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Tip of the Week
Repairs, Denials & Oops!
If and when it comes to pass that you need to call upon the SBA to pay under its guaranty, there are three responses that may come from SBA:
Obviously, the first option is the desirable one. If everything has been done properly (e.g. in accordance with the regulations, prudent lending standards, program requirements, reasonable and appropriately documented) from the time of receiving the initial loan application through the workout or liquidation, payment of the full guaranty is the anticipated outcome.
Repair - If there are ‘defects or deficiencies' that have occurred along the way in the life of the loan, which result in less recovery than would have been reasonably anticipated, a repair is likely. A repair is a reduction in the dollar amount of guaranty payment (not a change in the percentage of the guaranty). SOP 50 51, chapter 13 states, "If a lender has been deficient in its handling of a loan . . [SBA] . . should attempt to reach an equitable resolution through negotiation and agreement with the lender sufficient to compensate SBA for the amount of monetary loss caused by the lender deficiencies." Thus, a repair is based on being able to quantify the value (loss) as a result of the lenders action or inaction. Examples are:
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failure to obtain a lien or the proper lien position on collateral
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unreasonable release of a piece of collateral
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unauthorized use of loan proceeds
Note that the regulation says "negotiation and agreement with the lender". SBA is not supposed to dictate a dollar amount. If you are proactive, it may be preferable to point out any deficiency and suggest what you reasonably believe to be an appropriate and justifiable repair amount (support your rationale). But, if you are not proactive in this way, SBA staff will suggest a repair amount based on their perspective of the matter. Lenders do have the opportunity to negotiate, but must logically and reasonably support their position.
Denial - In order for the SBA guaranty to be valid, lenders are required to originate, close, service and liquidate guaranteed loans in accordance with the regulations and program requirements, the terms of the Loan Authorization, consistent with prudent and reasonable commercial lending standards, etc. If a lender fails to materially comply with these expectations, there is a strong possibility that SBA will deny liability under the guaranty. Examples are:
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making a loan (using unilateral approval authority) that is ineligible
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actions that confer preference on the lender and to the detriment of SBA
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material non-compliance with terms of the Loan Authorization
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fraud or misrepresentation
These would be things that are so significant that cannot be reasonably mitigated by a reduction in the guaranty amount. If SBA (NGPC or CLSC) suggests a denial of a guaranty, but you staunchly disagree, you should present your case and evidence as to why you believe a denial is not appropriate. If the matter cannot be resolved at that Center location, you have the right to appeal to SBA Headquarters. It should go without saying that the lender must "make its case" convincingly (and with good documentation to substantiate your position). And, it is not a speedy process.
Oops! - When, in the course of preparing a guaranty purchase package, you realize there is some deficiency that has come to light you should be forthright in acknowledging the issue(s). Perhaps the first thing to evaluate is whether the issue is something that was within your reasonable control or was it beyond your control. An example for consideration:
- Did the borrower sell off some collateral assets without your knowledge or consent and divert the proceeds to something such as payroll?
- What was the materiality of the issue in regards to liquidation or recovery (in dollar terms)?
- It may be that an asset was obsolete, no longer of value or broken down and disposal was a reasonable action.
- If on the other hand there is a deficiency (failure to obtain or retain a proper lien position on collateral) which you should have been responsible for, then it behooves you to present a case as to the appropriate repair amount.
- For example, if an asset is aged/depreciated, it is probably not reasonable to use the price paid when new as a basis for computing a repair. What was the market or book value at the time of liquidation? Or, if the lien position was less than required, how much is the prior lien that must be satisfied before nay liquidation proceeds flow to the SBA loan?
Sooner or later, lenders are likely to encounter a situation in which there are some challenges to receiving payment of the (full) SBA guaranty. When that arises, we encourage you to be forthright in acknowledging any valid issue(s) but not to "roll over" if you believe there are sound mitigating factors. If payment of the full guaranty becomes contested, and the lender disagrees...step back, re-examine the facts and put forth your case, specifically zeroing in on overcoming whatever objections have been cited.
sbaAccess may be able to help avoid such situations by assisting with training, establishing procedures and policies and offering guidance with the liquidation and guaranty purchase process. Call or e-mail us - sooner rather than later.
Take the Right Approach.
John Cumbey, Karen McHugh and Brian Burke
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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