Best Practices: Increasing Loan Defaults require Prudent SBA Lenders to Pivot Staffing from PPP to Monitoring of their 7(a) loan portfolios

With no end in sight to the COVID-19 pandemic, SBA lenders would be wise to address the rapidly rising number of small business loan failures.  While the SBA has been providing Section 1112 debt relief since April, these payments are scheduled to end in late September, forcing lenders to examine stressed loan portfolios.  It is therefore imperative for SBA lenders to implement innovative procedures and policies today in order to assist borrowers with workouts, when appropriate, and otherwise protect SBA loan guarantees attached to their 7(a) loans.

Proactive and prudent lenders should consider taking the following steps now in order to protect their loan portfolios:

• Communicate often and periodically with borrowers. How do they plan to address scaled back operations and changing markets?

• Work with borrowers to verify that their small business concerns have realistic plans. Conduct a careful review of their cash flow projections and pro forma financial statements.

• Assist borrowers with locating and applying for other forms of financial assistance, including loans or grants available from federal, state or local government agencies and entities.

• Conduct internal audits of SBA loan files to make sure any items that would be required for a Guaranty Purchase 10 Tab Submission are present.

• Encourage training and cross training of your teams so that everyone can pitch in on back end issues. Make sure that you have enough institutional knowledge to manage the myriad of SBA’s post-default requirements as set forth in SOP 50 57 2. Timely and compliant site visits may not be easy to perform. Novel strategies may be needed to guide special assets groups in order to liquidate collateral, efforts which will be complicated by shelter in place orders, directives prohibiting foreclosures, and an increasing number of bankruptcies.

• Identify creditors’ rights attorneys who can handle workout, liquidation, and bankruptcy matters for out-of-footprint loans.

• Retain experienced counsel familiar with SBA program requirements. Use them to work alongside in-house counsel or guide outside litigators in order to avoid taking actions that could jeopardize the SBA Guaranty.

The current economic emergency will require prudent lenders to be creative and proactive in order to protect their institutions in the times ahead.  Those lenders who seek to protect their SBA guarantees must act in a commercially reasonable and prudent manner which means getting ahead of the curve now, so that they will be able to manage the expected upcoming defaults.  If you need us, we can help. For assistance, contact the attorneys at Starfield & Smith at 215.542.7070.