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Winter IS Coming ... Are YOU Ready to Meet SBA’s Prudent Liquidation Deadline?
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Winter IS Coming ... Are YOU Ready to Meet SBA’s Prudent Liquidation Deadline? 

Several months ago, NAGGL published an article intended to correct common misperceptions about SBA’s then-new Prudent Liquidation Deadline requirements. Since then, two things have happened: 1) SBA’s National Guaranty Purchase Center (NGPC) has implemented its process for considering lenders’ requests for extensions of the two-year liquidation deadline, and 2) additional incorrect information has been circulated from various sources about the process and the deadline.

So, with the December 1, 2017 deadline for resolving loans purchased by SBA prior to December 1, 2015 looming, now is a good time to update lenders on SBA’s Prudent Liquidation Deadline and to provide new information on the extension request process.  

The most significant change over the past few months is that SBA now has a process in place for considering lenders’ requests for extensions to the two-year liquidation deadline. Last April when the NGPC sent out the semi-annual status report template it also provided a template for lenders to use to request extensions of the liquidation deadline.The template provides a roadmap of the information that lenders need to provide when asking SBA for more time to resolve their previously purchased loans. But, the most important thing to remember is the requirement that the lender describe the steps that it has been taking to resolve the loan and document the specific reason(s) why it is unable to fully complete its actions on the specific loan within the 24 month period that SBA allows.

SBA has advised NAGGL that it has processed nearly 100 extension requests and approved most of them. But, SBA also asked us to let lenders know about some of the issues that could cause an extension request to be denied.

First and foremost, there must be a rationale provided that allows SBA to determine that the lender has been actively working on resolving the loan and that resolution within the mandated timeframe is not possible because of circumstances beyond the lender’s control.

To reach that conclusion, SBA relies on the documentation that the lender provides, e.g., information regarding state laws requiring judicial foreclosure on a loan secured by real property together with proof that the lender is actively pursuing such action; documentation related to a bankruptcy filing, including evidence of the actions that the lender has taken to protect the lender/SBA rights, together with information on the status of the bankruptcy; etc. Also, SBA has advised that it will not act on a request that the agency provide extensions based on a “list” of loans provided by the lender. Each action must be requested separately with appropriate documentation to support the individual request.  

Although the Commercial Loan Servicing Centers (CLSCs) are accepting applications for extensions, they have not yet started to formally consider extension requests on the loans that they service. But, SBA intends to expand that process to the CLSCs soon, so they will be sending the extension request template to lenders with loans in those centers with the next semi-annual report template.   

NAGGL is expending our best efforts to assure that no lender loses its loan guaranty because it missed the liquidation deadline, so we are offering a specially-priced WEBExpress session, Winter IS Coming ...  How to Meet the Prudent Liquidation Deadline on September 20. The training has been revised to include up-to-the-minute information from SBA on requesting extensions and will offer plenty of time for Q&A.  

Correcting Misperceptions About SBA's Prudent Liquidation Requirements – Updated as of 9/08/2017
Effective December 1, 2015 (SOP 50 57 2), SBA implemented new requirements for resolving loans AFTER they are purchased by SBA. The requirements are meant to assure that loans are promptly handled after SBA honors its guaranty and are not left to languish.

SBA determined that it needed more proscriptive guidance regarding its post-purchase requirements because it has continued to have a large inventory of purchased loans that have not been resolved by lenders.That inventory includes a significant number of loans that the agency purchased more than 2 years ago (about 2500).  

Prudent Liquidation Requirements: For loans that SBA purchased on or after December 1, 2015 a lender MUST "resolve" a loan within 24 months of the date on which SBA either*:

  • Buys the loan back from the secondary market; or 
  • Directly pays the lender the SBA guaranteed share of the loan. 

*unless SBA grants an extension based on extenuating circumstances related to a specific loan
For loans that SBA purchased prior to December 1, 2015, resolution must be completed by December 1, 2017; and, for loans purchased by SBA December 1, 2015 or after, the two-year period is measured from the date of loan purchase.  
While the requirements appear simple, there has been a lot of confusion about the specifics of their applications. Let's debunk a few myths . . . 
MISPERCEPTION: That "resolving" a loan always means liquidating it
FACT:  There are are 3 ways by which a loan can be resolved:

  1. It can be paid in full;
  2. It can be returned to regular servicing; or
  3. It can be fully liquidated and reported to SBA as ready for charge off.

MISPERCEPTION: That the 24 month resolution period is impacted by the date on which the loan is classified as in liquidation.
FACT:  The 24 month period begins on the date that SBA honors its guaranty.

Whether a loan currently is classified as "in liquidation", or the date on which it was so classified, has NO IMPACT on the 24 month period. 

Again, the new requirement is that one of the 3 resolution actions MUST be completed within the 24 month period that begins on the day that SBA repurchases a loan from the secondary market OR directly honors its guaranty with the lender.
MISPERCEPTION: That the new 24 month resolution deadline changes in some way a lender's ability to work out a troubled 7(a) loan when there is reason to believe that, with adjusted terms, the business can ultimately repay its obligation.
FACT: NOTHING has changed with regard to a lender's obligation and right to consider working out a troubled loan. SOP 50 57 2 remains clear on this point: "Whenever feasible, a good faith effort must be made to negotiate a workout on an SBA loan that is seriously delinquent or classified in liquidation".

MISPERCEPTION: If the loan is being liquidated, the lender has a full two years after SBA's purchase to submit its wrap-up report (a/k/a/ "Charge-off Tabs) to SBA.
FACT: While SBA permits a lender 2 years to liquidate a loan, it also requires the lender to submit its wrap-up report within 30 days after liquidation is completed.

For example, if SBA honored its guaranty on May 1, 2017, the lender would have on until May 1, 2019 to resolve the loan. But, if that resolution is via liquidation and the lender completed its liquidation activities on June 1, 2018, it would be required to submit its wrap-up report to SBA by July 1, 2018 (30 days after the liquidation activities were completed).
MISPERCEPTION: That SBA will automatically extend the prudent liquidation period if a lender requests it.
FACT: SBA will only allow a lender more time to resolve a loan if the lender requests, and SBA approves, the extension in writing prior to the expiration of the prudent liquidation period; AND such extension will only be approved if there are extenuating circumstance such as a protracted foreclosure or bankruptcy action. Additionally, SBA will only approve an extension request if the lender has submitted documentation to support the reason for the exception, such as a copy of the foreclosure documents or other supporting documentation that evidences why the lender needs additional time to resolve the loan. 
SBA is currently accepting exceptions requests in all three centers involved with loan servicing and liquidation.

There are three email boxes established to accept requests: (Herndon) (Little Rock) (Fresno)

In addition to a notice that a lender will receive regarding SBA’s action on an extension request, a lender can track the date of an approved extension via the semi-annual report sent out by the Centers. 
MISPERCEPTION: That the new SOP requirements effectively re-set the clock regarding when loans purchased prior to December 1, 2015 must be resolved
FACT: SBA is continuing to follow-up on old loan purchases, especially if the lenders never submitted a purchase package, or at some point notified SBA that the loan was ready for charge off, but failed to submit a wrap-up report.

In fact, SBA has contacted some lenders with old unresolved purchases, requesting refund of the guaranty purchase amount, and will continue to do so.
MISPERCEPTION: That if a lender fails to meet the two-year deadline and is required to repurchase the guaranteed portion of the loan from SBA, it may later submit a wrap-up report and SBA will honor the guaranty on the loan. 
FACT: If SBA requires a lender to refund the guaranty purchase amount, that effectively will be a denial of liability on the loan. It is our understanding that when this is a final decision, SBA will apply its denial of liability procedures and processes.
MISPERCEPTION: SBA can never resolve a loan if there is an open bankruptcy
FACT: If the dollar amount that the lender will be entitled to collect has been established by the bankruptcy authority, SBA encourages the lender to create a note receivable for that amount. It can then close-out the portion of the original SBA loan that will be uncollectible and report to SBA that the loan is ready for charge-off. 
Lenders with these special circumstances should contact their SBA servicing or liquidation center for assistance regarding how to proceed. 

Ongoing fee payment 'incentive' 
While the new requirements are intended to assure that lenders clean up the backlog of loans that have not been resolved and to prevent another backlog from occurring in the future, the requirements also provide a nice incentive for lenders that postpone asking SBA to honor a loan guaranty until the loan has been resolved and is ready for charge-off

In those cases, if the lender asks SBA to honor its guaranty at the same time that it wraps-up the loan, the lender will only have to pay the ongoing fee on the loan for 120 days after loan default. If the two actions are not accomplished concurrently, the ongoing fee is charged through the date that the lender requests that SBA purchase the guaranteed portion of the loan.

Requests for extension must be submitted to SBA no later than 30 calendar days prior to the deadline expiration, so the clock is now ticking very loudly for lenders to either resolve loans that were purchased by SBA prior to December 1, 2015, or apply for an extension to the two-year deadline.

Lenders that fail to comply with the Prudent Liquidation requirements are risking losing SBA's guaranty on individual loans as well as losing their good standing as an SBA lender.

For more information on the prudent resolution requirements, see SOP 50 57 2, particularly pages 17, 30 and 142-143, and SBA Notice 5000-1378, Clarification of Wrap-up Report Deadline and Prudent Liquidation

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