Best Practices: Lien Releases During Loan Servicing of an SBA 7(a) Loan

SBA lenders are often asked by borrowers or guarantors to release or subordinate collateral during the life of an SBA 7(a) loan. This collateral can include both personal and real property. While such requests are generally permissible, lenders must ensure that any release complies with SBA requirements and that they take the right steps to protect the SBA guaranty.

The SBA’s SOP 50 57 (4), effective November 1, 2025 (“SOP”), outlines these requirements in Chapter 8. Although the SOP has been updated several times, the rules on lien releases have remained largely consistent.

Start with the Servicing and Liquidation Matrix

As a first step, lenders should consult the Servicing and Liquidation Matrix (“Matrix”). The Matrix indicates whether a proposed action can be taken under the lender’s unilateral authority or requires prior SBA approval. Under the current Matrix, lenders may generally release a lien without notifying or seeking SBA approval first.

Lien Release Requirements

The SOP outlines different requirements depending on whether the lender is receiving consideration for the release. In either case, lenders must act prudently to protect themselves, the SBA, and the SBA guaranty.

If the lender is releasing a lien without consideration, it should ensure:

1. The borrower uses any proceeds from the release of collateral for business purposes only.
2. The borrower still has the ability to repay the 7(a) loan in full.
3. The release does not materially interfere with business operations or reduce the value of remaining collateral.
4. The remaining collateral’s recoverable value is sufficient to adequately secure the 7(a) loan after the release.
5. The release documents do not impair the lender’s or SBA’s interest in, or ability to foreclose upon, the remaining collateral.

If the lender is releasing a lien with consideration, it should ensure:

1. The amount of consideration received is equal to or greater than the recoverable value of the collateral or the outstanding loan balance—whichever is less. (See SOP Chapter 5, “Environmental Risk Management,” for due diligence requirements if collateral value may be affected by contamination.)
2. The release does not jeopardize the ability to maximize recovery on the 7(a) loan.

Making a Prudent Decision

Once a lender determines that a release may be appropriate, it should assess whether the action makes sound financial sense for all parties. This includes:

• Preparing a collateral analysis showing before-and-after valuations.
• Considering whether replacement collateral or a loan paydown is needed.
• Reviewing the borrower’s and guarantors’ current financial condition.
• Ensuring the decision aligns with the lender’s internal policies for similarly sized non-SBA loans.
• Evaluating whether the release would affect the borrower’s ability to repay, interfere with operations, or decrease the value of other collateral.

Documentation Is Key

Whenever a lender allows a lien release, it’s essential to thoroughly document both the decision and the reasoning behind it. The lender should also double-check that the release documents are accurate—particularly that they don’t release more collateral than intended or inadvertently suggest the loan is fully satisfied.

Protecting the SBA Guaranty

Lenders must ensure that releases are handled properly and in the best interests of both the lender and the SBA. Failure to do so could result in a repair or a guaranty denial. For more information on lien releases during servicing, contact Tim D’Lauro at tdlauro@starfieldsmith.com or 215-542-7070.