7(a) Loan Liquidation Actions
This article is Part I of a two-part blog series, designed to assist 7(a) lenders and Certified Development Companies in determining which liquidation actions require SBA’s pre-approval on SBA loans. Part I in this blog series addresses the liquidation actions that require the SBA’s pre-approval for loans made under section 7(a) of the Small Business Act. Part II addresses liquidation actions for SBA 504 Loans.
Lenders should make a good faith effort to work with delinquent borrowers to bring their Small Business Administration (“SBA”) loans current. However, when a default cannot be cured, and the 7(a) loan is transferred into liquidation status, the lender becomes responsible for liquidating the entire debt owed. Although the lender has unilateral authority to take all necessary actions to liquidate 7(a) loans in their portfolio, some liquidation actions require the SBA’s written pre-approval before the lender can take action.
If the lender does not obtain the SBA’s written pre-approval, the lender risks losing the SBA’s guaranty of the 7(a) loan. The lender also risks paying for legal fees and/or costs incurred in connection with the liquidation. Accordingly, all SBA lenders should have a detailed understanding of the pre-requisites to preserving the government guarantee and reimbursement of appropriate expenses incurred.
What Liquidation Actions Require SBA’s Pre-Approval?
Lenders must receive the SBA’s written pre-approval for all of the following liquidation actions:
- Liquidation Plans and amendments for loans approved under the Certified Lender Program (“CLP”) procedures (Liquidation Plans are encouraged for other loans as an aid to recovery);
- Sale of collateral or acquired collateral to the lender, an associate of the lender, employee of lender, or close relative of an employee of the lender;
- Private sale of collateral or acquired collateral to an obligor, or close relative, or associate of an obligor;
- Appointment of a receiver; and
- Continued liquidation actions for more than 24 months past date of guaranty purchase.
Notably, the SBA may, in its discretion, and upon request by a lender, waive the pre-approval requirement of Liquidation Plans and amendments for loans approved under the CLP procedures, if expeditious action is required to avoid the potential risk of loss on the loan, or dissipation of collateral exists. See 13 C.F.R. § 120.540(f). The lender may respond to such an emergency, provided that it:
- Makes a good faith effort to obtain the SBA’s written approval before undertaking the emergency action;
- Submits a written Liquidation Plan or amended Liquidation Plan to the SBA Loan Center as soon after the emergency as possible; and
- Takes no further action without SBA’s written approval of the Liquidation Plan or amended Liquidation Plan.
See SOP 50 57 2.
How to Obtain SBA’s Pre-Approval
Loan actions requiring the SBA’s pre-approval must be submitted in writing to the appropriate SBA Loan Center. Requests should be in the form of a clear and concise letter on the Lender’s internal credit memorandum. The request should include:
- A brief description of the proposed loan action;
- The justification for the proposed loan action;
- The amount funded, date of funding, current balance, and status of the loan;
- The current financial condition of the borrower;
- If the proposed loan action will increase the risk of loss, any mitigating factor;
- 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;
- A summary of prior servicing experience with the borrower;
- Whether the written consent of the SBA’s fiscal and transfer agent is required, and if so, whether it has been or will be obtained; and
- A list of the obligors and a statement as to whether their consent has been or will be obtained for the proposed loan action.
When Should the SBA Respond?
The SBA will approve or deny a lender’s request for pre-approval of a proposed liquidation action within 15 business days of receiving the request. If the SBA is not able to approve or deny the request within 15 business days, the SBA will provide a written notice to the lender requesting additional time, and, if appropriate, requesting additional information. See 13 C.F.R. § 120.541(a).
If the SBA does not respond to a lender’s request for pre-approval of a proposed Liquidation Plan for a loan approved under the CLP procedures within 10 business days, the request is deemed approved. See 13 C.F.R. § 120.541(c). The SBA will not provide written approval for a proposed loan action that the lender has unilateral authority to take.
What are the Consequences of Not Obtaining SBA Pre-Approval?
Lenders must liquidate loans in their portfolio in a prompt, cost-effective, and commercially reasonable manner, consistent with prudent lending standards, and in accordance with Loan Program Requirements. See 13 C.F.R. § 120.535(b). This includes obtaining the SBA’s written pre-approval for the above-mentioned liquidation actions. Failure to comply materially with any Loan Program Requirement for 7(a) loans, or failure to liquidate a loan in a prudent manner, releases the SBA from liability on its loan guarantee. See 13 C.F.R. § 120.524.
The SBA may, in its sole discretion, refuse to honor the lender’s guaranty purchase request, in full or in part. The SBA may also recover any moneys already paid on the guarantee plus interest from the lender, whether they were paid directly to the lender or to a secondary market investor. See SOP 50 57 2. In addition, the SBA may, in its discretion, decline to pay a lender for all, or a portion, of legal fees and/or other costs incurred in connection with the liquidation, if the lender fails to obtain written pre-approval from the SBA for any liquidation action requiring such approval. See 13 C.F.R. § 120.542(b).
Takeaways for 7(a) Lenders: Stay Proactive and Obtain Pre-Approval
In the event that lenders are required to conduct liquidation actions, lenders must liquidate the loan consistent with prudent lending standards, and comply materially with any Loan Program Requirements for 7(a) loans. Lenders must receive the SBA’s written pre-approval for the above mentioned liquidation actions. Failure to comply with this requirement may result in the release of the SBA’s liability on the loan guarantee, and the SBA may decline to pay for the legal fees and/or costs incurred in connection with the liquidation. Lenders should familiarize themselves with these requirements to avoid the risk of the SBA declining their guaranty purchase request, the SBA recovering any moneys paid in connection with a guaranty purchase, and the SBA declining to pay for the legal fees and/or costs incurred in connection with the liquidation.
- Brandon C. Meadows, Esquire
- Melissa Murrin, JD Candidate 2021