As part of obtaining your SBA 7a loan, you may have pledged your residence as collateral. This was an afterthought for obtaining your SBA loan. However, once the business defaulted on the SBA loan, the SBA lien became a huge headache.
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This article answers the four questions homeowners have about an SBA lien.
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. As the owner of a business, the SBA will require you to sign a personal guarantee. SBA does not permit its guarantee 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 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 business 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” is defined when the equity in the residence is less than 25 percent of the property’s fair market value.
Under the latest SBA guidelines, lenders must carefully assess the impact of state laws on foreclosure and liens. For example, California, where Protect Law Group is located, primarily follows a non-judicial foreclosure process, allowing lenders to sell a property without going through court. Furthermore, recent state legislation may provide additional protections to homeowners, such as mandating a notice period or enabling homeowners to request loan modifications before foreclosure proceedings begin. Understanding these nuances can be crucial in navigating your situation.
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". Concerning 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 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 of 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 the release of the SBA lien for consideration and compromise of your liability for the SBA loan balance before 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 homeowners before 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 the 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.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Clients borrowed and personally guaranteed an SBA 7(a) loan. Clients defaulted on the SBA loan and were sued in federal district court for breach of contract. The SBA lender demanded the Client pledge several personal real estate properties as collateral to reinstate and secure the defaulted SBA loan. We were subsequently hired to intervene and aggressively defend the lawsuit. After several months of litigation, our attorneys negotiated a reinstatement of the SBA loan and a structured workout that did not involve any liens against the Client's personal real estate holdings.
Clients obtained an SBA 7(a) loan for their small business in the amount of $298,000. They pledged their primary residence and personal guarantees as direct collateral for the loan. The business failed, the lender was paid the 7(a) guaranty money and the debt was assigned to the SBA. Clients received the Official 60-Day Notice giving them a couple of options to resolve the debt balance directly with the SBA before referral to Treasury's Bureau of Fiscal Service. The risk of referral to Treasury would add nearly $95,000 to the SBA principal loan balance. With the default interest rate at 7.5%, the amount of money to pay toward interest was projected at $198,600. Clients hired the Firm with only 4 days left to respond to the 60-Day due process notice. Because the clients were not eligible for an Offer in Compromise (OIC) due to the significant equity in their home and the SBA lien encumbering it, the Firm Attorneys proposed a Structured Workout to resolve the SBA debt. After back and forth negotiations, the SBA Loan Specialist assigned to the case approved the Workout terms which prevented potential foreclosure of their home, but also saved the clients approximately $294,000 over the agreed-upon Workout term with a waiver of all contractual and statutory administrative fees, collection costs, penalties, and interest.
Small business sole proprietor obtained an SBA COVID-EIDL loan for $500,000. Client defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for aggressive collection. Treasury added $180,000 in collection fees totaling $680,000+. Client tried to negotiate with Treasury but was only offered a 3-year or 10-year repayment plan. Client hired the Firm to represent before the SBA, Treasury and a Private Collection Agency. After securing government records through discovery and reviewing them, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury citing a host of purported violations. The Firm was able to negotiate a reinstatement and recall of the loan back to the SBA, participation in the Hardship Accommodation Plan, termination of Treasury's enforced collection and removal of the statutory collection fees.
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