Tip of the Week
Recovering Expenses While Liquidating Collateral
Many lenders seem to be confused and frustrated when it comes to recovering expenses resulting from workout and liquidation situations. Typically, the borrower is defunct and often the proceeds recovered from collateral liquidation and guarantors are not sufficient to fully satisfy the debt and expenses.
There are a number of factors to be considered with respect to recovering expenses:
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Is there more than one loan involved? If so, are all loans SBA guaranteed? At the same guaranty percentage? If there are multiple loans (SBA loans with different guaranty percentages and/or a mix of SBA and non-SBA loans), expenses must be pro rated and allocated based on which loan(s) the expenses relate to.
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Are expenses (at least related to the SBA guaranteed loans) reasonable and customary?
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Legal expenses for routine legal actions have a cap of $10,000 without obtaining SBA's prior approval. Legal expenses for non-routine actions (typically defined as contested legal issues) have a $0 delegated limit. That means that for non-routine actions involving SBA guaranteed loans, SBA's prior approval of a litigation plan and budget are required if the lender wants SBA to share in the expenses. (If actual legal fees exceed an approved budget by more than 15%, an amended budget approval is required.)
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Expenses for work that might normally be done by a lender but which has been contracted out to a third party may not be reimbursable (e.g. filing a proof of claim for a bankruptcy - something the lender can easily do).
Another point to remember is that SBA does not pay or reimburse a lender for expenses prior to purchasing its guaranty. (See SOP 50 51, Chapter 19, section 19, p19-6)
Assuming the lender has liquidated collateral and completed any other means of recovery, the lender should deduct allowable expenses (100% - lender's share and SBA's share) from liquidation proceeds prior to applying the remaining proceeds as a principal pay-down on the defaulted loan balance. (See SOP 50 51, Chapter 8, section 24, p 8-17)
SBA recently introduced a CPC (Care and Preservation of Collateral) TAB package to standardize and improve the reimbursement of expenses in those cases where expenses are not recovered from liquidation proceeds. Based on the success of the TAB packages for regular 7(a) and Express loans, this new CPC Tab package should aid lenders in preparing uniform requests and thereby expedite receipt of payments. Click here to find the CPC TABS on our website at.
As with so many aspects of SBA lending, the recovery or reimbursement of expenses to a lender must be fair and reasonable. Lenders are entitled to recover prudent and reasonable expenses that are incurred and properly documented in the course of attempting to attain the best outcome of a workout or liquidation. But, by the same token, the lender must not expect SBA to participate in expenses that are unnecessary, or not directly related to actions pertaining to the SBA guaranteed loan(s).
If you have questions about how to prepare and present a litigation plan and budget, or how to properly allocate expenses and obtain reimbursement, please contact us at sbaAccess.com.
Take the Right Approach
John Cumbey, Brian Burke and Karen McHugh
SBA Access ©2009 - All Rights Reserved
All content is copyrighted and unauthorized use is strictly prohibited. If you would like to quote any part of this text, email bburke@sbaaccess.com or kmchugh@sbaaccess.com for permission.
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