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Publication of Final Regulations for Liquidation and Debt Collection Activities . Initially published in Federal Register as proposed rules on 11/3/05 Published in final form on 4/12/07 Regulations become effective 5/14/07. Loan Program Requirements.
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Publication of Final Regulations for Liquidation and Debt Collection Activities Initially published in Federal Register as proposed rules on 11/3/05 Published in final form on 4/12/07 Regulations become effective 5/14/07
Loan Program Requirements • This term is defined to make clear what SBA directives 7(a) lenders and CDCs must comply with for their SBA loans. • See the definition of Loan Program Requirements in section 120.10, and also refer to section 120.180 in which the responsibilities of 7(a) lenders and CDCs to follow Loan Program Requirements are explained. • Loan Program Requirements in effect when a 7(a) lender or CDC takes an action on a loan govern that specific action. • Some provisions of the new regulations are effective only for loans approved on or after May 14, 2007. These are all clearly indicated.
Guaranty Purchases • For loans approved on or after May 14, 2007 section 120.520(a) provides that 7(a) lenders must liquidate all business personal property securing a loan prior to requesting SBA to purchase the guaranteed portion of the loan. This includes SBAExpress loans. • Exception: if the borrower files for bankruptcy. • Section 120.520(b) makes explicit that SBA will not process a guarantee purchase if the lender does not supply adequate documentation (not a new requirement). • Section 120.522 limits interest to 120 days on loans approved after May 14, 2007 that are purchased by SBA from the lender. This does not apply to secondary market purchases (SBA will continue to pay all accrued interest to the day of purchase). • Failure to request purchase within 120 days after purchase will not release SBA from guarantee of loan (extended to 180 days after maturity or 180 days after completion of recovery actions).
Secondary Market Purchases • For secondary market loans that SBA purchases, section 120.520(c) requires lenders to submit loan status reports within 15 business days of SBA’s purchase of the guaranteed portion. • This reporting requirement applies to all loans, including those approved prior to May 14, 2007. • Lenders are also required to submit sufficient documentation to enable SBA to conduct post-purchase reviews (not a new requirement). • A lender’s failure to provide adequate documentation may lead to a recovery action by SBA for the secondary market disbursement. • Also, the lender’s future participation in the secondary market may be restricted. • Requirement for liquidation of business personal property prior to purchase does not apply to secondary market purchases by SBA.
Servicing/Liquidation Actions • Section 120.536 standardizes across various loan programs the particular servicing/liquidation actions that require prior SBA approval. This provision applies to all loans, not just to those approved on or after May 14, 2007. • Reminds 7(a) lenders and CDCs to maintain in their loan files supporting documentation for actions taken in connection with a loan that do not require SBA approval. • Documentation regarding loan-related actions is important: • It is crucial to SBA’s review of the lender’s handling of a loan if it is submitted for guaranty purchase, and then at the time of SBA’s final review of the loan prior to charge-off. • SBA will use the lender’s documentation to determine whether the lender’s actions were prudent and commercially reasonable (see section 120.535 for a discussion of these standards).
Liquidation/Litigation Plans • Section 120.540 discusses when liquidation and litigation plans are required to be submitted to SBA. • After May 14, 2007, only 7(a) loans made under a lender’s authority as a CLP lender and CDCs must submit liquidation plans to SBA prior to initiating liquidation action. • SBA encourages all lenders to prepare liquidation plans since this practice is considered prudent and commercially reasonable as an aid to maximizing recovery. Please submit any prepared liquidation plans with your purchase package. • All 7(a) lenders and CDCs must obtain SBA’s prior approval of a litigation plan before proceeding with any Non-Routine Litigation: • Factual or legal issues are in dispute and require resolution through adjudication. • Legal fees are estimated to exceed $10,000. • Lender/CDC has actual or potential conflict of interest with SBA. • Lender/CDC has made a separate (non-SBA) loan to borrower.
7(a) Loan Asset Sales (120.546) Non secondary market loans • Loans approved on or after May 14, 2007: • Following purchase by SBA from the lender, the lender will be deemed to have consented to SBA’s sale of the loan (both the guaranteed and unguaranteed portions) in an asset sale conducted or overseen by SBA. • SBA will not sell the loan until nine months from the date of the purchase if the lender has not completed its liquidation actions for the loan (unless the lender consents). • Loans approved prior to May 14, 2007: • SBA must obtain the lender’s consent to sell a loan.
7(a) Loan Asset Sales, con’t Secondary market loans • Loans approved on or after May 14, 2007: • If SBA purchases the guaranteed portion from the secondary market, the lender is deemed to have consented to the sale of the loan in an asset sale conducted or overseen by SBA. • The lender may submit a request within 15 business days of SBA’s secondary market purchase requesting that the loan not be sold and explaining the reasons for the request. • SBA may then, in its sole discretion, decide to delay the sale or may proceed with the sale of the loan. • Loans approved prior to May 14, 2007: • SBA must obtain the lender’s consent to sell a loan.
Loan/Asset Sales - 504 For all loans irrespective of the date approved: PCLP Loans • Subsequent to the purchase of a debenture on a defaulted PCLP loan, SBA may sell the loan after providing at least 90 days notice to the PCLP CDC. • Approval of the PCLP CDC is not needed. All Other 504 Loans (not approved PCLP) • For all other 504 loans after SBA’s purchase of a debenture on a defaulted loan, SBA may sell the loan at any time. • Approval of the CDC is not needed.
Authorized CDC Liquidators (120.975) • Under existing regulations, section 120.848(f), PCLP CDCs are generally required to liquidate and conduct debt collection litigation for all loans approved under their PCLP authority. • For all other loans in their portfolios, PCLP CDCs are considered to be Authorized CDC Liquidators if notified by SBA that either of two requirements are met for such designation: • (1) the CDC has one or more employees with at least two years of acceptable liquidation experience who have completed a suitable liquidation training program, or • (2) the CDC has entered into a contract with a qualified third party contractor whose qualifications and contract terms have been approved by SBA.
Authorized CDC Liquidators (con’t) • CDCs other than PCLP may apply to become an Authorized CDC Liquidator if the CDC: • Participated in the CDC liquidation pilot, OR • Made an average of at least 10 loans per year during the past three fiscal years, AND • The CDC meets either of the following two requirements: • The CDC has one or more employees with at least two years of acceptable liquidation experience who have completed a suitable liquidation training program, OR • The CDC has entered into a contract with a qualified third party contractor whose qualifications and contract terms have been approved by SBA. • CDCs will apply for designation as an Authorized CDC Liquidator through their commercial servicing center.
Authorized CDC Liquidators -Compensation • CDCs may receive compensation for their liquidation activities as explained in Section 120.542(c) of up to 10% of realized net recovery proceeds from a loan up to a fee of $25,000, and a lower percentage (not to exceed 5%) of the realized net recovery proceeds above such amount. • Authorized compensation percentages will be published from time to time in the Federal Register. • If the CDC uses an SBA-approved contractor to handle its liquidations, the contractor may be compensated up to these same amounts. • In addition, SBA will compensate CDCs for reasonable, customary and necessary out-of-pocket expenses incurred in liquidation activities on a loan.