Best Practices: SBA Considerations for Forbearance Agreement Terms

Lenders should consider entering into a forbearance agreement when liquidating SBA guaranteed loans. These agreements are valuable tools which may permit successful workouts instead of lenders having to resort to foreclosure proceedings. In the proper circumstances, foreclosure agreements may maximize a lender’s recovery by reducing expenses and accelerating recoveries. Forbearance agreements, however, present special requirements when liquidating SBA guaranteed loans.

The SOP 50 57(2) sets forth how payments should be applied to an SBA guaranteed loan placed in liquidation status. Chapter 22 of the SOP 50 57(2) states that recoveries on loans in liquidation should be applied first to “recoverable expenses,” then the principal balance of the loan, followed by accrued interest. Because a forbearance fee inserted into a forbearance agreement is not a “recoverable expense,” it should not be categorized as one in a forbearance agreement.

Many conventional lenders include cross-collateralization provisions in a forbearance agreement. While these terms may be appropriate for non-SBA loans, they are problematic in the SBA realm. In the case of cross-collateral provisions in forbearance agreements, if a lender includes this provision and it has conventional loans outstanding to the borrower, this may create confusion as to how proceeds should be applied. Accordingly, cross-collateralization language may cause a disproportionate amount of money going towards the conventional loan, which in turn would result in a repair or denial of the SBA guaranty. This is because the SOP 50 57(2) mandates that a lender cannot take actions that would create a preference in favor of the lender over the SBA. This is the same reason that the SBA requires 504 lenders to sign a third party lender agreement which prohibits the use of cross-colorization or cross-default provisions.

If you need assistance with the drafting of a forbearance agreement relating to an SBA guaranteed loan or a 504 loan, please contact Lyndsay at 267-470-1154 or at lrowland@starfieldsmith.com. She can assist lenders and their counsel to ensure that forbearance agreement provisions comply with SBA program requirements.