Pros and Cons of SBA Loan Modification
Discover the pros & cons of SBA loan modification with Protect Law Group. Expert SBA debt relief help for small businesses. Take control today!
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 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.
Client received the SBA's Official 60-Day Notice for a loan that was obtained by her small business in 2001. The SBA loan went into default in 2004 but after hearing nothing from the SBA lender or the SBA for 20 years, out of the blue, she received the SBA's collection due process notice which provided her with only one of four options: (1) repay the entire accelerated balance immediately; (2) negotiate a repayment arrangement; (3) challenge the legal enforceability of the debt with evidence; or (4) request an OHA hearing before a U.S. Administrative Law Judge.
Client hired the Firm to represent her with only 13 days left before the expiration deadline to respond to the SBA's Official 60-Day Notice. The Firm attorneys immediately researched the SBA's Official loan database to obtain information regarding the 7(a) loan. Thereafter, the Firm attorneys conducted legal research and asserted certain affirmative defenses challenging the legal enforceability of the debt. A written response was timely filed to the 60-Day Notice with the SBA subsequently agreeing with the client's affirmative defenses and legal arguments. As a result, the SBA rendered a decision immediately terminating collection of the debt against the client's alleged personal guarantee liability saving her $50,000.
Client’s small business obtained an SBA 7(a) loan for $750,000. She and her husband signed personal guarantees exposing all of their non-exempt income and assets. With just 18 months left on the maturity date and payment on the remaining balance, the Great Recession of 2008 hit, which ultimately caused the business to fail and default on the loan terms. The 7(a) lender accelerated and sent a demand for full payment of the remaining loan balance. The SBA lender’s note allowed for a default interest rate of about 7% per year. In response to the lender's aggressive collection action, Client's husband filed for Chapter 7 bankruptcy in an attempt to protect against their personal assets. However, his bankruptcy discharge did not relieve the Client's personal guarantee liability for the SBA debt. The SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection against the Client to the SBA. The Client then received the SBA Official 60-Day Notice. After conducting a Case Evaluation with her, she then hired the Firm to respond and negotiate on her behalf with just 34 days left before the impending referral to Treasury. The Client wanted to dispute the SBA’s alleged debt balance as stated in the 60-Day Notice by claiming the 7(a) lender failed to liquidate business collateral in a commercially reasonable manner - which if done properly - proceeds would have paid back the entire debt balance. However, due to time constraints, waivers contained in the SBA loan instruments, including the fact the Client was not able to inspect the SBA's records for investigation purposes before the remaining deadline, Client agreed to submit a Structured Workout for the alleged balance in response to the Official 60-Day Notice as she was not eligible for an Offer in Compromise (OIC) because of equity in non-exempt income and assets. After back and forth negotiations, the SBA Loan Specialist approved the Workout proposal, reducing the Client's purported liability by nearly $142,142.27 in accrued interest, and statutory collection fees. Without the Firm's intervention and subsequent approval of the Workout proposal, the Client's debt amount (with accrued interest, Treasury's statutory collection fee and Treasury's interest based on the Current Value of Funds Rate (CVFR) would have been nearly $291,030.
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