LOAN LIQUIDATION - Small Business Administration

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SBASOP 50 51 3LOAN LIQUIDATIONOffice of Capital AccessU.S. Small Business AdministrationNovember 15, 2010

SOP 50 51 3Effective Date: November 15, 20102

SOP 50 51 3Table of ContentsChapter 1. Introduction . 11A. Purpose .11B. Authority .11C. Resources .111. Forms and Templates .112. Environmental Risk Management Materials .123. Tools and Quick Reference Guides .12Chapter 2. Definitions . 15A. Introduction .15B. General Terms .15C. Environmental Terms .26Chapter 3. Classifying Loans in Liquidation . 27A. When Loans Must Be Classified in Liquidation Status .27B. When Loans Should Be Removed from Liquidation Status .27Chapter 4. SBA Liquidation . 29A. Responsibility and Authority .29B. Performance Standards .29C. Loan Actions .291. Documentation Requirements .292. Rule of Two Approval .293. Review by Legal Counsel .304. Split Decisions.325. Exceptions to Policy.32D. Review of Quarterly Status Reports .33E. Review of Requests for Loan Action Approval.33Effective Date: November 15, 20103

SOP 50 51 3Chapter 5. 7(a) Lender Liquidation . 35A. Responsibility .35B. Authority .351. Unilateral Authority .352. Actions Requiring Prior SBA Approval .353. How to Obtain SBA Approval .35C. Documentation Requirements .36D. Performance Standards .36E. SBA Takeover of Lender Liquidation .36F. Reporting Requirements .37Chapter 6. CDC Liquidation .39A. Responsibility .39B. Authority .401. Unilateral Authority .402. Actions Requiring Prior SBA Approval .403. How to Obtain SBA Approval .40C. Reassignment of Loan Documents .41D. Use of Independent Contractors .42E. Documentation Requirements .42F. Performance Standards .42G. SBA Takeover of CDC Liquidation .42H. Reporting Requirements .43Chapter 7. Site Visits . 45A. When Required.45B. Pre-site Visit Preparation .45C. Goals .46D. Site Visit Reports.48Chapter 8. Liquidation Plans. 49A. General .49B. Format and Content .49Effective Date: November 15, 20104

SOP 50 51 3C. Factors to Consider .49D. When to Prepare .50E. Obtaining SBA Approval of Liquidation Plans .50Chapter 9. Post-default Environmental Risk Management . 53A. General .53B. When an Environmental Investigation Is Required .53C. Use of Environmental Professionals .54D. Environmental Investigation Process .54E. Special Procedures for Gas Stations and Dry Cleaners .55F. Environmental Investigation Report.56G. Obtaining SBA Approval of Loan Actions with Environmental Risk .56H. SBA Review of Requests to Acquire Title to Contaminated Property .60I. SBA Review of Requests to Take Over Business Using Hazardous Substances .62Chapter 10. Third Party Loans and Other Senior Liens . 65A. General .65B. Payment Advances .65C. Purchase or Pay Off .65D. Protective Bids .66E. No Bid Position .66F. Redemption Rights .67G. Excess Proceeds from Senior Lien Foreclosure Sale .70H. Obtaining SBA Approval of Loan Actions Regarding Senior Liens .71I. SBA and CDC Use of Treasury Checks .71Chapter 11. Workouts . 75A. General .75B. Feasibility Test .75C. Limitations .75D. Requirement—New Consideration from Borrower .76E. Workout Options .761. Forbearance .76Effective Date: November 15, 20105

SOP 50 51 32. Reinstatement or Extension of Maturity Date .773. Repayment Plan for Past-due Amounts .774. Deferment.775. Modification of Note .786. Reduction of Loan Balance .787. Assumption of Loan by Third Party .788. Subordination to Working Capital Loan .789. Relief on Senior Loan .7810. Voluntary Sale of Collateral .78F. Agreement Provisions .80G. Obtaining SBA Approval of Workout Agreements .80H. Return to Regular Servicing .80Chapter 12. Obligors . 81A. Acceleration and Demand Letters .81B. Skip Tracing .81C. Life Insurance .81D. Repayment Ability Analysis .81E. Release of Personal Guaranty .82F. Deceased Obligors .82Chapter 13. Real Property Collateral . 83A. General .83B. Procedure for Selecting Best Method of Liquidation .83C. Liquidation Methods .861. Release of Lien for Consideration .862. Deed in Lieu of Foreclosure .873. Lien Foreclosure .884. Collection of Rents .895. Appointment of Receiver .896. Short Sale Approval.90D. Credit Bids .91E. Eviction Proceedings .91Effective Date: November 15, 20106

SOP 50 51 3Chapter 14. Personal Property Collateral. 93A. General .93B. Procedure for Selecting Best Method of Liquidation .93C. Liquidation Methods .951. Release of Lien for Consideration .952. U.C.C. Sale .953. Judicial Foreclosure .994. Collection of Accounts Receivable .995. Set-off of Deposit Account .996. Surrender of Life Insurance Policy for Cash Value .1007. Foreclosure of Lien on Fixtures .1008. Marine Mortgage Foreclosure .100Chapter 15. Litigation . 101A. SBA Responsibility and Authority .1011. SBA District Counsel .1012. SBA Loan Center Legal Counsel .1013. SBA Loan Center .101B. 7(a) Lender Responsibility and Authority .102C. CDC Responsibility and Authority.102D. Performance Standards for Lender and CDC Litigation .1021. General Requirements.1032. Attorneys—Required Qualifications .1033. Attorney Fees .104E. SBA Takeover of Lender or CDC Litigation .105F. Litigation Plans .105G. Obtaining SBA Approval of Litigation Plans .106H. Documentation Requirements .107I. Bankruptcy Proceedings.108J. Probate Proceedings .109Effective Date: November 15, 20107

SOP 50 51 3Chapter 16. Compromise . 111A. General .111B. When Compromise is Appropriate .111C. Compromise Amount .112D. Compromise with Joint and Severally Liable Obligors.114E. Obtaining SBA Approval of Compromise Agreements .115F. Completing the Compromise Process .115G. Alternative—Treasury Department Referral.116H. SBA Review of Proposed Compromise Agreements .116Chapter 17. Sale of Loan . 119A. General Requirements .119B. Documentation .119C. Disclosure of Information .119Chapter 18. Acquired Collateral . 121A. General .121B. Acquiring Title to Collateral .121C. Ownership Responsibilities .122D. Expenses .123E. Timeframe for Disposal .123F. Sale .123G. Lease .127H. Abandonment .127Chapter 19. Expenses and Recoveries . 129A. Classification of Expenses .129B. Recoveries .131C. Payment of Non-recoverable Expenses .132D. Payment of Recoverable Expenses.132E. Obtaining SBA Approval, Payment or Reimbursement of Expenses .134F. SBA Review of Expense Requests .136Effective Date: November 15, 20108

SOP 50 51 3Chapter 20. Wrap-up Procedures . 139A. General .139B. Abandonment of Collateral .139C. Charge-off .140D. IRS Notification of Cancelled Debt .140E. Wrap-up Reports.141F. Treasury Department Referral for Further Collection .144G. Credit Bureau Reporting .145H. Record Retention .145I. SBA Review of Wrap-up Activities .146Chapter 21. Inspector General Referrals . 149A. What Matters Should be Referred .149B. How to Make a Referral .151C. What Information Should Be Provided .151D. Post-referral Responsibility.152Chapter 22. 7(a) Guaranty Purchase . 153A. General .153B. Requirements .154C. Practice Tips for Lenders .158D. Turnaround Time on Purchase Requests .159E. Incomplete Purchase Packages .159F. SBA Review of Purchase Requests.160Chapter 23. Denial of Liability on 7(a) Guaranty . 165A. When SBA May Deny Liability on a 7(a) Guaranty .165B. Who May Approve Denial of Liability Recommendations .165C. Loss Attributable to Lender .166D. Repairs .166E. Partial Denial of Liability .167F. Full Denial of Liability .169G. Examples of Lender Deficiencies Justifying Full or Partial Denial of Liability .171Effective Date: November 15, 20109

SOP 50 51 31. Incorrect Eligibility Determination .1712. Early Default Due to Failure to Properly Make or Close Loan .1713. Failure to Use IRS Transcripts to Verify Financial Information .1724. Failure to Use Loan Proceeds as Required by Loan Authorization .1725. Failure to Verify Equity Injection.1736. Failure to Obtain Required Lien Position .1757. Failure to Prepare and Use an Adequate List of Collateral .1758. Failure to Conduct a Post-default Site Visit .1769. Failure to Liquidate in a Commercially Reasonable Manner .177Chapter 24. Prepayment of 504 Loans and Debentures. 179A. General .179B. When 504 Loans and Debentures Can Be Prepaid .179C. Prepayment Amount .179D. Procedure for Prepayment of 504 Loans and Debentures .180E. Cancelling or Rescheduling Prepayment Date .182Chapter 25. Debenture Purchase. 183A. General .183B. When CDC Required to Request Purchase .183C. When SBA Required to Purchase .183D. Purchase Amount .183E. SBA Procedure for Purchasing Debentures.183F. Impact of Debenture Purchase on 504 Loan.184Chapter 26. Reimbursement of Loss on PCLP Debentures . 187A. PCLP CDC’s Duty to Reimburse SBA .187B. Amount of Reimbursement Obligation .187C. Notification of Reimbursement Obligation .187D. Appeal Process .188E. Payment Deadline .188F. SBA's Right to LLRF.188Effective Date: November 15, 201010

SOP 50 51 3Chapter 1.IntroductionA.PurposeThe purpose of SOP 50 51 3 ("SOP") is to provide SBA personnel, Lenders andCDCs with standard operating policies and procedures for handling 7(a) and 504Loans that are in default.B.AuthorityThe policy and procedures set out in this SOP are based on Section 7(a) of the SmallBusiness Act (15 U.S.C. § 636(a)), Title V of the Small Business Investment Act of1958 (15 U.S.C. §§ 695, et seq.), and Subpart E of Part 120 of Title 13 of the Code ofFederal Regulations.C.ResourcesThe forms, templates, tools and other resource materials referred to in this SOP arecontinually being updated and modified. The most current version of each isaccessible from the "Electronic Lending" section of SBA’s Web site, which is locatedat www.sba.gov/banking.1.For

SBA SOP 50 51 3. LOAN LIQUIDATION . Office of Capital Access . U.S. S

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