When the defaulted loan is a Small Business Administration (“SBA”) guaranteed loan, lenders must ensure that the liquidation and collection process not only adheres to prudent lending standards, it also must comply with the applicable SBA Standard Operating Procedures (“SOP”).
As of the date of this article, SOP 50 57 2 7(a) Loan Servicing and Liquidation is to be used as protocol for processing SBA loans. The SBA has announced the release of SOP 50 57 3 7(a) Loan Servicing and Liquidation to be effective on August 1, 2023. It is prudent for lenders to be well versed in the standards outlined in each document.
The SOPs set forth that lenders liquidate and exhaust all reasonable, cost-effective, and practical avenues of collection before charged off is appropriate. However, if the liquidation and collection efforts of a lender do not comply with the applicable SOPs, and a loss results, the SBA can either deny a request for purchase of its guaranteed portion or reduce the amount of its purchase by the amount of the loss—known as a repair. Carefully adhering to the applicable SOPs during the liquidation and collection process can significantly decrease the chance of a denial or repair.
When a loan is secured by real or personal property, a lender will need to obtain a post-default valuation in order to assess whether there is Recoverable Value in the asset. Put simply, lenders have an obligation to liquate personal property collateral that has a Recoverable Value in excess of $5,000 and to liquidate real property collateral that has a Recoverable Value in excess of $10,000.
To calculate the Recoverable Value of collateral, a lender needs a recent third-party valuation of the asset. The valuation should be no less than one year old, but SBA recommends that the valuation be less than 120 days at the time the lender relies upon it to make a decision. The type of valuation required depends upon the asset itself and the service action in consideration. For example, if the personal property is unique, such as a coin collection, jewelry, or artwork, a lender should obtain a personal property appraisal that complies with the Uniform Standards of Professional Appraisal Practice. In all other cases, absent a substitution of collateral, a lender can rely upon an auctioneer or other expert’s opinion as to value with respect to personal property.
Similarly, for real property, when a lender is obtaining a valuation in order to evaluate a release of liens for consideration, make a Protective Bid at a foreclosure sale, or deed in lieu of foreclosure, a lender should obtain a real property appraisal that complies with the Uniform Standards of Professional Appraisal Practice. In all other cases, absent a substitution of collateral, a real property appraisal may consist of a broker price opinion prepared in substantial compliance with the Broker Price Opinion Board Standards.
Lenders should obtain a valuation of the collateral before moving forward with the liquidation of any collateral. The valuation will inform the lender on whether the collateral should be liquidated or abandoned, as well as provide support for an appropriate sale price with respect to future sales of the assets.
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.