What Responsibility and Authority do SBA Lenders Have in Servicing and Liquidating Loans?
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Lenders are responsible for servicing and liquidating all of the 7(a) loans in their portfolio. CDC’s are responsible for servicing 504 loans in their portfolio, but they will only be responsible for liquidating the loan based on its designation. Lenders and CDC’s must be cognizant about their responsibilities and authority in servicing and liquidating SBA loans because failure to do so properly may lead to formal enforcement actions by the SBA Office of Credit Risk Management. A formal enforcement action may include a suspension from participating in the SBA loan program, a limit on the maximum dollar amount the SBA will guarantee, or a civil monetary penalty.
Lenders and CDC’s must service SBA loans in their portfolio in a diligent, commercially reasonable manner, consistent with prudent lending standards, and in accordance with Loan Program Requirements. 13 C.F.R. § 120.535(a).
If liquidation actions are necessary, lenders and CDC’s must liquidate and conduct debt collection litigation in a diligent, prompt, cost-effective, commercially reasonable manner, consistent with prudent lending standards, in accordance with Loan Program Requirements, and with any SBA approval of either a liquidation or litigation plan or any amendment of such plan. § 120.535(b). All liquidation actions must be free of any actual or apparent conflicts of interest. § 120.535(c).
Responsibility & Authority
7(a) lenders have unilateral authority to take all necessary actions to service and liquidate all of the 7(a) loans in their portfolio, both before and after the SBA purchases the guaranteed portion, provided their actions are consistent with the performance standards described above. When taking substantive unilateral loan actions, such as changing the loan maturity date, changing the borrower’s name or address, or changing the monthly payment amount, the lender must notify the appropriate SBA Loan Center in writing or via e-Tran. The 7(a) Lenders Servicing and Liquidation Matrix provides a specific list of unilateral actions that require SBA notification. SOP 50 57 2.
CDC’s, on the other hand, are responsible for servicing all of the 504 loans in their portfolio, provided they are classified in regular servicing status. The scope of a CDC’s responsibility and authority in liquidation depends on its designation. All authorized CDC liquidators (“ACL’s”) and premier certified lender program (PCLP) CDC’s have unilateral authority to take all necessary action to liquidate all of the 504 loans in their portfolio, provided their actions are consistent with the performance standards described above. However, non-ACL’s and non-PCLP CDC’s are only responsible for liquidating the PCLP loans in their portfolio. SBA loan centers are primarily responsible for liquidating 504 loans of non-ACL’s and non-PCLP CDC’s. An SBA loan center, however, may authorize non-ACL’s and non-PCLP CDC’s to liquidate specific 504 loans on a case-by-case basis. When taking substantive unilateral loan actions, all CDC’s must provide the appropriate SBA Loan Center with written notice. SOP 50 55.
Some servicing and liquidation actions require SBA pre-approval before taking action. For more information on the actions that require SBA approval, see: SBA 7(a) Loan Liquidation: Which Liquidation Actions Require SBA’s Pre-Approval (Part 1) and SBA 504 Loan Liquidation: Which Liquidation Actions Require SBA’s Pre-Approval (Part 2).
Servicing and Liquidation Take-Over by SBA
All servicing and liquidation authority by 7(a) lenders and CDC’s are subject to the SBA’s right to take over. The SBA has sole discretion to undertake the servicing, liquidation, and/or litigation of any 7(a) or 504 loan. This may happen, for example, if there is an actual or apparent conflict of interest in the CDC’s ability to liquidate the loan. If the SBA elects to take over servicing or liquidation, it will notify the lender or CDC in writing. If a lender or CDC receives such notice, it must assign the loan instruments to the SBA and provide any needed assistance to allow the SBA to service, liquidate, or litigate the loan. The SBA will also notify the borrower of the change in servicing. 13 C.F.R. § 120.535(d).
All loan action decisions, including the justification for those decisions, must be documented in the loan file or computer tracking system. All loan action records must be dated and kept in the file, along with all supporting documentation. Detailed information regarding telephone calls and meetings, such as the date, time, place, persons in attendance, substance of meeting, must also be kept in the file. SOP 50 55; SOP 50 57 2.
7(a) lenders are required to retain their loan files for at least six (6) years following the final disposition of each loan. CDC’s are required to retain their loan files for nine (9) years after the loan is paid in full, or ten (10) years after the loan is charged-off, whichever is applicable. If there is a reasonable anticipation of litigation, all potentially relevant information regarding the loan must be preserved. SOP 50 55; SOP 50 57 2.
Lenders and CDC’s are responsible for monitoring each SBA loan in their portfolio to mitigate the risk of loss because after the loan has closed, changes may occur that can impact the ability to administer or collect on the loan. These changes may include, for example, the borrower’s failure to pay taxes, which if unpaid, could become senior liens against the collateral for the SBA loan. Lenders and CDC’s must continuously monitor the following for changes:
- Borrower’s name, address, or legal structure;
- Borrower’s creditworthiness;
- UCC filings;
- Taxes and assessments;
- Insurance; and
- Senior secured loans.
All 7(a) lenders must make monthly 1502 reports on all loans in regular servicing status and all pre-guaranty purchase loans in liquidations status to the SBA. For loans purchased by the SBA from the secondary market, lenders must provide the SBA loan center with a written status report within fifteen (15) business days after receiving notice that the SBA purchased its guaranty from the secondary market. For all loans the SBA has purchased, whether from the secondary market or directly from the lender, lenders must provide the SBA loan center with a written status report every six (6) months, starting with six (6) months from the date of guaranty purchase. The status report must include the following:
- Borrower status;
- REO and acquired personal property collateral;
- Recoveries and expenses incurred;
- Liquidation activities and litigation proceedings;
- Reasons preventing the resolution of the SBA loan; and
- Timelines as to when the lender’s resolution activities are expected to be completed.
All CDCs must submit quarterly delinquency reports to the appropriate SBA loan center on each loan that is sixty (60) days or more past due until the debenture has been purchased. These reports must be submitted no later than 30 days after March 31st, June 30th, September 30th, and December 31st. ACLs and PCLP CDCs must provide the SBA loan center with a written liquidation status report within fifteen (15) days of receiving notice that a debenture has been purchased, and every ninety (90) days thereafter until a Wrap-Up Report has been filed. The liquidation status must include the following:
- Workout negotiations;
- Recoveries and expenses incurred;
- Liquidation and litigation proceedings; and
- REO and acquired personal property collateral.
All 7(a) lenders and CDC’s are also required to report information to the appropriate credit reporting agencies whenever they extend credit via an SBA loan, in accordance with the Debt Collection Improvement Act of 1996. They should routinely report information to the credit reporting agencies throughout the life-cycle of the loan.
All 7(a) lenders and CDC’s should also prepare Site Visit Reports, which should be kept in the loan file, after every visit to the borrower’s business premises. All 7(a) lenders must prepare a post-default Site Visit Report. Non-PCLP CDC’s must provide the SBA loan center with a Site Visit Report along with their proposed Liquidation Plan. PLCP CDC’s must provide a Site Visit Report along with the first quarterly liquidation report. If a site visit was not conducted, the reason why it was neither necessary nor prudent must be demonstrated in the file and explained on a Wrap-up Report.
All 7(a) lenders and CDC’s must submit a Wrap-up Report to the appropriate SBA loan center upon completion of liquidation activities. The Wrap-up Report must be submitted for review and approval within thirty (30) calendar days after prudent liquidation is complete or upon receipt of a request from the SBA, whichever occurs first. SOP 50 55; SOP 50 57 2.
Administrative or Enforcement Action
If a 7(a) lender or CDC fails to properly service or liquidate its SBA loan portfolio, the SBA Office of Credit Risk Management may take administrative action or enforcement pursuant to 13 C.F.R. § 120.1400 and 13 C.F.R. § 120.1500. Some formal enforcement actions may include, limiting the maximum dollar amount that SBA will guarantee, suspension or revocation from participating in the SBA program, and/or monetary penalties. SOP 50 55; SOP 50 57 2.
All SBA lenders should be cognizant of their servicing and reporting requirements and timelines to avoid any adverse action from the SBA.
- Brandon C. Meadows, Esquire
- Melissa Murrin, JD Candidate 2021
Continued reading in this series:
- Which Liquidation Actions Require SBA’s Pre-Approval: Part 1 – SBA 7(a) Loan Liquidation
- Which Liquidation Actions Require SBA’s Pre-Approval: Part 2 – SBA 504 Loan Liquidation
- Classifying SBA Loans in Liquidation Status
- How SBA Lenders Ensure Expense Recovery in Loan Liquidation and Litigation
- Loan Modification and Deferment Requirements for SBA Lenders
- SBA Loan Site Visits: How to Prepare and What to Expect
- SBA Loans: How to Maximize Recovery by Liquidating Real Property
- SBA Loans: How to Maximize Recovery by Liquidating Personal Property
- How to Maximize Recovery on a SBA Loan by Negotiating a Workout Agreement
- Assumption, Assignment and Sale of SBA Loans
- SBA Loans: Insurance Requirements and Considerations
- SBA Loans: Offers in Compromise