SBA SOP 50 57 7(a) LOAN SERVICING and LIQUIDATION

SBA

SOP 50 57

7(a) LOAN SERVICING and LIQUIDATION

Office of Capital Access Small Business Administration March 1, 2013

7(a) Loan Servicing and Liquidation

50 57

1. Purpose: Update and consolidate SBA policy and procedures on 7(a) loan servicing and liquidation.

2. Personnel Concerned: All SBA employees.

3. SOPs Partially Revised: (a) SOP 50 50 4--deletion of the provisions that apply solely to 7(a) loan servicing; (b) SOP 50 51 3--deletion of the provisions that apply solely to 7(a) loan liquidation; and (c) SOP 70 50--deletion of Paragraph 4 in Chapter 5 of SOP 70 50, which lists the loan servicing and liquidation actions that SBA counsel must review.

4. Originator: Office of Capital Access

Jeanne A. Hulit Associate Administrator Office of Capital Access

03/01/13 1

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Effective Date: March 1, 2013

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Table of Contents

Chapter 1. Introduction........................................................................................................... 7 A. Purpose............................................................................................................................. 7 B. Authority ............................................................................................................................ 7 C. General Policy and Goals .................................................................................................. 7 D. Performance Standards..................................................................................................... 7 E. Exceptions to Policy .......................................................................................................... 8

Chapter 2. Definitions ............................................................................................................. 9 A. General Terms .................................................................................................................. 9 B. Environmental Terms .......................................................................................................21

Chapter 3. Lender Responsibility and Authority .................................................................23 A. Servicing and Liquidation .................................................................................................23 B. Litigation...........................................................................................................................23 C. Decision-Making...............................................................................................................23 D. Recordkeeping .................................................................................................................26 E. Loan Monitoring................................................................................................................28 F. Reporting Requirements...................................................................................................29 G. SBA Take Over of Servicing or Liquidation.......................................................................31 H. Enforcement Action by OCRM..........................................................................................31

Chapter 4. Loan Payment Administration ............................................................................33 A. Collection and Application of Loan Payments ...................................................................33 B. Post-Guaranty Purchase Servicing Fee on SBA Portion of Interest Payments .................34 C. Remittance of Borrower Loan Payments ..........................................................................35 D. Prepayment......................................................................................................................35 E. Paid in Full Loans.............................................................................................................36 F. Reinstatement of Guaranty on Loan Mistakenly Coded "PIF" ...........................................36

Chapter 5. Environmental Risk Management.......................................................................37 A. Overview ..........................................................................................................................37 B. General Requirements .....................................................................................................37 C. When an Environmental Investigation is Required............................................................38 D. Environmental Investigation Process for Loans in Regular Servicing Status.....................38 E. Environmental Investigation Process for Loans in Liquidation Status ...............................38 F. Environmental Investigation Reports ................................................................................41 G. Remedial Action by Secured Creditor...............................................................................41 H. Taking Title to Contaminated Property or Control of Business with Environment Risks ....41

Chapter 6. Servicing Requests..............................................................................................47 A. General Requirements .....................................................................................................47 B. Review and Analysis ........................................................................................................47 C. How To Obtain SBA Approval of a Proposed Loan Action ................................................50 D. Implementing Loan Actions ..............................................................................................52

Chapter 7. Modification of Note ............................................................................................53 A. General Requirements .....................................................................................................53 B. Payment Due Date ...........................................................................................................54 C. Change from Revolving to Non-revolving Loan ................................................................54 D. Installment Amount...........................................................................................................54 E. Interest Rate.....................................................................................................................54 F. Maturity Date ....................................................................................................................54

Effective Date: March 1, 2013

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G. Loan Amount ....................................................................................................................55

Chapter 8. Modification of Collateral Requirements............................................................57 A. Subordination of Lien Position ..........................................................................................57 B. Inter-creditor Agreements .................................................................................................58 C. Substitution of Collateral...................................................................................................59 D. Substitution of Guarantor..................................................................................................60 E. Release of Lien without Consideration .............................................................................60 F. Release of Lien for Consideration ....................................................................................60 G. Release of Guarantor or Co-Borrower ..............................................................................61 H. Release of Condemnation Proceeds ................................................................................62

Chapter 9. Insurance Coverage............................................................................................63 A. General Requirements .....................................................................................................63 B. Mortgagee's Title Insurance .............................................................................................63 C. Hazard Insurance .............................................................................................................63 D. Life Insurance...................................................................................................................64 E. Flood Insurance................................................................................................................66

Chapter 10. Modification of Management Covenants..........................................................67 A. General Requirements .....................................................................................................67 B. Financial Statements ........................................................................................................67 C. Restrictions on Compensation, Dividends, Fixed Assets, etc............................................67 D. Standby Agreements ........................................................................................................67

Chapter 11. Assumption, Assignment or Sale of Loan .......................................................69 A. Assumption ......................................................................................................................69 B. Assignment of Lender's Interest in Loan...........................................................................70 C. Sale of Loan in Liquidation Status ....................................................................................70

Chapter 12. Deferments .........................................................................................................71 A. Overview ..........................................................................................................................71 B. General Rule ....................................................................................................................71 C. General Requirement--Temporary Cash Flow Problem...................................................71 D. Deferred Amount ..............................................................................................................71 E. Amount of Payments during Deferment Period.................................................................72

Chapter 13. Delinquent Secured Senior Loans ....................................................................73 A. General Requirements .....................................................................................................73 B. Procedure for Developing Best Strategy to Protect Junior Lien Securing SBA Loan.........73 C. Options.............................................................................................................................74

Chapter 14. Classifying Loans in Liquidation ......................................................................79 A. When Loans Must Be Classified in Liquidation Status ......................................................79 B. When the Note Should Be Accelerated ............................................................................79 C. Repurchase from Secondary Market ................................................................................79 D. Demand Letters................................................................................................................80 E. Skip Tracing .....................................................................................................................80 F. Obligors in Active Military Service ....................................................................................80 G. Liquidation Plans ..............................................................................................................81 H. Payments and Recoveries on Loans in Liquidation Status ...............................................83 I. When Loans Should Be Removed from Liquidation Status...............................................83

Effective Date: March 1, 2013

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