Best Practices: Refresher on Wrap-Up and Charge-off

Once a loan is purchased off the secondary market by SBA, lenders must proceed with liquidation before they can request a loan to be charged off. When liquidation is complete, the wrap up report and charge off tabs must be submitted to SBA. Lenders should be sure to keep current on SBA’s guidance to ensure their package is complete, and compliant with current SBA requirements, prior to submission.

Lenders are required to submit a wrap up report within 30 days after prudent liquidation is complete or upon receipt of a request from SBA, whichever comes first. And in any event, the wrap up report must be submitted to SBA prior to the Prudent Liquidation Deadline, unless an extension is approved by SBA in writing.

Pursuant to SOP 50 57 3, in order for the loan to be ready for wrap up, a lender must confirm it has:

a. Exhausted all Prudent Liquidation actions available to collect on the debt, and

b. Determined that there are no further cost effective-collection actions available, and

c. Determined all obligors are either unable or unwilling to pay, or are unable to be located, or

d. Determined that the loan balance is legally uncollectible.

            The wrap up report must be prepared by using the SBA Form available on SBA’s website. Once a loan is charged off by SBA, any remaining obligors are reported to Treasury for further collection.

It is important for lenders to keep in mind that the obligors on a debt remain obligated to repay after charge off, unless they have been discharged in bankruptcy. Similarly, any unliquidated collateral will remain encumbered, as long as the liens were not otherwise released. Accordingly, as a part of the wrap up report and charge off tabs, the lender is required to include an assignment of its loan documents to SBA. Treasury will continue collections efforts when a loan is referred to it by SBA.

Since there are certain circumstances where collateral may not be liquidated (for example, when it is not cost-effective to do so), lenders must be sure to keep the liens in place, when requesting charge off. SBA may request additional documentation to effectuate assignments of judgments or unliquidated lien instruments, as necessary.

If a lender receives any recoveries after an assignment has been made to Treasury, the lender must submit the appropriate percentage of the recovery to Treasury using www.pay.gov. At this stage, Treasury has the exclusive right to service and liquidate the loan. If lender receives any notices of a bankruptcy filing or other litigation, it must immediately notify the SBA Treasury Offset Division so that SBA may recall the loan from Treasury. SBA will handle the action related to litigation.

For more information on SOP 50 57 3, contact Jessica Conn at jconn@starfieldsmith.com or 215-542-7070.