Best Practices: Prudent Liquidation Deadline is Quickly Approaching

When SBA issued Standard Operating Procedure 50 57 (2), which became effective on December 1, 2015, the Agency included a new guideline designed to encourage SBA lenders to complete liquidation of their 7(a) loans in a “prompt, cost-effective and commercially reasonable manner.” This concept, defined by the SBA as “Prudent Liquidation,” is intended to incentivize lenders to timely wrap up their SBA loans and help the agency further reduce the backlog of loans that are ready for charge off.

The key concept for lenders in Prudent Liquidation is: “that a Lender submits a Wrap-Up Report acceptable to SBA on a SBA loan no later than either 24 months from SBA guaranty purchase date or 24 months after the effective date of this SOP for loans where SBA has previously honored the guaranty and lenders are actively liquidating, whichever is longer…” What this means is that lenders have 24 months after the SBA purchases the guaranteed portion of the loan, either from the lender or the secondary market holder, to complete liquidation of the collateral for the loan and submit its Charge-Off tabs to the SBA. For loans that had the guaranteed portion purchased by the SBA prior to December 1, 2015, this means that the deadline to complete liquidation and submit the wrap-up report and Charge-Off Tabs to SBA for these loans is December 1, 2017, less than 6 months from today.

Despite a lender’s best efforts, however, there may be extenuating circumstances (such as a judicial foreclosure or bankruptcy) that prevent the lender from meeting the Prudent Liquidation deadline. In such circumstances, extensions may be granted on a case by case basis. Lenders requesting an extension to the Prudent Liquidation deadline must submit a written request not less than thirty (30) days prior to the expiration of the deadline including: “(i.) A detailed description of the extenuating circumstance preventing timely liquidation; (ii.) Supporting documentation evidencing the extenuating circumstance; (iii.) A reasonable estimate of when the Prudent Liquidation will be complete on the SBA purchased loan; and (iv.) A status report must be submitted with the request for extension.” For loans under the December 1, 2017 Prudent Liquidation deadline, this means that the deadline for extension requests is November 1, 2017, less than 5 months from today. SBA is encouraging lenders that are actively liquidating their loans, but know that they will be unable to meet the Prudent Liquidation deadline, request their extensions now to avoid the expected rush in October, 2017. Additionally, SBA has indicated that lenders must demonstrate that they are actively liquidating the collateral in their extension request – it will not be an acceptable justification that the lender has not, or has only recently, commenced liquidation and now needs more time. SBA expects lenders to promptly and diligently liquidate the collateral for their loans and a lender’s neglect does not meet this standard.

Why is this important? For lenders, the stakes are extraordinarily high – a lender’s failure to comply with the Prudent Liquidation deadline will result in the lender being required to purchase the guaranteed portion of the loan back from SBA and will further result in a referral to SBA’s Office of Credit Risk Management for potential enforcement actions such as: “restriction from future participation in the secondary market and suspension of delegated [PLP] authority.” These penalties, while severe, underscore the importance being placed on Prudent Liquidation by the SBA, and lenders are well advised to act accordingly.

For more information regarding the impending Prudent Liquidation deadline and other requirements for servicing and liquidating SBA loans, please contact Ethan at 267-470-1186 or via email at esmith@starfieldsmith.com.