It’s finally come to this. You’ve been there: After catch-up payment plans, modifications and restructures – including extending the loan maturity, it’s painfully clear that the loan won’t be repaid. And the borrower’s hopes and dreams have come to an abrupt end. As for you, you must make critical decisions so you can recover what you can of the loan balance and also proceed within SBA guidelines to preserve the guaranty.
If you’re an experienced lender – specifically a Special Assets person — you have felt the pain of reviewing the initial credit memo and “opinions of value” of the collateral, whether business, personal property or real estate. What seemed like a strong collateral position at funding is now literally pennies on the dollar.
At times, the costs to pursue worthwhile collateral can greatly impact the amount of recovery. And if you must foreclose in a “debtor friendly” state, you could be looking at months, even years, before a favorable judgment enables you to sell the collateral. Do you have the budget or wear-with-all to carry legal expenses until you can foreclose and put in for the guaranty? It’s a real problem for some lenders.
What to do? Better get the facts. Because liquidations aren’t one-size-fits all, we recommend doing research and gathering the facts so you can make an informed decision.
Collateral Liquidations: A Rule of Thumb. In short, lenders must liquidate personal property collateral (individual or aggregate) with a “recoverable value” of $5,000 or more. (SBA SOP 50 57 2 Chapter 17, Real Property Collateral; Chapter 18, Personal Property Collateral)
Great. Now What? You take your valuations and your liquidation plan worksheet and start scratching out figures. You might find recoverable value ON PAPER but in reality, the anticipated recovery might be severely reduced, or even a loss. Let’s say you have a 3rd Deed of Trust against a single-family residence. The local housing market boom has increased the net equity. But consider: Does it make business sense to pay off two senior liens? Or to carry months of mortgage payments, insurance, and other care and preservation costs?
What about selling the loan? During my time working in Special Assets and Risk Mitigation at several financial institutions, I received many a letter, email, or phone call from note investors looking to purchase defaulted loans. Can you sell an SBA loan to a note investor? Short answer: Yes, under the following conditions: (SOP 50 57 2, Chapter 11)
- Sale is to a Person other than the Borrower;
- Sale price bears a reasonable relationship to the amount that could be recovered through enforced collection proceedings;
- 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;
- SBA has already purchased the guaranteed portion of the loan if it was sold on the secondary market; and
- The lender selling the loan has submitted a complete guaranty Purchase Package and SBA has completed its guaranty purchase review process.
Selling could be an option to avoid a costly and lengthy liquidation and to maximize recovery, saving precious time and resources.
Looking for assistance with your SBA loans in liquidation? Contact JRB.