We see a common trend in our loan review and liquidation work with clients across the country: As soon as a loan begins showing stress, so do the lender’s procedures. In a perfect world this wouldn’t be the case, but in our world it’s a fact. If you’re in the middle of a high-volume origination at the same time a loan goes sour, you might not have the time or resources to deal with it. So the flailing loan goes under along with the guaranty.
Throwing the loan a lifeline: Deferment, Workout or Forbearance? As with your conventional loans, the goal is to maximize your recovery. It’s an added bonus if you can help keep the borrower in business. Your best bet: Shore up with solid procedures to ensure you’ve done everything you could to help maximize recovery and protect the guaranty. Some suggestions:
Site Visit. Begin with a site visit and have a site visit template that guides your staff on what to look for. Site visits must be conducted within 45 days of payment default and 15 days of an adverse event. Be sure to have the fixed asset list from the origination with you on your site visit so you can note changes to any collateral remaining on site and ask for reasons for the discrepancies. From the site visit you can determine next steps: Deferment, Workout or Forbearance?
Deferments are not a band-aid fix for a larger problem. If the borrower is having a cash flow problem as a result of a short term issue, e.g., nearby road construction making access to the borrower’s location difficult, then a deferment is reasonable.
Restructure and Workout. If the cash flow issue is more long term, e.g., resulting from a decline in an industry such as newspapers, then restructuring through a Workout Agreement could be your best bet. SBA SOP 50 57 2 has a chapter on Workouts (SOP 50 57 2, Chapter 16, pg. 86) that spells out what language must be included in your Workout Agreements. Be sure to review this section. If your outside counsel is drafting the Agreement, make sure they also know the requirements.
Document, Document, Document. Support your actions in a credit memo detailing your analysis of the borrower’s personal and business financials along with tax returns for the most recent two years and the interim period. Justify your actions by including in your liquidation analysis the cost/benefit of your options, e.g., foreclosure vs. workout. We recommend working in table format so SBA can see your comparisons side by side.
So much of what you do and how quickly you address issues can affect your guaranty!
Rebecca Mendoza
Senior Associate
Rebecca@jrbrunoassoc.com