Best Practices: The Basics of Acquired Collateral Under SOP 50 57 3

With rising interest rates, many lenders are experiencing a rise in defaults and liquidations.  Sometimes, liquidations result in the lender having to acquire title to real property or personal property.  SOP 50 57 3, Chapter 20 requires that Lenders liquidate real property and personal property in a manner that will maximize recovery in the shortest amount of time.  Lenders should avoid acquiring title to collateral unless it is necessary to maximize recovery for the SBA Loan.

If it is necessary for a lender to take title to real property or personal property, the lender should take the following actions, as appropriate:

• Possession and Control: Take possession of the acquired collateral; change the locks on vacant, improved real estate; arrange for security if necessary; and start eviction proceedings for any unlawful occupants.
• Inventory: Take inventory and take photographs of all acquired personal property.
• Accounting: Set up a new file and keep it separate from the SBA loan file; credit the SBA loan for the value of the acquired collateral using foreclosure laws of the state of the acquired property; and share any gain or loss with the SBA according to SBA’s participation interest in the SBA loan after guaranty purchase.

• Taxes: Pay taxes and assessments that become due.
• Care and Preservation: Take reasonable steps to prevent deterioration of acquired real property and personal property; arrange for utility services, essential repairs and maintenance as necessary.
• Insurance: Insure acquired real property and personal property in compliance with SOP 50 57 3, Chapter 9.
• Reporting Requirements: Notify the appropriate SBA Loan Center if there are any risks associated with the real property or personal property being acquired such as hazardous materials; and use SBA Form 297 (Collateral Purchase Report) when real property is acquired in SBA’s name.  Lenders can only acquire title to collateral in the SBA’s name with SBA’s prior written approval, and, in doing so, must use the following language on title:  Administrator, U.S. Small Business Administration, an Agency of the United States Government.

Lenders may only recoup expenses incurred in acquiring real property and personal property that are necessary, reasonable and customary.  Lenders can seek reimbursement in accordance with SOP 50 57 3, Chapter 23, and the SBA will review the requested expenses in accordance with SOP 50 57 3, Paragraph E.  Lenders may deduct the expenses from the acquired collateral sale proceeds and may request SBA reimbursement of any remaining expenses.  However, lenders must reimburse the SBA for any expenses that are denied.  Lenders must reconcile all expenses on their final wrap-up report submitted to the appropriate SBA Loan Center in accordance with SOP 50 57 3, Chapter 27.

Lenders should diligently try to sell acquired real property and personal property within 12 months of acquisition through whatever means will maximize recovery in the shortest time frame, including, but not limited to, public auction, broker’s sale and sealed bid. The asking price should be based on the current appraised value of the real property or personal property.  Unless there is a written exception to policy via 50 57 3, Chapter 1, SBA officials and Lenders and all of their employees, close relatives and associates are precluded from directly or indirectly bidding on, buying or taking title to acquired real property and personal property.  In addition, lenders are precluded from selling acquired real property and personal property to obligors, close relatives of obligors and associates of the borrower at less than full, appraised value unless certain conditions outlined in the SOP are met.

If there is a surplus upon selling the real property and personal property, then lenders must provide the surplus and a written explanation to the appropriate SBA Loan Center discussing how the surplus was created and recommending how to distribute the surplus in accordance with applicable law.

The SBA has announced that 50 57 3.1 is forthcoming, so changes to servicing and liquidation may be on the horizon.

For assistance with workouts and liquidation of SBA loans, contact the attorneys at Starfield & Smith, PC at 215.542.7070 or visit us at www.starfieldsmith.com.