Best Practices: Past Due versus Acceleration Letters

When Lenders are dealing with a borrower who is falling behind on payments or moving into default territory, it may be hard for a lender to determine when to send a past due letter (also known as a reservation of rights letter) versus a full acceleration letter. This article explains the differences between an acceleration letter and a past due letter, as well as the consequences of each for a lender’s SBA loans.

An acceleration letter is an essential step in a workout situation. However, it can also lead to unintended consequences that a lender should be aware of pertaining to SBA loans. Defaults can occur for various reasons including, failure to make payments as outlined in the loan documents, bankruptcy of the obligors, or even the closure of a business. The type of default can influence whether and when a loan must be placed into liquidation status and subsequently repurchased from the secondary market. SBA loan training for lenders can help institutions better understand when to issue a past due letter versus an acceleration letter to avoid unintended consequences.

SOP 50 57 3.1 (the “SOP”), Chapter 15, Section A requires that a lender classify a loan in “liquidation status” when a lender accelerates the Note.  Classification of a loan in liquidation status typically requires that a lender must request the loan be purchased back from the secondary market, however, the SOP also notes that unless the SBA otherwise agrees in writing, the borrower must be in default on a payment for more than (60) days before the lender may request guaranty purchase.  See SOP, Chapter 15, Section B (1).  The SOP also notes that a lender may not request guaranty purchase based solely on non-payment default such as failure to provide financial statements.

If a lender determines that a loan qualifies for liquidation status, the first crucial step is to send the acceleration letter. The SOP Chapter 15, Section D, mandates that the acceleration letter be sent to all obligors listed in the loan documents via first-class mail and certified mail, or through another method that allows the Lender to confirm delivery. The SBA requires “reasonable efforts to contact the obligors who fail to respond” in order to ascertain their intentions regarding the repayment of the loan. Contacting the obligors through alternative means, such as phone or email, can demonstrate to the SBA that the Lender has made the necessary effort.

Due to the acceleration letter requiring the loan to be classified in “liquidation status,” the SBA will require additional measures to be met before the lender can move the loan back into regular servicing. For instance, obligors may need to execute a loan workout agreement after a lender has gathered additional financial information to qualify the obligors for the workout, modification or forbearance.

Due to the consequences of having to classify a loan in liquidation status at the time a lender sends an acceleration letter, lender should use caution in determining whether to send a full acceleration letter for a loan that is less than sixty (60) days past due. For loans that are less than sixty (60) days past due, a lender may determine a well-crafted past-due or reservation of rights letter may be a better option. Such a letter demands payment of the outstanding amount needed to bring the loan current but does not accelerate the full balance due, triggering the need to move the loan to liquidation status.

In many cases, a past-due letter may prompt the borrower to contact the lender to make payment arrangements, which can lead to a favorable resolution. However, if a past-due letter is sent to the obligors and the default is not rectified, then a lender should consider moving to sending out a full acceleration letter to comply with SBA requirements.

Your role as a lender is crucial in the default evaluation process. In complex workout or liquidation scenarios, consulting an SBA guarantee lawyer can provide guidance on protecting the guaranty and maintaining compliance. For more information about acceleration letters and to maintain compliance with SBA requirements, it is advisable to consult with counsel.  For questions regarding past due or acceleration letters, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.