March 4, 2015
Best Practices: Working Out with the SBA
by Greg T. Kupniewski
Whenever a client asks a lawyer a question, the answer almost always starts with “it depends.” Lenders frequently ask us whether SBA approval is required for a proposed workout. The short answer is: it depends on the terms of the workout. If any term of the workout would require SBA approval under the Lender’s Matrix, then SBA approval is required of the workout. If each term of the workout is within the Lender’s delegated authority under the Matrix, then SBA approval is not required to proceed with the workout.
For example, if the proposed workout involves the release of a guarantor, the SBA needs to approve it. Conversely, if the workout involves the release or substitution of collateral, SBA approval of the workout is not necessary. This is because the release of a guarantor requires SBA approval under the Lender’s Matrix, but a release of collateral does not.
Typically, workouts grant multiple concessions to the borrower. If any one of those concessions requires SBA approval, such as the compromise of the principal balance, the entire workout requires SBA approval.
The Matrix, however, does not hold all the answers for a lender that is contemplating a workout. For starters, workouts only arise once a loan is in liquidation. That means the lender must place the loan in liquidation status with the SBA. A lender can place a loan in liquidation status once defaults occur that are sufficient to permit the lender to accelerate the note. Once the loan is in liquidation status, the loan must be repurchased from the secondary market. The secondary market repurchase streamlines the workout process because it eliminates the need for the lender to seek investor approval for any potential workout plan.
Once these prerequisites are met, the lender can proceed with the workout process itself. The SBA has certain requirements regarding both the due diligence that is necessary for, and the terms of the workout agreement. It is imperative that the lender collect all of the required due diligence and document the workout agreement properly. If prior SBA approval is not required for the workout, the first time the SBA will review the workout file is at during the guaranty purchase process. If there is any material flaw in the due diligence or other documentation, the lender could face a repair or even a denial of the SBA guaranty.
The SBA requires lenders to obtain the past two years of tax returns for all the individuals and business entities involved. The lender also needs to obtain the most recent year-end financial statements for the borrower and a copy of the current financial statement signed under penalty of perjury.
The SBA also requires that workouts be evidenced by a written agreement. There is no specific form for a workout agreement, but the agreement must contain certain terms, such as new consideration from the borrower, a confirmation of the events of default, a confirmation of the collateral and other specific terms.
If done properly, a workout can be a win-win for the borrower and the lender. But the lender must pay attention to the detail because, if the lender doesn’t meet all of the SBA’s requirements, it could wind up effectively trading its SBA guaranty for a failed workout.
For more information about SBA loan workouts, please contact Greg at firstname.lastname@example.org or at 215-390-1023.