We’re already seeing businesses start to file for bankruptcy even as SBA’s six-month payments under the CARES Act continue. Other businesses are reaching out to lenders and beginning discussions on additional financing or workouts in anticipation of the payments ending in September or October for borrowers that had existing SBA loans.
And as COVID-19 continues to rage, we’re watching for SBA guidance on servicing your existing portfolio. To date there has been little. It’s understandable, given the challenges involved in making payments under the CARES Act and implementing the requirements for PPP Loans. That said, here are our Top 5 Tips for protecting your guaranty when handling these problem loans:
- Do timely site visits. You must do a site visit within 60 days of an uncured payment default or sooner if collateral can be removed, lost or dissipated. While you cannot do a formal visit under bankruptcy, you can drive by to determine whether the business is still open and operational. Critical: Document to the file with a report including the date of the visit and – to the extent possible – photos, if you’re able to get them.
- Handling bankruptcy filings under the CARES Act. SBA hasn’t provided guidance on how to handle a bankruptcy filing while the borrower’s payments are being made under the CARES Act. Our recommendation: Transfer the file to liquidation, request guidance from SBA in writing, and do not request additional payments until you have received SBA’s guidance. Important: Maintain the correspondence with SBA in your file to support your actions.
- Collect information for workouts and extensions. Dating from when the CARES Act was passed, most of the six months payments under the Act will end in September or October. If a borrower is already talking about workout and extensions, it’s time to start collecting the information you need. As an SBA lender, you are required to assess the feasibility of the request and the viability of the business. Items to request:
- Current Financials for the business including agings
- Borrower’s last year-end financial statements
- Affiliate current consolidated financial statements
- Complete Borrower tax returns for the last two years
- Complete Personal tax returns for the last two years
- In this era of COVID-19, we recommend a questionnaire or written statement from the borrower on COVID-19’s impact on the business and the borrower’s plan to turn the business around.
Deferrals are an option, but they have their limitations. SBA views deferrals as a solution to a temporary problem. Our recommendation: Collect the information listed in #3 above before you determine if a deferral is the correct option. Here are some limitations of deferrals:
- If you sold your loan on the secondary market, you can only offer a one-time deferral of no more than three consecutive months without FTA written approval.
- If the loan has not been sold, you may offer a deferment of up to six consecutive months. The amount deferred should not exceed the total of six cumulative payments or 20% of the original loan amount, whichever is less.
- Final note on deferrals: If you did not extend the maturity with the deferral, be sure to re-amortize the loan after the deferral period. SBA does not allow for balloon payments so the loan needs to remain fully amortizing.
- Review your file for deficiencies. During your workout discussions with the borrower, correct any deficiencies found in the file. Make sure any remaining deficiencies can be addressed, in case a subsequent request for repurchase of the guaranty is required.
- Litigation plans are a must. If a litigation plan reflects legal expenses exceeding $10,000.00, the lender is required to get SBA approval.
At JRB, we continue to keep an eye out for SBA guidance on servicing your existing portfolio during this era of COVID-19. It’s likely this guidance will come in time. When it does, we’ll give you our take on it. Until then, stay safe and be well.