Following a default, Lenders often contend with questions related to whether to file suits against obligors; the need for litigation plans; when to advance expenses; and, what costs can be reimbursed by SBA. Ultimately, most decisions made on these questions are determined following a cost/benefit analysis. Chapters 22 and 23 of the SOP 50 57 3 (the “SOP”), which cover Litigation and Recoverable Expenses respectively, provide lenders with critical information that will help guide the strategy of how to proceed when an SBA loan is in default.
Chapter 22 of SOP 50 57 3 provides general guidance on litigation. One of the primary things to keep in mind about this section is that it emphasizes that due diligence must be done before lenders undertake litigation, to ensure actions taken are cost effective. Chapter 22 of the SOP clearly states, that after collateral is liquidated if there are no further cost-effective options, the loan should be submitted to the SBA for charge-off.
The SOP highlights the importance of litigation plans as a tool for determining the cost-effectiveness of a lender action. Litigation plans are only required to be submitted to SBA if the litigation is “non-routine.” However, the SOP encourages lenders to draft litigation plans for even non-routine litigation and retain these in their loan file. The SOP also reminds lenders that if litigation is going to exceed $10,000.00 and become “non-routine,” a lender must submit the litigation plan for approval within thirty (30) days of the litigation becoming “non-routine” for approval by the SBA. Failure to do so, may result in the SBA not reimbursing lenders for legal fees and expenses that were not submitted prior to the incurrence of such fees. In emergency situations, such as expeditious action needed to avoid dissipation of the collateral, SBA may waive the requirements for a pre-approved litigation plan. Keep in mind that, in such a situation, the litigation plan must be submitted as soon as possible after the action is taken.
Chapter 22 also adds a section that outlines that lenders should retain copies of all legal pleadings in case they need to be submitted to the SBA, via CPC Tabs or otherwise. It includes best practices for getting debt collection litigation expenses reimbursed, including submitting all itemized invoices within the CPC tabs in chronological order. So lenders should be sure to review these practices prior to incurring expenses to be sure that the proper documentation is obtained and can subsequently be submitted to SBA.
Chapter 23 outlines fees the SBA deems non-recoverable versus fees which are deemed recoverable and also provides guidance on remitting recoveries to SBA. This section did not change significantly from the last version of the SOP, but it does add clarifying language indicating that SBA will not reimburse a lender for “recoverable expenses” until after the SBA purchases the SBA loan guaranty.
Chapter 22 indicates that lenders are required to remit SBA’s pro-rata share of any recovery on a SBA loan, even if the lender has charged the same off and assigned the loan to the SBA, until the SBA loan has been paid in full or Treasury concludes their collections. It also provides that should the SBA deny expenses that have been deducted from recoveries, the lender has thirty (30) days from notification of that denial, to reimburse the SBA those expenses. Failure to do so may result in a referral to OCRM.
It is always important to assess relevant factors that will impact both recovery and expenses in determining the best course of action on an SBA loan workout. If you need assistance with litigation strategy, litigation plans, recoverable expenses, or submitting to be reimbursed for the same, please feel free to reach out directly to Lyndsay Rowland at 267-470-1154.