Best Practices: Lender Considerations for the Sale of Collateral in SBA Loan Liquidations

There may come a time when a SBA Lender must face a liquidation scenario with an a Borrower. When faced with liquidating assets of a SBA 7(a) Loan, the Lender should first check the SBA Servicing and Liquidation Actions 7(a) Lender Matrix.  A review of the 7(a) Lender Matrix shows that a “public, private or negotiated sale of collateral” does not require prior notification to the SBA. However, if you look further at the “Liquidation Actions” section of the 7(a) Matrix the “sale of acquired collateral to an Obligor, or Close Relative or Associate of an Obligor” does require prior SBA approval. This raises an interesting point that a Lender may overlook when it comes to collateral sales. Who exactly is the purchaser?

Whether negotiating a public, private or negotiated sale of collateral directly or through a cooperating Borrower, a Lender must ask questions about the potential purchaser. Preferably, a Lender should advise a Borrower and their representatives up front, that any sale to an Obligor, close relative or Associate requires SBA prior approval. Putting Borrower on notice about pre-approval will hopefully ensure that the Lender gets information early in the sale process and can submit the appropriate requests to the SBA, if and when necessary.

While it is fairly clear to both the Lender and the Borrower who an “obligor” or a “close relative” may be, what is not so clear cut is who is an “Associate.” An “Associate of the Borrower” is defined in Chapter 2 of the SOP 50 57(2) as, “an officer, director, Key Employee of the Borrower, or a Person who has an ownership interest of 20% or more in the Borrower’s business; any entity in which one or more of the foregoing Persons has an ownership interest of 20% or more in the entity’s business; or any Person in control of, or controlled by, the Borrower except a Small Business Investment Company licensed by the SBA.” 13 C.F.R. §120.10.

Lenders should take care to ask any potential purchaser of collateral to provide enough information about its ownership (if an entity) or relationship to the Borrower, if any, so that Lender is able to determine that the purchaser is not an Associate of the Borrower. If the purchaser is an Associate of the Borrower, then Lender must collect all of the information on the sale of the collateral and submit the information along with a summary of the proposed offer directly to the SBA for review and approval.

When seeking approval for a sale to the close relative, the SOP 50 57(2) outlines that sales of collateral to these parties should not be permitted for less than the full amount due on the SBA loan, unless it will maximize recovery on the SBA loan and the following conditions are met including: a public foreclosure sale of the collateral was held; a good faith effort was made to resell the collateral to a disinterested party; the collateral is being sold for fair market value; the sale is an all cash sale; if the sale is to an Obligor to repurchase the Obligor’s primary residence, that the real estate will continue to be Obligor’s primary residence; and, the sale will not harm the integrity of the SBA loan program. See SOP 50 57(2), Chapter 19.

Therefore, a Lender should be prepared to submit enough information to the SBA with any such request to approve a sale to a close relative or Obligor addressing the above factors to allow the SBA to make a well reasoned decision to approve or deny the sale request. Based on the foregoing, a sale to an Obligor, close relative or an Associate for less than fair market value that does not have prior approval from the SBA will likely result in a repair or denial of the SBA guaranty.

For more information on liquidation of collateral securing a SBA loan, contact Lyndsay Rowland at 267.470.1154 or at lrowland@starfieldsmith.com.