It’s a given: Liquidating SBA loans is stressful for any lender. It’s time consuming too. If you’re a small institution with a small department, liquidations can be overwhelming. We’ve all been there. With a one- to- two-man SBA shop without an internal Special Assets department, your department is left to originate, service and then liquidate. It’s a balancing act between priorities.
What takes priority? Liquidations, hands down. Why? Because SBA has firm timelines you have to adhere to when liquidating. Often, we see our lender clients do the right thing, but in the wrong order when it comes to protecting the SBA guaranty.
There are ways to hit those deadlines and still be able to originate. Forms and procedures are critical to staying on top of your liquidation process and freeing up time to originate and service.
Deadlines to remember
- Site Visit:
- Payment default: within 60 days of an uncured payment default, or sooner if collateral could be lost, removed or dissipated
- Nonpayment default: within 15 days of receiving notifications of an adverse event, such as business closure, death of a principal
- Transfer of the loan to Liquidation Status. Must be completed when the Note has been accelerated
- Repurchase of the loan from the Secondary Market. Lender is required to repurchase the loan from the secondary market, or request SBA to do so once the loan has been transferred to liquidation and the Note is accelerated.
- Early Default. Occurs 18 months from the month of initial disbursement of the loan, or within 18 months of the final disbursement if the default occurred more than six months from the initial disbursement.
Written procedures and checklists. We can’t say it enough. These help everyone stay on point and help avoid missed actions that can hurt you later. Here are some recommended procedures to have in place:
- Site Visit Forms that cover:
- Photos of the remaining collateral
- Your efforts to determine whether a workout arrangement is feasible
- Established value of the remaining collateral (include any legal fees from the Litigation Plan)
- Necessary steps to protect the collateral
- Litigation Plans should be a standard operating procedure, regardless of whether you’re required to get SBA approval. On a loan level, this will help your team stay on task and get all necessary requirements addressed. Your institution’s legal counsel should provide a litigation plan for actions needed to move on collateral with value, or guarantors if there are additional means of collection.
- Liquidation Plans should include:
- Site Visit Findings, e.g., was all collateral on site; is the lease current; what will it take to remove and store the collateral?
- Feasibility of a workout: Do you have current financials/tax returns? Is the borrower cooperative? Does the borrower have a plan to turn the business around?
- Value of the collateral, minus the recovery expenses, equals the total estimated recovery value. Does the estimated recovery value require action? Does it come to $5,000.00 or more for BPP, or greater for RE? If so, you must take action to liquidate.
- Plan to address the required legal action and the course of action you choose to take.
- Finally, written justification of your actions to abandon the collateral, it you choose to do so.
Yes, liquidations can throw you. Even a simple $250,000 loan can send you spinning if you haven’t got your procedures in order and you’re not prepared. At JRB, Servicing & Liquidations is one of my specialties. I can help you keep your balance and stay on track!