Best Practices: Meeting SBA’s Prudent Liquidation Deadline

SBA Standard Operating Procedure 50 57 (2) requires 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 number of loans that are ready for charge off.

The key concept for lenders in Prudent Liquidation is that lenders complete liquidation and “submits a Wrap-Up Report acceptable to SBA on a SBA loan no later than 24 months from SBA guaranty purchase date.” 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/Wrap-up Report to the SBA.

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 no 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.” SBA encourages lenders that are actively liquidating their loans, but know that they will be unable to meet the Prudent Liquidation deadline, to request their extensions sufficiently early to enable SBA to review and act on the requests in due course, rather than on an emergency basis. 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 service and 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, contact Ethan at 267-470-1186 or esmith@starfieldsmith.com.