance Center is responsible for providing the Borrower and the
IRS with IRS Form 1099-C for SBA’s share of the cancelled portion of an SBA loan.

b. Lenders

Lenders are responsible for providing the Borrower and the IRS with IRS Form 1099-
C for the Lender’s share of the cancelled portion of an SBA loan.

3. When IRS Form 1099-C Issued

a. Compromised debt should be reported the calendar year after the compromise
amount was paid in full;

b. Debt discharged in bankruptcy should be reported the calendar year after the
discharge; and

c. Charged-off debt that is not related to compromise or bankruptcy should be reported
the calendar year after:

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SOP 50 57

(1) The event occurred that rendered the debt uncollectible, (e.g., the date the
statute of limitations for collecting the debt expired), or

(2) The date Treasury completed its collection efforts.

F. Credit Bureau Reporting

1. Initial Reports

Charged-off loans should be reported to the appropriate credit bureaus and Federal
Government delinquent debtor databases, e.g., Credit Alert Interactive Voice Response
System ("CAIVRS") and Debt Check.

Note: CAIVRS is a HUD maintained computer information system that enables lenders to
learn if an applicant has previously defaulted on a federally-assisted loan from the USDA,
SBA, Department of Education, HUD or VA. Debt Check is a Treasury program that allows
agencies and outside lenders to obtain information regarding whether applicants for federal
loans, loan insurance or loan guarantees owe delinquent child support or delinquent non-tax
debt to the Federal Government.

2. Subsequent Reports

If there is a substantial change in the condition or amount of the delinquent debt after it
has been reported, the new information should be promptly reported to each credit
bureau and database to which the original disclosure was made.

3. Responsibility

a. SBA

SBA is responsible for reporting its share of each charged-off loan balance to the
appropriate credit reporting bureaus, and is also responsible for reporting charged-off
debt to Federal Government delinquent debtor databases such as CAIVRS and Debt
Check.

b. Lenders

Lenders are responsible for reporting their share of each charged-off loan balance to
the appropriate credit reporting bureaus.

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