The ongoing pandemic has created unprecedented challenges for SBA lenders who are confronting a stressed 7(a) loan portfolio. In many states, we have seen court systems essentially shut down, halting civil actions across the country. The stay at home orders also have resulted in the postponement of auctions of business assets and real estate, while stopping appraisals and site visits in their tracks. In many instances, this has made the process of liquidating an SBA loan almost impossible.
Fortunately, we are starting to see restrictions ease, with some states getting back to business as usual. Now is then an ideal time for lenders to stay on top of their special assets portfolio. Speak with your customers. If businesses have been closed, will they be able to re-open?
Ask your local liquidation counsels for updates on whether stalled actions may be resumed. Seek updates on each matter’s court status to determine which cases can move forward. Can foreclosures proceed? May new filings occur? The answers will be determined on a state by state and sometimes even a county by county basis over an ever-shifting time line. Lenders should obtain this information periodically and document their loan files contemporaneously in writing and with care.
In the case of stored business assets at leased locations, some landlords are allowing assets to remain in leased locations during the shutdown. Landlords are facing their own economic stressors with empty locations that could not be rented, while not receiving rent from tenants in spaces where the businesses could not operate. While PPP loans may assist with rent payments, lenders should stay in communication with landlords to ensure that business assets are allowed to remain at the leased locations while auctions are rescheduled. Documenting each communication and providing a current status in the file is of utmost importance.
Additionally, lenders should consider if postponed auctions may be rescheduled. While appraisals and site visits were also halted during the pandemic, some companies appear to be getting back to handling site visits with little to no contact. It also appears that appraisers are starting to get postponed appraisals back onto the calendar. Again, lenders that have faced delays to site visits and appraisals due to the pandemic should be documenting their loan files and making arrangements to get those visits done in accordance with the deadlines established by the CARES Act.
While SBA borrowers have received short payment deferments, received PPP loans and may be receiving the CARES Act subsidy payments, there is no way to predict how many small businesses will fully recover from the pandemic. It is therefore likely that lenders will be facing an increase in defaulting SBA loans. This means that Lenders should be taking the time now to ensure they have systems in place to manage any SBA loans that go into default, and take actions and document their files in accordance with SOP 50 57 2 requirements. While the SBA is aware of the issues which lenders are facing, it is incumbent upon lenders to monitor their portfolios and document their servicing and liquidation efforts in writing so that, when lenders submit guaranty purchase packages and wrap up reports, SBA will be in a position to honor the guaranty.
For assistance with loan liquidation, questions feel free to contact the attorneys at Starfield & Smith at 215.542.7070.