SBA Short Sales
SBA short sales occur when the property securing an SBA loan is sold for less than the loan amount.
SOP 50 51 2A, Ch. 17, 8-12 states that “[a]ny settlement amount must bear a reasonable relationship to the present value of the estimated amount of recovery available through foreclosure (using a forced sale equivalent value) and enforced collection. This value, combined with the earning potential of the debtor, will form the basis for the offer in compromise.“ Litigative risks” involve answering certain legal questions as to the actual liability of the debtor and will be thoroughly explored by the SBA, if raised properly. The degree of doubt coupled with the potential costs, expenses and time involved in pursuing collection matters will generally determine the acceptable amount for a settlement. Thus, when considering an SBA OIC, it is very important for your qualified representative (who should have a background in litigation and thus be an attorney and have a working knowledge of SBA matters) to be able to advise SBA debtors regarding litigative risks and the costs associated with litigation and how all of these factors can impact the proposed offer to the Federal Government.
The following is a general list of categories that the SBA refers to in assessing the obligor’s ability to pay:a. Forced sale equivalent (liquidation value).(1) The basis for this value is normally the amount recoverable from the sale of the assets within a limited period of time (auction type sale). Also to be considered, is the time and expense needed for the SBA to gain control of the asset. But generally speaking, the SBA considers the following assets: Real Property (Commercial), (Residential), (Unimproved Land); Business Assets: (Machinery/Equipment), (Accounts Receivable/Inventory), (Furniture/Fixtures), (Leasehold Improvements).(2) The Claims Collection Act and the GAO standard provide that consideration be given to the time and monies involved with enforced collection to establish a discounted forced sales figure. The forced sale equivalent value needs to be adjusted for the following types of expenses: Court costs, filing fees; (a) Prior liens, taxes, assessments; (b) Costs of sale (auctioneer’s fees, advertising, lotting, and clean up costs); (c) Time of SBA employees (financial, legal, clerical, and administrative); (d) U.S. Attorney costs (professional, administrative, out of pocket); (e) Possibility of protested litigation or of bankruptcy and related expenses; (f) Time mandated by State redemption periods and the cost (depreciation, vandalism, insurance risks) that may result from such delays; (g) Care and protection expenses pending resale; (h) Extraordinary expenses of eviction, repairs to property, vandalism; (i) Costs necessary to bring property to marketable condition; (j) Transportation/travel costs; and (k) Discount reflecting the present value of future net recovery.b. Non-reachable assets and income.There may be items which are utilizable to the obligor(s) and have substantial value but are beyond the reach of the Government. The facts of the situation should enter into the Agency’s assessment of the obligor’s good faith.c. Jointly owned property.Special problems are encountered when the obligor shares ownership with another of an asset. This, by itself, is not sufficient reason to disregard the asset as having no value. The situation must be closely examined to determine (even to the extent of hiring appraisers and consultants) if the potential value of the property warrants further action.d. Individual asset valuations.Each worthwhile asset owned by the obligor needs to be assessed. Estimating the values of these assets is not an exact science but the SBA utilizes a uniformity of approach.(1) Cash.The SBA will only be concerned with cash in amounts substantially in excess of basic living expenses as determined from the SBA 770. Special accounts (IRA’s, Keoghs, trust accounts) should be valued net of early withdrawal penalties and other costs.(2) Cash surrender value (CSV) of life insurance.The SBA will determine the net amount receivable under the terms of the policy. Loans outstanding and other costs may also have to be subtracted out. The policy must often be surrendered in order to receive the CSV. The loan value should be used for analysis if surrendering the policy would leave the family with inadequate protection. This approach is to be used even if the Agency is acknowledged as assignee in the insurance company’s home office.(3) Accounts/notes receivable.The size, age, and collectibility of these assets will be examined to determine their worth. Typically they have little forced sale value. Ordinarily, the SBA will consider only large receivables with such attention.(4) Furniture, fixtures, and other personal effects.The SBA’s policy regarding this class of assets is that they are normally not worth very much. Efforts spent in other areas will yield much better results. The SBA will assign a nominal value to the contents of a modest home for compromise situations. If such assets are subject to an SBA lien, the lien may be realized for nominal value or the assets may be abandoned if no such release is possible.(5) Jewelry, paintings, antiques, and collections.When items in these categories have been assigned substantial value, the SBA will give them special attention. Outside sources may have to be utilized to determine meaningful values on these specialty items.(6) Automobiles.Automobiles generally have a ready market and various published books give a handy reference as to value. Gross compromise value “rule of thumb” is 80 percent of loan value. Of course prior encumbrances must be deducted to determine the net compromise value.(7) Securities.The SBA generally views the value of stocks and bonds in publicly traded firms as easily ascertainable and can quickly be converted to cash. Ownership interest in firms with closely held corporate stock and in unincorporated firms present much greater valuation problems. Each situation is considered using the best judgment available. If substantial potential worth is apparent, the SBA will obtain a valuation analysis by a chartered financial analyst or some other qualified person.(8) Other assets.Common carrier rights, copyrights, liquor licenses, patents, inheritances, and trusts are the types of assets that can be worthless or have substantial value. The SBA will confer with counsel regarding local laws and their effect on these assets. The establishment of values for these assets must rely on a reasonable assessment of the circumstances in each case.(9) Real estate.This is often the asset having the largest value on an SBA obligor’s or debtor’s balance sheet. For income producing or commercial properties, the SBA will use a member of a nationally recognized appraisal organization to conduct valuation analysis.(a) For the average residence, the SBA will consider some of the following acceptable alternatives:i. A “Property Report” by a recognized reporting service;ii. A written evaluation from a local realtor (with Multiple Listing Service (MLS) comparables);iii. A report from a residential appraiser used by Farmers Home Administration (FHA), Veterans Administration (VA), or other established mortgage lender; oriv. Any other local source you may have of similar reliability.(b) These reports usually furnish the market value of the property. However, this is not sufficient for SBA valuation purposes. The following must also be weighed:i. State redemption periods, homestead exemptions, and the like.These can substantially delay or negate the SBA’s ability to get the property: SBA will have to consult with counsel if there are any questions on the impact of this type of legislation. The value analysis must consider the recovery impact of local laws.ii. Policy regarding primary residence.Both the Department of Justice (DoJ) and SBA have strong positions regarding foreclosing on homes. For the SBA, a foreclosure action is generally considered as a very last resort. Concerted settlement efforts are generally first attempted, and fully documented in the loan file. Similarly, the DoJ will not, as a matter of policy, proceed with a foreclosure action if a reasonable settlement is at all possible or if the result will cause a cooperative debtor a severe hardship. This policy is consistent with the Claims Collection Act which says that a compromise settlement must be attempted before steps are taken to deprive obligors of their residences.
The adequacy of an SBA OIC must begin with an evaluation of the assets of the obligor(s). The starting point is ordinarily the net present value of the forced sale value of such assets (not the loan balance). This value combined with the prognosis of the obligors’ earning power form the basis for determining the adequacy of the offer. The review must balance the right of the Government to collect the amount owed and the obligation to treat all obligors with dignity and fairness.
What Is The SBA Office Of Hearings And Appeals (OHA) And What Is Their Jurisdictional Power? CollapseThe Office of Hearings and Appeals (OHA) is an independent office of the Small Business Administration (SBA) established in 1983 to provide an independent, quasi-judicial appeal of certain SBA program decisions.The SBA OHA has authority to conduct proceedings in the following cases:Collection of debts owed to SBA and the United States under the Debt Collection Act of 1982, the Debt Collection Improvement Act of 1996, and part 140 of the aforesaid chapter;(t) Any other hearing, determination, or appeal proceeding referred to OHA by the Administrator of SBA, either through an SOP, Directive, Procedural Notice, or individual request by the Administrator to the SBA/OHA.The SBA OHA’s office is on the eighth floor of SBA headquarters above the Federal Center SW metro stop. Their office address is:409 Third Street, SW, Eighth FloorWashington, DC 20416
Yes. The Agency Practice Act (5 U.S. Code Section 500 et seq.) specifically authorizes attorneys in good standing of the bar of the highest court of their State to represent you before the U.S. Small Business Administration, the U.S. Department of Treasury and the Bureau of Fiscal Service. However, if you decide to hire a non-attorney firm or consultant to handle your SBA matter before the aforesaid federal agencies, be advised that this non-attorney firm or consultant are in violation of the Federal Agency Practice Act, and cannot advise you on any legal issues. The problem we have with non-attorney representation for SBA matters in this industry is that we do not believe these non-attorneys have the legal authorization and ability to advise or counsel you on any interpretation of SBA administrative law (such as the SBA’s SOPs, the Code of Federal Regulations (CFRs), SBA OHA decisions, bankruptcy issues, federal/state statutory law or federal case law). In addition, many of these non-attorney representatives are neither affiliate members of NADCO, NAGGL (SBA trade associations) nor authorized to practice before the Department of Treasury pursuant to the Agency Practice Act and Circular 230. Finally, in the event that you need to appeal your case to the SBA Office of Hearings and Appeals in connection with your SBA debt or any adverse decision that may be considered an abuse of discretion, the non-attorney representatives will NOT be able to cite to legal precedent or argue applicable law before the SBA’s Administrative Law Judge (ALJ) as any attempt on their part would arguably be the unauthorized practice of law, and would be useless since these non-attorneys wouldn’t have any clue as to how to proceed with representing your interests in this special forum as these individuals do not have the education, training or experience to administratively litigate your case and protect your interests.