Once a loan is classified into liquidation status, a lender will likely incur expenses relative to liquidation and collection. In many instances, lenders will retain legal counsel to assist the lender with enforcing its rights under the loan documents, including repossessing and liquidating collateral with Recoverable Value. When the defaulted loan is a Small Business Administration (“SBA”) guaranteed loan, the lender may not need to shoulder 100% of its legal expenses. Pursuant to SBA Standard Operating Procedure (“SOP”) 50 57 2 (click here for link to SOP 50 57 2), attorneys’ fees and costs may be deemed Recoverable Expenses, and a lender may seek recoupment of a portion of its legal expenses from the SBA.
However, SBA does not provide a lender with blanket reimbursement for any and all attorneys’ fees and costs incurred by a lender in connection with liquidation and collection of the SBA loan. Attorneys’ fees and costs that a lender seeks to recoup as Recoverable Expenses must be approved by SBA. In certain instances, a lender must have an SBA approved Litigation Plan in order to preserve the lender’s right to seek reimbursement from the SBA.
Even when legal expenses are necessary, reasonable, and customary, SBA will not consider the attorneys’ fees and costs as Recoverable Expenses if the fees were incurred through Non-Routine Litigation, and there is not an SBA approved Litigation Plan. With this in mind, prior to taking any material legal action, lenders should evaluate what legal actions are to be taken and determine whether SBA approval is necessary.
Routine litigation, such as uncontested litigation, non-adversarial matters in bankruptcy, and undisputed foreclosure actions, does not require the SBA’s prior approval, provided the estimated legal fees and costs do not exceed $10,000. Given the threshold dollar amount, it behooves lenders to communicate with their legal counsel at the outset of the litigation process to obtain an estimate of the legal fees and costs and to closely monitor the legal fees and costs throughout the litigation.
Non-routine litigation must be approved by the SBA. Non-Routine Litigation includes:
- All litigation where factual or legal issues are in dispute;
- Any litigation where legal fees are estimated to exceed $10,000;
- Any litigation involving receivership proceedings;
- Any litigation involving a loan where a lender has an actual or potential conflict of interest with the SBA; or
- Any litigation where the lender has made a separate loan to the same borrower which is not a SBA 7(a).
In addition, whenever there is a material change in the litigation, including changes which may affect legal expenses, an amended Litigation Plan should be prepared, and a lender must determine whether SBA approval is necessary.
A Litigation Plan can be submitted for SBA’s approval by email at: SBALitigation@SBA.Gov.
By recognizing and implementing these careful and considered initial steps, lenders who liquidate and collect defaulted SBA 7(a) loans can significantly reduce the risk of a repair or a denial from the SBA in the event of a loss. If you have questions about SBA’s requirements for timely submission of Litigation Plans, please contact Jellum Law, at SBAQuestions@JellumLaw.com.