|
|
Tip of the Week
Collateral – Perfection, Protection and Possession
It seems that often once a loan goes into default, lenders become aware that their interest in collateral is not what they believed it to be. And, in the context of a SBA guaranty purchase, that raises the prospect of a “repair” (a discount in the value of the guaranty and ultimately in the amount received from SBA.)
In order for a lender to have the right to property that is owned by someone else, they must have a perfected interest in the property. The term “perfect” is defined as “complete in all respects; without defect or omission; flawless”. In a lending context, perfect means to have established a legal right to or interest in the collateral. Thus, a perfected interest in some form of property must be fulfilled completely in accordance with the laws and regulations applicable to the type of property, the legal jurisdiction and any other governing factors. In most cases, an interest in business personal property (chattels) is obtained through the combination of a security agreement and a public notice filing as called for in the Uniform Commercial Code (UCC) and local statues. Some types of personal property may be registered or licensed with the lender noted as lien holder. An interest in real property (real estate) typically is established through recording of a deed of trust (or mortgage). In either case, interests in the property are determined by correct filing of documents, correct and accurate identification of the property and the priority of the filing versus any other interests in or filings on the same property.
A lender is expected to assure that collateral is protected from loss, damage, theft, destruction, etc. such that the value of the property may not be diminished by such factors. Typically, protection begins with monitoring to be sure the borrower is maintaining adequate insurance coverage on the collateral property (with the lender named as a loss payee). In the absence of the borrower maintaining adequate insurance to protect the collateral, a lender may opt to “force-place” insurance coverage, charging the borrower for the premiums. However, in the event of a loan default, it frequently comes to light that the borrower has allowed insurance to lapse. And, it is not uncommon to find that in some cases the borrower may actually have abandoned the collateral. In such situations, the lender may need to take further steps to protect its interest in the collateral including fencing off property, hiring a security patrol or even physically taking possession. However, be aware that any such actions must be done in accordance with local ordinances and laws. And, don’t overlook a timely site visit (SBA requires a site visit within 15 days of notice of an adverse event or within 60 days of an unremedied payment default).
Finally, if it becomes necessary for the lender to take possession – either by removing personal property or acquiring title to real property – then the requirements for protecting the collateral rest solely with the lender. Most jurisdictions have laws that stipulate a lien holder must comply with “peaceful possession” statutes. So, it is very important that the lender either have thorough familiarity with the laws or engage suitable legal counsel to assist them. If the property is readily movable, it may be stored in a secure warehouse. Bonded auction companies often have such facilities. Or, with real property, it may be necessary to hire a security patrol to monitor it to prevent vandalism, theft of fixtures and furnishings, etc. Be prudent in the expenses involved with care and preservation of collateral (see SOP 50 51, Chapter 19). SBA will share in reasonable and prudent expenses, within limits.
But, what do you do when you find that your ability to repossess or foreclose on collateral is hindered by a flaw in the perfection of the interest that was intended? Does such a revelation automatically mean that a repair or denial is probable? The answer is not necessarily. Much depends on how you present your case to SBA. Can you make reasonable arguments to support the actions (or mitigate inaction?)
These are the types of situations that sbaAccess can help you analyze, evaluate and suggest options, and help you obtain the best outcome. Also, if you’re finding that these kinds of gaps are popping up and creating problems for you on the back end (liquidation and guaranty purchase), it might be time to review how things are done on the front end to improve the process and the quality control on all new and existing SBA loans in your portfolio. We can help with a diagnostic review and recommend next steps such as Policy and Improvement review and overhaul, targeted and customized training for staff, and executive consultation for senior management to deploy the right resources to get the job done right.
Take the Right Approach,
John Cumbey, Karen McHugh, 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.
|
|
|
