What Lenders Need To Know To Get SBA Guarantee Payment On Default PPP Loans | Fox Rothschild LLP
The Payroll Protection Program (“PPP”) was created by Congress through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to borrow money from certain companies primarily to provide money to fund payrolls, and other eligible expenses. When the PPP loan funds are used for specific purposes, the PPP loan is waived in whole or in part. Loans that are not fully paid back are guaranteed by the Small Business Administration (“SBA”), the government agency appointed by Congress to oversee and administer PPP loans.
PPP loans are granted under the SBA 7 (a) program, which existed before the CARES Act. SBA 7 (a) loans are made directly to qualified borrowers by lenders but are guaranteed in whole or in part by SBA. The SBA guarantee means that if the loan defaults, SBA will return the balance to the lender once certain conditions and requirements of the SBA regulations 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 a business entity borrower does not require a personal guarantee from a borrower. In many cases, when the borrower uses the PPP loan proceeds for qualified purposes, the PPP loan is waived in whole or in part. However, not all PPP loans are waived, or at least not completely waived. In this case, the borrower has to repay the PPP loan to the lender.
Since other SBA 7 (a) loans are backed by collateral, in the event of a borrower’s default, the lender must make every effort to realize the collateral and / or collect it from the surety. However, because PPP loans are unsecured and have no guarantors, a lender’s obligations in the event of default are less clear. Lenders under the SBA 7 (a) program must use their best endeavors to collect defaulted PPP loans, just as they would with any other SBA 7 (a) loan or any other unsecured non-SBA loan.
Lenders should consider taking the following steps if a borrower defaults on a PPP loan before requesting the SBA guarantee payment or the withdrawal of the PPP loan:
- Trainings: As with any other unsecured loan of the same size and type, if a borrower begins to miss loan payments, the SBA lender should try to work with the borrower to resolve the default.
- Research Borrower Assets: Lenders need to determine whether obtaining a judgment would likely result in a recovery of funds.
- Site visits are not required for PPP loans under SBA 7 (a) regulations as the loans are unsecured. However, depending on the loan size and the specifics of the lender about the company, site visits can still be important in determining the company’s assets.
- Searching assets at this stage is also important to determine if it is worth filing a judgment against the company to collect the claim.
- Lenders should also identify any assets or assets that the borrower has recently transferred in their name or transferred for less than fair market value as these are indicative of fraudulent transfers that may be reversed and recovered.
- Accelerate credit: After careful attempts to help the borrower resolve the default, if the loan remains unpaid for sixty (60) consecutive days, the lender should expedite the loan, send the borrower a reminder letter and notify the SBA that the loan is in is litigation.
- Process plan: Once the PPP loan (or any SBA 7 (a) loan) has been placed in litigation status, the lender must submit a litigation plan to SBA. The template for the process plan 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 does not mean that the lender is required to litigate the collection of the loan. Elements to consider are:
- Site visit results
- If the lender did not make a site visit, the lender must justify why they did not make the site visit. A typical explanation might include (1) an on-site visit was not required because the loan is unsecured, or (2) the asset search did not reveal any collectible assets
- Feasibility of training with borrowers
- How likely is it that the lender can reach an agreement with the borrower or that the borrower can repay the loan if loan modification etc is provided?
- Expected recovery of unencumbered assets
- The results of the site visit and the asset search help with this explanation
- Disclosure of all other non-SBA loans from the borrower to the lender
- The lender may not collect any other loans that he has with the same borrower from the SBA loan.
- This can sometimes lead to conflict and a clear agreement must be made with the SBA on how the recovery will be divided among the loans from the borrower.
SBA approval of the litigation plan is not required for (1) routine, undisputed litigation, (2) routine, undisputed foreclosures, and (3) routine, undisputed bankruptcies as long as the expected fees are less than $ 10,000. All other process plans must be approved by SBA.
- Request direct debit through SBA: The lender can require the PPP loan to be written off if:
- All reasonable efforts have been made to restore:
- Voluntary payments on the note;
- Compromise with the borrower;
- Realization of the collateral; and
- Forced collections.
- The estimated cost of further collection efforts will likely exceed the expected recovery;
- The only remaining option for recovery is that borrowers cannot be found or cannot pay the balance; or
- The loan balance is irrecoverable for a legal reason, such as: B. due to bankruptcy or the expiry of the limitation period.
- All reasonable efforts have been made to restore:
The charge-off checklist can be found on the SBA website at https://www.sba.gov/document/sba-form–sba-charge-tabswrap-report-test.
- Guarantee purchase package: A guarantee purchase package can be sent to SBA to request the guarantee purchase prior to liquidation completion and request a direct debit. However, SBA strongly encourages all lenders to liquidate all available assets first. A warranty purchase package template is available on the SBA website at https://www.sba.gov/sites/default/files/2020-03/7aPurchaseTabs-03062020.pdf.
Lenders and lenders should be aware that if a borrower files for bankruptcy or submits actions that could affect the ability to recover the PPP loan before the SBA pays the guarantee, lenders have an obligation to represent the interests of SBA and assume responsibility the PPP loan is responsible for the collection.
Although PPP loans are unsecured and not guaranteed by the borrower’s principals and are 100% guaranteed by the SBA, the SBA still expects the lenders to make every effort to secure such defaulted PPP loans Exactly how a lender can collect on a non-SBA unsecured loan (if not awarded) do. The terms for paying the SBA Guarantee are the same as any other SBA 7 (a) loan and are described above.