How Lenders Can Get SBA Payment on NPP Delinquent Loans



From Harriet Wallace

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Law360 (Jun 28, 2021 4:08 PM EDT) –

Harriet Wallace
Harriet Wallace

The Payroll Protection Program was created by Congress under the Coronavirus Relief, Relief and Economic Security Act, or CARES, to lend money to certain businesses with the primary purpose of providing money to fund payroll costs and other eligible expenses. If PPP loans are used for a specific purpose, all or part of the PPP loan will be forgiven.

Loans that have not been fully forgiven are guaranteed Small Business Administration, or SBA, a government agency appointed by Congress to oversee and manage PPP loans.

PPP loans are provided under the SBA 7 (a) program, which was already in place before the CARES Act. SBA 7 (a) loans are made directly by lenders to qualified borrowers, but are guaranteed in whole or in part by SBA. The SBA’s guarantee means that in the event of a default on a loan, SBA will reimburse the lender for the remaining amount as soon as certain conditions and requirements set forth in the SBA’s rules are met.

PPP loans differ from other SBA 7 (a) loans in that the application process is much more streamlined, the loans are unsecured, and the principal of the borrower of the legal entity is not required to fulfill a personal guarantee. If a borrower uses the funds of a PPP loan for a specific purpose, in many cases all or part of the PPP loan will be forgiven.

However, not all PPP loans will be forgiven, or at least not fully forgiven. When this happens, the borrower will have to repay the PPP loan to the lender.

Because other SBA 7 (a) loans are collateralized, in the event of a default by the borrower, the lender must make every effort to repay the collateral and / or recover from the guarantor. However, since PPP loans are unsecured and have no guarantors, the obligations of the lender in the event of default are less clear.

SBA 7 (a) lenders must use all reasonable endeavors to recover outstanding PPP loans in the same way they would with any other SBA 7 (a) loan or any other non-SBA unsecured loan.

Lenders should consider taking the following steps if a borrower defaults on a PPP loan before requesting payment of the SBA guarantee or requesting a write-off of a PPP loan.


As with any unsecured loan of the same size and type, if the borrower starts missing loan payments, the SBA lender should try to work with the borrower to fix the default.

Research Borrower Assets

Creditors need to determine whether receiving a judgment will result in a monetary penalty.

Site visits are not required for PPP loans under SBA 7 (a) because the loans are unsecured. However, depending on the amount of the loan and the specifics of what the lender knows about the business, site visits can still be important in determining the assets of the business.

Performing an asset search at this stage is also important to determine if it is worth seeking a judgment against the business in order to try to collect the debt.

Lenders must also identify any property or assets that the borrower has recently transferred on its own behalf or transferred at below fair market price because these are signs of fraudulent transactions that can be deferred and returned.

Accelerated loan

After prudent attempts to help the borrower correct the default have failed, if the loan remains unpaid for 60 consecutive days, the lender must expedite the loan, send the borrower a letter of demand, and inform the SBA that the loan is pending litigation.

Trial plan

After a PPP loan – or any SBA 7 (a) loan – is promoted to litigation, the lender must submit the litigation plan to the SBA. The Litigation Plan Template can be found on the SBA website.[1] Placing a PPP loan in litigation status does not mean that the lender will be required to challenge the collection of the loan. The following elements should be considered.

Site visit results

If the lender has not visited the property, he must provide an explanation as to why he did not visit the property. A typical explanation might include, among other things, that (1) a site visit was not required because the loan was not secured, or (2) an asset search did not identify any assets to be recovered.

Disassembly with the borrower

How likely is it that the lender will be able to reach an agreement with the borrower or that the borrower will be able to repay the loan if given a loan change, etc.

Expected Recovery of Unspent Assets

Site visit results and asset searches will help with this explanation.

Disclosure of all other loans provided by a borrower to a non-SBA lender

The lender is not permitted to collect other loans from the same borrower to the detriment of the SBA loan. This can sometimes lead to conflict and a clear understanding needs to be established with the SBA as to how the borrower’s repayment will be distributed among the loans.

SBA approval of the litigation plan is not required for (1) routine non-contested litigation; (2) ordinary, undeniable foreclosures; and (3) ordinary, uncontested bankruptcies if the expected fees are less than $ 10,000. All other litigation plans must be approved by the SBA.

Request a debit via SBA

The lender may request a write-off of the PPP loan.[2] when:

  • All reasonable efforts have been exhausted to obtain the recovery of: voluntary payments on a bill of exchange; a compromise with the borrower; liquidation of collateral; and forced collections.
  • The estimated cost of further collection efforts is likely to exceed the expected recovery.
  • The only remaining collection route is from borrowers who cannot be found or are unable to repay the remaining amount.
  • The loan balance cannot be obtained for any legal reason, such as bankruptcy or expiration of the statute of limitations.

Purchase warranty package

A warranty purchase package may be sent to SBA to request a warranty purchase prior to completion of liquidation and request a write-off. However, the SBA strongly recommends that all creditors first liquidate all existing assets. There is a warranty purchase package template on the SBA website.[3]

Lenders and lender advisors should be aware that lenders are required to represent the interests of the SBA in the event a borrower files for bankruptcy or takes any action that could affect the ability to recover a PPP loan, before SBA disburses the guarantee and takes responsibility for collection. PPP loan.

Although PPP loans are unsecured and not guaranteed by the principals of the borrower and 100% guaranteed by the SBA, the administration still expects lenders to make every effort to recover such defaulted PPP loans if not forgiven, for sure. just as the lender would do it on an unsecured loan not owned by the SBA. The payment requirements for an SBA guarantee are the same as for any other SBA 7 (a) loan and set out above.

Harriet P. Wallace is a partner in Fox Rothschild LLP

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its customers, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general informational purposes and is not intended and should not be taken as legal advice.


[2] A charge-off checklist can be found on the SBA website at–sba-charge-tabswrap-report-test


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