SBA 504 Loan Liquidation: Which Liquidation Actions Require SBA’s Pre-Approval (Part 2)

504 Loan Liquidation Actions

This article is Part II of a two-part blog series, designed to assist 7(a) lenders and Certified Development Companies in determining which liquidation actions require SBA’s pre-approval on SBA loans. Part II in this blog series addresses the liquidation actions that require the SBA’s pre-approval for loans made under Title V of the Small Business Investment Act.

Certified Development Companies (“CDC”) should make a good faith effort to work with delinquent borrowers to bring their Small Business Administration (“SBA”) loans current. However, when a default cannot be cured, the 504 loan is transferred into liquidation status and the debenture is purchased by the SBA, the CDC may become responsible for liquidating the debt.

Although the CDC may have unilateral authority to take all necessary actions to liquidate 504 loans in their portfolio, some liquidation actions require the SBA’s written pre-approval before the CDC can take action. If the CDC does not obtain the SBA’s written pre-approval, the SBA may decline to pay for all, or a portion of, the legal fees and/or other costs incurred in connection with the liquidation.

What Liquidation Actions Require SBA’s Pre-Approval?

The liquidation authority of CDCs is based on its designation as an Authorized CDC Liquidator (“ACL”), a Premier Certified Lender Program (“PCLP”), a non-PCLP CDC, or a non-ACL. A CDC that is authorized to act as an ACL is responsible for liquidating all of the 504 loans in its portfolio. Non-ACL PCLP CDCs are responsible for liquidating only the PCLP 504 loans in its portfolio. SBA Loan Centers are primarily responsible for liquidating 504 loans of non-PCLP CDCs and non-ACL CDCs. However, SBA Loan Centers may authorize non-PCLP CDCs and non-ACL CDCs to liquidate 504 loans on a case-by-case basis. See SOP 50 51 3.

A PLCP CDC must receive the SBA’s written pre-approval for all of the following liquidation actions:

• Release of lien on collateral with fair market value ≥ 10% of debenture amount or $10,000;
• Acceptance of a deed-in-lieu of foreclosure;
• Initiation of judicial foreclosure (requires assignment of note & deed of trust or mortgage);
• Initiation of non-judicial foreclosure (requires assignment of note & deed of trust or mortgage);
• Appointment receiver (requires SBA approved litigation plan);
• Approving short sale with less than 100% of net proceeds to TPL or 504 loan;
• Approving short sale with release of obligors;
• Initiation of eviction proceedings—non-routine litigation; and
• Abandonment of collateral with recoverable value ≥ $10,000 real property/ > $5,000 personal property (requires exception to policy).

A non-PCLP CDC must receive the SBA’s written pre-approval for all of the following liquidation actions:

• Acceleration of the note;
• Classification of loan in liquidation;
• Sending demand letter;
• Implementing Liquidation Plan or amended Liquidation Plan;
• Release of lien on collateral with fair market value ≥ 10% of debenture amount or $10,000;
• Allowing voluntary sale of collateral by obligor;
• Accepting deed-in-lieu of foreclosure;
• Initiation of judicial foreclosure (requires assignment of note & deed of trust or mortgage);
• Initiation of non-judicial foreclosure (requires assignment of note & deed of trust or mortgage);
• Surrender life insurance policy for cash value;
• Appointment of receiver (requires SBA approved litigation plan);
• Approving short sale with 100% of net proceeds to TPL or 504 loan and no release of obligors;
• Approving short sale with less than 100% of net proceeds to TPL or 504 loan;
• Approving short sale with release of obligors;
• Initiation of eviction proceedings—routine litigation;
• Initiation of eviction proceedings—non-routine litigation; and
• Abandonment of collateral with recoverable value < $10,000 real property/ < $5,000 personal property; and
• Abandonment of collateral with recoverable value ≥ $10,000 real property/ > $5,000 personal property (requires exception to policy).

See Servicing and Liquidation Actions CDC Matrix.

Notably, the SBA may, in its discretion, and upon request by an ACL, waive the pre-approval requirement of Liquidation Plans or amended Liquidation Plans, if expeditious action is required to avoid the potential risk of loss on the loan, or dissipation of collateral exists. See 13 C.F.R. § 120.540(f). The ACL may respond to such an emergency, provided that it:

• Makes a good faith effort to obtain the SBA’s written approval before undertaking the emergency action;
• Submits a written Liquidation Plan or amended Liquidation Plan to the SBA Loan Center as soon after the emergency as possible; and
• Takes no further action without SBA’s written approval of the Liquidation Plan or amended Liquidation Plan.

See SOP 50 51 3.

How to Obtain SBA’s Pre-Approval

Loan actions requiring the SBA’s pre-approval must be submitted in writing to the appropriate SBA Loan Center. The request should include:

• A brief description of the proposed loan action;
• The amount funded, date of funding, current balance, and status of the loan;
• The current financial condition of the borrower;
• The justification for the proposed loan action, i.e., benefit to the borrower, CDC and SBA—neither abundance nor lack of collateral alone is sufficient justification for a loan action;
• Whether the proposed loan action will increase the risk of loss, and if so, any mitigating factor, e.g., the value of the SBA’s collateral will be increased, or the borrower’s business performance will be improved;
• If the proposed loan action will impact the collateral, a summary of prior loan actions impacting the collateral, and an analysis of the recoverable value of the collateral both before and after the proposed loan action;
• A summary of prior servicing experience with the borrower, i.e., loan modifications or problems pertinent to the request; and
• A list of the obligors and a statement as to whether their consent has been or will be obtained for the proposed loan action.

See SOP 50 55.

When Should the SBA Respond?

The SBA will approve or deny a CDC’s request for pre-approval of a proposed liquidation action within 15 business days of receiving the request. See 13 C.F.R. § 120.541(a). If the SBA does not provide its written consent to a proposed Liquidation Plan, or a proposed amendment of a plan, within 15 business days of receiving the request, the request cannot be deemed approved. See 13 C.F.R. §120.541(b). The SBA will not provide written approval for a proposed loan action that the lender has unilateral authority to take.

What are the Consequences of Not Having SBA Pre-Approval?

If a CDC is responsible for liquidating a 504 loan, the CDC must liquidate the loan in a prompt, cost-effective, and commercially reasonable manner, consistent with prudent lending standards, and in accordance with Loan Program Requirements. See 13 C.F.R. § 120.535. This includes obtaining the SBA’s written pre-approval for the above-mentioned liquidation actions. Failure to liquidate a loan in a prudent manner, releases the SBA from liability on its loan guarantee. See 13 C.F.R. § 120.524. The SBA may, in its discretion, decline to pay a CDC for all, or a portion, of legal fees and/or other costs incurred in connection with the liquidation, if the CDC fails to obtain written pre-approval from the SBA for any liquidation action requiring such approval. See 13 C.F.R. § 120.542(b).

Takeaways for CDCs:

In the event that CDCs are required to conduct liquidation actions, CDCs must liquidate the loan consistent with prudent lending standards and comply materially with any Loan Program Requirements. CDCs must receive the SBA’s written pre-approval for the above-mentioned liquidation actions. Failure to comply with this requirement may result in the SBA declining to pay for legal fees and/or other costs incurred in connection with the liquidation. Lenders should familiarize themselves with these requirements to avoid the risk of paying for legal fees and/or costs incurred in connection with liquidating 504 loans.

Authors:

• Brandon C. Meadows, Esquire
• Melissa Murrin, JD Candidate 2021

Continued reading in this series:

• Which Liquidation Actions Require SBA’s Pre-Approval: Part 1 – SBA 7(a) Loan Liquidation
• Classifying SBA Loans in Liquidation Status
• How SBA Lenders Ensure Expense Recovery in Loan Liquidation and Litigation
• What Responsibility and Authority do SBA Lenders Have in Servicing and Liquidating Loans?
• Loan Modification and Deferment Requirements for SBA Lenders
• SBA Loan Site Visits: How to Prepare and What to Expect
• SBA Loans: How to Maximize Recovery by Liquidating Real Property
• SBA Loans: How to Maximize Recovery by Liquidating Personal Property
• How to Maximize Recovery on a SBA Loan by Negotiating a Workout Agreement
• Assumption, Assignment and Sale of SBA Loans
• SBA Loans: Insurance Requirements and Considerations
• SBA Loans: Offers in Compromise