Best Practices: The Art of the Credit Bid

Many SBA lenders have experienced foreclosure sales, either judicial or non-judicial, and the request to set your credit bid.  Since there are potential pitfalls during this process that can impact the SBA guaranty, lenders must be caution when determining their credit bid.

The section on Credit Bids is located within Chapter 18 of SOP 50 57 3.1. It is relatively short – directing a lender to consider three factors when determining a credit bid: the recoverable value of the property, the SBA loan balance, and the need and ability to collect a deficiency judgment.

When starting the foreclosure process, the first thing a lender should do is have a discussion with the lender’s foreclosure attorney to understand the implications of a credit bid in the state in which your collateral is located.  It is important to understand if a credit bid is going to impact the deficiency balance a lender may seek to collect following the foreclosure.

In some states, and frequently where a lender is proceeding with a non-judicial foreclosure, a credit bid may establish the value for the property and limit the deficiency balance amount that can be pursued after.  If that is the case, then a lender should submit the analysis for the credit bid, and the proposed credit bid, to the SBA prior to the sale of the property.  This will ensure the SBA has approved that credit bid ahead of time, since it may be construed to compromise the principal balance due on the loan, which requires prior SBA approval.

If, however, a lender is engaged in a judicial foreclosure sale, the upset price set for the sheriff’s sale may not impact the lender’s ability to seek a deficiency on the remaining balance due on the loan.  In that case the lender should thoroughly document the analysis the lender used in coming up with the credit bid.

In the case of a judicial foreclosure or in the case of any credit bid, a lender should also understand what amounts may be paid from that bid so the lender properly understands the net proceeds they may receive if someone outbids the lender at the foreclosure sale.  In some cases, the following items may be paid from the bid before the net proceeds get paid to the lender: unpaid real estate taxes, unpaid utility charges, sheriff’s commission fees, title fees, and local and/or state transfer taxes.

It is important for a lender to understand the impact a credit bid may have on the loan balance and further collectability.  It is also important a lender understand potential charges that may be paid from a third party bid in order to set an appropriate credit bid and seek the appropriate SBA approvals.

If you have questions on credit bids feel free to contact me at 267-470-1154 or at lrowland@starfieldsmith.com.