Divorce Attorneys Need to Avoid This 1 SBA Loan Pitfall
A settlement or judgement in a divorce does not absolve your client of liability on a defaulted SBA loan. Don't leave your client on the hook.
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.
Client personally guaranteed SBA 7(a) loan for $150,000. COVID-19 caused the business to fail, and the loan went into default with a balance of $133,000. Client initially hired a non-attorney consultant to negotiate an OIC. The SBA summarily rejected the ineligible OIC and the debt was referred to Treasury’sBureau of Fiscal Service for enforced collection in the debt amount of $195,000. We were hired to intervene and initiated discovery for SBA and Fiscal Service records. We were able to recall the case from Fiscal Service back to the SBA. We then negotiated a structured workout with favorable terms that saves the client approximately $198,000 over the agreed-upon workout term by waiving contractual and statutory administrative fees, collection costs, penalties, and interest.
Client personally guaranteed an SBA 7(a) loan for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.
We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.
Clients personally guaranteed an SBA 504 loan balance of $337,000. The Third Party Lender had obtained a Judgment against the clients. We represented clients before the SBA and negotiated an SBA OIC that was accepted for $30,000.
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