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SBA Loans: Wrap-Up and Charge-Off Procedures

Brandon C. Meadows, Esq.
sba loan prudent liquidation wrap-up report charge-off sba loan procedures

When a SBA loan is in liquidation status, lenders and authorized CDC liquidators are required to perform “Prudent Liquidation.” This means that lenders and authorized CDC liquidators must liquidate and conduct debt collection litigation in a “prompt, cost-effective and commercially reasonable manner, consistent with prudent lending standards, and in accordance with loan program requirements.” 13 C.F.R. § 120.535(b). When Prudent Liquidation is complete, it’s time for the lender or authorized CDC liquidator to submit a wrap-up report to the SBA and have the loan charged-off.

What is a Wrap-Up Report?

For each 7(a) loan in liquidation status, lenders must prepare and submit a wrap-up report to the appropriate SBA Loan Center within 30 calendar days after Prudent Liquidation is complete, or upon request from the SBA, whichever comes first. SOP 50 57 2. On the other hand, for each 504 loan in liquidation status, authorized CDCs must prepare and submit a wrap-up report to the appropriate SBA Loan Center within 90 calendar days after Prudent Liquidation is complete, or upon request from the SBA, whichever comes first. SOP 50 55.

7(a) lenders should use the  “SBA Charge Off Tabs/Wrap-Up Report” template, whereas 504 authorized CDCs should use the “503/504 Liquidation Wrap Up Report” template. The  wrap-up report must:

  1. Include the SBA loan number, borrower’s name, principal loan balance, lender/CDC’s name, and contact information;
  2. Include a detailed narrative identifying the collateral that was liquidated, including the date of liquidation, expenses, and net amount of recovery applied to the loan, including any supporting documentation;
  3. Identify remaining collateral, and justification for abandoning the collateral;
  4. Identify the remaining obligors and/or guarantors who are legally liable for the remining balance of the SBA loan, including any supporting documentation;
  5. Attach a copy of the site visit report;
  6. Identify the status of liquidation and litigation activities;
  7. Include all expenses;
  8. Include all recoveries; and
  9. Include a recommendation of whether the loan balance should be charged-off, whether any remaining collateral should be abandoned; whether the loan should be referred to the U.S. Department of the Treasury Bureau of Financial Management Service (“Treasury”) for further collection efforts, and whether the loan should be referred to the Office of the Inspector General to investigate any suspected fraud or abuse.

SOP 50 57 2; SOP 50 55.

What Are the Consequences of Failing to Submit a Wrap-Up Report?

7(a) lenders who fail to submit a timely wrap-up report (within 30 calendar days of completing Prudent Liquidation) risk being referred to the SBA Office of Credit Risk Management for possible enforcement action. In addition, the SBA can require the lender to purchase the loan back from the SBA, charge-off the loan balance, and refer the loan to Treasury after assignment of the loan documents. SOP 50 57 2.

Similarly, authorized CDCs who fail to submit a timely wrap-up report (within 90 calendar days of Prudent Liquidation), risk being referred to the SBA Office of Credit Risk Management for possible enforcement action. In addition, the SBA will charge-off the loan balance, and possibly refer the loan to Treasury. For Premier Certified Lenders Program (“PCLP”) 504 loans, the SBA will bill the PCLP CDC for its share of the loss. SOP 50 55.

When Can a SBA Loan Be Charged-Off?

It is appropriate for a SBA loan to be charged off when the lender or CDC submits a wrap-up report, and the wrap-up report identifies the following:

  1. All reasonable efforts have been exhausted to recover from: (a) voluntary loan payments; (b) compromise with obligors; (c) liquidation from the collateral; and (d) enforced collection; and
  2. Further collection efforts are not cost effective or practical; and
  3. One of the following:
    A. The legally responsible obligors cannot be located, are unable to pay the remaining balance, or are unwilling to pay the remaining balance; or
    B. The loan balance is uncollectable due to discharge in bankruptcy, expiration of the statute of limitations, or the existence of another defense available to the remaining obligors under state or federal law.

SOP 50 57 2; SOP 50 55.

What Does It Mean to Charge-Off a Loan?

If the SBA approves the wrap-up report, the remaining balance of the SBA loan, if any, will be “charged-off” and removed from the SBA’s accounting records. However, this does not mean the obligor(s) are “off the hook.” The SBA will refer all legally responsible obligors on both 7(a) loans and 504 loans to Treasury for further collection efforts under the Treasury Offset Program and/or the Cross-Servicing Program, unless further collection is barred by a valid legal defense, such as compromise, discharge in bankruptcy, or the statute of limitations. Further collection efforts may include administrative wage garnishment, recovery from tax refunds, negotiated repayment plans, use of private collection agencies, litigation, and the prevention of receiving federal financial assistance. Before submitting the referral to Treasury, the SBA will send a letter to the obligor(s), giving them 60 calendar days to either pay the loan in full, or negotiate an acceptable payment plan. SOP 50 57 2; SOP 50 55..

What Should Lenders and CDCs Know If The Loan is Referred to Treasury?

If the lender recommends in its wrap-up report that the loan should be referred to Treasury, 7(a) lenders must assign the loan documents to the SBA as part of the wrap-up report. At any time, the SBA may make a written request for certain documents from the lender. Upon such a request, lenders must assign the documents to the SBA within 5 business days. SOP 50 57 2.

If the SBA loan is referred to Treasury, the loan file must be retained by the institution originally responsible for liquidating the loan. However, once the loan has been referred to Treasury, lenders and CDCs are prohibited from conducting any servicing or liquidation actions on the loan. If the lender or CDC receives notice of a subsequent bankruptcy filing, it must immediately notify the SBA Treasury Offset Division in Birmingham, Alabama, so that the loan can be recalled from Treasury and the SBA’s legal counsel can take appropriate action. The notice must include the borrower’s name and SBA loan number, and must be emailed to BirminghamTOPS@sba.gov or faxed to 202-481-0592. SOP 50 57 2; SOP 50 55..

In addition, if the Treasury is successful in its collection efforts, the SBA will share the net amount recovered on the loan with the lender or PLCP CDC on a pro-rata basis. SOP 50 57 2; SOP 50 55..

Should the IRS be Notified of the Charged-Off Loan?

Yes. IRS Form 1099-C (Cancellation of Debt) must be filed with the IRS and mailed to the borrower—but not the guarantors—whenever the principal owed on the SBA loan is $600 or more, and the balance of the loan has become uncollectable. It is the responsibility of the SBA Denver Finance Center to provide the borrower and the IRS with the aggregate amount of the indebtedness discharged/cancelled. SOP 50 57 2; SOP 50 55..

Should the Charged-Off Loan be Reported to Credit Bureaus?

Yes. 7(a) lenders are responsible to report the entire amount of all SBA loans to the appropriate credit reporting bureaus, up until a final wrap-up report is submitted to the SBA. Once a wrap-up report is submitted to the SBA, it is the responsibility of the SBA to report all charged-off 7(a) and 504 loans to the appropriate credit bureaus, including the Credit Alert Interactive Voice Response System and Debt Check. SOP 50 57 2; SOP 50 55..

Conclusion

It is imperative that 7(a) lenders and 504 authorized CDC liquidators timely submit a wrap-up report to the SBA upon completion of Prudent Liquidation. If the SBA approves the wrap-up report, the SBA loan will be charged off. However, the obligors may not be absolved for the remaining balance on the loan and the loan may be referred to Treasury for further collection. Once the loan is charged-off and referred to Treasury, lenders and CDCs are prohibited from taking any further servicing or liquidation actions on the loan.

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