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April 17, 2013

Best Practices: 10 Tab Timing: Submission of Guaranty Purchase Packages

by Starfield & Smith

When an SBA-guaranteed loan has gone into default, the lender frequently wants to submit its guaranty purchase package as quickly as possible. However, the SBA will not consider a guaranty purchase request that is submitted either too early or too late. The timing requirements for submission of the 10 Tab (the SBA’s mandated form for submission of guaranty purchase requests) are set forth in 13 C.F.R. §120.520 and §120.524, as well as Chapter 23 of SOP 50 57.

First, guaranty purchase may not be demanded until there has been an uncured payment default of more than 60 calendar days. If the borrower cures the default before the Lender requests that the SBA honor the guaranty, then the right to request purchase lapses with respect to that default. However, the passage of 60 days alone is not sufficient to allow the Lender to demand that the SBA honor its guaranty.

If the loan was approved on or after May 14, 2007, the Lender may submit its guaranty purchase request only after it has liquidated all business personal property collateral securing the loan. 13 CFR §120.520 provides that “SBA considers liquidation of business personal property collateral to be completed when a Lender has exhausted all prudent and commercially reasonable efforts to collect upon these assets.” SOP 50 57 provides that, at a minimum, “the Lender must liquidate the business personal property collateral with an aggregate Recoverable Value of $5,000 or more.”

If the loan was approved before May 14, 2007, the rules governing the timing of 10 Tab submission are not as straightforward. In such a case, in accordance with 13 CFR §120.520, the Lender must look to the regulations applicable to the time that the Lender may make demand for purchase that were in effect immediately prior to May 14, 2007. SOP 50 57 details the collateral that must be liquidated for such loans based upon the loan program and type of collateral. For example, under the Export Working Capital Program, the Lender must liquidate the collateral associated with the export transactions financed by the loan. Under the CAPLine program, the working capital assets securing the loan must be liquidated. And under the LowDoc program, the business personal property collateral must be liquidated “unless the loan involves prolonged litigation or other circumstances that will extend the liquidation process more than 90 calendar days past the earliest date that the Lender could request guaranty purchase.”

There are exceptions to the timing requirements with respect to 7(a) loans. Under 13 CFR §120.520, “[a] Lender may also submit a request for purchase of a defaulted 7(a) loan when a Borrower files for federal bankruptcy once a period of at least 60 days has elapsed since the last full installment payment.” SOP 50 57 also allows the Lender to submit its guaranty purchase request without completing the liquidation of business personal property in the event of a borrower bankruptcy. Additionally, the Lender may submit its guaranty purchase request without completing the liquidation of business personal property if its loan was sold in the secondary market and the lender has declined to purchase the loan from the secondary market after the default (demanding, instead, that the SBA make the purchase); in such a case, however, the Lender must submit its guaranty purchase request within 45 days of the date of the SBA’s secondary market purchase.

Just as the Lender may not submit its guaranty purchase request too early, it must be careful not to submit the request too late. Pursuant to 13 CFR §120.524(a)(8), the SBA is released from liability under its loan guaranty if the Lender fails to make its purchase demand within 180 days after maturity of the loan (or within 180 days after the completion of liquidation or debt collection litigation, if the Lender is conducting liquidation or debt collection litigation in connection with a matured loan). Thus the Lender must make its demand within this timeframe or risk that the SBA will deny liability on the basis that the guaranty has expired.

For more information regarding guaranty purchase requirements, contact Amy at ABrownstein@StarfieldSmith.com or at (215) 542-7070.