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In recent months our lender clients have reported an increase in the number of SBA loan defaults. As such, many SBA lending organizations are revisiting their processes and procedures for Litigation Plans to ensure compliance with SOP 50 57 3.1.

When Lenders Must Submit a Litigation Plan to SBA:

Unless a written request is approved by SBA for extraordinary circumstances, all Lenders must prepare and submit a Litigation Plan to the appropriate SBA Loan Center for SBA District or Center Counsel written approval prior to initiating “Non-Routine Litigation”. Except for Loans approved under Certified Lenders Program (“CLP”) authority, Lenders are not required to submit a Litigation Plan to SBA prior to initiating Routine Litigation.

“Non-Routine Litigation” includes:

• All litigation where factual or legal issues are in dispute and require resolution through adjudication;
• Any litigation where Debt Collection Litigation Expenses are estimated to exceed $10,000 in the aggregate, even if a Lender deducts such fees from Recoverable Expenses;
• Any litigation involving a loan where a Lender has an actual or potential conflict of interest with SBA; or
• Any litigation involving a 7(a) loan where the Lender has made a separate loan to the same borrower that is not an SBA 7(a) loan.

For purposes of determining the $10,000 threshold, “Debt Collection Litigation Expenses” means the legal fees and expenses associated with actions conducted by a Lender’s outside legal counsel related to matters of adjudication before a local, state or federal court, which are subject to the $10,000 threshold for determining “Non-Routine Litigation” in accordance with 13 CFR §120.540(c) .

It is important to note that Debt Collection Litigation Expenses do not include the legal fees and expenses associated with a Lender’s non-judicial execution of the rights and responsibilities under the SBA Loan Documents, including the development of Loan modification agreements, forbearance and Loan workout agreements, non-judicial foreclosures and other liquidation actions, which are not subject to the $10,000 threshold for determining “Non-Routine Litigation”.

Lenders must submit a Litigation Plan to SBA within thirty (30) days of the litigation becoming “Non-Routine Litigation”, including 30 days from the date that a legal fee invoice reflects aggregate Debt Collection Litigation Expenses in excess of $10,000.

How to Submit a Litigation Plan:

Lenders must use the SBA’s official Litigation Plan template, which includes nine key sections:

1. Lender Information
2. Loan Information
3. Critical Information
4. Attorney Information
5. Recovery Analysis
6. Litigation Synopsis
7. Narrative
8. Attorney Fees & Litigation Costs Approved/Incurred To Date
9. Proposed Litigation Budget

Plans should be submitted via email to SBALitigation@SBA.gov (may also be uploaded to ETRAN, as long as a corresponding email is sent to SBALitigation@sba.gov).

Lenders must submit an amendment to a Litigation Plan to SBA for approval prior to taking any legal action or incurring any expense that materially deviates from the original Litigation Plan. Material changes include activities that cause actual or projected fees to exceed the previously approved budget by more than 15 percent.

Litigation Plan Best Practices:

• The SBA Litigation Plan form must be filled out in its entirety.
• Recovery Analysis Section: There must be an “estimated recovery” (it CANNOT be $0). Complete all fields in this section including the state and court.
• If the litigation is concurrently taking place in more than one state, a separate litigation plan is needed for each state.
• If there are companion SBA loans, the “primary” loan number is the loan with the highest original balance, not the current outstanding loan balance. All companions loans should be listed on the form. Companions loans are the smaller loans, i.e. loans with a lower original loan amount.
• Label all supporting documents with the primary loan number when uploading to Box.com
• The lender must attach an engagement letter with lender’s legal counsel.

Overall, proper planning and documentation are essential to ensure compliance and preserve your right to reimbursement of recoverable legal fees and expenses. If your lending institution has questions or needs help preparing a Litigation Plan, please contact us at SBAQuestions@JellumLaw.com.