What Loss Mitigation Measures Can SBA Lenders & CDCs Offer to SBA Loan Borrowers Facing Financial Hardship?
What isLoss Mitigation
It is generally defined as the process an SBA lender or CDC goes through to work with a small business borrower or obligor who is behind on loan payments, to create a workable solution, typically resulting in either a loan modification, structured workout or the sale of assets pledged as collateral for the SBA loan or some other alternative to liquidation with respect to personal and/or real estate assets that were voluntarily pledged as collateral for the SBA loan.
Common Loss Mitigation Alternatives To Liquidation Re An SBA Loan.
What is Forbearance?
Forbearance is an offer by the SBA lender or CDC to temporarily suspend or reduce the monthly principal and interest payments for a specified period of time. For an SBA lender or CDC to offer Forbearance, the small business borrower generally must experience some kind of extreme and short-term financial hardship. For now, due to COVID-19, the SBA has been paying the monthly principal and interest payments on behalf of borrowers for a period of 6 months in accordance with the SBA CARES Act’s Small Business Debt Relief Program. Only eligible small businesses were extended this government assistance.
What is a Repayment Plan?
A Repayment Plan is arranged when an SBA borrower and SBA Lender or CDC agree to spread out the past due amount, added on to the current principal and interest payment, over several months, in order to bring the loan obligation current.
A Repayment Plan may be a good option if the SBA borrower is ineligible or does not want to refinance; and the SBA borrower wants to remain in the property; and the SBA borrower faced a short-term financial hardship; and the SBA borrower can now afford their payments.
A Repayment Plan may not be a good option when the SBA borrower is more than a few payments behind or does not have the requisite income to afford their regular monthly payment plus their monthly payment towards the arrearage.
What is a Loan Modification?
The most common alternative to foreclosure on pledged collateral is a Loan Modification. Loan Modifications allow the SBA lender or CDC to retain a performing loan, allow the SBA borrower to retain the property (commercial or residential) and often lessen the cash flow burden on the SBA borrower or obligor.
Things that can be modified: term, interest rate, arrearage can be added on the SBA loan. A Loan Modification may be a good option if the SBA borrower wants to retain the pledged property and the SBA borrower has income, even if the income has been reduced from the origination of the SBA loan.
What is a Refinance?
A Refinance is when an SBA borrower takes out a new loan with new terms, interest rate and monthly payments, that completely replaces the current principal and interest payments.
For commercial loan situations, it is less likely that an SBA borrower may be able to refinance even if the pledged property is worth less than what the SBA borrower owes.
Oftentimes, SBA borrowers and obligors in default cannot qualify for a refinance because their credit reflects delinquent payments that hurt their loss mitigation chances.
What is a Deed in Lieu?
Deed in Lieu (“DIL”) is designed to transfer the pledged collateral to the SBA lender or CDC without the need for formal foreclosure proceedings.
Historically, DIL involves the SBA borrower conveying the pledged collateral to the SBA lender/CDC and the SBA lender/ CDC releasing the deed of trust and releasing the SBA borrower and the obligor from personal liability under the SBA loan instruments (where applicable).
What is a Short Sale?
A Short Sale is when an SBA lender agrees to release its deed of trust to allow an SBA borrower to sell pledged collateral without the entire SBA loan being paid. An SBA lender could consider this when the value of the pledged property is at or near the proposed short sale price, as the SBA lender receives the same amount of cash towards the debt but can avoid the time and expense of formal foreclosure proceedings, eviction action and marketing the property.
We also have extensive experience in the courtroom as well. If you have been sued by your SBA lender in state or federal court in San Diego, Orange, or Los Angeles County and need litigation or bankruptcy assistance, call us now to discuss the specifics of your case.
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