You’ve done your job: careful screening, underwriting, adherence to prudent lending practices, and the hard yards your lending team put in. The loan goes through. All is well. Time to move on, or time for a Liquidation Plan? Liquidation Plan? Why spend the time?
It happens. Despite all the due diligence and hard work, the loan goes bad. What now?
I’m reminded of a certain British spy who always finds his way out of what looks to be his sure demise. But he’s got a system. He adapts to the circumstances and makes his escape plan. He’s never in the same jam, so he figures out a different escape route every time. He comes out shaken, but alive.
The same system applies when you make a loan. Every loan is different. So at origination, determine the best escape route to limit the loss to your institution and the SBA. How do you decide how or if you should take action?
In doubt? Check out the SOP. Make a plan. A strategic plan. Help is hiding in plain sight in SOP 50 57:
“… all lenders should prepare a Liquidation Plan prior to taking any material action to liquidate a loan.”
(SOP 50 57, Subpart G, Liquidation Plans)
Preparing a Liquidation Plan enables you to decide on a strategy that makes the most sense quickly and prudently. Also, SBA will require the same information when you submit a request to honor the guaranty. You’ll be in a better position to provide an accurate and well justified explanation of your strategy if you prepare your Liquidation Plan at the beginning.
Come in from the cold. Look no further than Chapter 14 of the SOP and SBA Form 1979 for help on strategizing a recovery plan. Form 1979, advises lenders to prepare a memo addressing these points:
- What caused the breakdown of the business?
- Have there been any attempts to work out the loan?
- What were the findings of the post-default site visit? Is the collateral still present? Could it be endangered of being moved or sold?
- Are there any other non-SBA loans made to the borrower? How will the expenses and recoveries be allocated?
- What will happen to the collateral? Will it be subject to a voluntary sale? Will it be abandoned? Will there be a judicial or non-judicial foreclosure?
For assistance in determining what may happen with the collateral: SBA Form 1979 and SOP 50 57 2 to the rescue. Page 2 of Form 1979 provides a worksheet to assist in determining the bottom line of the recoverable value of any collateral pledged to the loan.
Will the costs involved to care and preserve, store and insure, and auction the collateral result in a recoverable value of at least $5,000 for personal property or $10,000 for real property? (See SOP 50 57 2, page 74.)
Some Hot Tips:
- Make sure there’s a post-default site visit within 60 days of an unremedied default OR within 15 days of any event causing a default;
- If possible, obtain a current valuation of the collateral and request a “forced liquidation value” (for personal property) or “liquidation value” for real estate.
- Consult with in-house or outside counsel for guidance. Note: A Litigation Plan takes on more importance if litigation costs are expected to exceed $10,000 or become non-routine.
For assistance with Litigation Plans and a multitude of SBA lending issues:
Contact Bruno. J.R. Bruno.