As part of obtaining your SBA 7a loan you may have pledged your personal residence as collateral. This seemed to be an afterthought to obtain your SBA loan. However, once the business defaulted on the SBA loan, the SBA lien has become a huge headache.
This article answers the four questions homeowners have about an SBA lien.
1.What are the Collateral Requirements for an SBA Lien?
The SBA Standard Operating Procedures (SOPs) provide the framework for lender banks and how to underwrite SBA 7a loans. If you are the owner of a business, the SBA will require you to sign a personal guaranty. SBA does not permit its guaranty to be used as a substitute for available collateral. The SBA
requires that the bank collateralize the SBA loan to the maximum extent possible up to the loan amount. If business assets do not fully secure the loan, the lender must take available personal assets of the owners as collateral. This more often than not includes your personal real estate, including your home.
The SBA considers a loan as “fully secured” if the bank obtained security interests in all available assets with a combined "liquidation value” up to the loan amount. The SBA defines “liquidation value” as the amount expected to be obtained if the bank took possession after an SBA loan default and sold the asset(s) after conducting a reasonable search for a buyer and after deducting the costs of taking possession, preserving and marketing the asset, less the value of any existing liens.
Therefore, if your businesses assets have a liquidation value of $10,000 but your house has equity of $50,000, the bank and SBA will require you to pledge your house as collateral for the SBA loan.
The SBA does not require a bank to collateralize a loan with a personal residence to meet the
“fully secured” definition when the equity in the residence is less than 25 percent of the property’s fair market value.
2. When Does the Bank Liquidate SBA Loan Collateral?
If your business defaults on the SBA loan, the lender bank must liquidate all collateral that has "Recoverable Value". With regard to real property collateral, if the Recoverable Value of an individual parcel is $10,000 or more, it must be liquidated unless there is a documented compelling reason for not doing so.
If the bank holds an SBA lien on your personal residence, you face the possibility of foreclosure. Foreclosure is an action taken to sell property that was pledged as security for the SBA loan. Since the laws pertaining to the foreclosure of mortgages, deeds of trust, and other types of real property liens vary by state, the bank will have to determine the proper method of foreclosure. The two primary methods of real property lien foreclosure actions are judicial foreclosure and non-judicial foreclosure as it pertains to SBA liens.
3. How Do SBA Standards Apply to Personal Homes?
Unless you have engaged in fraud, misrepresentation or other financial misconduct, a good faith effort on the part of the lender should be made to reach an agreement covering release of the SBA lien for consideration and compromise of your liability for the SBA loan balance prior to initiating a foreclosure action against your primary residence. Documentation showing that a bank has complied with applicable state or federal laws requiring mortgage lenders to work with home owners prior to foreclosure will be considered evidence that a bank has made a good faith effort to meet this requirement. So all is not lost if you have an SBA lien on your property.
4. How Can I Save My House?
The SBA dictates that you can save your home. You will have to pay to do so, however. The amount of consideration received must be approximately equal to or greater than the "Recoverable Value" of the collateral, and release of the lien must not jeopardize the ability to maximize recovery on the loan. Therefore, you do have an opportunity to save the family home.