Best Practices: Lender Servicing and Liquidation Responsibility and Authority under SOP 50 57 3

 

After August 1, 2023, all SBA 7(a) loans (regardless of when they were originated) are subject to SBA’s SOP 50 57 3. The new SOP includes a few changes and also clarifications to lender’s responsibilities and authority with regard to servicing and liquidation, litigation, decision-making, recordkeeping, loan monitoring, and reporting requirements.

Servicing and Liquidation

Pursuant to the Secondary Market Improvements Act of 1984, whenever a lender sells a 7(a) loan on the secondary market, SBA’s fiscal and transfer agent (“FTA”) is responsible for a number of important duties, including:

• Tracking loan payment histories;
• Collecting payments from lenders on loans sold to investors;
• Resolving SBA Form 1502 reporting discrepancies with lenders;
• Remitting payments to investors; and
• Forwarding all servicing requests from a lender to the investor and forwarding the response back to the lender.

SOP 50 57 3 now requires additional responsibilities of the FTA, including:

• Notifying SBA of delinquent loans;
• Processing all borrower prepayments;
• Forwarding all SBA fee remittances to SBA’s Denver Finance Center; and
• Handling SBA and lender repurchases from secondary market investors.

Litigation

            Lenders are generally responsible for all litigation required to recover on the SBA guaranteed loans in their portfolio, except for loans that have been referred to Treasury or those loans for which SBA has taken over servicing. Under SOP 50 57 3, lenders now have additional responsibilities with regard to loans that are serviced by SBA. Lenders are now required to immediately notify the appropriate Loan Servicing Center of any litigation they become aware of, including bankruptcy filings, so that SBA can take appropriate action on the loans they service.

Decision-Making

While lenders have unilateral authority to take certain routine actions relating to the servicing and administration of their 7(a) loan, SBA has outlined certain actions which require SBA’s prior written approval. These actions requiring prior written approval are identified in the 50 57 3 and are mostly consistent with prior iterations of the SOP; however, the new SOP now offers new guidance and includes minor changes. Lenders no longer need SBA’s prior written approval to release a limited guarantor when the guaranty secures an owner’s interest in collateral. Further, lenders must now obtain SBA’s prior written approval when making a determination that a loan prepayment is involuntary, specifically when that prepayment is in connection with whether a subsidy recoupment fee is due. Finally, the SOP formalizes the requirement that lenders need SBA’s prior written approval before approving a change in the ownership of a borrower entity, including a change in percentage of ownership, for 12 months after the final disbursement on the loan. The new SOP 50 57 3 clarifies where to send these notices, requests for SBA approval, and requests for reconsideration and appeals based on the type of loan and whether the loan is fully disbursed.

Recordkeeping

With regard to loan file retention, lenders must retain the original note, personal guaranty(ies), security/collateral documents (e.g., mortgages, deeds of trust, and security agreements), SBA loan applications (including SBA Form 1919 or any other application documents), SBA Form(s) 159, and any SBA Environmental Indemnification Agreements in their loan file.

Lenders must retain hard-copy records of any loan documents that required original signatures, except if the original signature was made electronically in accordance with applicable standards governing electronic signatures.

Under new SOP guidance, upon request by SBA, lenders must also make their SBA loan information available to SBA in a timely manner. Specifically, lenders are required to provide SBA’s authorized representatives access, during normal business hours, to their loan files for review and inspection. SBA may request copies of records and documents relating to SBA guaranteed loans.

Loan Monitoring

The new SOP now allows lenders to charge a default interest rate on SBA Express and Export Express loans. Lenders are still prohibited from charging a default interest rate on 7(a) loans, however.   Lenders may also now charge a separate extraordinary servicing fee on 7(a) loans for past due financial statements if those fees are consistent with the lender’s charges on its similarly-sized, non-SBA guaranteed loans.

Lender Reporting Requirements

            SOP 50 57 3 has also added lender reporting requirements with regard to approved litigation plans. When SBA District Counsel has approved a litigation plan, lenders are required to provide the appropriate SBA Loan Center with ongoing written status reports every six months from the date the initial litigation plan is approved. The litigation status reports must include a brief description of the proceedings, litigation fees and expenses incurred to date, and an estimate as to when litigation is expected to conclude.

For questions regarding SBA’s new guidance on SBA lender servicing and liquidation responsibility and authority, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.