What Lenders Need to Know to Receive an SBA Guarantee on NPP Delinquent Loans | Fox Rothschild LLP



The Payroll Protection Program (“PPP”) was created by Congress under the Coronavirus Relief, Assistance and Economic Security Act (“CARES Act”) for loans to specific businesses with the primary purpose of providing money to finance payroll costs and other eligible costs. 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 written off are guaranteed by the Small Business Administration (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 refund the remaining amount to the lender once 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 principals of the legal entity borrower are 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 measures if a borrower fails to meet its obligations under a PPP loan before requesting payment of the SBA guarantee or requesting a write-off of a PPP loan:

  • Workouts: Like any other 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: Lenders must determine whether receiving a judgment will result in a pecuniary 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 in determining whether 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 sixty (60) consecutive days, the lender should expedite the loan, send the borrower a letter of demand, and inform the SBA that the loan is in litigation status. proceedings.
  • 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 at https://www.sba.gov/document/support–litigation-plan-7a-504-loans… 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 may include, among other things, that (1) a site visit was not required because the loan was unsecured, 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 a settlement with the borrower or that the borrower will be able to repay the loan if given a loan modification, etc.?
  • Expected Return of Unspent Assets
    • Site visit results and asset search will help with this explanation.
  • Disclosure of all other loans issued by a borrower to a borrower to a non-SBA borrower.
    • 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, undeniable litigation, (2) routine, undeniable foreclosures, and (3) routine uncontested bankruptcies as long as expected fees do not exceed $ 10,000. All other litigation plans must be approved by the SBA.

  • Request a debit via SBA: A lender may request a write-off of a PPP loan when:
    • All reasonable efforts have been exhausted to achieve recovery from:
      • Voluntary payments by note;
      • Compromise with the borrower;
      • Liquidation of collateral; as well as
      • 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 pay the remaining amount; or
    • The loan balance cannot be obtained for any legal reason, such as bankruptcy or expiration of the statute of limitations.

A charge-off checklist can be found on the SBA website at https://www.sba.gov/document/sba-form–sba-charge-tabswrap-report-test

  • Purchase warranty package: A warranty purchase package may be sent to SBA to request a warranty purchase prior to completion of liquidation and requesting a cancellation. However, the SBA strongly recommends that all creditors first liquidate all existing assets. The SBA website has a warranty purchase package template at https://www.sba.gov/sites/default/files/2020-03/7aPurchaseTabs-03062020.pdf

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 collect a PPP loan before SBA pays off the guarantee and takes responsibility for collecting. loans. PPP loan.

Although PPP loans are unsecured and not guaranteed by the principals of the borrower and are 100% guaranteed by the SBA, the SBA still expects lenders to make every effort to recover PPP loans that have defaulted (if unforgiven) such as this the lender would do. make 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.

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