Best Practices: SBA Offers In Compromise

With the current uptick in SBA loan defaults, lenders should ensure that their loan servicing teams familiarize themselves with the SBA’s offer in compromise (“OIC”) process. A lender may not settle a borrower or any guarantor’s liability on a defaulted SBA loan without SBA approval. All settlement requests made by borrowers or guarantors to settle their remaining liability must be submitted to the SBA.

The SBA’s OIC tabs consist of a tab package similar to SBA’s guaranty purchase tabs. The OIC package consists of eight (8) tabs, and can be located on the SBA’s website. The OIC tabs are addressed to the lender to complete, however, they also require submission of certain forms and other financial documents by the party seeking settlement with the SBA (i.e. borrower or guarantor).

OIC packages are typically submitted after the collateral securing the SBA loan has been liquidated and all resulting recoveries have been applied to the balance due on the SBA loan (in rare cases, an OIC package can be submitted for a Borrower that is still a going concern, but approval of such requests is uncommon). After liquidation is completed, if there is a balance remaining on the SBA loan and the borrower, guarantor, or both wish to make a settlement proposal to the SBA, it is accomplished through the submission of an OIC package.

The party that wants to submit a settlement proposal via the OIC tabs should complete SBA Form 1150 detailing the settlement offer that is being made. This form must be signed by each party seeking settlement with the SBA.  Each party to the OIC must also complete and sign an SBA Form 770 Financial Statement and a current IRS From 4506-C.  Finally, each party submitting an OIC must provide their two most recently filed tax returns. All documents should be provided to lender to include in the OIC package for submission to SBA.

The lender should review all information submitted and determine if the settlement amount offered OIC bears a reasonable relationship to the amounts that could be collected through forced collection actions. Additionally, the lender should consider if the party submitting the OIC has cooperated with lender and has otherwise acted in good faith throughout the liquidation of the collateral securing the SBA loan. All of this information should be included in the OIC package, and then the completed package should be submitted by the SBA lender to the SBA.

The cover page of the OIC tabs contains instructions on the email address to be used to submit the OIC package to the appropriate SBA loan servicing center. The lender should then wait for a response from the SBA. Remember: a lender cannot release a party’s liability on an SBA loan without approval from the SBA.  Failure to follow this requirement will lead to repairs, and in some cases, denial of liability on the SBA guarantee.

If you are a lender with questions relating to an OIC package or need assistance completing and submitting an OIC package to SBA, please contact us at 215.542.7070 or info@starfieldsmith.com.