Small business owners with an SBA 7(a) or SBA 504 loan who signed personal guarantees should hire qualified counsel (an attorney authorized to practice before the SBA or U.S. Treasury Department) when facing an SBA loan default and considering resolution options such as an SBA Offer in Compromise.
SBA 7(a) loans are originated by private or public lenders. SBA 504 loans involve 2 parties (a Third-Party Lender and a Certified Development Corporation (CDC)). These 2 entities generally secure up to 90% of the financing for the small business. The CDC operates as an agent for the SBA and secures up to 40% of the financing. A pool of investors finance the CDC’s debenture or bond. Once the debenture or bond has been created, the SBA, through the 504 loan program, purchases the debenture-guarantee. The SBA 7(a) and 504 authorization between the lender/CDC and the SBA operates as an agreement whereby the SBA has committed to providing a guaranty (in the form of public funds) to the lender/CDC for an agreed-upon percentage in the event that the small business defaults on the loan. In in simplest terms, the 7(a)/504 guaranty is essentially insurance for the lender/CDC if a small business fails. Statistics show that, on average, approximately 80% of small businesses fail within 5 years.For all intents and purposes, the SBA is considered to be a party to a 7(a) or 504 loan even though the lender or CDC underwrote and originated the subject loan. A federal court referenced the SBA Note, the Unconditional Guaranty and the Loan Authorization (all of which were on SBA letterhead) in finding that the SBA is a party to the original transaction. The court’s rationale was further supported by the statutory authority delegated to the SBA by Congress. See U.S. v. Bensal, 853 F.3d 992 (9th Cir. 2017).
“When guaranteeing a loan, the United States Small Business Administration (SBA) can authorize participating lending institutions to take actions relating to loan servicing on behalf of the SBA, including loan monitoring, collection, and liquidation. 15 U.S.C.S. § 634(b)(7). Even though the SBA can authorize others to service a loan, the SBA remains a party to the loan and retains the power to take over the loan servicing, liquidation, collection, or related litigation activities. § 634(b)(7); 13 C.F.R. § 120.535(d). The SBA also has statutory authority to pursue to final collection, by way of compromise or otherwise, all claims against third parties assigned to the SBA in connection with loans made by it. § 634(b)(4).” Id.
Therefore, the SBA is considered to be a party during the servicing, liquidation, collection or litigation phases of a loan that it has guaranteed.
Once a small business defaults on a 7(a) loan, the lender will refer to the applicable SBA Standard Operating Procedures (SOP) to understand the rights and responsibilities of all interested parties. For 7(a) loans, the applicable SOP is currently SBA SOP 5057 2. Chapter 1, Section B, p. 9, of SBA SOP 5057 2 recites its authorization as follows:
“Authority: The policy and procedures set out in this SOP are based on Section 7(a) of the Small Business Act (15 U.S.C. § 631 et seq.), Part 120 of Title 13 of the Code of Federal Regulations, the Debt Collection Improvement Act of 1996 (“DCIA”) and the Federal Debt Collection Procedures Act.”
For 504 loans, the CDC will refer to SOP 50 55. Chapter 1, Section B, p. 9, states its authorization as follows:
“Authority: The policy and procedures set out in this SOP are based on Title V of the Small Business Investment Act of 1958 (15 U.S.C. § 695, et seq.), Part 120 of Title 13 of the Code of Federal Regulations, and applicable federal debt collection statutes, regulations and guidance, including the Debt Collection Improvement Act of 1996 (“DCIA”).”
In addition, any compromise involving an SBA loan would have to be reviewed under specific federal regulations, to wit: 31 C.F.R. Part 902 (Federal Claims Collection Standards), which are the supporting regulations associated with 31 U.S.C. § 3711.
Therefore, it is extremely important that SBA debtors retain qualified and authorized counsel to assist them in resolving any SBA loans during the servicing, liquidation, collection and/or litigation phases. Given the fact that negotiating any type of workout (i.e., SBA Loan Deferment, SBA Offer in Compromise, SBA Repayment Agreement, etc.) after an SBA loan default involves the “practice of law” since federal statutes, federal regulations and federal case law affecting their rights are involved, it would not be in the best interests of small business owners or guarantors to hire “non-attorneys” or “debt settlement companies” to represent them in any resolution endeavors – especially if these individuals or companies are not authorized to practice before the SBA pursuant to 5 U.S.C. § 500 (a-b). Non-attorneys offering their services with respect to an SBA loan default, given the application of the various federal statutes, federal regulations and common law as described above, are engaging in the unauthorized practice of law.
The American Bar Association (ABA) has defined the “practice of law” as follows:
(a) The practice of law shall be performed only by those authorized by the highest court of this jurisdiction.
(1) The "practice of law" is the application of legal principles and judgment with regard to the circumstances or objectives of a person that require the knowledge and skill of a person trained in the law.
(2) "Person" includes the plural as well as the singular and denotes an individual or any legal or commercial entity.
(3) "Adjudicative body" includes a court, a mediator, an arbitrator or a legislative body, administrative agency or other body acting in an adjudicative capacity. A legislative body, administrative agency or other body acts in an adjudicative capacity when a neutral official, after the presentation of evidence or legal argument by a party or parties, will render a binding legal judgment directly affecting a party’s interests in a particular matter.
(c) A person is presumed to be practicing law when engaging in any of the following conduct on behalf of another:
(1) Giving advice or counsel to persons as to their legal rights or responsibilities or to those of others;
(2) Selecting, drafting, or completing legal documents or agreements that affect the legal rights of a person;
(3) Representing a person before an adjudicative body, including, but not limited to, preparing or filing documents or conducting discovery; or
(4) Negotiating legal rights or responsibilities on behalf of a person.
(d) Exceptions and exclusions: Whether or not they constitute the practice of law, the following are permitted:
(1) Practicing law authorized by a limited license to practice;
(2) Pro se representation;
(3) Serving as a mediator, arbitrator, conciliator or facilitator; and
(4) Providing services under the supervision of a lawyer in compliance with the Rules of Professional Conduct.
(e) Any person engaged in the practice of law shall be held to the same standard of care and duty of loyalty to the client independent of whether the person is authorized to practice law in this jurisdiction. With regard to the exceptions and exclusions listed in paragraph (d), if the person providing the services is a nonlawyer, the person shall disclose that fact in writing. In the case of an entity engaged in the practice of law, the liability of the entity is unlimited and the liability of its constituent members is limited to those persons participating in such conduct and those persons who had knowledge of the conduct and failed to take remedial action immediately upon discovery of same.
(f) If a person who is not authorized to practice law is engaged in the practice of law, that person shall be subject to the civil and criminal penalties of this jurisdiction.
It is quite clear that any non-attorneys offering services that impinge on interpreting a small business owner’s or guarantor’s legal rights and responsibilities as spelled out in the applicable SBA SOP, federal statutes, federal regulations and federal common law, would be engaged in the unauthorized practice of law. Thus, the moral of the story . . . hire a qualified attorney who is authorized to practice pursuant to 5 U.S.C. § 500(a-b) (the Federal Agency Practice Act) to help you resolve your SBA loan problems.
If you are facing an SBA loan default, contact us today for a FREE initial consultation with an experienced SBA workout attorney at 1-888-756-9969 or visit our site at www.SBA-Attorneys.com.
We analyze your SBA loan problems and advise you on potential solutions such as a SBA offer in compromise for your SBA loan default.