Best Practices: SBA Workouts under the 50 57 3

As interest rates have risen, so has the possibility that borrowers will no longer be able to make regularly scheduled loan payments. In the 50 57 3 Loan Servicing and Liquidation SOP (“SOP”), the SBA requires the Lender to make a good faith effort when feasible to negotiate a workout on a Loan that is seriously delinquent or classified in liquidation. It is critical that lenders understand what options are available to them when initiating a workout with a borrower.

Once a borrower has become delinquent on its loan payments, a lender should request financial information from the borrower. If a borrower is unable or unwilling to provide documentation (such as financial statements from borrower and affiliates, federal business tax returns, and federal personal tax returns), then a lender should not pursue workout negotiations and must move directly towards other legal recourses.

Once a lender receives the financial information above, it needs to review the financial information and loan documents and conduct a site visit to determine if a workout is even feasible.  If it looks like a workout is feasible, lenders may consider the following options:

Forbearance– A lender may delay liquidation plans for a certain period of time to allow a borrower to improve its financial ability to comply with a new workout plan.

Reinstate/Extend Maturity Date– If a lender has accelerated the Note upon default, it can then reinstate or extend maturity date of Note.

Payment Deferment– A lender may defer delinquent and future payments for stated period of time to overcome temporary cash flow problem.

Modification of Note Repayment Terms– A lender may modify the repayment terms of the Note in accordance with other provisions of the SOP 50 57 3 and the lender servicing and liquidation matrix.

Subordination to Working Capital Loan- A lender may subordinate its lien to a short-term working capital loan, provided that the subordination is made in accordance with the other provisions of the SOP 50 57 3.

Voluntary Sale of Collateral- A lender may permit collateral to be sold, provided that the sale is closely monitored and commercially reasonable. Proceeds of the sale must be applied to the principal of the loan or used to facilitate the workout plan.

This is not an exhaustive list of options, but rather common ones that are utilized by lenders addressing defaults on SBA loans. Lenders should ensure that any workout agreement entered into is in writing so that all terms are clear and enforceable.

Since a workout agreement materially alters the terms and conditions of the loan, a loan in workout will need to be purchased from the secondary market investor before a formal workout agreement is executed. The SBA only needs to provide prior written approval of a workout plan if it includes a compromise of the principal loan balance or some other loan action that requires SBA’s prior written approval under the SOP 50 57 3 or servicing and liquidation matrix.

For any questions related to SBA loans in workout, please contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.